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, 2006
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23367
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BIRNER DENTAL MANAGEMENT SERVICES, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
-------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
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(Address of principal executive offices) (Zip Code)
(303) 691-0680
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer Accelerated filer Non-accelerated filer X
---- ---- ----
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Shares Outstanding as of November 1, 2006
------------------------------- -----------------------------------------
Common Stock, without par value 2,101,458*
* On July 13, 2005, the Company announced that its Board of Directors had
declared a 2-for-1 stock split of its Common Stock. The 2-for-1 stock split,
which was effected as a stock dividend, was distributed on August 8, 2005 to
shareholders of record at the close of business on August 1, 2005. All share
and earnings per share calculations for all periods in this document have been
restated to reflect the effect of the stock split.
1
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
----------------------------------
Item 1. Financial Statements Page
----
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2005
and September 30, 2006 3
Unaudited Condensed Consolidated Statements of Income for the Quarters
and Nine Months Ended September 30, 2005 and 2006 4
Unaudited Condensed Consolidated Statements of Shareholders' Equity as
of September 30, 2006 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and 2006 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
-------------------------------
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
ASSETS 2005 2006
------------- --------------
** (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 921,742 $ 669,458
Accounts receivable, net of allowance for doubtful
accounts of $261,031 and $291,114, respectively 3,215,369 3,597,663
Deferred tax asset 160,411 212,384
Prepaid expenses and other assets 605,599 458,151
------------- --------------
Total current assets 4,903,121 4,937,656
PROPERTY AND EQUIPMENT, net 3,939,452 5,770,464
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,036,652 12,467,207
Deferred charges and other assets 154,245 181,860
------------- --------------
Total assets $ 22,033,470 $ 23,357,187
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,065,076 $ 1,665,049
Accrued expenses 1,110,526 1,317,392
Accrued payroll and related expenses 1,502,877 2,121,668
Income taxes payable 175,259 207,147
Current maturities of long-term debt 145,150 66,445
------------- --------------
Total current liabilities 4,998,888 5,377,701
LONG-TERM LIABILITIES:
Deferred tax liability, net 750,346 751,304
Long-term debt, net of current maturities 2,887,166 3,111,610
Other long-term obligations 195,723 281,486
------------- --------------
Total liabilities 8,832,123 9,522,101
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Note 9)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding - -
Common Stock, no par value, 20,000,000 shares
authorized; 2,343,675 and 2,314,719 shares issued and
outstanding, respectively 9,628,457 8,971,415
Deferred equity compensation (648,240) (405,150)
Retained earnings 4,221,130 5,268,821
------------- --------------
Total shareholders' equity 13,201,347 13,835,086
------------- --------------
Total liabilities and shareholders' equity $ 22,033,470 $ 23,357,187
============= ==============
** Derived from the Company's audited consolidated balance sheet at December 31, 2005.
The accompanying notes are an integral part of these condensed consolidated balance sheets.
3
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2005 2006 2005 2006
---------- ---------- ----------- -----------
NET REVENUE: $9,264,449 $9,756,186 $28,025,464 $29,988,004
DIRECT EXPENSES:
Clinical salaries and benefits 3,321,931 3,540,887 10,298,277 10,811,123
Dental supplies 566,219 597,488 1,698,572 1,750,695
Laboratory fees 588,814 635,446 1,873,120 1,960,704
Occupancy 953,029 1,059,477 2,865,929 3,210,359
Advertising and marketing 223,387 176,830 794,984 637,763
Depreciation and amortization 420,998 572,788 1,261,990 1,581,250
General and administrative 1,074,880 1,126,326 3,047,312 3,456,569
---------- ---------- ----------- -----------
7,149,258 7,709,242 21,840,184 23,408,463
---------- ---------- ----------- -----------
Contribution from dental offices 2,115,191 2,046,944 6,185,280 6,579,541
CORPORATE EXPENSES:
General and administrative 1,578,244(1) 948,371(1) 3,385,361(1) 3,170,644(1)
Depreciation and amortization 33,595 32,396 102,887 99,038
---------- ---------- ----------- -----------
Operating income 503,352 1,066,177 2,697,032 3,309,859
Interest expense (income), net (13,353) 38,875 (41,220) 118,962
---------- ---------- ----------- -----------
Income before income taxes 516,705 1,027,302 2,738,252 3,190,897
Income tax expense 102,315 394,498 990,951 1,232,604
---------- ---------- ----------- -----------
Net income $ 414,390 $ 632,804 $ 1,747,301 $ 1,958,293
========== ========== =========== ===========
Net income per share of Common Stock - Basic $ 0.17 $ 0.27 $ 0.74 $ 0.84
========== ========== =========== ===========
Net income per share of Common Stock - Diluted $ 0.16 $ 0.25 $ 0.67 $ 0.77
========== ========== =========== ===========
Cash dividends per share of Common Stock $ 0.10 $ 0.13 $ 0.30 $ 0.39
========== ========== =========== ===========
Weighted average number of shares of
Common Stock and dilutive securities:
Basic 2,406,789 2,311,901 2,364,493 2,337,049
========== ========== =========== ===========
Diluted 2,662,240 2,493,941 2,613,331 2,528,388
========== ========== =========== ===========
(1) Corporate expense - general and administrative includes $81,030 of deferred
equity compensation for a stock award and $585,844 one-time expense related
to the reimbursement of an employees's income taxes in connection with a
stock award for the quarter ended September 30, 2005, and $81,030 of
deferred equity compensation for a stock award and $78,620 of stock-based
compensation expense pursuant to SFAS 123 (R) for the quarter ended
September 30, 2006. For the nine months ended September 30, 2005, corporate
expenses - general and administrative includes $81,030 of deferred equity
compensation for a stock award and $585,844 one-time expense related to the
reimbursement of income taxes in connection with a stock award, and for the
nine months ended September 30, 2006, $243,090 of deferred equity
compensation related to the stock award and $244,651 of stock-based
compensation expense pursuant to SFAS 123 (R).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Deferred
------------------------- Equity Retained Shareholders'
Shares Amount Compensation Earnings Equity
--------- ---------- ------------ ---------- -------------
BALANCES, December 31, 2005 2,343,675 $9,628,457 $(648,240) $4,221,130 $13,201,347
Common Stock options exercised 59,983 224,786 - - 224,786
Purchase and retirement of
Common Stock (88,939) (1,364,964) - - (1,364,964)
Tax benefit of Common Stock
options exercised - 238,485 - - 238,485
Dividends declared on Common
Stock - - - (910,602) (910,602)
Stock-based compensation expense - 244,651 - - 244,651
Amortization of deferred equity compensation - - 243,090 - 243,090
Net income - - - 1,958,293 1,958,293
--------- ---------- --------- ---------- -----------
BALANCES, September 30, 2006 2,314,719 $8,971,415 $(405,150) $5,268,821 $13,835,086
========= ========== ========= ========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Page 1 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------------------
2005 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,747,301 $ 1,958,293
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,364,877 1,680,288
Stock compensation expense - 244,651
Loss on disposition of property 221
Provision for doubtful accounts 410,143 562,683
Provision for (benefit from) deferred income taxes (48,854) (51,015)
Amortization of debt issuance costs 1,475
Amortization of deferred equity compensation 81,030 243,090
Changes in assets and liabilities net of effects
from acquisitions:
Accounts receivable (1,326,806) (944,976)
Prepaid expenses and other assets 345,212 147,448
Deferred charges and other assets - (27,615)
Accounts payable 99,151 (400,027)
Accrued expenses (604,520) 141,077
Accrued payroll and related expenses 580,416 618,789
Income taxes payable 179,917 31,888
Other long-term obligations 24,034 85,763
------------ ------------
Net cash provided by operating activities 2,853,597 4,290,337
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (635,091) (1,129,880)
Development of new dental centers (246,495) (1,811,974)
------------ ------------
Net cash used in investing activities (881,586) (2,941,854)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances - line of credit 16,162,719 15,067,330
Repayments - line of credit (15,388,491) (14,809,325)
Repayment of long-term debt (124,196) (112,266)
Proceeds from exercise of Common Stock options 519,496 224,786
Purchase and retirement of Common Stock (2,769,518) (1,364,964)
Tax benefit of Common Stock options exercised 333,401 238,485
Common Stock cash dividends (563,207) (844,813)
------------ ------------
Net cash used in financing activities (1,829,796) (1,600,767)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 142,215 (252,284)
CASH AND CASH EQUIVALENTS, beginning of period 756,181 921,742
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 898,396 $ 669,458
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
Page 2 of 2
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------------------
2005 2006
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 136,530 $ 169,487
============ ============
Cash paid during the year for income taxes $ 526,489 $ 1,012,000
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006
(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 have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. A description of
the Company's accounting policies and other financial information is included in
the audited consolidated financial statements as filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of September 30, 2006 and the results of
operations and cash flows for the periods presented. All such adjustments are
of a normal recurring nature. The results of operations for the quarter and
nine months ended September 30, 2006 are not necessarily indicative of the
results that may be achieved for a full fiscal year and cannot be used to
indicate financial performance for the entire year.
