Attached files
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EX-31.1 - BIRNER DENTAL MANAGEMENT SERVICES INC | v165741_ex31-1.htm |
EX-31.2 - BIRNER DENTAL MANAGEMENT SERVICES INC | v165741_ex31-2.htm |
EX-32.1 - BIRNER DENTAL MANAGEMENT SERVICES INC | v165741_ex32-1.htm |
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
September 30,
2009
OR
o
|
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
|
|
(State or other jurisdiction of incorporation or organization)
|
(IRS Employer 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes _____ No _____
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
One):
Large
accelerated filer Accelerated
filer
Non-accelerated filer Smaller
reporting company X
(Do not check if a
smaller
reporting company)
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 November 10, 2009
|
|
Common
Stock, without par value
|
1,867,591
|
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX
TO FORM 10-Q
|
Page
|
|
PART I - FINANCIAL
INFORMATION
|
||
Item 1. |
Financial
Statements
|
|
Condensed
Consolidated Balance Sheets as of December 31, 2008
and September 30, 2009 (Unaudited) |
3
|
|
|
||
Unaudited
Condensed Consolidated Statements of Income for the Quarters and Nine
Months
Ended September 30, 2008 and 2009 |
4
|
|
Unaudited
Condensed Consolidated Statements of Shareholders’ Equity
and
Comprehensive Income as of September 30, 2009 |
5
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Nine
Months
Ended September 30, 2008 and 2009 |
6
|
|
|
||
Unaudited
Notes to Condensed Consolidated Financial Statements
|
8
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
Item
4.
|
Controls
and Procedures
|
25
|
PART II - OTHER INFORMATION
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
26
|
Item
6.
|
Exhibits
|
27
|
Signatures |
28
|
2
PART I - FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
December
31,
|
September
30,
|
|||||||
2008
|
2009
|
|||||||
**
|
(Unaudited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 1,234,991 | $ | 884,845 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $290,688 and
$303,316, respectively
|
2,875,732 | 3,085,304 | ||||||
Deferred
tax asset
|
195,091 | 305,183 | ||||||
Prepaid
expenses and other assets
|
418,653 | 445,265 | ||||||
Total
current assets
|
4,724,467 | 4,720,597 | ||||||
PROPERTY
AND EQUIPMENT, net
|
3,887,919 | 3,161,433 | ||||||
OTHER
NONCURRENT ASSETS:
|
||||||||
Intangible
assets, net
|
10,621,918 | 10,360,067 | ||||||
Deferred
charges and other assets
|
160,289 | 152,885 | ||||||
Total
assets
|
$ | 19,394,593 | $ | 18,394,982 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 1,551,851 | $ | 1,881,568 | ||||
Accrued
expenses
|
1,462,258 | 1,672,479 | ||||||
Accrued
payroll and related expenses
|
1,714,550 | 2,045,286 | ||||||
Income
taxes payable
|
371,569 | 290,009 | ||||||
Current
maturities of long-term debt
|
920,000 | 920,000 | ||||||
Total
current liabilities
|
6,020,228 | 6,809,342 | ||||||
LONG-TERM
LIABILITIES:
|
||||||||
Deferred
tax liability, net
|
618,913 | 614,114 | ||||||
Long-term
debt, net of current maturities
|
5,988,202 | 3,217,683 | ||||||
Other
long-term obligations
|
259,678 | 251,743 | ||||||
Total
liabilities
|
12,887,021 | 10,892,882 | ||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Preferred
Stock, no par value, 10,000,000 shares authorized; none
outstanding
|
- | - | ||||||
Common
Stock, no par value, 20,000,000 shares authorized; 1,863,587
and 1,865,824 shares issued and outstanding,
respectively
|
- | 101,924 | ||||||
Treasury
Stock purchased in excess of Common Stock basis
|
(266,786 | ) | - | |||||
Retained
earnings
|
6,817,449 | 7,428,424 | ||||||
Accumulated
other comprehensive loss
|
(43,091 | ) | (28,248 | ) | ||||
Total
shareholders' equity
|
6,507,572 | 7,502,100 | ||||||
Total
liabilities and shareholders' equity
|
$ | 19,394,593 | $ | 18,394,982 |
** Derived
from the Company’s audited consolidated balance sheet at December 31,
2008.
The
accompanying notes are an integral part of these financial
statements
3
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarters Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
NET
REVENUE:
|
$ | 8,763,895 | $ | 8,496,084 | $ | 26,504,119 | $ | 26,423,323 | ||||||||
DIRECT
EXPENSES:
|
||||||||||||||||
Clinical
salaries and benefits
|
2,351,310 | 2,376,929 | 7,510,984 | 7,374,481 | ||||||||||||
Dental
supplies
|
627,377 | 580,022 | 1,845,599 | 1,703,935 | ||||||||||||
Laboratory
fees
|
693,809 | 651,501 | 2,085,682 | 1,973,718 | ||||||||||||
Occupancy
|
1,213,074 | 1,235,905 | 3,601,979 | 3,669,972 | ||||||||||||
Advertising
and marketing
|
105,227 | 138,870 | 331,775 | 322,631 | ||||||||||||
Depreciation
and amortization
|
623,199 | 601,545 | 1,826,232 | 1,831,537 | ||||||||||||
General
and administrative
|
1,192,403 | 1,160,913 | 3,629,391 | 3,456,683 | ||||||||||||
6,806,399 | 6,745,685 | 20,831,642 | 20,332,957 | |||||||||||||
Contribution
from dental offices
|
1,957,496 | 1,750,399 | 5,672,477 | 6,090,366 | ||||||||||||
CORPORATE
EXPENSES:
|
||||||||||||||||
General
and administrative
|
975,006 |
(1)
|
1,049,806 |
(1)
|
2,805,315 |
(2)
|
3,212,726 |
(2)
|
||||||||
Depreciation
and amortization
|
25,519 | 21,170 | 72,173 | 65,720 | ||||||||||||
Operating
income
|
956,971 | 679,423 | 2,794,989 | 2,811,920 | ||||||||||||
Interest
expense, net
|
63,819 | 49,160 | 199,817 | 118,513 | ||||||||||||
Income
before income taxes
|
893,152 | 630,263 | 2,595,172 | 2,693,407 | ||||||||||||
Income
tax expense
|
393,005 | 264,713 | 1,127,270 | 1,131,231 | ||||||||||||
Net
income
|
$ | 500,147 | $ | 365,550 | $ | 1,467,902 | $ | 1,562,176 | ||||||||
Net
income per share of Common Stock - Basic
|
$ | 0.25 | $ | 0.20 | $ | 0.71 | $ | 0.84 | ||||||||
Net
income per share of Common Stock - Diluted
|
$ | 0.24 | $ | 0.19 | $ | 0.69 | $ | 0.82 | ||||||||
Cash
dividends per share of Common Stock
|
$ | 0.17 | $ | 0.17 | $ | 0.51 | $ | 0.51 | ||||||||
Weighted
average number of shares of Common Stock and dilutive
securities:
|
||||||||||||||||
Basic
|
1,992,821 | 1,872,924 | 2,070,157 | 1,863,054 | ||||||||||||
Diluted
|
2,045,245 | 1,914,748 | 2,141,674 | 1,896,252 |
(1)
|
Corporate
expense - general and administrative includes $186,306 related to
stock-based compensation expense in the quarter ended September 30, 2008,
and $245,485 related to total stock-based compensation expense
in the quarter ended September 30, 2009, of which $163,693 related to ASC
Topic 718 expense (stock option expense) and $81,792 related to a long
term incentive program.
|
(2)
|
Corporate
expense - general and administrative includes $544,337 related to
stock-based compensation expense in the nine months ended September 30,
2008, and $662,370 related to total stock-based compensation expense in
the nine months ended September 30, 2009, of which $498,786 related to ASC
Topic 718 expense (stock option expense) and $163,584 related to a long
term incentive program.
