1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ------------------
Commission file number 0-23367
BIRNER DENTAL MANAGEMENT SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1307044
- ----------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO 80210
- ----------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(303) 691-0680
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ---------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding as of August 12, 2005
- ------------------------------- ----------------------------------------
Common Stock, without par value 2,417,790*
* On July 13, 2005, the Company announced that its Board of Directors had
declared a 2-for-1 stock split of its common stock. The 2-for-1 stock split,
which was effected as a stock dividend, was distributed on August 8, 2005 to
shareholders of record at the close of business on August 1, 2005. The stock
split increased the number of shares outstanding from 1,210,295 on August 8,
2005 to 2,420,590. All share and earnings per share calculations for all periods
in this document have been restated to reflect the effect of the stock split.
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2004
and June 30, 2005 3
Unaudited Condensed Consolidated Statements of Operations for the Quarters
and Six Months Ended June 30, 2004 and 2005 4
Unaudited Condensed Statement of Shareholders' Equity as of June 30, 2005 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2005 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 2004 2005
------------- ------------
** (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 756,181 $ 1,006,352
Accounts receivable, net of allowance for doubtful accounts
of $232,543 and $251,661, respectively 2,976,186 3,838,860
Deferred tax asset 135,826 135,826
Income tax receivable 80,318 -
Prepaid expenses and other assets 800,671 538,086
----------- -----------
Total current assets 4,749,182 5,519,124
PROPERTY AND EQUIPMENT, net 3,164,124 3,113,429
OTHER NONCURRENT ASSETS:
Intangible assets, net 13,787,093 13,411,873
Deferred charges and other assets 159,440 157,965
----------- -----------
Total assets $21,859,839 $22,202,391
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,637,927 $ 5,240,098
Income taxes payable - 426,018
Current maturities of long-term debt 167,217 165,221
----------- -----------
Total current liabilities 4,805,144 5,831,337
LONG-TERM LIABILITIES:
Deferred tax liability, net 670,893 670,893
Long-term debt, net of current maturities 1,078,711 1,223,672
Other long-term obligations 176,741 171,276
----------- -----------
Total liabilities 6,731,489 7,897,178
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized; none outstanding - -
Common Stock, no par value, 20,000,000 shares
authorized; 2,417,020 and 2,355,990 shares issued and
outstanding, respectively 12,125,811 10,442,330
Retained earnings 3,002,539 3,862,883
----------- -----------
Total shareholders' equity 15,128,350 14,305,213
----------- -----------
Total liabilities and shareholders' equity $21,859,839 $22,202,391
=========== ===========
** Derived from the Company's audited consolidated balance sheet at
December 31, 2004
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
2004 2005 2004 2005
----------- ----------- ----------- -----------
NET REVENUE $ 8,177,042 $ 9,393,284 $16,387,238 $18,761,015
DIRECT EXPENSES:
Clinical salaries and benefits 3,006,341 3,490,196 6,035,947 6,976,346
Dental supplies 495,415 599,015 957,839 1,132,353
Laboratory fees 638,934 655,810 1,267,572 1,284,306
Occupancy 867,920 952,684 1,743,068 1,912,900
Advertising and marketing 189,589 312,155 335,677 571,597
Depreciation and amortization 453,575 416,620 921,316 840,992
General and administrative 965,704 992,319 1,905,245 1,972,432
----------- ----------- ------------ -----------
6,617,478 7,418,799 13,166,664 14,690,926
----------- ----------- ------------ -----------
Contribution from dental offices 1,559,564 1,974,485 3,220,574 4,070,089
CORPORATE EXPENSES:
General and administrative 743,867 906,629 1,561,956 1,807,117
Depreciation and amortization 54,325 32,618 110,922 69,292
----------- ----------- ------------ -----------
Operating income 761,372 1,035,238 1,547,696 2,193,680
Interest expense (income), net 17,517 (20,235) 43,619 (27,867)
----------- ----------- ------------ -----------
Income from continuing operations
before income taxes 743,855 1,055,473 1,504,077 2,221,547
Income tax expense (297,542) (422,205) (601,631) (888,636)
----------- ----------- ------------ -----------
Income from continuing operations 446,313 633,268 902,446 1,332,911
DISCONTINUED OPERATIONS (NOTE 6):
Operating (loss) attributable to assets disposed of (36,840) - (82,035) -
(Loss) recognized on dispositions - - - -
Income tax benefit 14,736 - 32,814 -
----------- ----------- ------------ -----------
Loss on discontinued operations (22,104) - (49,221) -
----------- ----------- ------------ -----------
Net income $ 424,209 $ 633,268 $ 853,225 $ 1,332,911
=========== =========== ============ ===========
Net income per share of Common Stock - Basic:
Continuing Operations $ .19 $ .27 $ .38 $ .57
Discontinued Operations (.01) - (.02) -
----------- ----------- ------------ -----------
Net income per share of Common Stock - Basic $ .18 $ .27 $ .36 $ .57
=========== =========== ============ ===========
Net income per share of Common Stock - Diluted:
Continuing Operations $ .17 $ .25 $ .35 $ .52
Discontinued Operations (.01) - (.02) -
----------- ----------- ------------ -----------
Net income per share of Common Stock - Diluted $ .16 $ .25 $ .33 $ .52
=========== =========== ============ ===========
Weighted average number of shares of Common Stock
and dilutive securities:
Basic 2,379,582 2,306,202 2,378,442 2,342,994
=========== =========== ============ ===========
Diluted 2,596,602 2,555,696 2,594,126 2,587,816
=========== =========== ============ ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock Total
--------------------------- Retained Shareholders'
Shares Amount Earnings Equity
--------- ------------ ---------- ---------------
BALANCES, December 31, 2004 2,417,020 $ 12,125,811 $3,002,539 $15,128,350
Common Stock options exercised 136,334 513,897 - 513,897
Purchase and retirement of Common Stock (197,364) (2,197,378) - (2,197,378)
Dividends declared on Common Stock - - (472,567) (472,567)
Net income - - 1,332,911 1,332,911
--------- ------------ ---------- -----------
BALANCES, June 30, 2005 2,355,990 $ 10,442,330 $3,862,883 $14,305,213
========= ============ ========== ===========
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)
Six Months Ended
June 30,
--------------------------------
2004 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 853,225 $ 1,332,911
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,041,393 910,284
Loss (gain) on disposition of property 194 (244)
Provision for doubtful accounts 243,791 235,330
Amortization of debt issuance costs 1,703 1,475
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (467,913) (1,098,004)
Prepaid expenses and other assets 204,606 262,585
Deferred charges and other assets (3,600) -
Accounts payable and accrued expenses 372,327 457,211
Income taxes payable 7,217 506,336
Other long-term obligations (3,248) (5,465)
------------ -----------
Net cash provided by operating activities 2,249,695 2,602,419
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of new dental centers - (100,744)
Capital expenditures (348,720) (383,381)
------------ -----------
Net cash used in investing activities (348,720) (484,125)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances - line of credit 8,450,000 10,575,000
Repayments - line of credit (9,850,000) (10,350,000)
Repayment of long-term debt (172,615) (82,035)
Payment of debt issuance and financing costs - -
Proceeds from exercise of Common Stock options 111,165 513,897
Purchase and retirement of Common Stock (545,430) (2,197,378)
Common Stock cash dividends (88,876) (327,607)
Other - -
----------- -----------
Net cash used in financing activities (2,095,756) (1,868,123)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (194,781) 250,171
CASH AND CASH EQUIVALENTS, beginning of period 1,110,786 756,181
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 916,005 $ 1,006,352
=========== ===========
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)
Six Months Ended
June 30,
2004 2005
--------- --------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 76,215 $ 57,338
========= ========
Cash paid during the period for income taxes $ 561,600 $382,300
========= ========
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)
JUNE 30, 2005
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by Birner Dental
Management Services, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures included herein are adequate to make the
information presented not misleading. A description of the Company's accounting
policies and other financial information is included in the audited consolidated
financial statements as filed with the Securities and Exchange Commission in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of June 30, 2005 and the results of
operations and cash flows for the periods presented. All such adjustments are of
a normal recurring nature. The results of operations for the quarter and six
months ended June 30, 2005 are not necessarily indicative of the results that
may be achieved for a full fiscal year and cannot be used to indicate financial
performance for the entire year.
