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EX-31.1 - BIRNER DENTAL MANAGEMENT SERVICES INCv165741_ex31-1.htm
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EX-32.1 - BIRNER DENTAL MANAGEMENT SERVICES INCv165741_ex32-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)

 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended               September 30, 2009            

OR
 
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                                       to                                      

Commission file number 0-23367

BIRNER DENTAL MANAGEMENT SERVICES, INC.
(Exact name of registrant as specified in its charter)
 
COLORADO
 
84-1307044
(State or other jurisdiction of incorporation or organization)
  
(IRS Employer Identification No.)
 
3801 EAST FLORIDA AVENUE, SUITE 508
DENVER, COLORADO  
 
 
80210
(Address of principal executive offices)
 
(Zip Code)

(303) 691-0680
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes      X     No _____
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  _____  No _____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer            Accelerated filer             Non-accelerated filer                 Smaller reporting company     X   
    (Do not check if a smaller
        reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  _____  No      X   

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class  
 
Shares Outstanding as of November 10, 2009
Common Stock, without par value
 
1,867,591



 
 

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

 
Page
     
PART I - FINANCIAL INFORMATION
 
     
Item 1. 
Financial Statements 
 
     
 
Condensed Consolidated Balance Sheets as of December 31, 2008
and September 30, 2009 (Unaudited)
3
 
 
 
 
Unaudited Condensed Consolidated Statements of Income for the Quarters and Nine Months
Ended September 30, 2008 and 2009
4
     
 
Unaudited Condensed Consolidated Statements of Shareholders’ Equity and
Comprehensive Income as of September 30, 2009
5
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2009
6
 
 
 
 
Unaudited Notes to Condensed Consolidated Financial Statements
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
     
Item 4.
Controls and Procedures
25
     
PART II - OTHER INFORMATION
 
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
     
Item 6.
Exhibits
27
     
Signatures
28
 
 
2

 


PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
December 31,
   
September 30,
 
   
2008
   
2009
 
   
**
   
(Unaudited)
 
ASSETS
             
               
CURRENT ASSETS:
             
Cash and cash equivalents
  $ 1,234,991     $ 884,845  
Accounts receivable, net of allowance for doubtful accounts of $290,688 and $303,316, respectively
    2,875,732       3,085,304  
Deferred tax asset
    195,091       305,183  
Prepaid expenses and other assets
    418,653       445,265  
                 
Total current assets
    4,724,467       4,720,597  
                 
PROPERTY AND EQUIPMENT, net
    3,887,919       3,161,433  
                 
OTHER NONCURRENT ASSETS:
               
Intangible assets, net
    10,621,918       10,360,067  
Deferred charges and other assets
    160,289       152,885  
                 
Total assets
  $ 19,394,593     $ 18,394,982  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 1,551,851     $ 1,881,568  
Accrued expenses
    1,462,258       1,672,479  
Accrued payroll and related expenses
    1,714,550       2,045,286  
Income taxes payable
    371,569       290,009  
Current maturities of long-term debt
    920,000       920,000  
                 
Total current liabilities
    6,020,228       6,809,342  
                 
LONG-TERM LIABILITIES:
               
Deferred tax liability, net
    618,913       614,114  
Long-term debt, net of current maturities
    5,988,202       3,217,683  
Other long-term obligations
    259,678       251,743  
                 
Total liabilities
    12,887,021       10,892,882  
                 
SHAREHOLDERS' EQUITY:
               
Preferred Stock, no par value, 10,000,000 shares authorized; none outstanding
    -       -  
Common Stock, no par value, 20,000,000 shares authorized; 1,863,587 and  1,865,824 shares issued and outstanding, respectively
    -       101,924  
Treasury Stock purchased in excess of Common Stock basis
    (266,786 )     -  
Retained earnings
    6,817,449       7,428,424  
Accumulated other comprehensive loss
    (43,091 )     (28,248 )
                 
Total shareholders' equity
    6,507,572       7,502,100  
                 
Total liabilities and shareholders' equity
  $ 19,394,593     $ 18,394,982  

**  Derived from the Company’s audited consolidated balance sheet at December 31, 2008.

The accompanying notes are an integral part of these financial statements

 
3

 
 
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
NET REVENUE:
  $ 8,763,895     $ 8,496,084     $ 26,504,119     $ 26,423,323  
                                 
DIRECT EXPENSES:
                               
Clinical salaries and benefits
    2,351,310       2,376,929       7,510,984       7,374,481  
Dental supplies
    627,377       580,022       1,845,599       1,703,935  
Laboratory fees
    693,809       651,501       2,085,682       1,973,718  
Occupancy
    1,213,074       1,235,905       3,601,979       3,669,972  
Advertising and marketing
    105,227       138,870       331,775       322,631  
Depreciation and amortization
    623,199       601,545       1,826,232       1,831,537  
General and administrative
    1,192,403       1,160,913       3,629,391       3,456,683  
      6,806,399       6,745,685       20,831,642       20,332,957  
                                 
Contribution from dental offices
    1,957,496       1,750,399       5,672,477       6,090,366  
                                 
CORPORATE EXPENSES:
                               
General and administrative
    975,006
(1)
    1,049,806
(1)
    2,805,315
(2)
    3,212,726
(2)
Depreciation and amortization
    25,519       21,170       72,173       65,720  
                                 
Operating income
    956,971       679,423       2,794,989       2,811,920  
                                 
Interest expense, net
    63,819       49,160       199,817       118,513  
                                 
Income before income taxes
    893,152       630,263       2,595,172       2,693,407  
Income tax expense
    393,005       264,713       1,127,270       1,131,231  
                                 
Net income
  $ 500,147     $ 365,550     $ 1,467,902     $ 1,562,176  
                                 
Net income per share of Common Stock - Basic
  $ 0.25     $ 0.20     $ 0.71     $ 0.84  
                                 
Net income per share of Common Stock - Diluted
  $ 0.24     $ 0.19     $ 0.69     $ 0.82  
                                 
Cash dividends per share of Common Stock
  $ 0.17     $ 0.17     $ 0.51     $ 0.51  
                                 
Weighted average number of shares of Common Stock and dilutive securities:
                               
Basic
    1,992,821       1,872,924       2,070,157       1,863,054  
                                 
Diluted
    2,045,245       1,914,748       2,141,674       1,896,252  

(1)
Corporate expense - general and administrative includes $186,306 related to stock-based compensation expense in the quarter ended September 30, 2008, and  $245,485 related to total stock-based compensation expense in the quarter ended September 30, 2009, of which $163,693 related to ASC Topic 718 expense (stock option expense) and $81,792 related to a long term incentive program.
(2)
 
Corporate expense - general and administrative includes $544,337 related to stock-based compensation expense in the nine months ended September 30, 2008, and $662,370 related to total stock-based compensation expense in the nine months ended September 30, 2009, of which $498,786 related to ASC Topic 718 expense (stock option expense) and $163,584 related to a long term incentive program.

The accompanying notes are an integral part of these financial statements

 
4

 

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)

           Treasury Stock Purchased in                      
     
Common Stock
   
excess of Common Stock
   
Comprehensive
   
 
   
Shareholders'
 
   
Shares
   
Amount
   
Basis
   
Income
   
Retained Earnings
   
Equity
 
                                     
BALANCES, December 31, 2008
    1,863,587     $ -     $ (266,786 )   $ (43,091 )   $ 6,817,449     $ 6,507,572  
Common Stock options exercised
    49,333       101,924       311,473       -       -       413,397  
Purchase and retirement of Common Stock
    (47,096 )     -       (705,834 )     -               (705,834 )
Tax effect of Common Stock options exercised
    -               (1,223 )     -       -       (1,223 )
Dividends declared on Common Stock
    -       -       -       -       (951,201 )     (951,201 )
Stock-based compensation expense
    -       -       662,370       -               662,370  
Other comprehensive income
    -       -       -       14,843       -       14,843  
    Net income, nine months ended September 30, 2009
    -       -       -       1,562,176       1,562,176       1,562,176  
Comprehensive income
                            1,577,019                  
                                                 
BALANCES, September 30, 2009
    1,865,824     $ 101,924     $ -     $ (28,248 )   $ 7,428,424     $ 7,502,100  

The accompanying notes are an integral part of these financial statements

 
5

 
 
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended
September 30,
 
   
2008
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,467,902     $ 1,562,176  
Adjustments to reconcile net income to net  cash provided by operating activities:
               
Depreciation and amortization
    1,898,405       1,897,257  
Stock compensation expense
    544,337       662,370  
Loss on disposition of property
    885       -  
Provision for doubtful accounts
    559,375       431,047  
Provision for deferred income taxes
    73,345       (114,891 )
Changes in assets and liabilities net of effects  from acquisitions:
               