|
The
accompanying notes are an integral part of these financial
statements
4
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(UNAUDITED)
Treasury Stock Purchased in | ||||||||||||||||||||||||
Common
Stock
|
excess
of Common Stock
|
Comprehensive
|
|
Shareholders'
|
||||||||||||||||||||
Shares
|
Amount
|
Basis
|
Income
|
Retained Earnings
|
Equity
|
|||||||||||||||||||
BALANCES,
December 31, 2008
|
1,863,587 | $ | - | $ | (266,786 | ) | $ | (43,091 | ) | $ | 6,817,449 | $ | 6,507,572 | |||||||||||
Common
Stock options exercised
|
49,333 | 101,924 | 311,473 | - | - | 413,397 | ||||||||||||||||||
Purchase
and retirement of Common Stock
|
(47,096 | ) | - | (705,834 | ) | - | (705,834 | ) | ||||||||||||||||
Tax
effect of Common Stock options exercised
|
- | (1,223 | ) | - | - | (1,223 | ) | |||||||||||||||||
Dividends
declared on Common Stock
|
- | - | - | - | (951,201 | ) | (951,201 | ) | ||||||||||||||||
Stock-based
compensation expense
|
- | - | 662,370 | - | 662,370 | |||||||||||||||||||
Other
comprehensive income
|
- | - | - | 14,843 | - | 14,843 | ||||||||||||||||||
Net income, nine months ended September 30, 2009
|
- | - | - | 1,562,176 | 1,562,176 | 1,562,176 | ||||||||||||||||||
Comprehensive
income
|
1,577,019 | |||||||||||||||||||||||
BALANCES,
September 30, 2009
|
1,865,824 | $ | 101,924 | $ | - | $ | (28,248 | ) | $ | 7,428,424 | $ | 7,502,100 |
The
accompanying notes are an integral part of these financial
statements
5
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
|
||||||||
2008
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 1,467,902 | $ | 1,562,176 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
1,898,405 | 1,897,257 | ||||||
Stock
compensation expense
|
544,337 | 662,370 | ||||||
Loss
on disposition of property
|
885 | - | ||||||
Provision
for doubtful accounts
|
559,375 | 431,047 | ||||||
Provision
for deferred income taxes
|
73,345 | (114,891 | ) | |||||
Changes
in assets and liabilities net of effects from
acquisitions:
|
||||||||
Accounts
receivable
|
(821,943 | ) | (640,619 | ) | ||||
Prepaid
expenses and other assets
|
78,989 | (26,612 | ) | |||||
Deferred
charges and other assets
|
10,254 | 7,405 | ||||||
Accounts
payable
|
(263,901 | ) | 329,717 | |||||
Accrued
expenses
|
(87,741 | ) | 223,817 | |||||
Accrued
payroll and related expenses
|
657,697 | 330,736 | ||||||
Income
taxes payable
|
429,759 | (81,561 | ) | |||||
Other
long-term obligations
|
(3,712 | ) | (7,935 | ) | ||||
Net
cash provided by operating activities
|
4,543,651 | 4,572,907 | ||||||
CASH
FLOWS USED IN INVESTING ACTIVITIES:
|
||||||||
Capital
expenditures
|
(671,033 | ) | (558,919 | ) | ||||
Development
or acquisition of new dental centers
|
(367,977 | ) | (350,000 | ) | ||||
Net
cash used in investing activities
|
(1,039,010 | ) | (908,919 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Advances
– line of credit
|
18,476,809 | 9,908,874 | ||||||
Repayments
– line of credit
|
(16,917,162 | ) | (11,989,394 | ) | ||||
Repayments
– Term Loan
|
(690,000 | ) | (690,000 | ) | ||||
Proceeds
from exercise of Common Stock options
|
293,788 | 413,397 | ||||||
Purchase
and retirement of Common Stock
|
(3,880,517 | ) | (705,834 | ) | ||||
Tax
benefit of Common Stock options exercised
|
2,579 | (1,224 | ) | |||||
Common
Stock cash dividends
|
(1,035,844 | ) | (949,953 | ) | ||||
Net
cash used in financing activities
|
(3,750,347 | ) | (4,014,134 | ) | ||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(245,706 | ) | (350,146 | ) | ||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
964,150 | 1,234,991 | ||||||
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 718,444 | $ | 884,845 |
The
accompanying notes are an integral part of these financial
statements
6
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
|
||||||||
September 30,
|
||||||||
2008
|
2009
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the year for interest
|
$ | 245,548 | $ | 149,507 | ||||
Cash
paid during the year for income taxes
|
$ | 621,586 | $ | 1,328,907 | ||||
NON-CASH
ITEM:
|
||||||||
Gain
recognized on interst rate swap (net of taxes)
|
$ | 8,473 | $ | 14,843 |
The
accompanying notes are an integral part of these financial
statements
7
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September
30, 2009
(1)
|
UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
|
The
condensed consolidated 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
(“GAAP”) 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, 2008.
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 September 30, 2009 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 quarter and nine months ended September 30, 2009 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. The Company has evaluated all subsequent events through
November 12, 2009, the date the financial statements were issued.
Due to
the Company’s repurchases of Common Stock at prices higher than the original
issue price, the Company’s Common Stock balance would have been reduced to a
negative $266,786 as of December 31, 2008. The Company reclassified
this negative balance to treasury stock purchased in excess of Common Stock
basis on the balance sheet. In the Company’s Form 10-K for the year
ended December 31, 2008, the negative Common Stock amount of $266,786 was offset
against retained earnings.
(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 dental offices
(“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
related to the Office (“Management Agreement”). The Management Agreement
represents the Company's right to manage the Offices during the 40-year term of
the Management Agreement. The assigned value of the Management Agreement is
amortized using the straight-line method over a period of 25
years. Amortization was $195,098 and $195,015 for the quarters ended
September 30, 2009 and 2008, respectively. Amortization was $585,185 and
$584,990 for the nine months ended September 30, 2009 and 2008,
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
discounted cash flow value would be required.
Stock
Options
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 quarters ended September
30, 2009 and 2008 was approximately $245,000 and $186,000, respectively. For the
quarter ended September 30, 2009, the stock-based compensation expense consisted
of $164,000 related to stock options and $82,000 related to restricted stock
units granted under the long term incentive program (“LTIP”). The
LTIP was adopted by the Board of Directors on June 3, 2009 and provides for
long-term performance-based cash and stock opportunities for the executive
officers of the Company. Total stock-based compensation expense
included in the Company’s statement of income for the nine months ended
September 30, 2009 and 2008 was approximately $662,000 and $544,000,
respectively. For the nine months ended September 30, 2009, the stock-based
compensation expense consisted of $499,000 related to stock options and $164,000
related to restricted stock units granted under the LTIP. Total
stock-based compensation expense was recorded as a component of corporate
general and administrative expense.
8
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 ended September 30, 2009 equal to the expected
option term. Expected pre-vesting forfeitures were estimated based on actual
historical pre-vesting forfeitures over the most recent periods ended September
30, 2009 for the expected option term. From January 1, 2006 through December 31,
2007, the expected option term was calculated using the “simplified” method
permitted by Staff Accounting Bulletin 107. Starting January 1,
2008, the expected option term was calculated based on historical experience of
the terms of previous options.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance for fair value measurements and disclosures which defines
fair value, establishes a framework for measuring fair value and expands
disclosures related to assets and liabilities measured at fair value. In
February 2008, the FASB issued additional authoritative guidance for fair value
measurements which delayed the effective date of the authoritative guidance for
fair value measurements to fiscal years beginning after November 15, 2008
for all nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. The
Company adopted all of the provisions of the authoritative guidance for fair
value measurements on January 1, 2008 with the exception of the application
of the guidance to non-recurring nonfinancial assets and nonfinancial
liabilities which the Company adopted on January 1, 2009. The adoption did
not have a material effect on the Company’s consolidated financial
statements.
In
December 2007, the FASB issued revised authoritative guidance for business
combinations which establishes principles and requirements for how an acquirer
in a business combination transaction recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date. The provisions
of the guidance also establish disclosure requirements which will enable
financial statement users to evaluate the nature and financial effects of the
business combination. In April 2009, the FASB issued additional authoritative
guidance for business combinations relating to the initial recognition and
measurement, subsequent measurement and accounting and disclosures of assets and
liabilities that arise from contingencies in a business combination. The
authoritative guidance for business combinations is effective for fiscal years
beginning after December 15, 2008. The Company adopted all of the
provisions of the authoritative guidance for business combinations on January 1,
2009. The adoption did not have a material effect on the Company’s consolidated
financial statements.