On July 13, 2005 the Company announced that its Board of Directors had declared
a 2-for-1 stock split of its common stock. The 2-for-1 stock split, which was
effected as a dividend, was distributed on August 8, 2005, to shareholders of
record at the close of business on August 1, 2005. The stock split increased the
number of shares outstanding from 1,177,995 on August 8, 2005 to 2,355,990. All
shares and earnings per share calculations for all periods in this document be
restated to reflect the effect of the stock split.
(2) SIGNIFICANT ACCOUNTING POLICIES
Stock Options
The Company accounts for stock options using the intrinsic value method wherein
compensation expense is recognized on stock options granted only for the excess
of the market price of our Common Stock over the option exercise price on the
date of grant. All options of the Company are granted at amounts equal to or
higher than the fair value of our Common Stock, so no compensation expense is
recorded.
Some companies also recognize compensation expense for the fair value of the
option right itself. In December 2004, the FASB issued SFAS No. 123(R),
"Share-Based Payment," which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R) is effective for public companies for
interim or annual periods at the beginning of the next fiscal year that begins
after June 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. The new standard will
be effective for the Company beginning in the first quarter of 2006. The Company
has not yet completed its evaluation but expects the adoption to have an effect
on the financial statements similar to the pro forma effects reported below. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------
Risk-free interest rate 3.00% 3.79% 2.33% 3.67%
Expected dividend yield 1.88% 2.04% 1.88% 2.04%
Expected lives 3.4 years 3.5 years 3.4 years 3.5 years
Expected volatility 45% 25% 37% 37%
To estimate lives of options for this valuation, it was assumed options would be
exercised one year after becoming fully vested. All options are initially
assumed to vest. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
Fair value computations are highly sensitive to the volatility factor assumed;
the greater the volatility, the higher the computed fair value of options
granted.
8
The total fair value of options and warrants granted was computed to be
approximately $10,000 and $242,000 for the three months ended June 30, 2004 and
2005, respectively and $24,000 and $539,000 for the six months ended June 30,
2004 and 2005, respectively. These amounts are amortized ratably over the
vesting periods of the options or recognized at the date of grant if no vesting
period is required. Pro forma stock-based compensation, net of the effect of
forfeitures, was $51,000 and ($225,000) for the quarters ended June 30, 2004 and
2005, respectively, and $39,000 and ($112,000) for the six months ended June 30,
2004 and 2005, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
the Company's net income and net income per common share would have been
reported as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2004 2005 2004 2005
--------- --------- --------- ----------
Net income, as reported $ 424,209 $ 633,268 $ 853,225 $1,332,911
Stock-based compensation included in net income - - - -
Fair value of stock-based compensation, net of income taxes (31,187) 136,527 (23,647) 67,798
--------- --------- --------- ----------
Pro forma net income $ 393,022 $ 769,795 $ 829,578 $1,400,709
========= ========= ========= ==========
Net income per share, basic:
As reported $ .18 $ .27 $ .36 $ .57
Stock-based compensation included in net income - - - -
Fair value of stock-based compensation, net of income taxes (.01) .06 (.01) .03
----- ----- ------ -----
Pro forma $ .17 $ .33 $ .35 $ .60
===== ===== ====== =====
Net income per share, diluted:
As reported $ .16 $ .25 $ .33 $ .52
Stock-based compensation included in net income - - - -
Fair value of stock-based compensation, net of income taxes (.01) .05 (.01) .02
----- ----- ------ -----
Pro forma $ .15 $ .30 $ .32 $ .54
===== ===== ====== =====
Weighted average shares used to calculate pro forma net income per share were
determined as described in Note 3, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
(3) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings Per Share".
Quarters Ended June 30,
----------------------------------------------------------------------------
2004 2005
------------------------------------ ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- ---------- --------- ---------
Basic EPS:
Net income available to
shares of Common Stock $ 424,209 2,379,582 $ .18 $ 633,268 2,306,202 $ .27
Effect of dilutive shares of
Common Stock from stock
options and warrants - 217,020 (.02) - 249,494 (.02)
Diluted EPS:
--------- --------- ----- ---------- --------- -----
Net income available to
shares of Common Stock $ 424,209 2,596,602 $ .16 $ 633,268 2,555,696 $ .25
========= ========= ===== ========== ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended June 30, 2004 and
2005 relates to the effect of 217,020 and 249,494, respectively, of dilutive
shares of Common Stock from stock options and warrants which are included in
total shares for the diluted calculation.
9
Six Months Ended June 30,
----------------------------------------------------------------------------
2004 2005
------------------------------------ ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- --------- ---------- --------- ---------
Basic EPS:
Net income available to
shares of Common Stock $ 853,225 2,378,442 $ .36 $ 1,332,911 2,342,994 $ .57
Effect of dilutive shares of
Common Stock from stock
options and warrants - 215,684 (.03) - 244,822 (.05)
--------- --------- ----- ----------- --------- -----
Diluted EPS:
Net income available to
shares of Common Stock $ 853,225 2,594,126 $ .33 $ 1,332,911 2,587,816 $ .52
========= ========= ===== =========== ========= =====
The difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the six months ended June 30, 2004 and
2005 relates to the effect of 215,684 and 244,822, respectively, of dilutive
shares of Common Stock from stock options and warrants which are included in
total shares for the diluted calculation.