Accounts receivable
    (821,943 )     (640,619 )
Prepaid expenses and other assets
    78,989       (26,612 )
Deferred charges and other assets
    10,254       7,405  
Accounts payable
    (263,901 )     329,717  
Accrued expenses
    (87,741 )     223,817  
Accrued payroll and related expenses
    657,697       330,736  
Income taxes payable
    429,759       (81,561 )
Other long-term obligations
    (3,712 )     (7,935 )
Net cash provided by operating activities
    4,543,651       4,572,907  
                 
CASH FLOWS USED IN INVESTING ACTIVITIES:
               
Capital expenditures
    (671,033 )     (558,919 )
Development or acquisition of new dental centers
    (367,977 )     (350,000 )
Net cash used in investing activities
    (1,039,010 )     (908,919 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Advances – line of credit
    18,476,809       9,908,874  
Repayments – line of credit
    (16,917,162 )     (11,989,394 )
Repayments – Term Loan
    (690,000 )     (690,000 )
Proceeds from exercise of Common Stock options
    293,788       413,397  
Purchase and retirement of Common Stock
    (3,880,517 )     (705,834 )
Tax benefit of Common Stock options exercised
    2,579       (1,224 )
Common Stock cash dividends
    (1,035,844 )     (949,953 )
Net cash used in financing activities
    (3,750,347 )     (4,014,134 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (245,706 )     (350,146 )
CASH AND CASH EQUIVALENTS, beginning of period
    964,150       1,234,991  
CASH AND CASH EQUIVALENTS, end of period
  $ 718,444     $ 884,845  

The accompanying notes are an integral part of these financial statements

 
6

 


BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2009
 
             
SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:
           
             
Cash paid during the year for interest
  $ 245,548     $ 149,507  
Cash paid during the year for income taxes
  $ 621,586     $ 1,328,907  
                 
NON-CASH ITEM:
               
                 
Gain recognized on interst rate swap (net of taxes)
  $ 8,473     $ 14,843  

The accompanying notes are an integral part of these financial statements

 
7

 
 
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2009

(1) 
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein have been prepared by Birner Dental Management Services, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2009 and the results of operations and cash flows for the periods presented.  All such adjustments are of a normal recurring nature.  The results of operations for the quarter and nine months ended September 30, 2009 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.  The Company has evaluated all subsequent events through November 12, 2009, the date the financial statements were issued.

Due to the Company’s repurchases of Common Stock at prices higher than the original issue price, the Company’s Common Stock balance would have been reduced to a negative $266,786 as of December 31, 2008.  The Company reclassified this negative balance to treasury stock purchased in excess of Common Stock basis on the balance sheet.  In the Company’s Form 10-K for the year ended December 31, 2008, the negative Common Stock amount of $266,786 was offset against retained earnings.

(2)
SIGNIFICANT ACCOUNTING POLICIES

Intangible Assets

The Company's dental practice acquisitions involve the purchase of tangible and intangible assets and the assumption of certain liabilities of the acquired dental offices (“Offices”). As part of the purchase price allocation, the Company allocates the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, based on estimated fair market values. Costs of acquisition in excess of the net estimated fair value of tangible assets acquired and liabilities assumed are allocated to the management agreement related to the Office (“Management Agreement”). The Management Agreement represents the Company's right to manage the Offices during the 40-year term of the Management Agreement. The assigned value of the Management Agreement is amortized using the straight-line method over a period of 25 years.  Amortization was $195,098 and $195,015 for the quarters ended September 30, 2009 and 2008, respectively. Amortization was $585,185 and $584,990 for the nine months ended September 30, 2009 and 2008, respectively.

The Management Agreements cannot be terminated by the related professional corporation without cause, consisting primarily of bankruptcy or material default by the Company.

In the event that facts and circumstances indicate that the carrying value of long-lived and intangible assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value would be required.

Stock Options

The Company recognizes compensation expense on a straight line basis over the requisite service period of the award. Total stock-based compensation expense included in the Company’s statement of income for the quarters ended September 30, 2009 and 2008 was approximately $245,000 and $186,000, respectively. For the quarter ended September 30, 2009, the stock-based compensation expense consisted of $164,000 related to stock options and $82,000 related to restricted stock units granted under the long term incentive program (“LTIP”).  The LTIP was adopted by the Board of Directors on June 3, 2009 and provides for long-term performance-based cash and stock opportunities for the executive officers of the Company.  Total stock-based compensation expense included in the Company’s statement of income for the nine months ended September 30, 2009 and 2008 was approximately $662,000 and $544,000, respectively. For the nine months ended September 30, 2009, the stock-based compensation expense consisted of $499,000 related to stock options and $164,000 related to restricted stock units granted under the LTIP.  Total stock-based compensation expense was recorded as a component of corporate general and administrative expense.

 
8

 
 
The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility, the expected pre-vesting forfeiture rate, expected dividend rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ended September 30, 2009 equal to the expected option term. Expected pre-vesting forfeitures were estimated based on actual historical pre-vesting forfeitures over the most recent periods ended September 30, 2009 for the expected option term. From January 1, 2006 through December 31, 2007, the expected option term was calculated using the “simplified” method permitted by Staff Accounting Bulletin 107.   Starting January 1, 2008, the expected option term was calculated based on historical experience of the terms of previous options.

Recent Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for fair value measurements and disclosures which defines fair value, establishes a framework for measuring fair value and expands disclosures related to assets and liabilities measured at fair value. In February 2008, the FASB issued additional authoritative guidance for fair value measurements which delayed the effective date of the authoritative guidance for fair value measurements to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted all of the provisions of the authoritative guidance for fair value measurements on January 1, 2008 with the exception of the application of the guidance to non-recurring nonfinancial assets and nonfinancial liabilities which the Company adopted on January 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued revised authoritative guidance for business combinations which establishes principles and requirements for how an acquirer in a business combination transaction recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. The provisions of the guidance also establish disclosure requirements which will enable financial statement users to evaluate the nature and financial effects of the business combination. In April 2009, the FASB issued additional authoritative guidance for business combinations relating to the initial recognition and measurement, subsequent measurement and accounting and disclosures of assets and liabilities that arise from contingencies in a business combination. The authoritative guidance for business combinations is effective for fiscal years beginning after December 15, 2008. The Company adopted all of the provisions of the authoritative guidance for business combinations on January 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued authoritative guidance for consolidations which states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. The guidance also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The guidance applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This guidance is effective for fiscal years beginning after December 15, 2008. The Company adopted this guidance as of January 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial statements.
 
In March 2008, the FASB issued authoritative guidance for derivatives and hedging which requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under the guidance, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash. This guidance is effective for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this guidance on January 1, 2009. The adoption requires the Company to make additional disclosures but did not have a material effect on the Company’s consolidated financial statements.
 
In April 2008, the FASB issued authoritative guidance for intangibles – goodwill and other which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the guidance. This guidance also requires enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a recognized intangible asset. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted this guidance on January 1, 2009, but it did not have a material impact on the Company's consolidated financial statements.

 
9

 
 
In June 2008, the FASB issued authoritative guidance for earnings per share. The guidance addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share pursuant to the two-class method of the guidance for earnings per share. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
 
In April 2009, the FASB issued authoritative guidance for fair value measurements and disclosures. This guidance provides companies with guidelines on how to determine fair value measurements when the volume and level of activity for an asset or liability have significantly decreased and how to identify transactions that are not orderly. This guidance was effective for the Company beginning with its reporting period ended June 30, 2009 and did not have a material effect on the Company’s consolidated financial statements.
 
In April 2009, the FASB issued authoritative guidance for interim disclosures for financial instruments. This guidance amends prior authoritative guidance by requiring disclosures of the fair value of financial instruments included within the scope of the prior guidance whenever a public company issues summarized financial information for interim reporting periods. This guidance was effective for the Company beginning with its reporting period ended June 30, 2009 and did not have a material effect on its consolidated financial statements. The Company has provided the additional disclosures required in Note 2.
 
In May 2009, the FASB issued authoritative guidance for subsequent events which provides rules on recognition and disclosure for events and transactions occurring after the balance sheet date but before the financial statements are issued or available to be issued. In addition, the guidance requires a reporting entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements are issued or the date the financial statements are available to be issued. This guidance was effective for the Company beginning with its reporting period ended June 30, 2009 and shall be applied prospectively. The adoption of this statement did not have a material effect on the Company’s consolidated financial statements.
 