In
December 2007, the FASB issued authoritative guidance for consolidations which
states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. The guidance also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. The
guidance applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. This guidance is effective for fiscal years
beginning after December 15, 2008. The Company adopted this guidance as of
January 1, 2009. The adoption did not have a material effect on the
Company’s consolidated financial statements.
In March
2008, the FASB issued authoritative guidance for derivatives and hedging which
requires companies with derivative instruments to disclose information that
should enable financial statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under the guidance, and how derivative instruments and related
hedged items affect a company’s financial position, financial performance and
cash. This guidance is effective for fiscal years and interim periods beginning
after November 15, 2008. The Company adopted this guidance on January 1,
2009. The adoption requires the Company to make additional disclosures but did
not have a material effect on the Company’s consolidated financial
statements.
In April
2008, the FASB issued authoritative guidance for intangibles – goodwill and
other which amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under the guidance. This guidance also requires enhanced
disclosures concerning a company’s treatment of costs incurred to renew or
extend the term of a recognized intangible asset. This guidance is effective for
financial statements issued for fiscal years beginning after December 15,
2008. The Company adopted this guidance on January 1, 2009, but it did not
have a material impact on the Company's consolidated financial
statements.
9
In June
2008, the FASB issued authoritative guidance for earnings per share. The
guidance addresses whether instruments granted in share-based payment
transactions may be participating securities prior to vesting and, therefore,
need to be included in the earnings allocation in computing basic earnings per
share pursuant to the two-class method of the guidance for earnings per share.
This guidance is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those years.
The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.
In April
2009, the FASB issued authoritative guidance for fair value measurements and
disclosures. This guidance provides companies with guidelines on how to
determine fair value measurements when the volume and level of activity for an
asset or liability have significantly decreased and how to identify transactions
that are not orderly. This guidance was effective for the Company beginning with
its reporting period ended June 30, 2009 and did not have a material effect on
the Company’s consolidated financial statements.
In April
2009, the FASB issued authoritative guidance for interim disclosures for
financial instruments. This guidance amends prior authoritative guidance by
requiring disclosures of the fair value of financial instruments included within
the scope of the prior guidance whenever a public company issues summarized
financial information for interim reporting periods. This guidance was effective
for the Company beginning with its reporting period ended June 30, 2009 and did
not have a material effect on its consolidated financial statements. The Company
has provided the additional disclosures required in Note 2.
In May
2009, the FASB issued authoritative guidance for subsequent events which
provides rules on recognition and disclosure for events and transactions
occurring after the balance sheet date but before the financial statements are
issued or available to be issued. In addition, the guidance requires a reporting
entity to disclose the date through which subsequent events have been evaluated,
as well as whether that date is the date the financial statements are issued or
the date the financial statements are available to be issued. This guidance was
effective for the Company beginning with its reporting period ended June 30,
2009 and shall be applied prospectively. The adoption of this statement did not
have a material effect on the Company’s consolidated financial
statements.
In July
2009, the Financial Accounting Standards Board (FASB) established the FASB
Accounting Standards Codification (ASC) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with
GAAP. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The ASC supersedes all
existing non-SEC accounting and reporting standards and is not intended to
change GAAP. The use of the ASC was effective for financial
statements issued for periods ending after September 15, 2009.
10
(3)
|
EARNINGS PER
SHARE
|
The
Company calculates earnings per share in accordance with ASC Topic 718,
“Compensation – Stock Compensation.”
Quarters Ended September 30,
|
||||||||||||||||||||||||
2008
|
2009
|
|||||||||||||||||||||||
Income
|
Shares
|
Per Share
Amount
|
Income
|
Shares
|
Per Share
Amount
|
|||||||||||||||||||
Basic
EPS:
|
||||||||||||||||||||||||
Net
income available to shares of Common Stock
|
$ | 500,147 | 1,992,821 | $ | 0.25 | $ | 365,550 | 1,872,924 | $ | 0.20 | ||||||||||||||
Effect
of dilutive shares of Common Stock from stock options and
warrants
|
- | 52,424 | (0.01 | ) | - | 41,824 | (0.01 | ) | ||||||||||||||||
Diluted
EPS:
|
||||||||||||||||||||||||
Net
income available to shares of Common Stock
|
$ | 500,147 | 2,045,245 | $ | 0.24 | $ | 365,550 | 1,914,748 | $ | 0.19 |
The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended September 30, 2009
and 2008 relates to the effect of 41,824 and 52,424 shares, respectively, of
dilutive shares of Common Stock from stock options, which are included in total
shares for the diluted calculation. For the quarters ended September
30, 2009 and 2008, options to purchase 246,350 and 272,929 shares, respectively,
of the Company’s Common Stock were not included in the computation of dilutive
earnings per share because their effect was anti-dilutive.
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2008
|
2009
|
|||||||||||||||||||||||
Income
|
Shares
|
Per Share
Amount
|
Income
|
Shares
|
Per Share
Amount
|
|||||||||||||||||||
Basic
EPS:
|
||||||||||||||||||||||||
Net
income available to shares of Common Stock
|
$ | 1,467,902 | 2,070,157 | $ | 0.71 | $ | 1,562,176 | 1,863,054 | $ | 0.84 | ||||||||||||||
Effect
of dilutive shares of Common Stock from stock options and
warrants
|
- | 71,517 | (0.02 | ) | - | 33,198 | (0.02 | ) | ||||||||||||||||
Diluted
EPS:
|
||||||||||||||||||||||||
Net
income available to shares of Common Stock
|
$ | 1,467,902 | 2,141,674 | $ | 0.69 | $ | 1,562,176 | 1,896,252 | $ | 0.82 |
The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the nine months ended September 30,
2009 and 2008 relates to the effect of 33,198 and 71,517 shares, respectively,
of dilutive shares of Common Stock from stock options, which are included in
total shares for the diluted calculation. For the nine months ended September
30, 2009 and 2008, options to purchase 295,605 and 252,400 shares, respectively,
of the Company’s Common Stock were not included in the computation of dilutive
earnings per share because their effect was anti-dilutive.
11
(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”). An amendment to the 2005 Plan was
approved at the June 2009 annual meeting of shareholders to increase the number
of authorized shares of Common Stock issuable under the 2005 Plan from 425,000
shares to 625,000 shares. 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 and providing for additional
performance incentives by providing employees with the opportunity to acquire
equity in the Company. As of September 30, 2009, there were 162,898 shares
available for issuance under the 2005 Plan. The exercise price of the stock
options issued under the 2005 Plan is equal to the market price, or market price
plus 10% for shareholders who own greater than 10% of the Company, at the date
of grant. These stock options expire seven years, or five years for shareholders
who own greater than 10% 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 independent 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 awards in addition to those
contained in the 2005 Plan. As of September 30, 2009, there were 150,055
vested options, 159,628 unvested options and 60,000 vested restricted shares
outstanding under 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 September 30, 2009, there were 96,000
vested options outstanding and zero unvested options outstanding under the
Employee Plan.