On July 13, 2005, the Company announced that its Board of Directors had declared
a 2-for-1 stock split of its Common Stock. The 2-for-1 stock split, which was
effected as a stock dividend, was distributed on August 8, 2005 to shareholders
of record at the close of business on August 1, 2005. All shares and earnings
per share calculations for all periods in this document have been restated to
reflect the effect of the stock split.
(2) SIGNIFICANT ACCOUNTING POLICIES
Intangible Assets
The Company's dental practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
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 agreement. The assigned value of the Management Agreement is
amortized using the straight-line method over a period of 25 years.
Amortization was $194,848 and $187,610 for the quarter ended September 30, 2006
and 2005, respectively. Amortization was $584,446 and $562,831 for the nine
months ended September 30, 2006 and 2005, respectively.
The Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default by the Company.
In the event that facts and circumstances indicate that the carrying value of
long-lived and intangible assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation were required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow value would be required.
Stock Options
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Share-Based Payment." This standard revises
SFAS 123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees."
Under SFAS 123(R), the Company is required to measure the cost of employee
services received in exchange for stock options and similar awards based on the
grant date fair value of the award and recognize this cost in the income
statement over the period during which an employee is required to provide
service in exchange for the award.
The Company adopted SFAS 123(R) using the modified prospective method. Under
this transition method, stock-based compensation expense for the quarter and
nine months ended September 30, 2006 includes: (i) compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provision of SFAS 123; and (ii) compensation expense for all
stock-based compensation awards granted subsequent to January 1, 2006, based on
the grant date fair value estimated in accordance with the provision of SFAS
123(R). The Company recognizes compensation expense on a straight line basis
over the requisite service period of the award. Total stock-based compensation
expense included in the Company's statement of income for the quarter ended
September 30, 2006 was approximately $79,000. Total stock-based compensation
expense included in the Company's statement of income for the nine months ended
September 30, 2006 was approximately $245,000. Total stock-based compensation
expense was recorded as a component of corporate general and administrative
expense. In accordance with the modified prospective method, financial results
for prior periods have not been restated.
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 ending September 30, 2006 equal to the expected
option term. Expected pre-vesting forfeitures were estimated based on actual
historical pre-vesting forfeitures over the most recent periods ending September
30, 2006 for the expected option term. The expected option term was calculated
using the "simplified" method permitted by Staff Accounting Bulletin 107.
Prior to January 1, 2006, the Company accounted for stock options using the
intrinsic value method wherein compensation expense is recognized on stock
options granted only for the excess of the market price of the Company's Common
Stock over the option exercise price on the date of grant. All options of the
Company are granted at amounts equal to or higher than the fair value of the
Common Stock, so no compensation expense is recorded.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income and net income per share
of Common Stock for the quarter and nine months ended September 30, 2005 would
have been reported as follows:
Quarter Ended Nine Months Ended
September 30, 2005 September 30, 2005
-------------------- --------------------
Net income, as reported $ 414,390 $ 1,747,301
Stock-based compensation included in net income - -
Fair value of stock-based compensation, net of income taxes (24,550) (182,221)
------------------- -------------------
Pro forma net income $ 389,840 $ 1,565,080
=================== ===================
Net income per share of Common Stock - Basic:
As reported $ 0.17 $ 0.74
Stock-based compensation included in net income - -
Fair value of stock-based compensation, net of income taxes (0.01) (0.08)
------------------- -------------------
Pro forma $ 0.16 $ 0.66
=================== ===================
Net income per share of Common Stock - Diluted:
As reported $ 0.16 $ 0.67
Stock-based compensation included in net income - -
Fair value of stock-based compensation, net of income taxes (0.01) (0.07)
------------------- -------------------
Pro forma $ 0.15 $ 0.60
=================== ===================
Pro-forma compensation expense under SFAS 123, among other computational
differences, does not consider potential pre-vesting forfeitures. Because of
these differences, the pro-forma stock compensation expense presented above for
the prior quarterly and nine month periods ended September 30, 2005 under SFAS
123 and the stock compensation expense recognized during the current quarterly
and nine month periods ended September 30, 2006 under SFAS 123(R) are not
directly comparable. In accordance with the modified prospective transition
method of SFAS 123(R), the prior comparative quarterly and nine month results
have not been restated.
9
(3) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share."
Quarters Ended September 30,
---------------------------------------------------------------------
2005 2006
----------------------------------- -------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------ --------- --------- -------- --------- ---------
Basic EPS:
Net income available
to shares of Common Stock $ 414,390 2,406,789 $ 0.17 $632,804 2,311,901 $ 0.27
Effect of dilutive shares
of Common Stock from stock
options and warrants - 255,451 (0.01) - 182,040 (0.02)
------------ --------- ------- -------- --------- -------
Diluted EPS:
Net income available to
shares of Common Stock $ 414,390 2,662,240 $ 0.16 $632,804 2,493,941 $ 0.25
============ ========= ======= ======== ========= =======
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended September 30, 2006
and 2005 relates to the effect of 182,040 and 255,451 shares, respectively, of
dilutive shares of Common Stock from stock options, which are included in total
shares for the diluted calculation. For the quarter ended September 30 , 2006,
options to purchase 69,200 shares of the Company's Common Stock were not
included in the computation of dilutive income per share because their effect
was anti-dilutive.
Nine Months Ended September 30,
---------------------------------------------------------------------
2005 2006
----------------------------------- -------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------ --------- --------- -------- --------- ---------
Basic EPS:
Net income available to
shares of Common Stock $ 1,747,301 2,364,493 $ 0.74 $1,958,293 2,337,049 $ 0.84
Effect of dilutive shares
of Common Stock from stock
options and warrants - 248,838 (0.07) - 191,339 (0.07)
------------ --------- ------- --------- --------- -------
Diluted EPS:
Net income available to
shares of Common Stock $ 1,747,301 2,613,331 $ 0.67 $1,958,293 2,528,388 $ 0.77
============ ========= ======= ========== ========= =======
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the nine months ended September 30,
2006 and 2005 relates to the effect of 191,339 and 248,838 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
, 2006, options to purchase 158,200 shares of the Company's Common Stock were
not included in the computation of dilutive income per share because their
effect was anti-dilutive.