In July 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The ASC supersedes all existing non-SEC accounting and reporting standards and is not intended to change GAAP.  The use of the ASC was effective for financial statements issued for periods ending after September 15, 2009.

 
10

 

(3)
EARNINGS PER SHARE

The Company calculates earnings per share in accordance with ASC Topic 718, “Compensation – Stock Compensation.”

   
Quarters Ended September 30,
 
   
2008
   
2009
 
   
Income
   
Shares
   
Per Share
Amount
   
Income
   
Shares
   
Per Share
Amount
 
Basic EPS:
                                   
Net income available to shares of Common Stock
  $ 500,147       1,992,821     $ 0.25     $ 365,550       1,872,924     $ 0.20  
                                                 
Effect of dilutive shares of Common Stock from stock options and warrants
    -       52,424       (0.01 )     -       41,824       (0.01 )
                                                 
Diluted EPS:
                                               
Net income available to shares of Common Stock
  $ 500,147       2,045,245     $ 0.24     $ 365,550       1,914,748     $ 0.19  
 
The difference in weighted average shares outstanding between basic earnings per share and diluted earnings per share for the quarters ended September 30, 2009 and 2008 relates to the effect of 41,824 and 52,424 shares, respectively, of dilutive shares of Common Stock from stock options, which are included in total shares for the diluted calculation.  For the quarters ended September 30, 2009 and 2008, options to purchase 246,350 and 272,929 shares, respectively, of the Company’s Common Stock were not included in the computation of dilutive earnings per share because their effect was anti-dilutive.

   
Nine Months Ended September 30,
 
   
2008
   
2009
 
   
Income
   
Shares
   
Per Share
Amount
   
Income
   
Shares
   
Per Share
Amount
 
Basic EPS:
                                   
Net income available to shares of Common Stock
  $ 1,467,902       2,070,157     $ 0.71     $ 1,562,176       1,863,054     $ 0.84  
                                                 
Effect of dilutive shares of Common Stock from stock options and warrants
    -       71,517       (0.02 )     -       33,198       (0.02 )
                                                 
Diluted EPS:
                                               
Net income available to shares of Common Stock
  $ 1,467,902       2,141,674     $ 0.69     $ 1,562,176       1,896,252     $ 0.82  

The difference in weighted average shares outstanding between basic earnings per share and diluted earnings per share for the nine months ended September 30, 2009 and 2008 relates to the effect of 33,198 and 71,517 shares, respectively, of dilutive shares of Common Stock from stock options, which are included in total shares for the diluted calculation. For the nine months ended September 30, 2009 and 2008, options to purchase 295,605 and 252,400 shares, respectively, of the Company’s Common Stock were not included in the computation of dilutive earnings per share because their effect was anti-dilutive.

 
11

 

(4) 
STOCK-BASED COMPENSATION PLANS

At the Company’s June 2005 annual meeting of shareholders, the shareholders approved the 2005 Equity Incentive Plan (“2005 Plan”). An amendment to the 2005 Plan was approved at the June 2009 annual meeting of shareholders to increase the number of authorized shares of Common Stock issuable under the 2005 Plan from 425,000 shares to 625,000 shares. The 2005 Plan provides for the grant of incentive stock options, restricted stock, restricted stock units and stock grants to employees (including officers and employee-directors) and non-statutory stock options to employees, directors and consultants. The objectives of this plan include attracting and retaining the best personnel and providing for additional performance incentives by providing employees with the opportunity to acquire equity in the Company. As of September 30, 2009, there were 162,898 shares available for issuance under the 2005 Plan. The exercise price of the stock options issued under the 2005 Plan is equal to the market price, or market price plus 10% for shareholders who own greater than 10% of the Company, at the date of grant. These stock options expire seven years, or five years for shareholders who own greater than 10% of the Company, from the date of the grant and vest annually over a service period ranging from three to five years. The 2005 Plan is administered by a committee of two or more independent directors from the Company’s Board of Directors (the “Committee”). The Committee determines the eligible individuals to whom awards under the 2005 Plan may be granted, as well as the time or times at which awards will be granted, the number of shares subject to awards to be granted to any eligible individual, the life of any award, and any other terms and conditions of the awards in addition to those contained in the 2005 Plan. As of September 30, 2009, there were 150,055 vested options, 159,628 unvested options and 60,000 vested restricted shares outstanding under the 2005 Plan.

The Employee Stock Option Plan (the ''Employee Plan'') was adopted by the Board of Directors effective as of October 30, 1995, and as amended on September 4, 1997, February 28, 2002, and June 8, 2004, reserved 479,250 shares of Common Stock for issuance. The Employee Plan provided for the grant of incentive stock options to employees (including officers and employee-directors) and non-statutory stock options to employees, directors and consultants. The Employee Plan expired by its terms on October 30, 2005. As of September 30, 2009, there were 96,000 vested options outstanding and zero unvested options outstanding under the Employee Plan.

The Company uses the Black-Scholes pricing model to estimate the fair value of each option granted with the following weighted average assumptions:

   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
Valuation Assumptions 
 
2008
   
2009 (5)
   
2008
   
2009
 
                         
Expected life (1)
    3.1       -       4.0       3.2  
Risk-free interest rate (2)
    2.30 %     -       2.28 %     1.30 %
Expected volatility (3)
    63 %     -       58 %     69 %
Expected dividend yield
    5.00 %     -       3.39 %     6.33 %
Expected Forteiture (4)
    9.39 %     -       2.70 %     4.97 %


(1)
The expected life, in years, of stock options is estimated based on historical experience.
(2)
The risk-free interest rate is based on U.S. Treasury bills whose term is consistent with the expected life of the stock options.
(3)
The expected volatility is estimated based on historical and current stock price data for the Company.
(4) 
 Forfeitures of options granted prior to the Company’s adoption of ASC Topic 718 on January 1, 2006 are recorded as they occur. Forfeitures of options granted since the Company’s adoption of ASC Topic 718 are estimated based on historical experience.
(5) 
 The Company did not issue any options during the quarter ended September 30, 2009.

 
12

 

A summary of option activity as of September 30, 2009, and changes during the nine months then ended, is presented below:
 
   
Number of
Options
   
Weighted-
Average
Exercise
Price
   
Range of
Exercise Prices
   
Weighted-
Average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
(thousands)
 
Outstanding at December 31, 2008
    466,516     $ 15.55       $7.88 - $21.85       3.8     $ 273  
Granted
    19,000     $ 10.75       $10.75 - $10.75                  
Exercised
    (49,333 )   $ 8.38       $7.88 - $14.81                  
Forfeited
    (30,500 )   $ 16.76       $11.50 - $21.75                  
                                         
Outstanding at September 30, 2009
    405,683     $ 16.10       $9.66 - $21.85       3.4     $ 777  
                                         
Exercisable at September 30, 2009
    246,055     $ 15.81       $9.66 - $21.85       2.3     $ 505  

The weighted average grant date fair values of options granted were $3.69 per option and $7.57 per option during the nine months ended September 30, 2009 and 2008, respectively.  Net cash proceeds from the exercise of stock options during the nine months ended September 30, 2009 and 2008 were $413,397 and $293,788, respectively. The associated income tax effect from stock options exercised during the nine months ended September 30, 2009 and 2008 was ($1,223) and $2,580, respectively. As of the date of exercise, the total intrinsic values of options exercised during the nine months ended September 30, 2009 and 2008 were $360,201 and $200,346, respectively. As of September 30, 2009, there was $758,000 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.32 years.

(5)
LONG TERM INCENTIVE PROGRAM

On June 3, 2009, the Compensation Committee of the Company adopted the LTIP.  The LTIP, which will operate under the 2005 Plan, provides for long-term performance-based cash and stock opportunities for the executive officers of the Company.  Details of the LTIP are as follows:

The Company’s executive officers may earn an aggregate of up to $1,050,000 in cash and up to 80,000 shares of Common Stock of the Company.  The Company issued restricted stock units with respect to the 80,000 shares.  Frederic W. Birner, the Company’s Chairman and Chief Executive Officer, Dennis N. Genty, the Company’s Chief Financial Officer, and Mark A. Birner, D.D.S., the Company’s President, may earn up to 50%, 25% and 25% of the foregoing amounts, respectively.  Of the foregoing amounts, 24%, 33% and 43% can be earned in each of 2009, 2010 and 2011, respectively.

The executive officers may earn the foregoing amounts through achievement by the Company of performance targets related to patient revenue growth, practice additions, adjusted EBITDA margin and earnings per share growth.  The executive officers will earn 100% of the amounts allocated to a particular year if the Company exceeds all four of the annual performance targets, 90% if the Company exceeds three of the four annual performance targets, 66.7% if the Company exceeds two of the four annual performance targets, and 0% if the Company achieves fewer than two of the four annual performance targets.  The Compensation Committee will review each of the performance targets annually and will administer the LTIP.