The
Company uses the Black-Scholes pricing model to estimate the fair value of each
option granted with the following weighted average assumptions:
Quarters Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
Valuation Assumptions
|
2008
|
2009 (5)
|
2008
|
2009
|
||||||||||||
Expected
life (1)
|
3.1 | - | 4.0 | 3.2 | ||||||||||||
Risk-free
interest rate (2)
|
2.30 | % | - | 2.28 | % | 1.30 | % | |||||||||
Expected
volatility (3)
|
63 | % | - | 58 | % | 69 | % | |||||||||
Expected
dividend yield
|
5.00 | % | - | 3.39 | % | 6.33 | % | |||||||||
Expected
Forteiture (4)
|
9.39 | % | - | 2.70 | % | 4.97 | % |
(1)
|
The
expected life, in years, of stock options is estimated based on historical
experience.
|
(2)
|
The
risk-free interest rate is based on U.S. Treasury bills whose term is
consistent with the expected life of the stock
options.
|
(3)
|
The
expected volatility is estimated based on historical and current stock
price data for the Company.
|
(4)
|
Forfeitures
of options granted prior to the Company’s adoption of ASC Topic 718 on
January 1, 2006 are recorded as they occur. Forfeitures of options granted
since the Company’s adoption of ASC Topic 718 are estimated based on
historical experience.
|
(5)
|
The
Company did not issue any options during the quarter ended September 30,
2009.
|
12
A summary
of option activity as of September 30, 2009, and changes during the nine months
then ended, is presented below:
Number of
Options
|
Weighted-
Average
Exercise
Price
|
Range of
Exercise Prices
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(thousands)
|
||||||||||||||||
Outstanding
at December 31, 2008
|
466,516 | $ | 15.55 | $7.88 - $21.85 | 3.8 | $ | 273 | |||||||||||||
Granted
|
19,000 | $ | 10.75 | $10.75 - $10.75 | ||||||||||||||||
Exercised
|
(49,333 | ) | $ | 8.38 | $7.88 - $14.81 | |||||||||||||||
Forfeited
|
(30,500 | ) | $ | 16.76 | $11.50 - $21.75 | |||||||||||||||
Outstanding
at September 30, 2009
|
405,683 | $ | 16.10 | $9.66 - $21.85 | 3.4 | $ | 777 | |||||||||||||
Exercisable
at September 30, 2009
|
246,055 | $ | 15.81 | $9.66 - $21.85 | 2.3 | $ | 505 |
The
weighted average grant date fair values of options granted were $3.69 per option
and $7.57 per option during the nine months ended September 30, 2009 and 2008,
respectively. Net cash proceeds from the exercise of stock options
during the nine months ended September 30, 2009 and 2008 were $413,397 and
$293,788, respectively. The associated income tax effect from stock options
exercised during the nine months ended September 30, 2009 and 2008 was ($1,223)
and $2,580, respectively. As of the date of exercise, the total intrinsic values
of options exercised during the nine months ended September 30, 2009 and 2008
were $360,201 and $200,346, respectively. As of September 30, 2009, there was
$758,000 of total unrecognized compensation expense related to non-vested stock
options, which is expected to be recognized over a weighted average period of
1.32 years.
(5)
|
LONG TERM INCENTIVE
PROGRAM
|
On June
3, 2009, the Compensation Committee of the Company adopted the
LTIP. The LTIP, which will operate under the 2005 Plan, provides for
long-term performance-based cash and stock opportunities for the executive
officers of the Company. Details of the LTIP are as
follows:
The
Company’s executive officers may earn an aggregate of up to $1,050,000 in cash
and up to 80,000 shares of Common Stock of the Company. The Company
issued restricted stock units with respect to the 80,000
shares. Frederic W. Birner, the Company’s Chairman and Chief
Executive Officer, Dennis N. Genty, the Company’s Chief Financial Officer, and
Mark A. Birner, D.D.S., the Company’s President, may earn up to 50%, 25% and 25%
of the foregoing amounts, respectively. Of the foregoing amounts,
24%, 33% and 43% can be earned in each of 2009, 2010 and 2011,
respectively.
The
executive officers may earn the foregoing amounts through achievement by the
Company of performance targets related to patient revenue growth, practice
additions, adjusted EBITDA margin and earnings per share growth. The
executive officers will earn 100% of the amounts allocated to a particular year
if the Company exceeds all four of the annual performance targets, 90% if the
Company exceeds three of the four annual performance targets, 66.7% if the
Company exceeds two of the four annual performance targets, and 0% if the
Company achieves fewer than two of the four annual performance
targets. The Compensation Committee will review each of the
performance targets annually and will administer the LTIP.
All
amounts vest only if the executive officer is employed by the Company on
December 31, 2011 and will be payable during the first quarter of
2012.
For the
quarter ended September 30, 2009, the Company accrued approximately $76,000
related to the cash portion and recorded $82,000 of stock-based compensation for
the equity portion, respectively, of the LTIP. For the nine months
ended September 30, 2009, the Company accrued approximately $151,000 related to
the cash portion and recorded $164,000 of stock-based compensation for the
equity portion, respectively, of the LTIP.
13
(6)
|
DIVIDENDS
|
Since
March 9, 2004, the Company has declared and paid the following quarterly cash
dividends.
Date Dividend Paid
|
Quarterly Dividend Paid
per Share
|
|||
April
9, 2004; July 9, 2004; October 8, 2004; January 14, 2005
|
0.0375 | |||
April
8, 2005; July 8, 2005; October 14, 2005; January 13, 2006
|
0.10 | |||
April
14, 2006; July 14, 2006; October 13, 2006; January 12,
2007
|
0.13 | |||
April
13, 2007; July 13, 2007; October 12, 2007; January 11,
2008
|
0.15 | |||
April
11, 2008; July 11, 2008; October 10, 2008; January 9, 2009
|
0.17 | |||
April
10, 2009; July 10, 2009; October 9, 2009
|
0.17 |
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 or require the Company to reduce the dividends. Such factors include
the Company’s financial position, capital requirements and liquidity, the
existence of a stock repurchase program, any loan agreement restrictions, state
corporate law restrictions, results of operations and such other factors that
the Company’s Board of Directors may consider relevant.
(7)
|
LINE OF
CREDIT
|
On June
30, 2009, the Company amended its bank line of credit (“Credit
Facility”). The amended Credit Facility extends the expiration of the
credit agreement from May 31, 2010 to May 31, 2011. The Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $7.0 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 Base Rate computes interest at the higher of the lender’s
“prime rate” or the Federal Funds Rate plus a margin. The amendment
adjusts the Base Rate margin from 0.5% to 2.5%. The LIBOR option
computes interest at the LIBOR rate as of the date such LIBOR rate loan was made
plus a LIBOR rate margin. The amendment states that the LIBOR rate is
the higher of 1.5% or the LIBOR rate and the margin is adjusted from 1.25% to
3.875%. A commitment fee on the average daily unused amount of the
revolving loan commitment during the preceding quarter is also assessed and was
increased from 0.25% to 0.40% as of June 1, 2009. 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. At September 30, 2009, the Company had $2.3
million outstanding and $4.7 million available for borrowing under the
Credit Facility. This consisted of $2.0 million outstanding under the
LIBOR rate option and $298,000 outstanding under the Base Rate
option. As of September 30, 2009, the Company’s LIBOR borrowing rate
was 5.375% and the Base Rate borrowing rate was 5.75%. Management
believes that the LIBOR and Base Rate margins increased as a result of the
lender’s increased cost of funds and not because of the Company’s credit
quality. The Credit Facility requires the Company to comply with
certain covenants and financial ratios. At September 30, 2009, the Company was
in full compliance with all of its covenants under the Credit
Facility.
(8)
|
TERM
LOAN
|
In
October 2006, the Company entered into a $4.6 million term loan (“Term Loan”).
Under the Term Loan, $2.3 million was borrowed at a fixed interest rate of 7.05%
and the remaining $2.3 million was borrowed at a floating interest rate of LIBOR
plus 1.5%. As of September 30, 2009, the floating rate was 1.81%. The
principal amount borrowed is repaid quarterly in 20 equal payments of $230,000
plus interest beginning December 31, 2006. The Term Loan matures on September
30, 2011. As of September 30, 2009, $920,000 was outstanding at the
fixed rate of 7.05% and $920,000 was outstanding at the LIBOR plus 1.5% floating
rate. The
Term Loan requires the Company to comply with certain covenants and financial
ratios. At September 30, 2009, the Company was in full compliance with
all of its covenants under the Term Loan.
14
Historically,
the Company has not used derivative instruments or engaged in hedging
activities. On October 12, 2006, the Company entered into a fixed-for-floating
interest rate swap transaction on $2.3 million of the Term Loan. The
Company elected to designate the swap as a cash flow hedge under ASC Topic
815. In September 2009, the Company recognized, on its balance sheet,
approximately $15,000 of other comprehensive income to mark up the value of the
cash flow hedge net of taxes. As required by ASC Topic 820, the
Company calculated the value of the cash flow hedge using Level II
inputs.