(4) LINE OF CREDIT
On April 29, 2005, the Company amended its Credit Facility. The amended Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $5.0 million at either, or a combination of, the
lender's Base Rate or at LIBOR plus a LIBOR rate margin, at the Company's
option. The lender's Base Rate computes interest at the higher of the lender's
"prime rate" or the Federal Funds Rate plus one-half percent (0.5%). The LIBOR
option computes interest at the LIBOR rate as of the date such LIBOR Rate loan
was made plus a LIBOR Rate margin of 1.50%. A commitment fee of 0.25% on the
average daily unused amount of the Revolving Loan commitment during the
preceding quarter will also be assessed. The Company may prepay any Base Rate
loan at any time and any LIBOR Rate loan upon not less than three business days
prior written notice given to the lender, but the Company will be responsible
for any loss or cost incurred by the lender in liquidating or employing deposits
required to fund or maintain the LIBOR Rate loan. The amended Credit Facility
expires on May 31, 2007. At June 30, 2005, the Company had $1.125 million
outstanding and $3.875 million available for borrowing under the Credit
Facility. This consisted of $625,000 outstanding under the Base Rate option and
$500,000 outstanding under the LIBOR Rate option. The Credit Facility requires
the Company to maintain certain financial ratios on an ongoing basis. At June
30, 2005, the Company was in full compliance with all of its covenants under the
Credit Facility.
(5) CAPITAL COMMITMENTS
The Company has budgeted capital commitments for the next 12 months of
approximately $1.5 million, which includes the development of three de novo
Offices and the build-out of a fourth Office which will be a relocation of one
existing Office. The Company anticipates that these capital expenditures will be
funded by cash on hand, cash generated by operations, or borrowings under the
Company's Credit Facility. The Company's retained earnings as of June 30, 2005
were approximately $3.9 million and the Company had a working capital deficit on
that date of approximately $312,000. During the quarter ended June 30, 2005, the
Company had capital expenditures of $265,000 and purchased approximately $1.5
million of Common Stock while increasing total bank debt by $550,000.
(6) DISCONTINUED OPERATIONS
During the third quarter of 2004, the Company closed an office in the Phoenix,
Arizona market. Discontinued operations are defined in Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", as a component that has either been disposed of or is
classified as held for sale if both the operations and cash flows of the
component have been or will be eliminated from ongoing operations of the Company
as a result of the disposal transaction and the Company will not have any
significant continuing involvement in the operations of the component after the
disposal transaction. SFAS No. 144 further provides that the assets and
liabilities of the component, if any, that has been classified as discontinued
operations be presented separately in the Company's balance sheet. The results
of operations of the component of the Company that has been classified as
discontinued operations are also reported as discontinued operations for all
periods presented.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The statements contained in this report that are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements, other than statements of
historical facts, included in this report that address activities, events or
developments that we expect, believe, intend or anticipate will or may occur in
the future, are forward-looking statements. When used in this document, the
words "estimate," "believe," anticipate," "project" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. These
forward-looking statements include statements in this Item 2., "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
regarding intent, belief or current expectations of the Company or its officers
with respect to the development or acquisition of additional dental practices
("Offices") and the successful integration of such Offices into the Company's
network, recruitment of additional dentists, funding of the Company's expansion,
capital expenditures, payment or nonpayment of dividends and cash outlays for
income taxes 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 the "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" section of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2004, this
report, and other factors as may be identified from time to time in the
Company's filings with the Securities and Exchange Commission or in the
Company's press releases.
General
The following discussion relates to factors that have affected the results of
operations and financial condition of the Company for the quarters and six
months ended June 30, 2004 and 2005. This information should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto included elsewhere in this report.
Overview
The Company was formed in May 1995 and current1y manages 56 Offices in Colorado,
New Mexico and Arizona staffed by 78 general dentists and 26 specialists. The
Company derives all of its Revenue (as defined below) from its Management
Agreements with professional corporations ("P.C.s"), which conduct the practice
at each Office. In addition, the Company assumes a number of responsibilities
when it acquires a new practice or develops a de novo Office, which are set
forth in a Management Agreement, as described below.
The Company was formed with the intention of becoming the leading provider of
business services to dental practices in Colorado. The Company's growth and
success in the Colorado market led to its expansion into the New Mexico and
Arizona markets. The Company's growth strategy is to focus on greater
utilization of existing physical capacity through recruiting more dentists and
support staff and through development of de novo Offices and selective
acquisitions.
Critical Accounting Policies
The Company's critical accounting policies are set forth in its Form 10-K for
the year ended December 31, 2004. There have been no changes to these policies
since the filing of that report.
11
Components of Revenue and Expenses
Total dental group practice revenue ("Revenue") represents the revenue of the
Offices reported at estimated realizable amounts, received from dental plans,
other third-party payors and patients for dental services rendered at the
Offices. The Company's Revenue is derived principally from fee-for-service
revenue and managed dental care revenue. Fee-for-service revenue consists of
P.C. revenue received from indemnity dental plans, preferred provider plans and
direct payments by patients not covered by any third-party payment arrangement.
Managed dental care revenue consists of revenue received from capitated managed
dental care plans, including capitation payments and patient co-payments.
Capitated managed dental care contracts are between dental benefits
organizations and the P.C.s.
Net revenue represents Revenue less amounts retained by the Offices. The amounts
retained by the Offices represent amounts paid as salary to employed dentists
and hygienists. The Company's net revenue is dependent on the Revenue of the
Offices. Direct expenses consist of the expenses incurred by the Company in
connection with managing the Offices, including salaries and benefits for
personnel other than dentists and hygienists, dental supplies, dental laboratory
fees, occupancy costs, advertising and marketing, depreciation and amortization
and general and administrative (including office supplies, equipment leases,
management information systems and other expenses related to dental practice
operations). The Company also incurs personnel and administrative expenses in
connection with maintaining a corporate function that provides management,
administrative, marketing, 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 managed care organizations. Under
the Management Agreements, the P.C. is responsible for, among other things (i)
supervision of all dentists and dental hygienists, (ii) complying with all laws,
rules and regulations relating to dentists and dental hygienists, and (iii)
maintaining proper patient records. The Company has made, and intends to make in
the future, loans to P.C.s in Colorado, New Mexico and Arizona to fund their
acquisition of dental assets from third parties in order to comply with the laws
of such states.
Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed at the
Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company's costs include all direct and indirect
costs, overhead and expenses relating to the Company's provision of management
services at each Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of employees who work at the Office (other than
dentist and hygienist salaries), (ii) direct costs of all Company employees or
consultants who provide services to or in connection with the Office, (iii)
utilities, janitorial, laboratory, supplies, advertising and other expenses
incurred by the Company in carrying out its obligations under the Management
Agreement, (iv) depreciation expense associated with the P.C.'s assets and the
assets of the Company used at the Office, and the amortization of intangible
asset value relating to the Office, (v) interest expense on indebtedness
incurred by the Company to finance any of its obligations under the Management
Agreement, (vi) general and malpractice insurance expenses, lease expenses and
dentist recruitment expenses, (vii) personal property and other taxes assessed
against the Company's or the P.C.'s assets used in connection with the operation
of the Office, (viii) out-of-pocket expenses of the Company's personnel related
to mergers or acquisitions involving the P.C., (ix) corporate overhead charges
or any other expenses of the Company, including the P.C.'s pro rata share of the
expenses of the accounting and computer services provided by the Company, and
(x) a collection reserve in the amount of 5.0% of Adjusted Gross Center Revenue.