All amounts vest only if the executive officer is employed by the Company on December 31, 2011 and will be payable during the first quarter of 2012.
 
For the quarter ended September 30, 2009, the Company accrued approximately $76,000 related to the cash portion and recorded $82,000 of stock-based compensation for the equity portion, respectively, of the LTIP.  For the nine months ended September 30, 2009, the Company accrued approximately $151,000 related to the cash portion and recorded $164,000 of stock-based compensation for the equity portion, respectively, of the LTIP.

 
13

 
 
(6)
DIVIDENDS

Since March 9, 2004, the Company has declared and paid the following quarterly cash dividends.

Date Dividend Paid
 
Quarterly Dividend Paid
per Share
 
       
April 9, 2004; July 9, 2004; October 8, 2004; January 14, 2005
    0.0375  
April 8, 2005; July 8, 2005; October 14, 2005; January 13, 2006
    0.10  
April 14, 2006; July 14, 2006; October 13, 2006; January 12, 2007
    0.13  
April 13, 2007; July 13, 2007; October 12, 2007; January 11, 2008
    0.15  
April 11, 2008; July 11, 2008; October 10, 2008; January 9, 2009
    0.17  
April 10, 2009; July 10, 2009; October 9, 2009
    0.17  

The payment of dividends in the future is subject to the discretion of the Company’s Board of Directors, and various factors may prevent the Company from paying dividends or require the Company to reduce the dividends. Such factors include the Company’s financial position, capital requirements and liquidity, the existence of a stock repurchase program, any loan agreement restrictions, state corporate law restrictions, results of operations and such other factors that the Company’s Board of Directors may consider relevant.

(7) 
LINE OF CREDIT

On June 30, 2009, the Company amended its bank line of credit (“Credit Facility”).  The amended Credit Facility extends the expiration of the credit agreement from May 31, 2010 to May 31, 2011.  The Credit Facility allows the Company to borrow, on a revolving basis, an aggregate principal amount not to exceed $7.0 million at either, or a combination of, the lender’s Base Rate or at LIBOR plus a LIBOR rate margin, at the Company’s option.  The Base Rate computes interest at the higher of the lender’s “prime rate” or the Federal Funds Rate plus a margin.  The amendment adjusts the Base Rate margin from 0.5% to 2.5%.  The LIBOR option computes interest at the LIBOR rate as of the date such LIBOR rate loan was made plus a LIBOR rate margin.  The amendment states that the LIBOR rate is the higher of 1.5% or the LIBOR rate and the margin is adjusted from 1.25% to 3.875%.  A commitment fee on the average daily unused amount of the revolving loan commitment during the preceding quarter is also assessed and was increased from 0.25% to 0.40% as of June 1, 2009.  The Company may prepay any Base Rate loan at any time and any LIBOR rate loan upon not less than three business days prior written notice given to the lender, but the Company is responsible for any loss or cost incurred by the lender in liquidating or employing deposits required to fund or maintain the LIBOR rate loan.  At September 30, 2009, the Company had $2.3 million outstanding and $4.7 million available for borrowing under the Credit Facility.  This consisted of $2.0 million outstanding under the LIBOR rate option and $298,000 outstanding under the Base Rate option.  As of September 30, 2009, the Company’s LIBOR borrowing rate was 5.375% and the Base Rate borrowing rate was 5.75%.  Management believes that the LIBOR and Base Rate margins increased as a result of the lender’s increased cost of funds and not because of the Company’s credit quality.  The Credit Facility requires the Company to comply with certain covenants and financial ratios. At September 30, 2009, the Company was in full compliance with all of its covenants under the Credit Facility.

(8)
TERM LOAN
 
In October 2006, the Company entered into a $4.6 million term loan (“Term Loan”). Under the Term Loan, $2.3 million was borrowed at a fixed interest rate of 7.05% and the remaining $2.3 million was borrowed at a floating interest rate of LIBOR plus 1.5%. As of September 30, 2009, the floating rate was 1.81%.  The principal amount borrowed is repaid quarterly in 20 equal payments of $230,000 plus interest beginning December 31, 2006. The Term Loan matures on September 30, 2011.  As of September 30, 2009, $920,000 was outstanding at the fixed rate of 7.05% and $920,000 was outstanding at the LIBOR plus 1.5% floating rate.  The Term Loan requires the Company to comply with certain covenants and financial ratios. At September 30, 2009, the Company was in full compliance with all of its covenants under the Term Loan.

 
14

 

Historically, the Company has not used derivative instruments or engaged in hedging activities. On October 12, 2006, the Company entered into a fixed-for-floating interest rate swap transaction on $2.3 million of the Term Loan.  The Company elected to designate the swap as a cash flow hedge under ASC Topic 815.  In September 2009, the Company recognized, on its balance sheet, approximately $15,000 of other comprehensive income to mark up the value of the cash flow hedge net of taxes.  As required by ASC Topic 820, the Company calculated the value of the cash flow hedge using Level II inputs.

(9) 
ACQUISITIONS
 
On September 30, 2009, the Company acquired substantially all of the assets of a dental practice in Tucson, Arizona and obtained certain rights to manage the practice for a total purchase price of $350,000 in cash.  The Company recorded an increase to intangible assets of $315,000 and an increase to fixed assets of $35,000 related to this Office.

(10) 
SUBSEQUENT EVENTS
 
On October 29, 2009, the Company acquired substantially all of the assets of a dental practice in Tucson, Arizona and obtained certain rights to manage the practice for a total purchase price of $700,000.  The Company recorded an increase to intangible assets of $530,000, an increase to accounts receivable, net of allowance for doubtful accounts of $100,000 and an increase to fixed assets of $70,000 related to this Office.

 (11) 
OTHER

The Company’s retained earnings as of September 30, 2009 were approximately $7.4 million, and the Company had a working capital deficit on that date of approximately $2.1 million. During the nine months ended September 30, 2009, the Company had capital expenditures of approximately $559,000, acquired a new dental practice for $350,000, paid dividends of approximately $950,000 and purchased approximately $706,000 of Common Stock pursuant to the Company’s stock repurchase program, while decreasing total bank debt by approximately $2.8 million.

 
15

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
The statements contained in this report that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, believe, intend or anticipate will or may occur in the future, are forward-looking statements. When used in this document, the words “estimate,” “believe,” anticipate,” “project” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. These forward-looking statements include statements in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding intent, belief or current expectations of the Company or its officers with respect to the development of de novo offices or acquisition of additional dental practices (“Offices”) and the successful integration of such Offices into the Company’s network, recruitment of additional dentists, funding of the Company’s expansion, capital expenditures, payment or nonpayment of dividends and cash outlays for income taxes and other purposes.

Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include regulatory constraints, changes in laws or regulations concerning the practice of dentistry or dental practice management companies, the availability of suitable new markets and suitable locations within such markets, changes in the Company’s operating or expansion strategy, the general economy of the United States and the specific markets in which the Company’s Offices are located or are proposed to be located, trends in the health care, dental care and managed care industries, as well as the risk factors set forth in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and other factors as may be identified from time to time in the Company’s filings with the Securities and Exchange Commission or in the Company’s press releases.
 
General
 
The following discussion relates to factors that have affected the results of operations and financial condition of the Company for the quarters and nine months ended September 30, 2008 and 2009. This information should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto included elsewhere in this report.
 
Overview
 
The Company was formed in May 1995 and currently manages 62 Offices in Colorado, New Mexico and Arizona staffed by 79 general dentists and 35 specialists. The Company derives all of its Revenue (as defined below) from its Management Agreements with professional corporations (“P.C.s”), which conduct the practice at each Office. In addition, the Company assumes a number of responsibilities when it develops a de novo Office or acquires an existing dental practice.  These responsibilities are set forth in a Management Agreement, as described below.

The Company was formed with the intention of becoming the leading provider of business services to dental practices in Colorado. The Company’s growth and success in the Colorado market led to its expansion into the New Mexico and Arizona markets. The Company’s growth strategy is to focus on greater utilization of existing physical capacity through recruiting more dentists and support staff and through development of de novo Offices and selective acquisitions.
 
Critical Accounting Policies
 
The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K for the year ended December 31, 2008.  There have been no changes to these policies since the filing of that report.
 