(9)
|
ACQUISITIONS
|
On
September 30, 2009, the Company acquired substantially all of the assets of a
dental practice in Tucson, Arizona and obtained certain rights to manage the
practice for a total purchase price of $350,000 in cash. The Company
recorded an increase to intangible assets of $315,000 and an increase to fixed
assets of $35,000 related to this Office.
(10)
|
SUBSEQUENT
EVENTS
|
On
October 29, 2009, the Company acquired substantially all of the assets of a
dental practice in Tucson, Arizona and obtained certain rights to manage the
practice for a total purchase price of $700,000. The Company recorded
an increase to intangible assets of $530,000, an increase to accounts
receivable, net of allowance for doubtful accounts of $100,000 and an increase
to fixed assets of $70,000 related to this Office.
(11)
|
OTHER
|
The
Company’s retained earnings as of September 30, 2009 were approximately $7.4
million, and the Company had a working capital deficit on that date of
approximately $2.1 million. During the nine months ended September 30, 2009, the
Company had capital expenditures of approximately $559,000, acquired a new
dental practice for $350,000, paid dividends of approximately $950,000 and
purchased approximately $706,000 of Common Stock pursuant to the Company’s stock
repurchase program, while decreasing total bank debt by approximately $2.8
million.
15
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 of de novo offices 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, 2008, 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 quarters and nine
months ended September 30, 2008 and 2009. 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 62 Offices in Colorado, New
Mexico and Arizona staffed by 79 general dentists and 35 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 develops a de
novo Office or acquires an existing dental practice. These
responsibilities 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, 2008. 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. Revenue is a non-GAAP measure. See the
reconciliation of Revenue to net revenue on page 19. 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.
16
Net
revenue represents Revenue less amounts retained by the Offices. The amounts
retained by the Offices represent amounts paid as compensation to employed
dentists, dental hygienists and dental assistants. 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, dental hygienists and
dental assistants, 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, dental hygienists and dental assistants, (ii)
complying with all laws, rules and regulations relating to dentists, dental
hygienists and dental assistants, and (iii) maintaining proper patient
records.
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, dental hygienists and dental assistants
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 dentists’, dental hygienists’ and
dental assistants’ 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
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 and dentist recruitment expenses, (vii) personal property and
other taxes assessed against 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, dental hygienists and dental
assistants 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 the capitated
managed dental care 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 of dentists, dental hygienists and dental
assistants), 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.
17
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.
Results
of Operations
For the
quarter ended September 30, 2009, Revenue decreased $285,000, or 1.9%, to $14.7
million compared to $15.0 million for the quarter ended September 30,
2008. For the quarter ended September 30, 2009, net revenue decreased
$268,000, or 3.1%, to $8.5 million compared to $8.8 million for the quarter
ended September 30, 2008. This decrease is attributable to a decrease
in same store net revenue from general dentistry of $326,000 partially offset by
an increase in same store net revenue from specialty dentistry of
$58,000. The Company attributes the decreases in Revenue and net
revenue for the quarter ended September 30, 2009 compared to the quarter ended
September 30, 2008, to a general weakness in the economy in its
markets.
For the
quarter ended September 30, 2009, net income decreased 26.9 % to $366,000, or
$.19 per share, compared to $500,000, or $.24 per share, for the quarter ended
September 30, 2008.
For the
nine months ended September 30, 2009, Revenue increased $102,000, or 0.2%, to
$45.2 million compared to $45.1 million for the nine months ended September 30,
2008. For the nine months ended September 30, 2009, net revenue
decreased $81,000, or 0.3%, to $26.4 million compared to $26.5 million for the
nine months ended September 30, 2008. This decrease is attributable
to a decrease in same store net revenue from general dentistry of $482,000
partially offset by an increase in same store net revenue from specialty
dentistry of $267,000 along with a de novo Office the Company
opened in May 2008 that generated an additional $134,000 in net
revenue. The Company attributes the decrease in net revenue for the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008, to a general weakness in the economy in its markets.
For the
nine months ended September 30, 2009, net income increased 6.4% to $1.6 million,
or $.82 per share, compared to $1.5 million, or $.69 per share, for the nine
months ended September 30, 2008.
During
the nine months ended September 30, 2009, the Company generated $4.6 million of
cash from operations. During this period, the Company purchased
$706,000 of its outstanding Common Stock, invested $559,000 in capital
expenditures, invested $350,000 in the acquisition of a new dental practice,
paid $950,000 in dividends and repaid $690,000 of the Term Loan while decreasing
borrowings under its Credit Facility by $2.1 million.
18
The
Company’s earnings before interest, taxes, depreciation, amortization and
non-cash expense associated with stock-based compensation (“Adjusted EBITDA”)
increased $134,000, or 2.6%, to $5.4 million for the nine months ended September
30, 2009 compared to $5.2 million for the corresponding nine month period in
2008. Although Adjusted EBITDA is not a GAAP measure of performance or
liquidity, the Company believes that it may be useful to an investor in
evaluating the Company’s ability to meet future debt service, capital
expenditures and working capital requirements. 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 Adjusted 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 Adjusted EBITDA to net income
can be made by adding depreciation and amortization expense - Offices,
depreciation and amortization expense – corporate, stock-based compensation
expense, interest expense, net and income tax expense to net income as in the
following table:
Quarters
|
Nine Months
|
|||||||||||||||
Ended September 30,
|
Ended September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
RECONCILIATION
OF ADJUSTED EBITDA:
|
||||||||||||||||
Net
income
|
$ | 500,147 | $ | 365,550 | $ | 1,467,902 | $ | 1,562,176 | ||||||||
Add
back:
|
||||||||||||||||
Depreciation
and amortization - Offices
|
623,199 | 601,545 | 1,826,232 | 1,831,537 | ||||||||||||
Depreciation
and amortization - Corporate
|
25,519 | 21,170 | 72,173 | 65,720 | ||||||||||||
Stock-based
compensation expense
|
186,306 | 245,485 | 544,337 | 662,370 | ||||||||||||
Interest
expense, net
|
63,819 | 49,160 | 199,817 | 118,513 | ||||||||||||
Income
tax expense
|
393,005 | 264,713 | 1,127,270 | 1,131,231 | ||||||||||||
Adjusted
EBITDA
|
$ | 1,791,995 | $ | 1,547,623 | $ | 5,237,731 | $ | 5,371,547 |
Revenue
is total dental group practice revenue generated at the Company’s Offices from
professional services provided to patients. Amounts retained by Offices
represent compensation expense to the dentists, dental hygienists and dental
assistants and are subtracted from total dental group practice revenue to arrive
at net revenue. The Company reports net revenue in its financial statements to
comply with ASC Topic 810. Revenue is not a GAAP measure. The Company discloses
Revenue and believes it is useful to investors 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 GAAP. The following table reconciles Revenue to net
revenue:
Quarters Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Total
dental group practice revenue
|
$ | 14,976,112 | $ | 14,690,693 | $ | 45,146,842 | $ | 45,248,436 | ||||||||
Less
- amounts retained by dental Offices
|
(6,212,217 | ) | (6,194,609 | ) | (18,642,723 | ) | (18,825,113 | ) | ||||||||
Net
revenue
|
$ | 8,763,895 | $ | 8,496,084 | $ | 26,504,119 | $ | 26,423,323 |
19
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 following 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.