As a result, substantially all costs associated with the provision of dental
services at the Offices are borne by the Company, other than the compensation of
the dentists and hygienists who work at the Offices of the P.C.'s. This enables
the Company to manage the profitability of the Offices. Each Management
Agreement is for a term of 40 years. Further, each Management Agreement
generally may be terminated by the P.C. only for cause, which includes a
material default by or bankruptcy of the Company. Upon expiration or termination
of a Management Agreement by either party, the P.C. must satisfy all obligations
it has to the Company.
12
The Company's Revenue is derived principally from fee-for-service revenue and
managed dental care revenue. Fee-for-service revenue consists of P.C. revenue
received from indemnity dental plans, preferred provider plans and direct
payments by patients not covered by any third-party payment arrangement. Managed
dental care revenue consists of P.C. revenue received from capitated managed
dental care plans, including capitation payments and patient co-payments.
Capitated managed dental care contracts are between dental benefits
organizations and the P.C.s. Under the Management Agreements, the Company
negotiates and administers these contracts on behalf of the P.C.s. Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental group practice obligated to provide them. This arrangement
shifts the risk of utilization of these services to the dental group practice
providing the dental services. Because the Company assumes responsibility under
the Management Agreements for all aspects of the operation of the dental
practices (other than the practice of dentistry) and thus bears all costs of the
P.C.s associated with the provision of dental services at the Offices (other
than compensation and benefits of dentists and hygienists), the risk of
over-utilization of dental services at the Offices under capitated managed
dental care plans is effectively shifted to the Company. In addition, dental
group practices participating in a capitated managed dental care plan often
receive supplemental payments for more complicated or elective procedures. In
contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided. Under a preferred provider plan, the dental
group practice is paid for dental services provided based on a fee schedule that
is a discount to the usual and customary fees paid under an indemnity insurance
agreement.
The Company seeks to increase its fee-for-service business by increasing the
patient volume at existing Offices through effective marketing and advertising
programs and by opening new Offices. The Company seeks to supplement this
fee-for-service business with revenue from contracts with capitated managed
dental care plans. Although the Company's fee-for-service business generally is
more profitable than its capitated managed dental care business, capitated
managed dental care business serves to increase facility utilization and dentist
productivity. The relative percentage of the Company's Revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable contract terms. In addition, the profitability of managed dental care
Revenue varies from market to market depending on the level of capitation
payments and co-payments in proportion to the level of benefits required to be
provided. Historically, the Company has experienced a decrease in capitation
premiums received from insurance companies' managed care plans for which the
Company's affiliated Offices are providers. The Company believes this decrease
in capitation premiums has been caused by insurance companies decreasing the
scope of or in some cases, discontinuing altogether, their managed care
products. The Company has experienced and expects to continue to experience an
increase in patient visits with Preferred Provider Organization ("PPO")
insurance and believes a significant portion of this increase has been the
result of patients moving from insurance companies' managed care products to
their PPO products.
Results of Operations
For the three months ended June 30, 2005, Revenue increased $1.6 million, or
13.7%, to $13.3 million compared to $11.7 million for the three months ended
June 30, 2004. For the three months ended June 30, 2005, net revenue increased
$1.2 million, or 14.9%, to $9.4 million compared to $8.2 million for the three
months ended June 30, 2004.
Net income increased 49.3% to $633,000 for the quarter ended June 30, 2005,
compared to net income of $424,000 for the quarter ended June 30, 2004. Net
income in the second quarter of 2004 included a loss on discontinued operations
of $(22,000).
For the six months ended June 30, 2005, Revenue increased $3.1 million, or
13.4%, to $26.7 million compared to $23.6 million for the six months ended June
30, 2004. For the six months ended June 30, 2005, net revenue increased to $18.8
million compared to $16.4 million for the six months ended June 30, 2004, an
increase of $2.4 million or 14.5%.
For the six months ended June 30, 2005, net income increased 56.2%, to $1.3
million, compared to net income of $853,000 for the six months ended June 30,
2004. Net income for the six months of 2004 included a loss on discontinued
operations of $(49,000).
The Company has signed leases for three additional de novo Offices in the
Phoenix, Arizona market, one of which is projected to open in the third quarter
of 2005 and two in the first quarter of 2006. The Company opened two de novo
Offices in the Denver, Colorado market, one in November 2004 and the other in
January 2005 and one de novo Office in Phoenix, Arizona in September 2004.
The Company continues to generate strong cash flow from operations. During the
first six months of 2005, the Company purchased $2.2 million of its outstanding
common stock and incurred $484,000 in capital expenditures while increasing
borrowings under its Credit Facility by only $225,000.
13
Revenue is total dental group practice revenue generated at the Company's
offices from professional services provided to its patients. Amounts retained by
group practices represents compensation expense to the dentists and hygienists
and is subtracted from total dental group practice revenue to arrive at net
revenue. The Company reports net revenue in its financial statements to comply
with Emerging Issues Task Force Issue No. 97-2, Application of SFAS No. 94
(Consolidation of All Majority Owned Subsidiaries) and APB Opinion No. 16
(Business Combinations) to Physician Practice Management Entities and Certain
Other Entities With Contractual Management Arrangements. Revenue is not a
generally accepted accounting principles measure. The Company discloses Revenue
because it is a critical component for management's evaluation of Office
performance. However, investors should not consider this measure in isolation or
as a substitute for net revenue, operating income, cash flows from operating
activities or any other measure for determining the Company's operating
performance that is calculated in accordance with generally accepted accounting
principles. The following table reconciles Revenue to net revenue (excluding
discontinued operations).
Quarters Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
------------ ------------ ------------ -------------
Total dental group practice revenue $ 11,740,173 $ 13,344,516 $ 23,550,013 $ 26,694,923
Amounts retained by group practices (3,563,131) (3,951,232) (7,162,775) (7,933,908)
------------ ------------ ------------ -------------
Net revenue $ 8,177,042 $ 9,393,284 $ 16,387,238 $ 18,761,015
============ ============ ============ =============
The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's Condensed Consolidated Statements of
Operations. The information contained in the table represents the historical
results of the Company. The information that follows should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
related Notes thereto contained elsewhere in this report.
Quarters Ended Six Months Ended
June 30, June 30,
---------------------- --------------------------
2004 2005 2004 2005
---- ---- ---- ----
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Direct expenses:
Clinical salaries and benefits 36.8 % 37.2 % 36.8 % 37.2 %
Dental supplies 6.1 % 6.4 % 5.9 % 6.0 %
Laboratory fees 7.8 % 7.0 % 7.7 % 6.9 %
Occupancy 10.6 % 10.1 % 10.6 % 10.2 %
Advertising and marketing 2.3 % 3.3 % 2.1 % 3.0 %
Depreciation and amortization 5.5 % 4.4 % 5.6 % 4.5 %
General and administrative 11.8 % 10.6 % 11.6 % 10.5 %
------- --------- -------- --------
80.9 % 79.0 % 80.3 % 78.3 %
------- -------- -------- --------
Contribution from dental offices 19.1 % 21.0 % 19.7 %. 21.7 %
Corporate expenses:
General and administrative 9.1 % 9.6 % 9.5 % 9.6 %
Depreciation and amortization 0.7% 0.4 % 0.7 % 0.4 %
------- --------- -------- --------
Operating income 9.3 % 11.0 % 9.5 % 11.7 %
Interest expense (income), net 0.2 % (0.2)% 0.3 % (0.1)%
------- --------- -------- --------
Income before income taxes 9.1 % 11.2 % 9.2 % 11.8 %
Income tax expense 3.6 % 4.5 % 3.7 % 4.7 %
Loss attributable to discontinued operations,
net of income taxes 0.3 % - % 0.3 % - %
------- --------- -------- --------
Net income 5.2 % 6.7 % 5.2 % 7.1 %
======= ========= ======== ========
14
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004:
Net revenue. For the three months ended June 30, 2005, net revenue increased
$1.2 million, or 14.9%, to $9.4 million compared to $8.2 million for the three
months ended June 30, 2004. This increase is attributable to higher revenues due
to an increased emphasis on specialty dentistry as well as the addition of three
new de novo Offices since June 30, 2004.