Components of Revenue and Expenses
 
Total dental group practice revenue (“Revenue”) represents the revenue of the Offices reported at estimated realizable amounts, received from dental plans, other third-party payors and patients for dental services rendered at the Offices.  Revenue is a non-GAAP measure.  See the reconciliation of Revenue to net revenue on page 19.  The Company’s Revenue is derived principally from fee-for-service revenue and managed dental care revenue. Fee-for-service revenue consists of revenue received from indemnity dental plans, preferred provider plans and direct payments by patients not covered by any third-party payment arrangement. Managed dental care revenue consists of revenue received from capitated managed dental care plans, including capitation payments and patient co-payments. Capitated managed dental care contracts are between dental benefits organizations and the P.C.s.

 
16

 

Net revenue represents Revenue less amounts retained by the Offices. The amounts retained by the Offices represent amounts paid as compensation to employed dentists, dental hygienists and dental assistants. The Company’s net revenue is dependent on the Revenue of the Offices. Direct expenses consist of the expenses incurred by the Company in connection with managing the Offices, including salaries and benefits for personnel other than dentists, dental hygienists and dental assistants, dental supplies, dental laboratory fees, occupancy costs, advertising and marketing, depreciation and amortization and general and administrative (including office supplies, equipment leases, management information systems and other expenses related to dental practice operations). The Company also incurs personnel and administrative expenses in connection with maintaining a corporate function that provides management, administrative, marketing, advertising, development and professional services to the Offices.

Under each of the Management Agreements, the Company manages the business and marketing aspects of the Offices, including (i) providing capital, (ii) designing and implementing marketing and advertising programs, (iii) negotiating for the purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of non-dental personnel, (vii) billing and collecting certain fees for dental services provided by the Offices, (viii) arranging for certain legal and accounting services, and (ix) negotiating with third party payors. Under the Management Agreements, the P.C. is responsible for, among other things (i) supervision of all dentists, dental hygienists and dental assistants, (ii) complying with all laws, rules and regulations relating to dentists, dental hygienists and dental assistants, and (iii) maintaining proper patient records.

Under the typical Management Agreement used by the Company, the P.C. pays the Company a management fee equal to the “Adjusted Gross Center Revenue” of the P.C. less compensation paid to the dentists, dental hygienists and dental assistants employed at the Office of the P.C.  Adjusted Gross Center Revenue is comprised of all fees and charges booked each month by or on behalf of the P.C. as a result of dental services provided to patients at the Office, less any adjustments for uncollectible accounts, professional courtesies and other activities that do not generate a collectible fee.  The Company’s costs include all direct and indirect costs, overhead and expenses relating to the Company’s provision of management services at each Office under the Management Agreement, including (i) salaries, benefits and other direct costs of employees who work at the Office (other than dentists’, dental hygienists’ and dental assistants’ salaries), (ii) direct costs of all Company employees or consultants who provide services to or in connection with the Office, (iii) utilities, janitorial, laboratory, supplies, advertising and other expenses incurred by the Company in carrying out its obligations under the Management Agreement, (iv) depreciation expense associated with the P.C.’s assets and the amortization of intangible asset value relating to the Office, (v) interest expense on indebtedness incurred by the Company to finance any of its obligations under the Management Agreement, (vi) general and malpractice insurance expenses and dentist recruitment expenses, (vii) personal property and other taxes assessed against the P.C.’s assets used in connection with the operation of the Office, (viii) out-of-pocket expenses of the Company’s personnel related to mergers or acquisitions involving the P.C., (ix) corporate overhead charges or any other expenses of the Company, including the P.C.’s pro rata share of the expenses of the accounting and computer services provided by the Company, and (x) a collection reserve in the amount of 5.0% of Adjusted Gross Center Revenue.  As a result, substantially all costs associated with the provision of dental services at the Offices are borne by the Company, except for the compensation of the dentists, dental hygienists and dental assistants who work at the Offices of the P.C.s. This enables the Company to manage the profitability of the Offices.  Each Management Agreement is for a term of 40 years. Further, each Management Agreement generally may be terminated by the P.C. only for cause, which includes a material default by or bankruptcy of the Company. Upon expiration or termination of a Management Agreement by either party, the P.C. must satisfy all obligations it has to the Company.

Under the Management Agreements, the Company negotiates and administers the capitated managed dental care contracts on behalf of the P.C.s.  Under a capitated managed dental care contract, the dental group practice provides dental services to the members of the dental benefits organization and receives a fixed monthly capitation payment for each plan member covered for a specific schedule of services regardless of the quantity or cost of services to the participating dental group practice obligated to provide them.  This arrangement shifts the risk of utilization of these services to the dental group practice providing the dental services.  Because the Company assumes responsibility under the Management Agreements for all aspects of the operation of the dental practices (other than the practice of dentistry) and thus bears all costs of the P.C.s associated with the provision of dental services at the Offices (other than compensation of dentists, dental hygienists and dental assistants), the risk of over-utilization of dental services at the Offices under capitated managed dental care plans is effectively shifted to the Company. In addition, dental group practices participating in a capitated managed dental care plan often receive supplemental payments for more complicated or elective procedures. In contrast, under traditional indemnity insurance arrangements, the insurance company pays whatever reasonable charges are billed by the dental group practice for the dental services provided. Under a preferred provider plan, the dental group practice is paid for dental services provided based on a fee schedule that is a discount to the usual and customary fees paid under an indemnity insurance agreement.

 
17

 

The Company seeks to increase its fee-for-service business by increasing the patient volume at existing Offices through effective marketing and advertising programs and by opening de novo Offices. The Company seeks to supplement this fee-for-service business with revenue from contracts with capitated managed dental care plans.  Although the Company’s fee-for-service business generally is more profitable than its capitated managed dental care business, capitated managed dental care business serves to increase facility utilization and dentist productivity.  The relative percentage of the Company’s Revenue derived from fee-for-service business and capitated managed dental care contracts varies from market to market depending on the availability of capitated managed dental care contracts in any particular market and the Company’s ability to negotiate favorable contract terms.  In addition, the profitability of managed dental care Revenue varies from market to market depending on the level of capitation payments and co-payments in proportion to the level of benefits required to be provided.
 
Results of Operations
 
For the quarter ended September 30, 2009, Revenue decreased $285,000, or 1.9%, to $14.7 million compared to $15.0 million for the quarter ended September 30, 2008.  For the quarter ended September 30, 2009, net revenue decreased $268,000, or 3.1%, to $8.5 million compared to $8.8 million for the quarter ended September 30, 2008.  This decrease is attributable to a decrease in same store net revenue from general dentistry of $326,000 partially offset by an increase in same store net revenue from specialty dentistry of $58,000.  The Company attributes the decreases in Revenue and net revenue for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008, to a general weakness in the economy in its markets.

For the quarter ended September 30, 2009, net income decreased 26.9 % to $366,000, or $.19 per share, compared to $500,000, or $.24 per share, for the quarter ended September 30, 2008.

For the nine months ended September 30, 2009, Revenue increased $102,000, or 0.2%, to $45.2 million compared to $45.1 million for the nine months ended September 30, 2008.  For the nine months ended September 30, 2009, net revenue decreased $81,000, or 0.3%, to $26.4 million compared to $26.5 million for the nine months ended September 30, 2008.  This decrease is attributable to a decrease in same store net revenue from general dentistry of $482,000 partially offset by an increase in same store net revenue from specialty dentistry of $267,000 along with a de novo Office the Company opened in May 2008 that generated an additional $134,000 in net revenue.  The Company attributes the decrease in net revenue for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, to a general weakness in the economy in its markets.

For the nine months ended September 30, 2009, net income increased 6.4% to $1.6 million, or $.82 per share, compared to $1.5 million, or $.69 per share, for the nine months ended September 30, 2008.

During the nine months ended September 30, 2009, the Company generated $4.6 million of cash from operations.  During this period, the Company purchased $706,000 of its outstanding Common Stock, invested $559,000 in capital expenditures, invested $350,000 in the acquisition of a new dental practice, paid $950,000 in dividends and repaid $690,000 of the Term Loan while decreasing borrowings under its Credit Facility by $2.1 million.