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarters Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
NET
REVENUE:
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
DIRECT
EXPENSES:
|
||||||||||||||||
Clinical
salaries and benefits
|
26.8 | % | 28.0 | % | 28.3 | % | 27.9 | % | ||||||||
Dental
supplies
|
7.2 | % | 6.8 | % | 7.0 | % | 6.4 | % | ||||||||
Laboratory
fees
|
7.9 | % | 7.7 | % | 7.9 | % | 7.5 | % | ||||||||
Occupancy
|
13.8 | % | 14.5 | % | 13.6 | % | 13.9 | % | ||||||||
Advertising
and marketing
|
1.2 | % | 1.6 | % | 1.3 | % | 1.2 | % | ||||||||
Depreciation
and amortization
|
7.1 | % | 7.1 | % | 6.9 | % | 6.9 | % | ||||||||
General
and administrative
|
13.6 | % | 13.7 | % | 13.7 | % | 13.1 | % | ||||||||
77.7 | % | 79.4 | % | 78.6 | % | 77.0 | % | |||||||||
Contribution
from dental offices
|
22.3 | % | 20.6 | % | 21.4 | % | 23.0 | % | ||||||||
CORPORATE
EXPENSES:
|
||||||||||||||||
General
and administrative
|
11.1 | % | 12.4 | % | 10.6 | % | 12.2 | % | ||||||||
Depreciation
and amortization
|
0.3 | % | 0.2 | % | 0.3 | % | 0.2 | % | ||||||||
Operating
income
|
10.9 | % | 8.0 | % | 10.5 | % | 10.6 | % | ||||||||
Interest
expense
|
0.7 | % | 0.6 | % | 0.8 | % | 0.4 | % | ||||||||
Income
before income taxes
|
10.2 | % | 7.4 | % | 9.8 | % | 10.2 | % | ||||||||
Income
tax expense
|
4.5 | % | 3.1 | % | 4.3 | % | 4.3 | % | ||||||||
Net
income
|
5.7 | % | 4.3 | % | 5.5 | % | 5.9 | % |
20
Quarter
Ended September 30, 2009 Compared to Quarter Ended September 30,
2008:
Net revenue. For the quarter
ended September 30, 2009, net revenue decreased $268,000, or 3.1%, to $8.5
million compared to $8.8 million for the quarter ended September 30,
2008. This decrease is attributable to a decrease in same store net
revenue from general dentistry of $326,000 partially offset by an increase in
same store net revenue from specialty dentistry of $58,000. The
Company attributes the decrease in net revenue for the quarter ended September
30, 2009 compared to the quarter ended September 30, 2008, to a general weakness
in the economy in its markets.
Clinical salaries and
benefits. For the quarters ended September 30, 2009 and 2008, clinical
salaries and benefits remained constant at $2.4 million. As a
percentage of net revenue, clinical salaries and benefits increased to 28.0% for
the quarter ended September 30, 2009 compared to 26.8% for the quarter ended
September 30, 2008.
Dental supplies. For the
quarter ended September 30, 2009, dental supplies decreased to $580,000 compared
to $627,000 for the quarter ended September 30, 2008, a decrease of $47,000 or
7.5%. This decrease is attributable to three factors: (1) fewer new
dentists requesting initial dental supply inventories; (2) a 3% rebate from the
Company’s primary dental supply vendor that will be effective through 2009; and
(3) a concentrated effort that began in January 2009 to reduce dental supply
expense through the implementation of a new process for the monthly dental
supply budget. As a percentage of net revenue, dental supplies
decreased to 6.8% for the quarter ended September 30, 2009 compared to 7.2% for
the quarter ended September 30, 2008.
Laboratory fees. For the
quarter ended September 30, 2009, laboratory fees decreased to $652,000 compared
to $694,000 for the quarter ended September 30, 2008, a decrease of $42,000 or
6.1%. This decrease is primarily due to lower laboratory fees that were
negotiated with the Company’s significant vendors in December
2008. As a percentage of net revenue, laboratory fees decreased to
7.7% for the quarter ended September 30, 2009 compared to 7.9% for the quarter
ended September 30, 2008.
Occupancy. For the quarters
ended September 30, 2009 and 2008, occupancy expense remained constant at $1.2
million. As a percentage of net revenue, occupancy
expense increased to 14.5% for the quarter ended September 30, 2009 compared to
13.8% for the quarter ended September 30, 2008.
Advertising and marketing.
For the quarter ended September 30, 2009, advertising and marketing expense
increased to $139,000 compared to $105,000 for the quarter ended September 30,
2008, an increase of $34,000 or 32.0%. This increase is attributable
to a radio advertising campaign the Company initiated in May 2009 in its Denver
and Colorado Springs, Colorado and Albuquerque, New Mexico
markets. The cost associated with the campaign was $51,000 for the
quarter ended September 30, 2009. The Company anticipates the cost of
this campaign to be $47,000 for the quarter ending December 31,
2009. This increase was partially offset by the Company negotiating
more favorable rates for its yellow page advertising. As a percentage
of net revenue, advertising and marketing expense increased to 1.6% for the
quarter ended September 30, 2009 compared to 1.2% for the quarter ended
September 30, 2008.
Depreciation and
amortization-Offices. For the quarter ended September 30, 2009,
depreciation and amortization expenses attributable to the Offices decreased to
$602,000 compared to $623,000 for the quarter ended September 30, 2008, a
decrease of $22,000 or 3.5%. As a percentage of net revenue, depreciation and
amortization expense attributable to the Offices remained constant at 7.1 % for
the quarters ended September 30, 2009 and 2008.
General and
administrative-Offices. For the quarters ended September 30, 2009 and
2008, general and administrative expenses attributable to the Offices remained
constant at $1.2 million. As a percentage of net revenue, general and
administrative expenses attributable to the Offices increased to 13.7% for the
quarter ended September 30, 2009 compared to 13.6% for the quarter ended
September 30, 2008.
Contribution from dental
Offices. As a result of the above, contribution from
dental Offices decreased to $1.8 million for the quarter ended September 30,
2009 compared to $2.0 million for the quarter ended September 30, 2008, a
decrease of $207,000 or 10.6%. As a percentage of net revenue, contribution from
dental Offices decreased to 20.6% for the quarter ended September 30, 2009
compared to 22.3% for the quarter ended September 30, 2008.
Corporate expenses - general and
administrative. For the quarter ended September 30, 2009, corporate
expenses - general and administrative increased to $1.0 million compared to
$975,000 for the quarter ended September 30, 2008, an increase of $75,000 or
7.7%. This increase is primarily related to an increase of $76,000
related to the cash component of the LTIP for executives, $82,000 related to the
equity component of the LTIP for executives and $49,000 in professional fees
partially offset by a decrease of $120,000 in executive bonuses. As a
percentage of net revenue, corporate expenses - general and administrative
increased to 12.4% for the quarter ended September 30, 2009 compared to 11.1%
for the quarter ended September 30, 2008.
21
Corporate expenses - depreciation
and amortization. For the quarter ended September 30, 2009, corporate
expenses - depreciation and amortization decreased to $21,000 compared to
$26,000 for the quarter ended September 30, 2008, a decrease of $4,000 or 17.0%.
As a percentage of net revenue, corporate expenses – depreciation and
amortization decreased to 0.2% for the quarter ended September 30, 2009 compared
to 0.3% for the quarter ended September 30, 2008.
Operating
income. As a result of the matters discussed above, the
Company’s operating income decreased to $679,000 for the quarter ended September
30, 2009 compared to $957,000 for the quarter ended September 30, 2008, a
decrease of $278,000 or 29.0%. As a percentage of net revenue,
operating income decreased to 8.0% for the quarter ended September 30, 2009
compared to 10.9% for the quarter ended September 30, 2008.
Interest expense, net. For
the quarter ended September 30, 2009, interest expense, net decreased to $49,000
compared to $64,000 for the quarter ended September 30, 2008, a decrease of
$15,000 or 23.0%. This decrease in interest expense, net is attributable to a
reduction of the principal amount outstanding on the Term Loan and reduced
borrowings on the amended Credit Facility. As a percentage of net
revenue, interest expense, net decreased to 0.6% for the quarter ended September
30, 2009 compared to 0.7% for the quarter ended September 30, 2008.
Net
income. As a result of the above, the Company reported
net income of $366,000 for the quarter ended September 30, 2009 compared to net
income of $500,000 for the quarter ended September 30, 2008, a decrease of
$135,000 or 26.9%. Net income for the quarter ended September 30, 2009 was net
of income tax expense of $265,000, while net income for the quarter ended
September 30, 2008 was net of income tax expense of $393,000. As a percentage of
net revenue, net income decreased to 4.3% for the quarter ended September 30,
2009 compared to 5.7% for the quarter ended September 30, 2008.