10
(4) STOCK-BASED COMPENSATION PLANS
At the Company's June 2005 annual meeting of shareholders, the shareholders
approved the 2005 Equity Incentive Plan ("2005 Plan"), which reserved 300,000
shares of Common Stock for issuance. The 2005 Plan provides for the grant of
incentive stock options, restricted stock, restricted stock units and stock
grants to employees (including officers and employee-directors) and
non-statutory stock options to employees, directors and consultants. The
objectives of this plan include attracting and retaining the best personnel,
providing for additional performance incentives by providing employees with the
opportunity to acquire Common Stock. As of September 30, 2006, there were 60,800
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 outside directors from
the Company's Board of Directors (the "Committee"). The Committee determines the
eligible individuals to whom awards under the 2005 Plan may be granted, as well
as the time or times at which awards will be granted, the number of shares 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.
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,
2006, there were 303,733 vested options outstanding and 87,666 unvested options
outstanding under the Employee Plan.
The Dental Center Stock Option Plan ("Dental Center Plan") was adopted by the
Board of Directors effective as of October 30, 1995, and as amended on September
4, 1997, reserved 160,475 shares of Common Stock for issuance. The Dental Center
Plan provided for the grant of non-statutory stock options to professional
corporations that operate the Offices ("P.C.s") that are parties to Management
Agreements with the Company, and to dentists or dental hygienists who are either
employed by or are an owner of the P.C.s. The Dental Center Plan expired by its
terms on October 30, 2005. As of September 30, 2006, there were 14,000 vested
options outstanding and no unvested options outstanding under the Dental Center
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 (1) 2005 2006 2005 2006
----- ----- ----- -----
Expected life (2) 4.5 5.8 3.4 5.5
Risk-free interest rate (3) 4.37% 4.87% 3.68% 4.87%
Expected volatility (4) 50% 65% 35% 61%
Expected dividend yield 2.25% 2.98% 2.72% 3.03%
`
_____________________________
(1) Beginning on the date of adoption of SFAS 123(R), on January 1, 2006,
forfeitures are estimated based on historical experience.
(2) The expected life, in years, of stock options is estimated using the
simplified-method calculation.
(3) The risk-free interest rate is based on U.S. Treasury bills whose term
is consistent with the expected life of the stock option
(4) The expected volatility is estimated based on historical and current stock
price data for the Company.
11
A summary of option activity as of September 30, 2006, and changes during the
nine months then ended, is presented below:
Weighted-Average Aggregate
Remaining Intrinsic
Number of Weighted-Average Range of Contractual Value
Options Exercise Price Exercise Prices Term (years) (thousands)
--------- ---------------- --------------- ---------------- -----------
Outstanding at December 31, 2005 655,382 $10.42 $ 1.00 - $19.37
Granted 27,200 $15.83 $14.81 - $19.75
Exercised 59,983 $ 3.75 $ 1.00 - $13.00
Forfeited 38,000 $14.92 $12.50 - $17.61
------- ------ ---------------
Outstanding at September 30, 2006 584,599 $11.06 $ 4.80 - $19.75 3.7 $6,467
======= ====== =============== === ======
Exercisable at September 30, 2006 318,733 $ 7.01 $ 4.80 - $17.81 2.1 $2,235
======= ====== =============== === ======
The weighted average grant date fair value of options granted was $7.24 per
option and $2.60 per option during the nine months ended September 30, 2006 and
2005, respectively. Net cash proceeds from the exercise of stock options during
the nine months ended September 30, 2006 and 2005 were $224,786 and $519,496,
respectively. The associated income tax benefit from stock options exercised
during the nine months ended September 30, 2006 and 2005 was $238,485 and
$333,401, respectively. As of the date of exercise, the total intrinsic value
of options exercised during the nine months ended September 30, 2006 and 2005
was $ 868,298 and $1.3 million, respectively. As of September 30, 2006, there
was $1.3 million of total unrecognized compensation expense related to
non-vested stock options, which is expected to be recognized over a weighted
average period of 1.55 years.
(5) RESTRICTED STOCK GRANT
On July 1, 2005, the Company granted 60,000 shares of restricted Common Stock to
the Company's Chairman and Chief Executive Officer (the "Employee"). In
connection with the grant of restricted stock, the Company agreed to reimburse
the Employee an amount equal to the tax liability associated with the grant.
Such reimbursement was made by the Company and totaled approximately $586,000
which was recognized as an expense during the third quarter of 2005. As of
September 30, 2006, there was approximately $405,000 of unrecognized
compensation expense related to the restricted stock grant. The expense is
expected to be recognized over a period of 1.25 years.
A summary of the vesting status of the shares of restricted stock as of
September 30, 2006, and the changes during the nine months then ended, is
presented below:
Nine Months Ended
September 30, 2006
-----------------------------------------------
Number of Weighted-Average
Restricted Shares Grant-Date Fair Value
----------------- ---------------------
Non-vested at December 31, 2005 60,000 $ 13.51
Granted - -
Vested (20,000) 13.51
Forfeited - -
------- -----------
Non-vested at September 30, 2006 40,000 $ 13.51
======= ===========
12
(6) DIVIDENDS
On March 9, 2004, the Company announced a quarterly cash dividend of $.0375 per
share. On February 10, 2005, the Company announced an increase in the amount of
the quarterly dividend to $.10 per share. On January 10, 2006, the Company
announced an increase in the amount of the quarterly dividend to $.13 per share.
The payment of dividends in the future is subject to the discretion of the
Company's Board of Directors, and various factors may prevent the Company from
paying dividends. Such factors include the Board of Directors' assessment of the
Company's financial position, capital requirements and liquidity, the existence
of a stock repurchase program, loan agreement restrictions, results of
operations and such other factors the Company's Board of Directors may consider
relevant.
(7) LINE OF CREDIT
On April 25, 2006, the Company amended its bank line of credit ("Credit
Facility"). The amended Credit Facility allows the Company to borrow, on a
revolving basis, an aggregate principal amount not to exceed $7.0 million (an
increase from $5.0 million) at either, or a combination of, the lender's Base
Rate or at LIBOR plus a LIBOR rate margin, at the Company's option. The lender's
Base Rate computes interest at the higher of the lender's "prime rate" or the
Federal Funds Rate plus one-half percent (0.5%). The LIBOR option computes
interest at the LIBOR rate as of the date such LIBOR Rate loan was made plus a
LIBOR rate margin of 1.50%. A commitment fee of 0.25% on the average daily
unused amount of the revolving loan commitment during the preceding quarter is
also assessed. The Company may prepay any Base Rate loan at any time and any
LIBOR rate loan upon not less than three business days prior written notice
given to the lender, but the Company is responsible for any loss or cost
incurred by the lender in liquidating or employing deposits required to fund or
maintain the LIBOR rate loan. The amended Credit Facility expires on May 31,
2008. At September 30, 2006, the Company had $3.1 million outstanding and $3.9
million available for borrowing under the Credit Facility. This consisted of
$1.3 million outstanding under the Base Rate option and $1.8 million outstanding
under the LIBOR rate option. The Credit Facility requires the Company to
maintain certain financial ratios on an ongoing basis. At September 30, 2006,
the Company was in full compliance with all of its covenants under the Credit
Facility.
(8) CAPITAL EXPENDITURES
The Company's retained earnings as of September 30, 2006 were approximately $5.3
million, and the Company had a working capital deficit on that date of
approximately $440,000. During the quarter ended September 30, 2006, the Company
had capital expenditures of approximately $843,000 and purchased approximately
$16,000 of Common Stock while decreasing total bank debt by approximately
$261,000.