 
18

 

The Company’s earnings before interest, taxes, depreciation, amortization and non-cash expense associated with stock-based compensation (“Adjusted EBITDA”) increased $134,000, or 2.6%, to $5.4 million for the nine months ended September 30, 2009 compared to $5.2 million for the corresponding nine month period in 2008. Although Adjusted EBITDA is not a GAAP measure of performance or liquidity, the Company believes that it may be useful to an investor in evaluating the Company’s ability to meet future debt service, capital expenditures and working capital requirements. However, investors should not consider these measures in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining the Company’s operating performance or liquidity that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not calculated in accordance with GAAP, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of Adjusted EBITDA to net income can be made by adding depreciation and amortization expense - Offices, depreciation and amortization expense – corporate, stock-based compensation expense, interest expense, net and income tax expense to net income as in the following table:

   
Quarters
   
Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2008
   
2009
   
2008
   
2009
 
RECONCILIATION OF ADJUSTED EBITDA:
                       
Net income
  $ 500,147     $ 365,550     $ 1,467,902     $ 1,562,176  
Add back:
                               
Depreciation and amortization - Offices
    623,199       601,545       1,826,232       1,831,537  
Depreciation and amortization - Corporate
    25,519       21,170       72,173       65,720  
Stock-based compensation expense
    186,306       245,485       544,337       662,370  
Interest expense, net
    63,819       49,160       199,817       118,513  
Income tax expense
    393,005       264,713       1,127,270       1,131,231  
                                 
Adjusted EBITDA
  $ 1,791,995     $ 1,547,623     $ 5,237,731     $ 5,371,547  

Revenue is total dental group practice revenue generated at the Company’s Offices from professional services provided to patients. Amounts retained by Offices represent compensation expense to the dentists, dental hygienists and dental assistants and are subtracted from total dental group practice revenue to arrive at net revenue. The Company reports net revenue in its financial statements to comply with ASC Topic 810. Revenue is not a GAAP measure. The Company discloses Revenue and believes it is useful to investors because it is a critical component for management’s evaluation of Office performance. However, investors should not consider this measure in isolation or as a substitute for net revenue, operating income, cash flows from operating activities or any other measure for determining the Company’s operating performance that is calculated in accordance with GAAP. The following table reconciles Revenue to net revenue:

   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Total dental group practice revenue
  $ 14,976,112     $ 14,690,693     $ 45,146,842     $ 45,248,436  
Less - amounts retained by dental Offices
    (6,212,217 )     (6,194,609 )     (18,642,723 )     (18,825,113 )
                                 
Net revenue
  $ 8,763,895     $ 8,496,084     $ 26,504,119     $ 26,423,323  
 
 
19

 

The following table sets forth the percentages of net revenue represented by certain items reflected in the Company’s condensed consolidated statements of income. The information contained in the following table represents the historical results of the Company. The information that follows should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto contained elsewhere in this report.
 
BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
NET REVENUE:
    100.0 %     100.0 %     100.0 %     100.0 %
                                 
DIRECT EXPENSES:
                               
Clinical salaries and benefits
    26.8 %     28.0 %     28.3 %     27.9 %
Dental supplies
    7.2 %     6.8 %     7.0 %     6.4 %
Laboratory fees
    7.9 %     7.7 %     7.9 %     7.5 %
Occupancy
    13.8 %     14.5 %     13.6 %     13.9 %
Advertising and marketing
    1.2 %     1.6 %     1.3 %     1.2 %
Depreciation and amortization
    7.1 %     7.1 %     6.9 %     6.9 %
General and administrative
    13.6 %     13.7 %     13.7 %     13.1 %
      77.7 %     79.4 %     78.6 %     77.0 %
                                 
Contribution from dental offices
    22.3 %     20.6 %     21.4 %     23.0 %
                                 
CORPORATE EXPENSES:
                               
General and administrative
    11.1 %     12.4 %     10.6 %     12.2 %
Depreciation and amortization
    0.3 %     0.2 %     0.3 %     0.2 %
                                 
Operating income
    10.9 %     8.0 %     10.5 %     10.6 %
                                 
Interest expense
    0.7 %     0.6 %     0.8 %     0.4 %
                                 
Income before income taxes
    10.2 %     7.4 %     9.8 %     10.2 %
Income tax expense
    4.5 %     3.1 %     4.3 %     4.3 %
                                 
Net income
    5.7 %     4.3 %     5.5 %     5.9 %
 
 
20

 

Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008:
 
Net revenue. For the quarter ended September 30, 2009, net revenue decreased $268,000, or 3.1%, to $8.5 million compared to $8.8 million for the quarter ended September 30, 2008.  This decrease is attributable to a decrease in same store net revenue from general dentistry of $326,000 partially offset by an increase in same store net revenue from specialty dentistry of $58,000.  The Company attributes the decrease in net revenue for the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008, to a general weakness in the economy in its markets.

Clinical salaries and benefits. For the quarters ended September 30, 2009 and 2008, clinical salaries and benefits remained constant at $2.4 million.  As a percentage of net revenue, clinical salaries and benefits increased to 28.0% for the quarter ended September 30, 2009 compared to 26.8% for the quarter ended September 30, 2008.
 
Dental supplies. For the quarter ended September 30, 2009, dental supplies decreased to $580,000 compared to $627,000 for the quarter ended September 30, 2008, a decrease of $47,000 or 7.5%.  This decrease is attributable to three factors: (1) fewer new dentists requesting initial dental supply inventories; (2) a 3% rebate from the Company’s primary dental supply vendor that will be effective through 2009; and (3) a concentrated effort that began in January 2009 to reduce dental supply expense through the implementation of a new process for the monthly dental supply budget.  As a percentage of net revenue, dental supplies decreased to 6.8% for the quarter ended September 30, 2009 compared to 7.2% for the quarter ended September 30, 2008.
 
Laboratory fees. For the quarter ended September 30, 2009, laboratory fees decreased to $652,000 compared to $694,000 for the quarter ended September 30, 2008, a decrease of $42,000 or 6.1%. This decrease is primarily due to lower laboratory fees that were negotiated with the Company’s significant vendors in December 2008.  As a percentage of net revenue, laboratory fees decreased to 7.7% for the quarter ended September 30, 2009 compared to 7.9% for the quarter ended September 30, 2008.
 
Occupancy. For the quarters ended September 30, 2009 and 2008, occupancy expense remained constant at $1.2 million.    As a percentage of net revenue, occupancy expense increased to 14.5% for the quarter ended September 30, 2009 compared to 13.8% for the quarter ended September 30, 2008.
 
Advertising and marketing. For the quarter ended September 30, 2009, advertising and marketing expense increased to $139,000 compared to $105,000 for the quarter ended September 30, 2008, an increase of $34,000 or 32.0%.  This increase is attributable to a radio advertising campaign the Company initiated in May 2009 in its Denver and Colorado Springs, Colorado and Albuquerque, New Mexico markets.  The cost associated with the campaign was $51,000 for the quarter ended September 30, 2009.  The Company anticipates the cost of this campaign to be $47,000 for the quarter ending December 31, 2009.  This increase was partially offset by the Company negotiating more favorable rates for its yellow page advertising.  As a percentage of net revenue, advertising and marketing expense increased to 1.6% for the quarter ended September 30, 2009 compared to 1.2% for the quarter ended September 30, 2008.
 
Depreciation and amortization-Offices. For the quarter ended September 30, 2009, depreciation and amortization expenses attributable to the Offices decreased to $602,000 compared to $623,000 for the quarter ended September 30, 2008, a decrease of $22,000 or 3.5%. As a percentage of net revenue, depreciation and amortization expense attributable to the Offices remained constant at 7.1 % for the quarters ended September 30, 2009 and 2008.

General and administrative-Offices. For the quarters ended September 30, 2009 and 2008, general and administrative expenses attributable to the Offices remained constant at $1.2 million.  As a percentage of net revenue, general and administrative expenses attributable to the Offices increased to 13.7% for the quarter ended September 30, 2009 compared to 13.6% for the quarter ended September 30, 2008.
 
Contribution from dental Offices.   As a result of the above, contribution from dental Offices decreased to $1.8 million for the quarter ended September 30, 2009 compared to $2.0 million for the quarter ended September 30, 2008, a decrease of $207,000 or 10.6%. As a percentage of net revenue, contribution from dental Offices decreased to 20.6% for the quarter ended September 30, 2009 compared to 22.3% for the quarter ended September 30, 2008.
 
Corporate expenses - general and administrative. For the quarter ended September 30, 2009, corporate expenses - general and administrative increased to $1.0 million compared to $975,000 for the quarter ended September 30, 2008, an increase of $75,000 or 7.7%.  This increase is primarily related to an increase of $76,000 related to the cash component of the LTIP for executives, $82,000 related to the equity component of the LTIP for executives and $49,000 in professional fees partially offset by a decrease of $120,000 in executive bonuses.  As a percentage of net revenue, corporate expenses - general and administrative increased to 12.4% for the quarter ended September 30, 2009 compared to 11.1% for the quarter ended September 30, 2008.

 
21

 

Corporate expenses - depreciation and amortization. For the quarter ended September 30, 2009, corporate expenses - depreciation and amortization decreased to $21,000 compared to $26,000 for the quarter ended September 30, 2008, a decrease of $4,000 or 17.0%. As a percentage of net revenue, corporate expenses – depreciation and amortization decreased to 0.2% for the quarter ended September 30, 2009 compared to 0.3% for the quarter ended September 30, 2008.
 