Clinical salaries and benefits. For the three months ended June 30, 2005,
clinical salaries and benefits increased $484,000, or 16.1%, to $3.5 million
compared to $3.0 million for the three months ended June 30, 2004. This increase
was primarily due to higher wages resulting from a higher number of contract
dentists working in the specialty dentistry area, a larger support staff for the
additional dentists as well as annual wage increases that became effective
February 1, 2005. As a percentage of net revenue, clinical salaries and benefits
increased to 37.2% for the three months ended June 30, 2005 compared to 36.8%
for the three months ended June 30, 2004.
Dental supplies. For the three months ended June 30, 2005, dental supplies
increased to $599,000 compared to $495,000 for the three months ended June 30,
2004, an increase of $104,000 or 20.9%. This increase is attributable to
increased production, the opening dental supply inventory at two of the de novo
Offices and increased emphasis on specialty dentistry. As a percentage of net
revenue, dental supplies increased to 6.4% for the three months ended June 30,
2005 compared to 6.1% for the three months ended June 30, 2004.
Laboratory fees. For the three months ended June 30, 2005, laboratory fees
increased to $656,000 compared to $639,000 for the three months ended June 30,
2004, an increase of $17,000 or 2.6%. Laboratory fees associated with specialty
dentistry are not as significant, relative to general dentistry, and therefore
this expense did not increase as a result of increased production. As a
percentage of net revenue, laboratory fees decreased to 7.0% for the three
months ended June 30, 2005 compared to 7.8% for the three months June 30, 2004.
Occupancy. For the three months ended June 30, 2005, occupancy expense increased
to $953,000 compared to $868,000 for the three months ended June 30, 2004, an
increase of $85,000 or 9.8%. This increase was primarily due to the opening of
three de novo Offices since June 30, 2004 and increased rental payments
resulting from the renewal of Office leases at current market rates for Offices
whose leases expired subsequent to the 2004 period. As a percentage of net
revenue, occupancy expense decreased to 10.1% for the three months ended June
30, 2005 compared to 10.6% the three months ended June 30, 2004.
Advertising and marketing. For the three months ended June 30, 2005, advertising
and marketing increased to $312,000 compared to $190,000 for the three months
ended June 30, 2004, an increase of $123,000 or 64.6%. This increase is
attributable to a new television and print advertising campaign in the Denver,
Colorado market which began in January 2005. As a percentage of net revenue,
advertising and marketing increased to 3.3% for the three months ended June 30,
2005 compared to 2.3% for the three months ended June 30, 2004.
Depreciation and amortization. For the three months ended June 30, 2005,
depreciation and amortization expenses attributable to the Offices decreased to
$417,000 compared to $454,000 for the three months ended June 30, 2004, a
decrease of $37,000 or 8.1%. The decrease in the Company's depreciable asset
base is a result of existing assets becoming fully depreciated partially offset
by depreciation expense at the three de novo Offices. As a percentage of net
revenue, depreciation and amortization decreased to 4.4% for the three months
ended June 30, 2005 compared to 5.5% for the three months ended June 30, 2004.
General and administrative. For the three months ended June 30, 2005, general
and administrative expenses attributable to the Offices increased to $992,000
compared to $966,000 for the three months ended June 30, 2004, an increase of
$27,000 or 2.8%. As a percentage of net revenue, general and administrative
expenses decreased to 10.6% for the three months ended June 30, 2005 compared to
11.8% during the three months ended June 30, 2004.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased $415,000, or 26.6%, to $2.0 million for the three
months ended June 30, 2005 compared to $1.6 million for the three months ended
June 30, 2004. As a percentage of net revenue, contribution from dental offices
increased to 21.0% for the three months ended June 30, 2005 compared to 19.1%
for the three months ended June 30, 2004.
Corporate expenses - general and administrative. For the three months ended June
30, 2005, corporate expenses - general and administrative increased to $907,000
compared to $744,000 for the three months ended June 30, 2004, an increase of
$163,000 or 21.9%. This increase is related to increases in accrued bonuses,
corporate wages and accrued vacation. As a percentage of net revenue, corporate
expenses - general and administrative increased to 9.6% for the three months
ended June 30, 2005 compared to 9.1% during the three months ended June 30,
2004.
15
Corporate expenses - depreciation and amortization. For the three months ended
June 30, 2005, corporate expenses - depreciation and amortization decreased to
$33,000 compared to $54,000 for the three months ended June 30, 2004, a decrease
of $22,000 or 40.0%. The decrease is related to the decrease in the Company's
depreciable asset base. As a percentage of net revenue, corporate expenses -
depreciation and amortization decreased to 0.4% for the three months ended June
30, 2005 compared to 0.7% for the three months ended June 30, 2004.
Operating income. As a result of the matters discussed above, the Company
generated operating income of $1.0 million for the three months ended June 30,
2005 compared to operating income of $761,000 for the three months ended June
30, 2004, an increase of $274,000 or 36.0%. As a percentage of net revenue,
operating income increased to 11.0% for the three months ended June 30, 2005
compared to 9.3% for the three months ended June 30, 2004.
Interest expense/(income). For the three months ended June 30, 2005, interest
expense/(income) decreased to ($20,000) compared to $18,000 for the three months
ended June 30, 2004, a decrease of $38,000. This increase in interest income is
attributable to lower interest expense on the Company's seller notes due to
lower balances as the result of prepayments made in November 2004 and higher
charges for late payments on customer accounts receivable. As a percentage of
net revenue, interest expense/(income) decreased to (0.2)% for the three months
ended June 30, 2005 compared to 0.2% for the three months ended June 30, 2004.
Discontinued operations. In September 2004, the Company closed an Office in the
Phoenix market that resulted in a net loss from discontinued operations of
$22,000 for the quarter ended June 30, 2004. This loss for the three months
ended June 30, 2004 was comprised of an operating loss of $37,000, partially
offset by an income tax benefit of $15,000.