(9) DUTCH AUCTION TENDER OFFER AND TERM LOAN
On October 5, 2006, the Company accepted for payment, at a purchase price of
$21.75 per share, 212,396 shares of its Common Stock that were properly tendered
and not withdrawn pursuant to the Company's "dutch auction" tender offer
("Tender Offer"). The 212,396 shares purchased were comprised of the 175,000
shares the Company offered to purchase and 37,396 shares that were purchased
pursuant to the Company's right to purchase up to an additional 2% of the
outstanding shares as of August 31, 2006, without extending the Tender Offer in
accordance with applicable securities laws. These shares represented
approximately 9.2% of the shares outstanding as of September 30, 2006. The
Tender Offer was funded from a $4.6 million term loan ("Term Loan"). Under the
Term Loan, $2.3 million is borrowed at a fixed interest rate of 7.05% and the
remaining $2.3 million is borrowed at a floating interest rate of Libor plus
1.5%. The principal amount borrowed will be paid quarterly in 60 equal payments
of approximately $230,000 plus interest beginning December 31, 2006. The term
loan matures on September 30, 2011.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements, other than statements of
historical facts, included in this report that address activities, events or
developments that we expect, believe, intend or anticipate will or may occur in
the future, are forward-looking statements. When used in this document, the
words "estimate," "believe," anticipate," "project" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. These
forward-looking statements include statements in this Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
regarding intent, belief or current expectations of the Company or its officers
with respect to the development or acquisition of additional dental practices
("Offices") and the successful integration of such Offices into the Company's
network, recruitment of additional dentists, funding of the Company's expansion,
capital expenditures, payment or nonpayment of dividends and cash outlays for
income taxes and other purposes.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
the general economy of the United States and the specific markets in which the
Company's Offices are located or are proposed to be located, trends in the
health care, dental care and managed care industries, as well as the risk
factors set forth in Item 1A. "Risk Factors" in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, this report, and other
factors as may be identified from time to time in the Company's filings with the
Securities and Exchange Commission or in the Company's press releases.
GENERAL
The following discussion relates to factors that have affected the results of
operations and financial condition of the Company for the quarters and nine
months ended September 30, 2005 and 2006. This information should be read in
conjunction with the Company's condensed consolidated financial statements and
related notes thereto included elsewhere in this report.
OVERVIEW
The Company was formed in May 1995 and currently manages 60 Offices in Colorado,
New Mexico and Arizona staffed by 80 general dentists and 30 specialists. The
Company derives all of its Revenue (as defined below) from its Management
Agreements with professional corporations ("P.C.s"), which conduct the practice
at each Office. In addition, the Company assumes a number of responsibilities
when it acquires a new practice or develops a de novo Office, which are set
forth in a Management Agreement, as described below.
The Company was formed with the intention of becoming the leading provider of
business services to dental practices in Colorado. The Company's growth and
success in the Colorado market led to its expansion into the New Mexico and
Arizona markets. The Company's growth strategy is to focus on greater
utilization of existing physical capacity through recruiting more dentists and
support staff and through development of de novo Offices and selective
acquisitions.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are set forth in its Annual Report on
Form 10-K for the year ended December 31, 2005. There have been no changes to
these policies since the filing of that report.
COMPONENTS OF REVENUE AND EXPENSES
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from dental plans,
other third-party payors and patients for dental services rendered at the
Offices. The Company's Revenue is derived principally from fee-for-service
revenue and managed dental care revenue. Fee-for-service revenue consists of
revenue received from indemnity dental plans, preferred provider plans and
direct payments by patients not covered by any third-party payment arrangement.
Managed dental care revenue consists of revenue received from capitated managed
dental care plans, including capitation payments and patient co-payments.
Capitated managed dental care contracts are between dental benefits
organizations and the P.C.s.
14
Net revenue represents Revenue less amounts retained by the Offices. The amounts
retained by the Offices represent amounts paid as compensation to employed
dentists and hygienists. The Company's net revenue is dependent on the Revenue
of the Offices. Direct expenses consist of the expenses incurred by the Company
in connection with managing the Offices, including salaries and benefits for
personnel other than dentists and hygienists, dental supplies, dental laboratory
fees, occupancy costs, advertising and marketing, depreciation and amortization
and general and administrative (including office supplies, equipment leases,
management information systems and other expenses related to dental practice
operations). The Company also incurs personnel and administrative expenses in
connection with maintaining a corporate function that provides management,
administrative, marketing, advertising, development and professional services to
the Offices.
Under each of the Management Agreements, the Company manages the business and
marketing aspects of the Offices, including (i) providing capital, (ii)
designing and implementing marketing and advertising programs, (iii) negotiating
for the purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of
non-dental personnel, (vii) billing and collecting certain fees for dental
services provided by the Offices, (viii) arranging for certain legal and
accounting services, and (ix) negotiating with third party payors. Under the
Management Agreements, the P.C. is responsible for, among other things (i)
supervision of all dentists and dental hygienists, (ii) complying with all laws,
rules and regulations relating to dentists and dental hygienists, and (iii)
maintaining proper patient records. The Company has made, and intends to make
in the future, loans to P.C.s in Colorado, New Mexico and Arizona to fund their
acquisition of dental assets from third parties in order to comply with the laws
of such states.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the "Adjusted Gross Center Revenue" of the
P.C. less compensation paid to the dentists and dental hygienists employed at
the Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees
and charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at each Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office (other than
dentist and hygienist salaries), (ii) direct costs of all Company employees or
consultants who provide services to or in connection with the Office, (iii)
utilities, janitorial, laboratory, supplies, advertising and other expenses
incurred by the Company in carrying out its obligations under the Management
Agreement, (iv) depreciation expense associated with the P.C.'s assets and the
assets of the Company used at the Office, and the amortization of intangible
asset value relating to the Office, (v) interest expense on indebtedness
incurred by the Company to finance any of its obligations under the Management
Agreement, (vi) general and malpractice insurance expenses, lease expenses and
dentist recruitment expenses, (vii) personal property and other taxes assessed
against the Company's or the P.C.'s assets used in connection with the operation
of the Office, (viii) out-of-pocket expenses of the Company's personnel related
to mergers or acquisitions involving the P.C., (ix) corporate overhead charges
or any other expenses of the Company, including the P.C.'s pro rata share of the
expenses of the accounting and computer services provided by the Company, and
(x) a collection reserve in the amount of 5.0% of Adjusted Gross Center Revenue.
As a result, substantially all costs associated with the provision of dental
services at the Offices are borne by the Company, except for the compensation of
the dentists and hygienists who work at the Offices of the P.C.s. This enables
the Company to manage the profitability of the Offices. Each Management
Agreement is for a term of 40 years. Further, each Management Agreement
generally may be terminated by the P.C. only for cause, which includes a
material default by or bankruptcy of the Company. Upon expiration or termination
of a Management Agreement by either party, the P.C. must satisfy all obligations
it has to the Company.
Under the Management Agreements, the Company negotiates and administers 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 and hygienists), the risk of over-utilization of
dental services at the Offices under capitated managed dental care plans is
effectively shifted to the Company. In addition, dental group practices
participating in a capitated managed dental care plan often receive supplemental
payments for more complicated or elective procedures. In contrast, under
traditional indemnity insurance arrangements, the insurance company pays
whatever reasonable charges are billed by the dental group practice for the
dental services provided. Under a preferred provider plan, the dental group
practice is paid for dental services provided based on a fee schedule that is a
discount to the usual and customary fees paid under an indemnity insurance
agreement.
15
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 three months ended September 30, 2006, Revenue increased $991,000, or
7.5%, to $14.3 million compared to $13.3 million for the three months ended
September 30, 2005. For the three months ended September 30, 2006, net revenue
increased $492,000, or 5.3%, to $9.8 million compared to $9.3 million for the
three months ended September 30, 2005.
For the three months ended September 30, 2006, net income increased 52.7% to
$633,000, or $.25 per share compared to $414,000, or $.16 per share for the same
period of 2005. Net income for the three months ended September 30, 2006,
includes a before-tax expense of $78,620 pursuant to SFAS 123 (R) versus no
such expense in the third quarter of 2005. Net income for the three months ended
September 30, 2005, includes a one-time before-tax expense of $586,000 for the
reimbursement of income taxes related to a stock award.