Operating income.   As a result of the matters discussed above, the Company’s operating income decreased to $679,000 for the quarter ended September 30, 2009 compared to $957,000 for the quarter ended September 30, 2008, a decrease of $278,000 or 29.0%.  As a percentage of net revenue, operating income decreased to 8.0% for the quarter ended September 30, 2009 compared to 10.9% for the quarter ended September 30, 2008.
 
Interest expense, net. For the quarter ended September 30, 2009, interest expense, net decreased to $49,000 compared to $64,000 for the quarter ended September 30, 2008, a decrease of $15,000 or 23.0%. This decrease in interest expense, net is attributable to a reduction of the principal amount outstanding on the Term Loan and reduced borrowings on the amended Credit Facility.  As a percentage of net revenue, interest expense, net decreased to 0.6% for the quarter ended September 30, 2009 compared to 0.7% for the quarter ended September 30, 2008.
 
Net income.   As a result of the above, the Company reported net income of $366,000 for the quarter ended September 30, 2009 compared to net income of $500,000 for the quarter ended September 30, 2008, a decrease of $135,000 or 26.9%. Net income for the quarter ended September 30, 2009 was net of income tax expense of $265,000, while net income for the quarter ended September 30, 2008 was net of income tax expense of $393,000. As a percentage of net revenue, net income decreased to 4.3% for the quarter ended September 30, 2009 compared to 5.7% for the quarter ended September 30, 2008.
 
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008:
 
Net revenue. For the nine months September 30, 2009, net revenue decreased $81,000, or 0.3%, to $26.4 million compared to $26.5 million for the nine months ended September 30, 2008. This decrease is attributable to a decrease in same store net revenue from general dentistry of $482,000 partially offset by an increase in same store net revenue from specialty dentistry of $267,000 along with a de novo Office the Company opened in May 2008 that generated an additional $134,000 in net revenue.  The Company attributes the decrease in net revenue for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, to a general weakness in the economy in its markets.

Clinical salaries and benefits. For the nine months ended September 30, 2009, clinical salaries and benefits decreased $137,000, or 1.8%, to $7.4 million compared to $7.5 million for the nine months ended September 30, 2008. This decrease is primarily due to reduced administrative wages as a result of fewer front desk personnel at the Offices in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.  As a percentage of net revenue, clinical salaries and benefits decreased to 27.9% for the nine months ended September 30, 2009 compared to 28.3% for the nine months ended September 30, 2008.
 
Dental supplies. For the nine months ended September 30, 2009, dental supplies decreased to $1.7 million compared to $1.8 million for the nine months ended September 30, 2008, a decrease of $142,000 or 7.7%.  This decrease is attributable to three factors: (1) fewer new dentists requesting initial dental supply inventories; (2) a 3% rebate from the Company’s primary dental supply vendor that will be effective through 2009; and (3) a concentrated effort that began in January 2009 to reduce dental supply expense through the implementation of a new process for the monthly dental supply budget.  As a percentage of net revenue, dental supplies decreased to 6.4% for the nine months ended September 30, 2009 compared to 7.0% for the nine months ended September 30, 2008.
 
Laboratory fees. For the nine months ended September 30, 2009, laboratory fees decreased to $2.0 million compared to $2.1 million for the nine months ended September 30, 2008, a decrease of $112,000 or 5.4%.  This decrease is primarily due to lower laboratory fees that were negotiated with the Company’s significant vendors in December 2008.  As a percentage of net revenue, laboratory fees decreased to 7.5% for the nine months ended September 30, 2009 compared to 7.9% for the nine months ended September 30, 2008.
 
Occupancy. For the nine months ended September 30, 2009 and 2008, occupancy expense increased to $3.7 million compared to $3.6 million for the nine months ended September 30, 2008, an increase of $68,000 or 1.9%.  As a percentage of net revenue, occupancy expense increased to 13.9% for the nine months ended September 30, 2009 compared to 13.6% for the nine months ended September 30, 2008.

 
22

 
 
Advertising and marketing. For the nine months ended September 30, 2009, advertising and marketing expense decreased to $323,000 compared to $332,000 for the nine months ended September 30, 2008, a decrease of $9,000 or 2.8%.  This decrease is attributable to a decrease of $94,000 for yellow page advertising as a result of the Company’s negotiations for more favorable rates.  This was partially offset by a radio advertising campaign the Company initiated in May 2009 in its Denver and Colorado Springs, Colorado and Albuquerque, New Mexico markets.  The cost associated with the campaign was $70,000 for the nine months ended September 30, 2009.  The Company anticipates the cost of this campaign to be $47,000 for the quarter ending December 31, 2009.  As a percentage of net revenue, advertising and marketing expense decreased to 1.2% for the nine months ended September 30, 2009 compared to 1.3% for the nine months ended September 30, 2008.
 
Depreciation and amortization-Offices. For the nine months ended September 30, 2009 and 2008, depreciation and amortization expenses attributable to the Offices remained constant at $1.8 million. As a percentage of net revenue, depreciation and amortization expenses attributable to the Offices remained constant at 6.9% for the nine months ended September 30, 2009 and 2008.

General and administrative-Offices. For the nine months ended September 30, 2009, general and administrative expenses attributable to the Offices decreased to $3.5 million compared to $3.6 million for the nine months ended September 30, 2008, a decrease of $173,000 or 4.8%.  This decrease is primarily due to decreased bad debt expense of $139,000.  As a percentage of net revenue, general and administrative expenses attributable to the Offices decreased to 13.1% for the nine months ended September 30, 2009 compared to 13.7% for the nine months ended September 30, 2008.
 
Contribution from dental Offices.   As a result of the above, contribution from dental Offices increased $418,000 or 7.4%, to $6.1 million for the nine months ended September 30, 2009 compared to $5.7 million for the nine months ended September 30, 2008. As a percentage of net revenue, contribution from dental Offices increased to 23.0% for the nine months ended September 30, 2009 compared to 21.4% for the nine months ended September 30, 2008.
 
Corporate expenses - general and administrative. For the nine months ended September 30, 2009, corporate expenses - general and administrative increased to $3.2 million compared to $2.8 million for the nine months ended September 30, 2008, an increase of $407,000 or 14.5%. This increase is primarily related to an increase of $123,000 in executive bonuses, $151,000 related to the cash component of the LTIP for executives and $164,000 related to the equity component of the LTIP for executives.  As a percentage of net revenue, corporate expenses - general and administrative increased to 12.2% for the nine months ended September 30, 2009 compared to 10.6% for the nine months ended September 30, 2008.
 
Corporate expenses - depreciation and amortization. For the nine months ended September 30, 2009, corporate expenses - depreciation and amortization decreased to $66,000 compared to $72,000 for the nine months ended September 30, 2008, a decrease of $6,000 or 8.9%.  As a percentage of net revenue, corporate expenses – depreciation and amortization decreased to 0.2% for the nine months ended September 30, 2009 compared to 0.3% for the nine months ended September 30, 2008
 
Operating income.   As a result of the matters discussed above, the Company’s operating income remained constant at $2.8 million for the nine months ended September 30, 2009 and 2008. As a percentage of net revenue, operating income increased to 10.6% for the nine months ended September 30, 2009 compared to 10.5% for the nine months ended September 30, 2008.
 
Interest expense, net. For the nine months ended September 30, 2009, interest expense, net decreased to $119,000 compared to $200,000 for the nine months ended September 30, 2008, a decrease of $81,000 or 40.7%. This decrease in interest expense, net is attributable to a reduction of the principal amount outstanding on the Term Loan and reduced borrowings on the Credit Facility.  As a percentage of net revenue, interest expense, net decreased to 0.4% for the nine months ended September 30, 2009 compared to 0.8% for the nine months ended September 30, 2008.
 
Net income.   As a result of the above, the Company reported net income of $1.6 million for the nine months ended September 30, 2009 compared to net income of $1.5 million for the nine months ended September 30, 2008, an increase of $94,000 or 6.4%.  Net income for the nine months ended September 30, 2009 and 2008 was net of income tax expense of $1.1 million.  As a percentage of net revenue, net income increased to 5.9% for the nine months ended September 30, 2009 compared to 5.5% for the nine months ended September 30, 2008.

 
23

 
 
Liquidity and Capital Resources
 
The Company finances its operations and growth through a combination of cash provided by operating activities and the Credit Facility.  As of September 30, 2009, the Company had a working capital deficit of approximately $2.1 million, retained earnings of $7.4 million and a cash balance of $885,000.  On October 29, 2009, the Company acquired substantially all the assets of a dental practice in Tucson, Arizona for the total purchase price of $700,000.
 