Net income. As a result of the above, the Company reported net income of
$633,000 for the three months ended June 30, 2005 compared to net income of
$424,000 for the three months ended June 30, 2004, an increase of $209,000 or
49.3%. Net income for the quarter ended June 30, 2005 was net of income tax
expense of $422,000 while net income for the quarter ended June 30, 2004 was net
of income tax expense of $283,000. As a percentage of net revenue, net income
increased to 6.7% for the three months ended June 30, 2005 compared to 5.2% for
the three months ended June30, 2004.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004:
Net revenue. For the six months ended June 30, 2005, net revenue increased to
$18.8 million compared to $16.4 million for the six months ended June 30, 2004,
an increase of $2.4 million or 14.5%. This increase is attributable to higher
revenues due to an increased emphasis on specialty dentistry as well as the
addition of three de novo Offices since June 30, 2004.
Clinical salaries and benefits. For the six months ended June 30, 2005, clinical
salaries and benefits increased to $7.0 million compared to $6.0 million for the
six months ended June 30, 2004, an increase of $940,000 or 15.6%. This increase
was primarily due to higher wages resulting from a higher number of contract
dentists working in the specialty dentistry area, a larger support staff for the
additional dentists as well as annual wage increases that became effective
February 1, 2005. As a percentage of net revenue, clinical salaries and benefits
increased to 37.2% for the six months ended June 30, 2005 compared to 36.8% for
the six months ended June 30, 2004.
Dental supplies. For the six months ended June 30, 2005, dental supplies
increased to $1.1 million compared to $958,000 for the six months ended June 30,
2004, an increase of $175,000 or 18.2%. This increase is attributable to
increased production, the opening dental supply inventory at two of the de novo
Offices and increased emphasis on specialty dentistry. As a percentage of net
revenue, dental supplies increased to 6.0% for the six months ended June 30,
2005 compared to 5.9% for the six months ended June 30, 2004.
Laboratory fees. For the six months ended June 30, 2005, laboratory fees
remained constant at $1.3 million compared to the six months ended June 30,
2004. Laboratory fees associated with specialty dentistry are not as
significant, relative to general dentistry, and therefore this expense did not
increase as a result of increased production. As a percentage of net revenue,
laboratory fees decreased to 6.9% for the six months ended June 30, 2005
compared to 7.7% for the six months June 30, 2004.
Occupancy. For the six months ended June 30, 2005, occupancy expense increased
$170,000, or 9.7%, to $1.9 million compared to $1.7 million for the six months
ended June 30, 2004. This increase was primarily due to the opening of three de
novo Offices since June 30, 2004 and increased rental payments resulting from
the renewal of Office leases at current market rates for Offices whose leases
expired subsequent to the 2004 period. As a percentage of net revenue, occupancy
expense decreased to 10.2% for the six months ended June 30, 2005 compared to
10.6% for the six months ended June 30, 2004.
16
Advertising and marketing. For the six months ended June 30, 2005, advertising
and marketing increased to $572,000 compared to $336,000 for the six months
ended June 30, 2004, an increase of $236,000 or 70.3%. This increase is
attributable to the new television and print advertising campaign in the Denver,
Colorado market which began in January 2005. As a percentage of net revenue,
advertising and marketing increased to 3.0% for the six months ended June 30,
2005 compared to 2.1% for the six months ended June 30, 2004.
Depreciation and amortization. For the six months ended June 30, 2005,
depreciation and amortization expenses attributable to the Offices decreased to
$841,000 compared to $921,000 for six months ended June 30, 2004, a decrease of
$80,000 or 8.7%. The decrease in the Company's depreciable asset base is a
result of existing assets becoming fully depreciated partially offset by
depreciation expense at the three de novo Offices. As a percentage of net
revenue, depreciation and amortization decreased to 4.5% for the six months
ended June 30, 2005 compared to 5.6% for the six months ended June 30, 2004.
General and administrative. For the six months ended June 30, 2005, general and
administrative expenses attributable to the Offices increased to $2.0 million
compared to $1.9 million for the six months ended June 30, 2004, an increase of
$67,000 or 3.5%. The increase is primarily due to higher dentist recruiting
costs and higher credit card fees. As a percentage of net revenue, general and
administrative expenses decreased to 10.5% for the six months ended June 30,
2005 compared to 11.6% during the six months ended June 30, 2004.
Contribution from dental offices. As a result of the above, contribution from
dental offices increased to $4.1 million for the six months ended June 30, 2005
compared to $3.2 million for the six months ended June 30, 2004, an increase of
$850,000 or 26.4%. As a percentage of net revenue, contribution from dental
offices increased to 21.7% for the six months ended June 30, 2005 compared to
19.7% for the six months ended June 30, 2004.
Corporate expenses - general and administrative. For the six months ended June
30, 2005, corporate expenses - general and administrative increased to $1.8
million compared to $1.6 million the six months ended June 30, 2004. This
increase was primarily due to higher accrued bonuses, regional director wages
and accrued vacation. As a percentage of net revenue, corporate expenses -
general and administrative increased to 9.6% for the six months ended June 30,
2005 compared to 9.5% for the six months ended June 30, 2004.
Corporate expenses - depreciation and amortization. For the six months ended
June 30, 2005, corporate expenses - depreciation and amortization decreased to
$69,000 compared to $111,000 for the six months ended June 30, 2004, a decrease
of $42,000 or 37.5%. This decrease is related to the decrease in the Company's
depreciable asset base. As a percentage of net revenue, corporate expenses -
depreciation and amortization decreased to 0.4% for the six months ended June
30, 2005 compared to 0.7% for the six months ended June 30, 2004.
Operating income. As a result of the above, the Company generated operating
income of $2.2 million for the six months ended June 30, 2005 compared to
operating income of $1.5 million for the six months ended June 30, 2004, an
increase of $646,000 or 41.7%. As a percentage of net revenue, operating income
increased to 11.7% for the six months ended June 30, 2005 compared to 9.5% for
the six months ended June 30, 2004.
Interest expense/(income). For the six months ended June 30, 2005 interest
expense/(income) decreased to ($28,000) compared to $44,000 for the six months
ended June 30, 2004, a decrease of $72,000. This increase in interest income is
attributable to lower interest expense on the Company's seller notes due to
lower balances as the result of prepayments made in November 2004 and higher
charges for late payments on customer accounts receivable. As a percentage of
net revenue, interest expense/(income) decreased to (0.1%) for the six months
ended June 30, 2005 compared to 0.3% for the six months ended June 30, 2004.
Discontinued operations. In September 2004, the Company closed an Office in the
Phoenix market which resulted in a net loss from discontinued operations of
$49,000 for the six months ended June 30, 2004. This loss for the six months
ended September 30, 2004 was comprised of an operating loss of $82,000,
partially offset by an income tax benefit of $33,000.
Net income. As a result of the above, the Company reported net income of $1.3
million for the six months ended June 30, 2004 compared to net income of
$853,000 for the six months ended June 30, 2004, an increase of $480,000 or
56.2%. Net income for the six months ended June 30, 2005 was net of income tax
expense of $889,000 while the net income for the six months ended June 30, 2004
was net of income tax expense of $569,000. As a percentage of net revenue, net
income increased to 7.1% for the six months ended June 30, 2005 compared to 5.2%
for the six months ended June 30, 2004.