For the nine months ended September 30, 2006, Revenue increased $3.4 million, or
8.6%, to $43.4 million compared to $40.0 million for the nine months ended
September 30, 2005. For the nine months ended September 30, 2006, net revenue
increased $2.0 million, or 7.0%, to $30.0 million compared to $28.0 million for
the nine months ended September 30, 2005.
For the nine months ended September 30, 2006, net income increased 12.1% to $2.0
million, or $.77 per share compared to $1.7 million, or $.67 per share for the
same period of 2005. Net income for the nine months ended September 30, 2006,
includes a before-tax expense of $244,651 pursuant to SFAS 123 (R) and $243,000
of deferred equity compensation for a stock award compared to, for the nine
months ended September 30, 2005, a one-time before-tax expense of $586,000 for
the reimbursement of income taxes related to a stock award and $81,000 of
deferred equity compensation for a stock award.
In August 2006 the Company opened two de novo Offices. One in the Phoenix,
Arizona market and one in the Albuquerque, New Mexico market.
The Company continues to generate strong cash flow from operations. During the
first nine months of 2006, the Company purchased $1.4 million of its outstanding
Common Stock, incurred $2.9 million in capital expenditures, paid $845,000 in
dividends, and repaid $112,000 of long term debt while increasing borrowings
under its bank line of credit ("Credit Facility") by $258,000.
Revenue is total dental group practice revenue generated at the Company's
Offices from professional services provided to its patients. Amounts retained by
dental Offices represents compensation expense to the dentists and hygienists
and is subtracted from total dental group practice revenue to arrive at net
revenue. The Company reports net revenue in its financial statements to comply
with Emerging Issues Task Force Issue No. 97-2, Application of SFAS No. 94
(Consolidation of All Majority Owned Subsidiaries) and APB Opinion No. 16
(Business Combinations) to Physician Practice Management Entities and Certain
Other Entities With Contractual Management Arrangements. Revenue is not a U.S.
generally accepted accounting principles ("GAAP") measure. The Company discloses
Revenue because it is a critical component for management's evaluation of Office
performance. However, investors should not consider this measure in isolation or
as a substitute for net revenue, operating income, cash flows from operating
activities or any other measure for determining the Company's operating
performance that is calculated in accordance with generally accepted accounting
principles. The following table reconciles Revenue to net revenue.
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------------------- ----------------------------
2005 2006 2005 2006
---------------- ------------------- ------------- -------------
Total dental group practice revenue $ 13,292,104 $ 14,282,765 $ 39,987,027 $ 43,429,434
Less - amounts retained by dental Offices (4,027,655) (4,526,579) (11,961,563) (13,441,430)
--------------- ------------------ ------------ ------------
Net revenue $ 9,264,449 $ 9,756,186 $ 28,025,464 $ 29,988,004
=============== ================== ============ ============
16
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's condensed consolidated statements of
income. The information contained in the table represents the historical results
of the Company. The information that follows should be read in conjunction with
the Company's condensed consolidated financial statements and related notes
thereto contained elsewhere in this report.
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------
2005 2006 2005 2006
------- ------- ------- -------
NET REVENUE: 100.0 % 100.0 % 100.0 % 100.0 %
DIRECT EXPENSES:
Clinical salaries and benefits 35.9 % 36.3 % 36.7 % 36.1 %
Dental supplies 6.1 % 6.1 % 6.1 % 5.8 %
Laboratory fees 6.4 % 6.5 % 6.7 % 6.5 %
Occupancy 10.3 % 10.9 % 10.2 % 10.7 %
Advertising and marketing 2.4 % 1.8 % 2.8 % 2.1 %
Depreciation and amortization 4.5 % 5.9 % 4.5 % 5.3 %
General and administrative 11.6 % 11.5 % 10.9 % 11.5 %
------- ------- ------- -------
77.2 % 79.0 % 77.9 % 78.1 %
------- ------- ------- -------
Contribution from dental offices 22.8 % 21.0 % 22.1 % 21.9 %
CORPORATE EXPENSES:
General and administrative 17.0 % (1) 9.7 % (1) 12.1 % (1) 10.6 % (1)
Depreciation and amortization 0.4 % 0.3 % 0.4 % 0.3 %
------- ------- ------- -------
Operating income 5.4 % 10.9 % 9.6 % 11.0 %
Interest expense (income), net ( 0.1)% 0.4 % ( 0.1)% 0.4 %
------- ------- ------- -------
Income before income taxes 5.6 % 10.5 % 9.8 % 10.6 %
Income tax expense 1.1 % 4.0 % 3.5 % 4.1 %
------- ------- ------- -------
Net income 4.5 % 6.5 % 6.2 % 6.5 %
======= ======= ======= =======
(1) Corporate expense - general and administrative includes $81,030 of deferred
equity compensation for a stock award and $585,844 one-time expense related
to the reimbursement of an employee's income taxes in connection with a
stock award for the quarter ended September 30, 2005, and $81,030 of
deferred equity compensation for a stock award and $78,620 of stock-based
compensation expense pursuant to SFAS 123 (R) for the quarter ended
September 30, 2006. For the nine months ended September 30, 2005, corporate
expenses - general and administrative includes $81,030 of deferred equity
compensation for a stock award and $585,844 one-time expense related to the
reimbursement of income taxes in connection with a stock award, and for the
nine months ended September 30, 2006, $243,090 of deferred equity
compensation related to the stock award and $244,651 of stock-based
compensation expense pursuant to SFAS 123 (R).
17
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005:
Net revenue. For the three months ended September 30, 2006, net revenue
increased $492,000, or 5.3%, to $9.8 million compared to $9.3 million for the
three months ended September 30, 2005. This increase is attributable to
increases at existing offices as well as additional net revenue generated by the
five de novo Offices opened since September 30, 2005.
Clinical salaries and benefits. For the three months ended September 30, 2006,
clinical salaries and benefits increased $219,000, or 6.6%, to $3.5 million
compared to $3.3 million for the three months ended September 30, 2005. This
increase was primarily due to additional employees at the de novo Offices opened
since September 30, 2005, as well as annual wage increases that became effective
February 1, 2006. As a percentage of net revenue, clinical salaries and benefits
increased to 36.3% for the three months ended September 30, 2006 compared to
35.9% for the three months ended September 30, 2005.
Dental supplies. For the three months ended September 30, 2006, dental supplies
increased to $597,000 compared to $566,000 for the three months ended September
30, 2005, an increase of $31,000 or 5.5%. As a percentage of net revenue, dental
supplies remained constant at 6.1% for the three months ended September 30, 2006
and 2005.
Laboratory fees. For the three months ended September 30, 2006, laboratory fees
increased to $635,000 compared to $589,000 for the three months ended September
30, 2005, an increase of $47,000 or 7.9%. As a percentage of net revenue,
laboratory fees increased to 6.5% for the three months ended September 30, 2006
compared to 6.4% for the three months ended September 30, 2005.
Occupancy. For the three months ended September 30, 2006, occupancy expense
increased to $1.1 million compared to $953,000 for the three months ended
September 30, 2005, an increase of $106,000 or 11.2%. This increase was
primarily due to the opening of five de novo Offices since September 30, 2005,
the expansion of one existing office and increased rental payments resulting
from the renewal of Office leases at current market rates for Offices whose
leases expired subsequent to the 2005 period. As a percentage of net revenue,
occupancy expense increased to 10.9% for the three months ended September 30,
2006 compared to 10.3% for the three months ended September 30, 2005.
Advertising and marketing. For the three months ended September 30, 2006,
advertising and marketing expense decreased to $177,000 compared to $223,000 for
the three months ended September 30, 2005, a decrease of $47,000 or 20.8%. This
decrease is attributable to a shift in the Company's television and print
advertising from the relatively expensive Denver, Colorado market in 2005 to the
Albuquerque, New Mexico and Colorado Springs, Colorado markets in 2006. As a
percentage of net revenue, advertising and marketing decreased to 1.8% for the
three months ended September 30, 2006 compared to 2.4% for the three months
ended September 30, 2005.