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008:
Net
revenue. For
the nine months September 30, 2009, net revenue decreased $81,000, or 0.3%, to
$26.4 million compared to $26.5 million for the nine months ended September 30,
2008. This decrease is attributable to a decrease in same store net
revenue from general dentistry of $482,000 partially offset by an increase in
same store net revenue from specialty dentistry of $267,000 along with a de novo Office the Company
opened in May 2008 that generated an additional $134,000 in net
revenue. The Company attributes the decrease in net revenue for the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008, to a general weakness in the economy in its markets.
Clinical salaries and
benefits. For the nine months ended September 30, 2009, clinical salaries
and benefits decreased $137,000, or 1.8%, to $7.4 million compared to $7.5
million for the nine months ended September 30, 2008. This decrease is primarily
due to reduced administrative wages as a result of fewer front desk personnel at
the Offices in the nine months ended September 30, 2009 compared to the nine
months ended September 30, 2008. As a percentage of net revenue,
clinical salaries and benefits decreased to 27.9% for the nine months ended
September 30, 2009 compared to 28.3% for the nine months ended September 30,
2008.
Dental supplies. For the nine
months ended September 30, 2009, dental supplies decreased to $1.7 million
compared to $1.8 million for the nine months ended September 30, 2008, a
decrease of $142,000 or 7.7%. This decrease is attributable to three
factors: (1) fewer new dentists requesting initial dental supply inventories;
(2) a 3% rebate from the Company’s primary dental supply vendor that will be
effective through 2009; and (3) a concentrated effort that began in January 2009
to reduce dental supply expense through the implementation of a new process for
the monthly dental supply budget. As a percentage of net revenue,
dental supplies decreased to 6.4% for the nine months ended September 30, 2009
compared to 7.0% for the nine months ended September 30, 2008.
Laboratory fees. For the nine
months ended September 30, 2009, laboratory fees decreased to $2.0 million
compared to $2.1 million for the nine months ended September 30, 2008, a
decrease of $112,000 or 5.4%. This decrease is primarily due to lower
laboratory fees that were negotiated with the Company’s significant vendors in
December 2008. As a percentage of net revenue, laboratory fees
decreased to 7.5% for the nine months ended September 30, 2009 compared to 7.9%
for the nine months ended September 30, 2008.
Occupancy. For the nine
months ended September 30, 2009 and 2008, occupancy expense increased to $3.7
million compared to $3.6 million for the nine months ended September 30, 2008,
an increase of $68,000 or 1.9%. As a percentage of net revenue,
occupancy expense increased to 13.9% for the nine months ended September 30,
2009 compared to 13.6% for the nine months ended September 30,
2008.
22
Advertising and marketing.
For the nine months ended September 30, 2009, advertising and marketing expense
decreased to $323,000 compared to $332,000 for the nine months ended September
30, 2008, a decrease of $9,000 or 2.8%. This decrease is attributable
to a decrease of $94,000 for yellow page advertising as a result of the
Company’s negotiations for more favorable rates. This was partially
offset by a radio advertising campaign the Company initiated in May 2009 in its
Denver and Colorado Springs, Colorado and Albuquerque, New Mexico
markets. The cost associated with the campaign was $70,000 for the
nine months ended September 30, 2009. The Company anticipates the
cost of this campaign to be $47,000 for the quarter ending December 31,
2009. As a percentage of net revenue, advertising and marketing
expense decreased to 1.2% for the nine months ended September 30, 2009 compared
to 1.3% for the nine months ended September 30, 2008.
Depreciation and
amortization-Offices. For the nine months ended September 30, 2009 and
2008, depreciation and amortization expenses attributable to the Offices
remained constant at $1.8 million. As a percentage of net revenue, depreciation
and amortization expenses attributable to the Offices remained constant at 6.9%
for the nine months ended September 30, 2009 and 2008.
General and
administrative-Offices. For the nine months ended September 30, 2009,
general and administrative expenses attributable to the Offices decreased to
$3.5 million compared to $3.6 million for the nine months ended September 30,
2008, a decrease of $173,000 or 4.8%. This decrease is primarily due
to decreased bad debt expense of $139,000. As a percentage of net
revenue, general and administrative expenses attributable to the Offices
decreased to 13.1% for the nine months ended September 30, 2009 compared to
13.7% for the nine months ended September 30, 2008.
Contribution from dental
Offices. As a result of the above, contribution from
dental Offices increased $418,000 or 7.4%, to $6.1 million for the nine months
ended September 30, 2009 compared to $5.7 million for the nine months ended
September 30, 2008. As a percentage of net revenue, contribution from dental
Offices increased to 23.0% for the nine months ended September 30, 2009 compared
to 21.4% for the nine months ended September 30, 2008.
Corporate expenses - general and
administrative. For the nine months ended September 30, 2009, corporate
expenses - general and administrative increased to $3.2
million compared to $2.8 million for the nine months ended September 30, 2008,
an increase of $407,000 or 14.5%. This increase is primarily related to an
increase of $123,000 in executive bonuses, $151,000 related to the cash
component of the LTIP for executives and $164,000 related to the equity
component of the LTIP for executives. As a percentage of net revenue,
corporate expenses - general and administrative increased to 12.2% for the nine
months ended September 30, 2009 compared to 10.6% for the nine months ended
September 30, 2008.
Corporate expenses - depreciation
and amortization. For the nine months ended September 30, 2009, corporate
expenses - depreciation and amortization decreased to $66,000 compared to
$72,000 for the nine months ended September 30, 2008, a decrease of $6,000 or
8.9%. As a percentage of net revenue, corporate expenses –
depreciation and amortization decreased to 0.2% for the nine months ended
September 30, 2009 compared to 0.3% for the nine months ended September 30,
2008
Operating
income. As a result of the matters discussed above, the
Company’s operating income remained constant at $2.8 million for the nine months
ended September 30, 2009 and 2008. As a percentage of net revenue, operating
income increased to 10.6% for the nine months ended September 30, 2009 compared
to 10.5% for the nine months ended September 30, 2008.
Interest expense, net. For
the nine months ended September 30, 2009, interest expense, net decreased to
$119,000 compared to $200,000 for the nine months ended September 30, 2008, a
decrease of $81,000 or 40.7%. This decrease in interest expense, net is
attributable to a reduction of the principal amount outstanding on the Term Loan
and reduced borrowings on the Credit Facility. As a percentage of net
revenue, interest expense, net decreased to 0.4% for the nine months ended
September 30, 2009 compared to 0.8% for the nine months ended September 30,
2008.
Net
income. As a result of the above, the Company reported
net income of $1.6 million for the nine months ended September 30, 2009 compared
to net income of $1.5 million for the nine months ended September 30, 2008, an
increase of $94,000 or 6.4%. Net income for the nine months ended
September 30, 2009 and 2008 was net of income tax expense of $1.1
million. As a percentage of net revenue, net income increased to 5.9%
for the nine months ended September 30, 2009 compared to 5.5% for the nine
months ended September 30, 2008.
23
Liquidity
and Capital Resources
The
Company finances its operations and growth through a combination of cash
provided by operating activities and the Credit Facility. As of
September 30, 2009, the Company had a working capital deficit of approximately
$2.1 million, retained earnings of $7.4 million and a cash balance of
$885,000. On October 29, 2009, the Company acquired substantially all
the assets of a dental practice in Tucson, Arizona for the total purchase price
of $700,000.
Net cash
provided by operating activities was approximately $4.6 million and $4.5 million
for the nine months ended September 30, 2009 and 2008,
respectively. During the nine months ended September 30, 2009,
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 $884,000, offset by an increase in
accounts receivable of $641,000, an increase in prepaid expenses and other
assets of approximately $27,000 and a decrease in income taxes payable of
approximately $82,000. During the nine months ended September 30,
2008, 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 $306,000, an increase in
income taxes payable of approximately $430,000 and a decrease in prepaid
expenses and other assets of approximately $79,000, offset by an increase in
accounts receivable of $822,000.