17
Liquidity and Capital Resources
The Company finances its operations and growth through a combination of cash
provided by operating activities, a bank line of credit (the "Credit Facility")
and, from time to time, seller notes. As of June 30, 2005, the Company had a
working capital deficit of approximately $312,000. This is primarily comprised
of balances in accounts payable and accrued expenses, income taxes payable and
current maturities of long-term debt in excess of balances in cash, accounts
receivable and prepaid expenses as of June 30, 2005.
Net cash provided by operating activities was approximately $2.6 million and
$2.2 million for the six months ended June 30, 2005 and 2004, respectively.
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
$457,000, a decrease in prepaid expenses and other assets of approximately
$263,000 and an increase in income taxes payable of approximately $506,000,
partially offset by an increase in accounts receivable of approximately $1.1
million. During the 2004 period, excluding net income and after adding back
non-cash items, the Company's cash provided by operating activities consisted
primarily of an increase in accounts payable and accrued expenses of
approximately $372,000 and a decrease in prepaid expenses and other assets of
approximately $205,000, partially offset by an increase in accounts receivable
of approximately $468,000.
Net cash used in investing activities was approximately $484,000 and $349,000
for the six months ended June 30, 2005 and 2004, respectively. For the six
months ended June 30, 2005, the Company invested approximately $383,000 in the
purchase of additional property and equipment and approximately $101,000 in the
development of de novo Offices. For the six months ended June 30, 2004,
approximately $349,000 was invested in the purchase of additional property and
equipment.
Net cash used in financing activities was approximately $1.9 million for the six
months ended June 30, 2005 and $2.1 million for the six months ended June 30,
2004. During the six months ended June 30, 2005, net cash used in financing
activities was comprised of approximately $2.2 million used in the purchase and
retirement of Common Stock, approximately $82,000 for the repayment of long-term
debt and approximately $327,000 for the payment of dividends, partially offset
by approximately $514,000 in proceeds from the exercise of Common Stock options
and $225,000 advanced from the Credit Facility. During the six months ended June
30, 2004, net cash used in financing activities was comprised of approximately
$1.4 million paid down on the Credit Facility, approximately $545,000 used in
the purchase and retirement of Common Stock, approximately $177,000 for the
repayment of long-term debt and approximately $89,000 for the payment of
dividends, partially offset by approximately $111,000 in proceeds from the
exercise of Common Stock options..
On April 29, 2005, 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 $5.0 million at either, or a combination of, the
lender's Base Rate or at LIBOR plus a LIBOR rate margin, at the Company's
option. The lender's Base Rate computes interest at the higher of the lender's
"prime rate" or the Federal Funds Rate plus one-half percent (0.5%). The LIBOR
option computes interest at the LIBOR rate as of the date such LIBOR Rate loan
was made plus a LIBOR Rate margin of 1.50%. A commitment fee of 0.25% on the
average daily unused amount of the Revolving Loan commitment during the
preceding quarter will also be assessed. The Company may prepay any Base Rate
loan at any time and any LIBOR Rate loan upon not less than three business days
prior written notice given to the lender, but the Company will be responsible
for any loss or cost incurred by the lender in liquidating or employing deposits
required to fund or maintain the LIBOR Rate loan. The amended Credit Facility
expires on May 31, 2007. At June 30, 2005, the Company had $1.125 million
outstanding and $3.875 million available for borrowing under the Credit
Facility. This consisted of $625,000 outstanding under the Base Rate option and
$500,000 outstanding under the LIBOR Rate option. The Credit Facility requires
the Company to maintain certain financial ratios on an ongoing basis. At June
30, 2005, the Company was in full compliance with all of its covenants under the
Credit Facility.
At June 30, 2005, the Company had outstanding indebtedness in addition to the
Credit Facility of approximately $264,000 represented by seller notes issued in
connection with various dental practice acquisitions, all of which bear interest
at 8.0%. At June 30, 2005, the Company had capital commitments of approximately
$1.5 million related to the development of three de novo offices and the
build-out of a fourth Office which will be a relocation of one existing Office.
The Company's retained earnings as of June 30, 2005 were approximately $3.9
million. The Company expects increased costs over the next 12 to 18 months as it
prepares to comply with Sarbanes-Oxley section 404.
18
The Company's earnings before discontinued operations (before income tax
benefit), interest, taxes and depreciation and amortization ("Adjusted EBITDA")
increased to $3.1 million for the six months ended June 30, 2005 compared to
$2.6 million for the corresponding six-month period in 2004. Although Adjusted
EBITDA is not a generally accepted accounting principles measure of performance
or liquidity, the Company believes that it may be useful to an investor in
evaluating its performance. However, investors should not consider this measure
in isolation or as a substitute for operating income, cash flows from operating
activities or any other measure for determining the Company's operating
performance or liquidity that is calculated in accordance with generally
accepted accounting principles. In addition, because Adjusted EBITDA is not
calculated in accordance with generally accepted accounting principles, it may
not necessarily be comparable to similarly titled measures employed by other
companies. A reconciliation of Adjusted EBITDA can be made by adding
discontinued operations, depreciation and amortization expense - offices,
depreciation and amortization expense - corporate, interest expense/(income),
net and income tax expense to net income as in the table below.
Quarters Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2004 2005 2004 2005
----------- ----------- ------------ -------------
RECONCILIATION OF ADJUSTED EBITDA:
Net income $ 424,209 $ 633,268 $ 853,225 $ 1,332,911
Discontinued operations -
(before income tax benefit) 36,840 - 82,035 -
Depreciation and amortization - Offices 453,575 416,620 921,316 840,992
Depreciation and amortization - Corporate 54,325 32,618 110,922 69,292
Interest expense/(income), net 17,517 (20,235) 43,619 (27,867)
Income tax expense 282,806 422,205 568,817 888,636
----------- ----------- ----------- -----------
ADJUSTED EBITDA $ 1,269,272 $ 1,484,476 $ 2,579,934 $ 3,103,964
=========== =========== =========== ===========
As of June 30, 2005, the Company had the following known contractual
obligations:
Payments due by Period
------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
---------- --------- --------- --------- ---------
Long-Term Debt Obligations 1,388,893 165,221 1,223,672 - -
Operating Lease Obligations 8,554,142 2,390,542 4,064,304 1,929,760 169,536
Other Long-Term Liabilities Reflected on
the Balance Sheet Under GAAP 171,276 - 115,382 53,802 2,092
---------- --------- --------- --------- ---------
Total 10,114,311 2,555,763 5,403,358 1,983,562 171,628
========== ========= ========= ========= =========
The Company from time to time may purchase its Common Stock on the open market.