Depreciation and amortization-Offices. For the three months ended September 30,
2006, depreciation and amortization expenses attributable to the Offices
increased to $573,000 compared to $421,000 for the three months ended September
30, 2005, an increase of $152,000 or 36.1%. The increase in the Company's
depreciable asset base is a result of tenant improvements and new equipment
purchases for five de novo Offices opened since September 30, 2005, the
expansion of three existing Offices and increased capital purchases for
specialty services. As a percentage of net revenue, depreciation and
amortization increased to 5.9% for the three months ended September 30, 2006
compared to 4.5% for the three months ended September 30, 2005.
General and administrative-Offices. For the three months ended September 30,
2006 and 2005, general and administrative expenses attributable to the Offices
remained constant at $1.1 million. As a percentage of net revenue, general and
administrative expenses decreased to 11.5% for the three months ended September
30, 2006 compared to 11.6% for the three months ended September 30, 2005.
Contribution from dental Offices. As a result of the above, contribution from
dental Offices decreased $68,000, or 3.2%, to $2.0 million for the three months
ended September 30, 2006 compared to $2.1 million for the three months ended
September 30, 2005. As a percentage of net revenue, contribution from dental
offices decreased to 21.0% for the three months ended September 30, 2006
compared to 22.8% for the three months ended September 30, 2005.
Corporate expenses - general and administrative. For the three months ended
September 30, 2006, corporate expenses - general and administrative decreased to
$948,000 compared to $1.6 million for the three months ended September 30, 2005,
a decrease of $630,000 or 39.9%. This decrease is primarily related to a one
time expense of approximately $586,000 in the third quarter of 2005 associated
with the reimbursement of personal income taxes to the Company's Chairman and
Chief Executive Officer related to a 60,000 share restricted stock award on July
1, 2005 and a decrease of approximately $66,000 in executive bonuses in the
third quarter of 2006, partially offset by an increase of approximately $79,000
in the third quarter of 2006 in stock-based compensation expense related to the
adoption of SFAS 123(R), "Share-Based Payment" on January 1, 2006. The remainder
of the difference was primarily due to increases in occupancy, contract labor,
and travel expenses. As a percentage of net revenue, corporate expenses -
general and administrative decreased to 9.7% for the three months ended
September 30, 2006 compared to 17.0% for the three months ended September 30,
2005.
18
Corporate expenses - depreciation and amortization. For the three months ended
September 30, 2006, corporate expenses - depreciation and amortization decreased
$2,000, or 3.6%, to $32,000 compared to $34,000 for the three months ended
September 30, 2005. As a percentage of net revenue, corporate expenses -
depreciation and amortization decreased to 0.3% for the three months ended
September 30, 2006 from 0.4% for the three months ended September 30, 2005.
Operating income. As a result of the revenue and expenses discussed above, the
Company's operating income increased by $563,000, or 111.8% to $1.1 million for
the three months ended September 30, 2006 compared to $503,000 for the three
months ended September 30, 2005. As a percentage of net revenue, operating
income increased to 10.9% for the three months ended September 30, 2006 compared
to 5.4% for the three months ended September 30, 2005.
Interest expense/(income), net. For the three months ended September 30, 2006,
interest expense increased to $39,000 compared to ($13,000) for the three months
ended September 30, 2005, an increase of $52,000. This increase in interest
expense is attributable to higher interest expense on the Company's Credit
Facility due to increased rates and increased balances on the credit line and
lower charges for late payments on customer accounts receivable. As a percentage
of net revenue, interest expense/(income), net, increased to 0.4% for the three
months ended September 30, 2006 compared to (0.1)% for the three months ended
September 30, 2005.
Net income. As a result of the above, the Company's net income was $633,000
for the three months ended September 30, 2006 compared to net income of $414,000
for the three months ended September 30, 2005, an increase of $218,000 or 52.7%.
Net income for the three months ended September 30, 2006 was net of income tax
expense of $394,000 while net income for the three months ended September 30,
2005 was net of income tax expense of $102,000. As a percentage of net revenue,
net income increased to 6.5% for the three months ended September 30, 2006
compared to 4.5% for the three months ended September 30, 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2005:
Net revenue. For the nine months ended September 30, 2006, net revenue increased
$2.0 million, or 7.0%, to $30.0 million compared to $28.0 million for the nine
months ended September 30, 2005. This increase is attributable to increases at
existing offices as well as additional net revenue generated by the five de novo
Offices opened since September 30, 2005.
Clinical salaries and benefits. For the nine months ended September 30, 2006,
clinical salaries and benefits increased $513,000, or 5.0%, to $10.8 million
compared to $10.3 million for the nine months ended September 30, 2005. This
increase was primarily due to additional employees at the de novo Offices opened
since September 30, 2005, as well as annual wage increases that became effective
February 1, 2006. As a percentage of net revenue, clinical salaries and benefits
decreased to 36.1% for the nine months ended September 30, 2006 compared to
36.8% for the nine months ended September 30, 2005.
Dental supplies. For the nine months ended September 30, 2006, dental supplies
increased to $1.8 million compared to $1.7 million for the nine months ended
September 30, 2005, an increase of $52,000 or 3.1%. As a percentage of net
revenue, dental supplies decreased to 5.8% for the nine months ended September
30, 2006 compared to 6.1% for the nine months ended September 30, 2005.
Laboratory fees. For the nine months ended September 30, 2006, laboratory fees
increased $88,000 or 4.7%, to $2.0 million compared to $1.9 million for the nine
months ended September 30, 2005. As a percentage of net revenue, laboratory fees
decreased to 6.5% for the nine months ended September 30, 2006 compared to 6.7%
for the nine months ended September 30, 2005.
Occupancy. For the nine months ended September 30, 2006, occupancy expense
increased to $3.2 million compared to $2.9 million for the nine months ended
September 30, 2005, an increase of $344,000 or 12.0%. This increase was
primarily due to the opening of five de novo Offices since September 2005 and
increased rental payments resulting from the renewal of Office leases at current
market rates for Offices whose leases expired subsequent to the 2005 period. As
a percentage of net revenue, occupancy expense increased to 10.7% for the nine
months ended September 30, 2006 compared to 10.2% for the nine months ended
September 30, 2005.
Advertising and marketing. For the nine months ended September 30, 2006,
advertising and marketing expenses decreased to $638,000 compared to $795,000
for the nine months ended September 30, 2005, a decrease of $157,000 or 19.8%.
This decrease is attributable to a shift in the Company's television and print
advertising from the relatively expensive Denver, Colorado market in 2005 to the
Albuquerque, New Mexico and Colorado Springs, Colorado markets in 2006. As a
percentage of net revenue, advertising and marketing decreased to 2.1% for the
nine months ended September 30, 2006 compared to 2.8% for the nine months ended
September 30, 2005.
19
Depreciation and amortization-Offices. For the nine months ended September 30,
2006, depreciation and amortization expenses attributable to the Offices
increased to $1.6 million compared to $1.3 million for the nine months ended
September 30, 2005, an increase of $319,000 or 25.3%. The increase in the
Company's depreciable asset base is a result of tenant improvements and new
equipment purchases for five de novo Offices opened since September 30, 2005,
the expansion of three existing Offices and increased capital purchases for
specialty services. As a percentage of net revenue, depreciation and
amortization increased to 5.3% for the nine months ended September 30, 2006
compared to 4.5% for the nine months ended September 30, 2005.
General and administrative-Offices. For the nine months ended September 30,
2006, general and administrative expenses attributable to the Offices increased
to $3.5 million compared to $3.0 million for the nine months ended September 30,
2005, an increase of $409,000 or 13.4%. This increase in general and
administrative expenses is primarily attributable to higher write offs of
uncollectible accounts receivables and increased costs for travel, legal fees,
office supplies and increased recruiting fees. As a percentage of net revenue,
general and administrative expenses increased to 11.5% for the nine months ended
September 30, 2006 compared to 10.9% for the nine months ended September 30,
2005.