Net cash
used in investing activities was approximately $909,000 and $1.0 million for the
nine months ended September 30, 2009 and 2008, respectively. For the nine months
ended September 30, 2009, the Company invested approximately $559,000 in the
purchase of additional equipment and $350,000 in acquiring a dental practice in
Tucson, Arizona. During the nine months ended September 30, 2008, the
Company invested approximately $1.0 million in capital expenditures, which
included $163,000 to upgrade the Company’s payroll time collection system,
$157,000 to remodel an Office and $368,000 in the development of a de novo Office.
Net cash
used in financing activities was approximately $4.0 million
for the nine months ended September 30, 2009 and $3.8 million for the nine
months ended September 30, 2008. During the nine months ended September 30,
2009, net cash used in financing activities was comprised of approximately
$706,000 used in the purchase and retirement of Common Stock, approximately
$950,000 for the payment of dividends, approximately $2.1 million used to pay
down the Credit Facility and $690,000 to pay down the Term Loan partially offset
by approximately $413,000 in proceeds from the exercise of Common Stock
options. During the nine months ended September 30, 2008, net cash
used in financing activities was comprised of approximately $3.9 million used in
the purchase and retirement of Common Stock, approximately $1.0 million for the
payment of dividends and approximately $690,000 for the repayment of the Term
Loan, partially offset by an increase of approximately $1.6 million on the
Credit Facility and approximately $294,000 in proceeds from the exercise of
Common Stock options.
On June
30, 2009, the Company amended its bank line of credit (“Credit
Facility”). The amended Credit Facility extends the expiration of the
credit agreement from May 31, 2010 to May 31, 2011. The Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $7.0 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 Base Rate computes interest at the higher of the lender’s
“prime rate” or the Federal Funds Rate plus a margin. The amendment
adjusts the Base Rate margin from 0.5% to 2.5%. The LIBOR option
computes interest at the LIBOR rate as of the date such LIBOR rate loan was made
plus a LIBOR rate margin. The amendment states that the LIBOR rate is
the higher of 1.5% or the LIBOR rate and the margin is adjusted from 1.25% to
3.875%. A commitment fee on the average daily unused amount of the
revolving loan commitment during the preceding quarter is also assessed and was
increased from 0.25% to 0.40% as of June 1, 2009. 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. At September 30, 2009, the Company had $2.3
million outstanding and $4.7 million available for borrowing under the
Credit Facility. This consisted of $2.0 million outstanding under the
LIBOR rate option and $298,000 outstanding under the Base Rate
option. As of September 30, 2009, the Company’s LIBOR borrowing rate
was 5.375% and the Base Rate borrowing rate was 5.75%. Management
believes that the LIBOR and Base Rate margins increased as a result of the
lender’s increased cost of funds and not because of the Company’s credit
quality. The Credit Facility requires the Company to comply with
certain covenants and financial ratios. At September 30, 2009, the Company was
in full compliance with all of its covenants under the Credit
Facility.
24
On
October 5, 2006, the Company entered into a $4.6 million Term Loan to finance a
“dutch auction” tender offer for shares of its Common Stock. Under the Term
Loan, $2.3 million was borrowed at a fixed interest rate of 7.05% and the
remaining $2.3 million was borrowed at a floating interest rate of LIBOR plus
1.5%. The $2.3 million borrowed at a fixed rate was achieved by the
Company by entering into a fixed for floating interest rate swap that the
Company designates as a cash flow hedge under
ASC Topic 815. The principal amount borrowed is repaid quarterly in 20
equal payments of $230,000 plus interest beginning December 31, 2006. The Term
Loan matures on September 30, 2011. As of September 30, 2009,
$920,000 was outstanding at the fixed rate of 7.05% and $920,000 was outstanding
at the LIBOR plus 1.5% floating rate. The Term Loan requires the
Company to comply with certain covenants and financial ratios. At
September 30, 2009, the Company was in full compliance with all of its covenants
under the Term Loan.
As of
September 30, 2009, the Company had budgeted capital commitments for the next 12
months of approximately $900,000, which includes the funding of a de novo Office in New Mexico
and the relocation of two dental practices in Colorado.
As of
September 30, 2009, the Company had the following debt and lease
obligations:
Payments due by Period
|
||||||||||||||||||||
Total
|
Less than 1
year
|
1-3 years
|
3-5 years
|
More than 5
years
|
||||||||||||||||
Debt
obligations
|
$ | 4,137,683 | $ | 920,000 | $ | 3,217,683 | $ | - | $ | - | ||||||||||
Operating
lease obligations
|
7,647,291 | 2,941,528 | 3,548,219 | 1,154,236 | 3,309 | |||||||||||||||
Total
|
$ | 11,784,974 | $ | 3,861,528 | $ | 6,765,902 | $ | 1,154,236 | $ | 3,309 |
The Company from time to
time may purchase its Common Stock on the open market. During the quarter
ended September 30, 2009, the Company, in 28 separate transactions, purchased
33,411 shares of its Common Stock for total consideration of approximately
$536,000 at prices ranging from $14.66 to $17.20. All purchases were
made on the open market pursuant to plans that were approved by the Board of
Directors. As of September 30, 2009, there was approximately $355,000 available
for the purchase of the Company’s Common Stock under these
plans. There is no expiration date on these plans. Such purchases may
be made from time to time as the Company’s management deems
appropriate.
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 or at all. 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 4. CONTROLS
AND PROCEDURES
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 September 30, 2009. 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 were effective as of September 30, 2009, 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 control over financial reporting (as
defined in Rules 13a – 15(f) and 15d – 15(f) of the Exchange Act) that occurred
in the quarter ended September 30, 2009 that materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting.
25
PART II. OTHER
INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuer
Purchases of Equity Securities
The
following chart provides information regarding Common Stock purchased by the
Company during the period July 1, 2009 through September 30, 2009.
Issuer
Purchases of Equity Securities
Period
|
Total Number
Of Shares
Purchased
|
Average Price
Paid per Share
|
Total Number
Of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)
|
Approximate
Dollar Value
Of Shares That
May Yet Be
Purchased
Under the
Plans or
Programs (1)
|
||||||||||||
July
1, 2009 through July 31, 2009
|
15,623 | $ | 15.99 | 15,623 | $ | 640,697 | ||||||||||
August
1, 2009 through August 31, 2009
|
5,300 | 16.67 | 5,300 | $ | 552,328 | |||||||||||
September
1, 2009 through September 30, 2009
|
12,488 | 15.83 | 12,488 | $ | 354,646 | |||||||||||
Total
|
33,411 | $ | 16.04 | 33,411 |
(1)
|
All purchases were made on the
open market pursuant to plans that were approved by the Board of
Directors. The Company’s Board of Directors has authorized a
stock repurchase program since 2000. The maximum authorized
amounts under the program have ranged from $150,000 to $2.4
million. Most recently, in August 2008, the Board of Directors
approved up to $2.0 million of stock repurchases. As of
September 30, 2009, there was approximately $355,000 available for the
purchase of the Company’s Common Stock under these plans. There is no
expiration date on these plans. Purchases under these plans may
be made from time to time as the Company’s management deems
appropriate.
|
26
ITEM
6. EXHIBITS
Exhibit
|
||
Number
|
Description of Document
|
|
3.1
|
Amended
and Restated Articles of Incorporation, incorporated herein by reference
to Exhibit 3.1 and 3.2 to the Company’s Registration Statement on Form S-1
(SEC File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
|
|
3.2
|
Amended
and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to
the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
|
|
4.1
|
Reference
is made to Exhibits 3.1 and 3.2.
|
|
4.2
|
Specimen
Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the
Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as
filed with the Securities and Exchange Commission on November 25,
1997.
|
|
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.
|
27
SIGNATURES
Pursuant
to the requirements 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: November
13, 2009
|
By:
|
/s/ Frederic W.J. Birner
|
Name:
|
Frederic
W.J. Birner
|
|
Title:
|
Chairman of the Board and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
||
Date: November
13, 2009
|
By:
|
/s/ Dennis N. Genty
|
Name:
|
Dennis
N. Genty
|
|
Title:
|
Chief Financial Officer, Secretary, and Treasurer
|
|
(Principal Financial and
Accounting Officer)
|
28