During 2003, the Company, in 84 separate transactions, purchased 592,390 shares
of its Common Stock for total consideration of approximately $3.9 million at
prices ranging from $4.77 to $7.10 per share. During 2004, the Company, in seven
separate transactions, purchased 108,000 shares of its Common Stock for total
consideration of approximately $778,000 at prices ranging from $6.33 to $9.25
per share. During the six month period ended June 30, 2005, the Company, in
three separate transactions, purchased 197,364 shares of its Common Stock for
total consideration of approximately $2.2 million at prices ranging from $9.00
to $12.00 per share. Included during this period, the Company purchased, in a
single private transaction approved by the Board of Directors and outside of
previously publicly announced plans, 127,364 shares of its Common Stock for
$12.00 per share. This purchase, of approximately $1.5 million, was financed
with borrowings under the Company's Credit Facility. On August 10, 2004, the
Board of Directors authorized the Company to make up to $500,000 in open-market
purchases of its Common Stock. On November 9, 2004, the Board of Directors
authorized the Company to increase the amount available to make open-market
purchases of its Common Stock by $300,000. On March 17, 2005, the Board of
Directors authorized the Company to increase the amount available to make
open-market purchases of its Common Stock by $500,000. As of June 30, 2005,
there was approximately $758,000 available for the purchase of the Company's
Common Stock under publicly announced plans which have been approved by the
Board of Directors. There is no expiration date on these plans. Such purchases
may be made from time to time as the Company's management deems appropriate.
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.
19
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
June 30, 2005, the Company has not used derivative instruments or engaged in
hedging activities.
Interest Rate Risk. The interest payable on the Company's Credit Facility is
variable based upon the lender's Base Rate and the LIBOR rate and, therefore, is
affected by changes in market interest rates. At June 30, 2005, the Company had
$625,000 outstanding with an interest rate of 6.25% (under the Base Rate option)
and $500,000 with an interest rate of 4.67% (under the LIBOR Rate option). The
Company does not believe that reasonably possible near-term changes in interest
rates will result in a material effect on future earnings, fair values or cash
flows of the Company. The Company estimates that a 1.0% increase in the
Company's interest rate would have resulted in additional interest expense of
approximately $6,600 for the six months ended June 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
The effectiveness of our or any system of disclosure controls and procedures is
subject to certain limitations, including the exercise of judgment in designing,
implementing and evaluating the controls and procedures, the assumptions used in
identifying the likelihood of future events, and the inability to eliminate
misconduct completely. As a result, there can be no assurance that our
disclosure controls and procedures will detect all errors or fraud. By their
nature, our or any system of disclosure controls and procedures can provide only
reasonable assurance regarding management's control objectives.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the design
and operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange
Act") as of June 30, 2005. On the basis of this review, our management,
including our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures are designed, and are effective, to
give reasonable assurance that the information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC
and to ensure that information required to be disclosed in the reports filed or
submitted under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
in a manner that allows timely decisions regarding required disclosure. There
were no changes in the Company's internal controls over financial reporting that
occurred in the second quarter of 2005 that materially affected, or were
reasonably likely to materially affect, its internal control over financial
reporting.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following chart provides information regarding Common Stock repurchases by
the Company during the period April 1, 2005 through June 30, 2005.
Issuer Purchases of Equity Securities
Approximate
Total Number Dollar Value
Of Shares Of Shares That May
Purchased as Yet Be
Average Part of Publicly Purchased
Total Number Price Announced Under the
Of Shares Paid per Plans or Plans or
Period Purchased Share Programs Programs
------ ------------ --------- ---------------- ------------------
April 1, 2005 through April 30, 2005 127,364 $ 12.00 - $ 758,458
May 1, 2005 through May 31, 2005 - $ - - $ 758,458
June 1, 2005 through June 30, 2005 - $ - - $ 758,458
------- ------- ------- ---------
Total 127,364 $ 12.00 -
The purchase of 127,364 shares in April 2005 was made through a private
transaction which were approved by the Board of Directors. As of June 30, 2005,
there was approximately $758,000 available for the purchase of the Company's
Common Stock under publicly announced plans which have been approved by the
Board of Directors. There is no expiration date on these plans. Such purchases
may be made from time to time, as the Company's management deems appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on June 7, 2005.
(b) The following director was elected at the meeting to serve a three-year term
as a Class II director:
For Withheld Authority Abstain
--------- ------------------ -------
Brooks G. O'Neil 2,094,854 9,620 0
Continuing Directors
After the meeting, the following directors continued to serve their three-year
terms as Class III directors, whose terms will expire at the Company's annual
meeting in 2006:
Frederic W.J. Birner
Mark A. Birner, D.D.S.
After the meeting, the following directors continued to serve their three-year
terms as Class I directors, whose terms will expire at the Company's annual
meeting in 2007:
Thomas D. Wolf
Paul E. Valuck, D.D.S.
21
(c) Other matters voted upon at the meeting and results of those votes are as
follows:
Approval of the 2005 Equity Incentive Plan:
For Against Abstain Not Voted
--- ------- ------- ---------
1,163,656 13,636 9,532 917,650
The matters mentioned above are described in detail in the Company's definitive
proxy statement dated April 29, 2005 for the Annual Meeting of Shareholders held
on June 7, 2005.
ITEM 5. OTHER INFORMATION
On July 1, 2005, in accordance with the terms of the 2005 Equity Incentive Plan
(the "Plan") of the Company, the independent directors of the Company's Board of
Directors granted 60,000 restricted shares of the Company's Common Stock (the
"Shares") to Frederick W.J. Birner, the Chairman of the Board and Chief
Executive Officer of the Company (the "Employee").
The Shares granted to the Employee vest as follows: one third (1/3) of the
Shares vest six (6) months from the grant date, one third (1/3) of the Shares
vest eighteen (18) months from the grant date, and the balance of the shares
vest thirty (30) months from the grant date, in each case assuming the
Employee's employment is not terminated prior to the time of such vesting.
Notwithstanding the foregoing, in the event the Employee's employment terminates
in connection with the Employee's death, disability, or retirement in accordance
with the Company's established retirement policy, or in the event of a change in
control of the Company, all unvested shares will vest immediately.
In connection with the grant of restricted Shares to the Employee, the Company
has agreed to reimburse the Employee an amount equal to the tax liability
incurred by the Employee in connection with the grant. Such reimbursement to be
made by the Company to the Employee will total approximately $580,000. As a
result of the award of shares and the reimbursement of the tax liability, the
Company expects to recognize equity compensation expense, before taxes, of
approximately $661,000 in the quarter ended September 30, 2005 and approximately
$81,000 of compensation expense, before taxes, in each subsequent quarter
through the quarter ending December 31, 2007.
On July 13, 2005, the Company announced that its Board of Directors had declared
a 2-for-1 stock split of its common stock. The 2-for-1 stock split, which was
effected as a stock dividend, was distributed on August 8, 2005 to shareholders
of record at the close of business on August 1, 2005. The stock split increased
the number of shares outstanding from 1,210,295 on August 8, 2005 to 2,420,590.
All shares and earnings per share calculations for all periods in this report
are restated to reflect the effect of the stock split.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1 Section 1350 Certifications of the Chief Executive Officer and
the Chief Financial Officer.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIRNER DENTAL MANAGEMENT SERVICES, INC.
Date: August 12, 2005 By: /s/ Frederic W.J. Birner
-----------------------------------------
Name: Frederic W.J. Birner
Title: Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2005 By: /s/ Dennis N. Genty
----------------------------------------
Name: Dennis N. Genty
Title: Chief Financial Officer, Secretary, and
Treasurer
(Principal Financial and Accounting Officer)
23