Contribution from dental Offices. As a result of the above, contribution from
dental Offices increased $394,000, or 6.4%, to $6.6 million for the nine months
ended September 30, 2006 compared to $6.2 million for the nine months ended
September 30, 2005. As a percentage of net revenue, contribution from dental
Offices decreased to 21.9% for the nine months ended September 30, 2006 compared
to 22.1% for the nine months ended September 30, 2005.
Corporate expenses - general and administrative. For the nine months ended
September 30, 2006, corporate expenses - general and administrative decreased to
$3.2 million compared to $3.4 million for the nine months ended September 30,
2005, a decrease of $215,000 or 6.3%. This decrease is primarily related to a
one time expense of approximately $586,000 in the 2005 period associated with
the reimbursement of personal income taxes to the Company's Chairman and Chief
Executive Officer related to a 60,000 share restricted stock award on July 1,
2005 and decrease of approximately $67,000 in executive bonuses in the 2006
period, partially offset by an increase of approximately $245,000 in stock-based
compensation expense related to the adoption of SFAS 123(R), "Share-Based
Payment" on January 1, 2006. The remainder of the difference was primarily due
to increases in computer maintenance, legal fees, office supplies and travel
expenses. As a percentage of net revenue, corporate expenses - general and
administrative decreased to 10.6% for the nine months ended September 30, 2006
compared to 12.1% for the nine months ended September 30, 2005.
Corporate expenses - depreciation and amortization. For the nine months ended
September 30, 2006, corporate expenses - depreciation and amortization decreased
by $4,000 to $99,000 compared to $103,000 for the nine months ended September
30, 2005. As a percentage of net revenue, corporate expenses - depreciation and
amortization decreased to 0.3% for the nine months ended September 30, 2006
compared to 0.4% for the nine months ended September 30, 2005.
Operating income. As a result of the revenue and expenses discussed above, the
Company's operating income increased to $3.3 million compared to $2.7 million
for the nine months ended September 30, 2005, an increase of $613,000 or 22.7%.
As a percentage of net revenue, operating income increased to 11.0% for the nine
months ended September 30, 2006 compared to 9.6% for the nine months ended
September 30, 2005.
Interest expense/(income), net. For the nine months ended September 30, 2006,
interest expense increased to $119,000 compared to ($41,000) for the nine months
ended September 30, 2005, an increase of $160,000. This increase in interest
expense is attributable to higher interest expense on the Company's Credit
Facility due to increased interest rates and increased balances on the credit
line and lower charges for late payments on customer accounts receivable. As a
percentage of net revenue, interest expense/(income), net, increased to 0.4% for
the nine months ended September 30, 2006 compared to (0.1)% for the nine months
ended September 30, 2005.
Net income. As a result of the above, the Company's net income was $2.0
million compared to $1.7 million for the nine months ended September 30, 2005,
an increase of $211,000 or 12.08%. Net income for the nine months ended
September 30, 2006 was net of income tax expense of $1.2 million while net
income for the nine months ended September 30, 2005 was net of income tax
expense of $991,000. As a percentage of net revenue, net income increased to
6.5% for the nine months ended September 30, 2006 compared to 6.2% for the nine
months ended September 30, 2005.
20
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations and growth through a combination of cash
provided by operating activities, the Credit Facility and, from time to time,
seller notes issued in dental practice acquisitions. As of September 30, 2006,
the Company had a working capital deficit of approximately $440,000.
Net cash provided by operating activities was approximately $4.3 million and
$2.9 million for the nine months ended September 30, 2006 and 2005,
respectively. During the 2006 period, excluding net income and after adding
back non-cash items, the Company's cash provided by operating activities
consisted primarily of an increase in accounts payable and accrued expenses of
approximately $360,000, a decrease in prepaid expenses and other assets of
approximately $147,000, an increase in other long-term obligations of
approximately $86,000 and an increase in income taxes payable of approximately
$32,000, offset by an increase in accounts receivable of approximately $945,000.
During the 2005 period, excluding net income and after adding back non-cash
items, the Company's cash provided by operating activities consisted primarily
of an increase in accounts payable and accrued expenses of approximately
$75,000, a decrease in prepaid expenses and other assets of approximately
$345,000 and, an increase in income taxes payable of approximately $180,000,
offset by an increase in accounts receivable of approximately $1.3 million.
Net cash used in investing activities was approximately $2.9 million and
$882,000 for the nine months ended September 30, 2006 and 2005, respectively.
For the nine months ended September 30, 2006, the Company invested approximately
$1.1 million in the purchase of additional property and equipment and
approximately $1.8 million in the development of de novo Offices. For the nine
months ended September 30, 2005, the Company invested approximately $635,000 in
the purchase of additional property and equipment and $246,000 in the
development of de novo Offices.
Net cash used in financing activities was approximately $1.6 million, for the
nine months ended September 30, 2006 and $1.8 million for the nine months ended
September 30, 2005. During the nine months ended September 30, 2006, net cash
used in financing activities was comprised of approximately $1.4 million used in
the purchase and retirement of Common Stock, approximately $845,000 for the
payment of dividends and approximately $112,000 used in the repayment of
long-term debt, partially offset by approximately $258,000 advanced from the
Company's Credit Facility, approximately $225,000 in proceeds from the exercise
of Common Stock options and $238,000 in tax benefit of Common Stock options
exercised. During the nine months ended September 30, 2005, net cash used in
financing activities was comprised of approximately $2.8 million used in the
purchase and retirement of Common Stock, approximately $124,000 for the
repayment of long-term debt and approximately $563,000 for the payment of
dividends, partially offset by approximately $519,000 in proceeds from the
exercise of Common Stock options, $333,000 in tax benefit of Common Stock
options exercised, and $774,000 advanced from the Credit Facility.
On April 25, 2006, the Company amended the Credit Facility. The amended Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $7.0 million (an increase from $5.0 million) at
either, or a combination of, the lender's Base Rate or at LIBOR plus a LIBOR
rate margin, at the Company's option. The lender's Base Rate computes interest
at the higher of the lender's "prime rate" or the Federal Funds Rate plus
one-half percent (0.5%). The LIBOR option computes interest at the LIBOR rate
as of the date such LIBOR rate loan was made plus a LIBOR rate margin of 1.50%.
A commitment fee of 0.25% on the average daily unused amount of the Revolving
Loan commitment during the preceding quarter is also assessed. The Company may
prepay any Base Rate loan at any time and any LIBOR rate loan upon not less than
three business days prior written notice given to the lender, but the Company
will be responsible for any loss or cost incurred by the lender in liquidating
or employing deposits required to fund or maintain the LIBOR rate loan. The
amended Credit Facility expires on May 31, 2008. At September 30, 2006, the
Company had $3.1 million outstanding and $3.9 million available for borrowing
under the Credit Facility. This consisted of $1.3 million outstanding under the
Base Rate option and $1.8 million outstanding under the LIBOR rate option. The
Credit Facility requires the Company to maintain certain financial ratios on an
ongoing basis. At September 30, 2006, the Company was in full compliance with
all of its covenants under the Credit Facility.
The Company's retained earnings as of September 30, 2006 were approximately $5.3
million. The Company expects increased costs over the next 12 to 18 months as it
prepares to comply with Sarbanes-Oxley Act Section 404.
On October 5, 2006, the Company accepted for payment, at a purchase price of
$21.75 per share, 212,396 shares of its Common Stock that were properly tendered
and not withdrawn in the Tender Offer. The 212,396 shares purchased were
comprised of the 175,000 shares the Company offered to purchase and 37,396
shares that were purchased pursuant to the Company's right to purchase up to an
additional 2% of the outstanding shares as of August 31, 2006, without extending
the tender offer in accordance with applicable securities laws. These shares
represented approximately 9.2% of the shares outstanding as of September 30,
2006.
21
On October 5, 2006, the Company entered into a $4.6 million Term Loan to finance
the Tender Offer. Under the Term Loan, $2.3 million is borrowed at a fixed
interest rate of 7.05% and the remaining $2.3 million is borrowed at a floating
interest rate of Libor plus 1.5%. The principal amount borrowed will be paid
quarterly in 60 equal payments of approximately $230,000 plus interest beginning
December 31, 2006. The term loan expires September 30, 2011.
The Company's earnings before interest, taxes, depreciation, amortization and
non cash expense associated with stock-based compensation ("Adjusted EBITDA")
increased $749,000, or 15.8% to $5.5 million for the nine months ended September
30, 2006 compared to $4.7 million for the corresponding nine month period in
2005. Adjusted EBITDA for the three months and nine months ended September 30,
2005 includes an add-back of a one-time cash expense equal to $586,000 related
to the reimbursement of income taxes for an award of restricted stock. 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, amortization of equity compensation,
stock-based compensation related to SFAS 123(R), interest expense/(income), net
and income tax expense to net income as in the table below.
Quarters Nine Months
Ended September 30, Ended September 30,
--------------------------- -----------------------
2005 2006 2005 2006
------------ ------------ ----------- ----------
RECONCILIATION OF ADJUSTED EBITDA:
Net income $ 414,390 $ 632,804 $1,747,301 $1,958,293
Depreciation and amortization - Offices 420,998 572,788 1,261,990 1,581,250
Depreciation and amortization - Corporate 33,595 32,396 102,887 99,038
Amortization of deferred equity compensation expense 81,030 81,030 81,030 243,090
Stock-based compensation expense related to - 78,620 - 244,651
SFAS 123 (R)
Interest expense/(income), net (13,353) 38,875 (41,220) 118,962
Income tax expense 102,315 394,498 990,951 1,232,604
------------ ------------ ----------- ----------
Adjusted EBITDA 1,038,975 1,831,011 4,142,939 5,477,888
------------ ------------ ----------- ----------
Reimbursement of income taxes related
to restricted stock grant 585,844 - 585,844 -
------------ ------------ ----------- ----------
Adjusted EBITDA before reimbursement of
income taxes related to restricted stock grant $ 1,624,819 $ 1,831,011 $4,728,783 $5,477,888
============ ============ ========== ==========
As of September 30, 2006, the Company had the following known contractual
obligations:
Payments due by Period
------------------------------------------------------------
Total Less than 1 year 1-3 years 3-5 years More than 5 years
---------- ---------------- --------- --------- -----------------
Long-term debt obligations $ 3,178,055 $ 66,445 $3,111,610 $ - $ -
Operating lease obligations 8,249,105 2,720,211 3,841,901 1,592,334 94,659
Other long-term liabilities reflected on
the balance sheet under GAAP 345,060 63,573 169,775 110,163 1,549
----------- ---------- ---------- ---------- -------
Total $11,772,220 $2,850,229 $7,123,286 $1,702,497 $96,208
=========== ========== ========== ========== =======
22
The Company from time to time may purchase its Common Stock on the open market.
During 2005, the Company, in 40 separate transactions, purchased 311,961 shares
of its Common Stock for total consideration of approximately $4.3 million at
prices ranging from $9.00 to $19.31 per share. In January 2005, the Company
purchased 40,000 shares of its Common Stock through a private transaction that
was approved by the Board of Directors. On March 17, 2005, the Board of
Directors authorized the Company to increase by $500,000 the amount available to
make open market purchases of its Common Stock. In April 2005, the Company
purchased 127,364 shares of Common Stock in a private transaction that was
previously approved by the Board of Directors. On September 12, 2005, the Board
of Directors authorized the Company to increase by $1.0 million the amount
available to make open market purchases of its Common Stock. On November 28,
2005, the Board of Directors authorized the Company to increase by an additional
$1.5 million the amount available to make open market purchases of its Common
Stock. During the nine months ended September 30, 2006, the Company, in 49
separate transactions, purchased 88,939 shares of its Common Stock for total
consideration of approximately $1.4 million at prices ranging from $15.00 to
$18.10 per share. In April 2006, the Company purchased 54,250 shares of its
Common Stock through a private transaction that was approved by the Board of
Directors. As of September 30, 2006, approximately $600,000 of the previously
authorized amount was available for open market purchases. There is no
expiration date on these plans. Such purchases may be made from time to time as
the Company's management deems appropriate.
The Company believes that cash generated from operations and borrowings under
its Credit Facility will be sufficient to fund its anticipated working capital
needs, capital expenditures and dividend payments for at least the next 12
months. In order to meet its long-term liquidity needs, the Company may issue
additional equity and debt securities, subject to market and other conditions.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company. The failure to obtain the funds necessary to
finance its future cash requirements could adversely affect the Company's
ability to pursue its strategy and could negatively affect its operations in
future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the area of changes in interest rates. Historically, and as of
September 30, 2006, the Company has not used derivative instruments or engaged
in hedging activities.
Interest Rate Risk. The interest payable on the Credit Facility is variable
based upon the lender's Base Rate and the LIBOR rate and, therefore, is affected
by changes in market interest rates. At September 30, 2006, the Company had $1.3
million outstanding with an interest rate of 8.25% under the Base Rate option
and $1.8 million outstanding with an interest rate of 6.87% under the LIBOR rate
option. The Company does not believe that reasonably possible near-term changes
in interest rates will result in a material effect on future earnings, fair
values or cash flows of the Company. The Company estimates that a 1.0% increase
in the Company's interest rate would have resulted in additional interest
expense of approximately $22,000 for the nine months ended September 30, 2006.
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, 2006. On the basis of this review,
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures are designed, and are effective, to give reasonable assurance that
the information required to be disclosed by the Company in reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission and to ensure that information required to be disclosed in the
reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, in a manner that allows timely decisions regarding required
disclosure. There were no changes in the Company's internal controls over
financial reporting that occurred in the second quarter of 2006 that materially
affected, or were reasonably likely to materially affect, its internal control
over financial reporting.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following chart provides information regarding Common Stock purchases by the
Company during the period July 1, 2006 through September 30, 2006.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number Approximate Dollar
Of Shares Value Of Shares
Purchased as That May Yet Be
Total Number Average Price Part of Publicly Purchased Under
Of Shares Paid per Announced Plans the Plans or
Period Purchased Share or Programs Programs
-------------------------------------------- ------------ ------------- ---------------- ------------------
July 1, 2006 through July 30, 2006 999 $16.00 999 $599,618
August 1, 2006 through August 31, 2006 - - - $599,618
September 1, 2006 through September 30, 2006 - - - $599,618
--- ------ ---
Total 999 $16.00 999
All purchases were made on the open market and were pursuant to publicly
announced plans approved by the Board of Directors. As of September 30, 2006,
there was approximately $599,618 available for the purchase of the Company's
Common Stock under publicly announced plans that have been approved by the Board
of Directors. There is no expiration date on these plans. Such purchases may be
made from time to time, as the Company's management deems appropriate.
24
------
ITEM 5. OTHER INFORMATION
On August 1, 2006, the Company consolidated two of its Phoenix, Arizona Offices,
Perfect Teeth/Shea and Perfect Teeth/Bell Road, into one office. The
consolidated Office is located at the Perfect Teeth/Bell Road location.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.1 Amended and Restated Articles of Incorporation, incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement of 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 through 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
September 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.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
Date: November 14, 2006 By: /s/ Frederic W.J. Birner
------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
Date: November 14, 2006 By: /s/ Dennis N. Genty
-------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary, and
Treasurer
(Principal Financial and Accounting Officer)
26