Net cash provided by operating activities was approximately $4.6 million and $4.5 million for the nine months ended September 30, 2009 and 2008, respectively.  During the nine months ended September 30, 2009, excluding net income and after adding back non-cash items, the Company’s cash provided by operating activities consisted primarily of an increase in accounts payable and accrued expenses of approximately $884,000, offset by an increase in accounts receivable of $641,000, an increase in prepaid expenses and other assets of approximately $27,000 and a decrease in income taxes payable of approximately $82,000.  During the nine months ended September 30, 2008, excluding net income and after adding back non-cash items, the Company’s cash provided by operating activities consisted primarily of an increase in accounts payable and accrued expenses of approximately $306,000, an increase in income taxes payable of approximately $430,000 and a decrease in prepaid expenses and other assets of approximately $79,000, offset by an increase in accounts receivable of $822,000.
 
Net cash used in investing activities was approximately $909,000 and $1.0 million for the nine months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009, the Company invested approximately $559,000 in the purchase of additional equipment and $350,000 in acquiring a dental practice in Tucson, Arizona.  During the nine months ended September 30, 2008, the Company invested approximately $1.0 million in capital expenditures, which included $163,000 to upgrade the Company’s payroll time collection system, $157,000 to remodel an Office and $368,000 in the development of a de novo Office.
 
Net cash used in financing activities was approximately $4.0 million for the nine months ended September 30, 2009 and $3.8 million for the nine months ended September 30, 2008. During the nine months ended September 30, 2009, net cash used in financing activities was comprised of approximately $706,000 used in the purchase and retirement of Common Stock, approximately $950,000 for the payment of dividends, approximately $2.1 million used to pay down the Credit Facility and $690,000 to pay down the Term Loan partially offset by approximately $413,000 in proceeds from the exercise of Common Stock options.  During the nine months ended September 30, 2008, net cash used in financing activities was comprised of approximately $3.9 million used in the purchase and retirement of Common Stock, approximately $1.0 million for the payment of dividends and approximately $690,000 for the repayment of the Term Loan, partially offset by an increase of approximately $1.6 million on the Credit Facility and approximately $294,000 in proceeds from the exercise of Common Stock options.
 
On June 30, 2009, the Company amended its bank line of credit (“Credit Facility”).  The amended Credit Facility extends the expiration of the credit agreement from May 31, 2010 to May 31, 2011.  The Credit Facility allows the Company to borrow, on a revolving basis, an aggregate principal amount not to exceed $7.0 million at either, or a combination of, the lender’s Base Rate or at LIBOR plus a LIBOR rate margin, at the Company’s option.  The Base Rate computes interest at the higher of the lender’s “prime rate” or the Federal Funds Rate plus a margin.  The amendment adjusts the Base Rate margin from 0.5% to 2.5%.  The LIBOR option computes interest at the LIBOR rate as of the date such LIBOR rate loan was made plus a LIBOR rate margin.  The amendment states that the LIBOR rate is the higher of 1.5% or the LIBOR rate and the margin is adjusted from 1.25% to 3.875%.  A commitment fee on the average daily unused amount of the revolving loan commitment during the preceding quarter is also assessed and was increased from 0.25% to 0.40% as of June 1, 2009.  The Company may prepay any Base Rate loan at any time and any LIBOR rate loan upon not less than three business days prior written notice given to the lender, but the Company is responsible for any loss or cost incurred by the lender in liquidating or employing deposits required to fund or maintain the LIBOR rate loan.  At September 30, 2009, the Company had $2.3 million outstanding and $4.7 million available for borrowing under the Credit Facility.  This consisted of $2.0 million outstanding under the LIBOR rate option and $298,000 outstanding under the Base Rate option.  As of September 30, 2009, the Company’s LIBOR borrowing rate was 5.375% and the Base Rate borrowing rate was 5.75%.  Management believes that the LIBOR and Base Rate margins increased as a result of the lender’s increased cost of funds and not because of the Company’s credit quality.  The Credit Facility requires the Company to comply with certain covenants and financial ratios. At September 30, 2009, the Company was in full compliance with all of its covenants under the Credit Facility.

 
24

 

On October 5, 2006, the Company entered into a $4.6 million Term Loan to finance a “dutch auction” tender offer for shares of its Common Stock. Under the Term Loan, $2.3 million was borrowed at a fixed interest rate of 7.05% and the remaining $2.3 million was borrowed at a floating interest rate of LIBOR plus 1.5%.  The $2.3 million borrowed at a fixed rate was achieved by the Company by entering into a fixed for floating interest rate swap that the Company designates as a cash flow hedge under ASC Topic 815. The principal amount borrowed is repaid quarterly in 20 equal payments of $230,000 plus interest beginning December 31, 2006. The Term Loan matures on September 30, 2011.  As of September 30, 2009, $920,000 was outstanding at the fixed rate of 7.05% and $920,000 was outstanding at the LIBOR plus 1.5% floating rate.  The Term Loan requires the Company to comply with certain covenants and financial ratios. At September 30, 2009, the Company was in full compliance with all of its covenants under the Term Loan.

As of September 30, 2009, the Company had budgeted capital commitments for the next 12 months of approximately $900,000, which includes the funding of a de novo Office in New Mexico and the relocation of two dental practices in Colorado.

As of September 30, 2009, the Company had the following debt and lease obligations:

         
Payments due by Period
 
   
Total
   
Less than 1
year
   
1-3 years
   
3-5 years
   
More than 5
years
 
Debt obligations
  $ 4,137,683     $ 920,000     $ 3,217,683     $ -     $ -  
Operating lease obligations
    7,647,291       2,941,528       3,548,219       1,154,236       3,309  
Total
  $ 11,784,974     $ 3,861,528     $ 6,765,902     $ 1,154,236     $ 3,309  

The Company from time to time may purchase its Common Stock on the open market. During the quarter ended September 30, 2009, the Company, in 28 separate transactions, purchased 33,411 shares of its Common Stock for total consideration of approximately $536,000 at prices ranging from $14.66 to $17.20.  All purchases were made on the open market pursuant to plans that were approved by the Board of Directors. As of September 30, 2009, there was approximately $355,000 available for the purchase of the Company’s Common Stock under these plans.  There is no expiration date on these plans. Such purchases may be made from time to time as the Company’s management deems appropriate.

The Company believes that cash generated from operations and borrowings under its Credit Facility will be sufficient to fund its anticipated working capital needs, capital expenditures and dividend payments for at least the next 12 months. In order to meet its long-term liquidity needs, the Company may issue additional equity and debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to obtain the funds necessary to finance its future cash requirements could adversely affect the Company’s ability to pursue its strategy and could negatively affect its operations in future periods

ITEM 4.  CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the “Exchange Act”) as of September 30, 2009.  On the basis of this review, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2009, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in a manner  that allows timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) of the Exchange Act) that occurred in the quarter ended September 30, 2009 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 
25

 

PART II.  OTHER INFORMATION
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Issuer Purchases of Equity Securities

The following chart provides information regarding Common Stock purchased by the Company during the period July 1, 2009 through September 30, 2009.

Issuer Purchases of Equity Securities

Period
 
Total Number
Of Shares
Purchased
   
Average Price
Paid per Share
   
Total Number
Of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)
   
Approximate
Dollar Value
Of Shares That
May Yet Be
Purchased
Under the
Plans or
Programs (1)
 
July 1, 2009 through July  31, 2009
    15,623     $ 15.99       15,623     $ 640,697  
August 1, 2009 through August 31, 2009
    5,300       16.67       5,300     $ 552,328  
September 1, 2009 through September 30, 2009
    12,488       15.83       12,488     $ 354,646  
Total
    33,411     $ 16.04       33,411          

(1)
All purchases were made on the open market pursuant to plans that were approved by the Board of Directors.  The Company’s Board of Directors has authorized a stock repurchase program since 2000.  The maximum authorized amounts under the program have ranged from $150,000 to $2.4 million.  Most recently, in August 2008, the Board of Directors approved up to $2.0 million of stock repurchases.  As of September 30, 2009, there was approximately $355,000 available for the purchase of the Company’s Common Stock under these plans. There is no expiration date on these plans.  Purchases under these plans may be made from time to time as the Company’s management deems appropriate.

 
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ITEM 6.   EXHIBITS
 
Exhibit
   
Number
 
Description of Document
     
3.1
 
Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.1 and 3.2 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
     
3.2
 
Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
     
4.1
 
Reference is made to Exhibits 3.1 and 3.2.
     
4.2
 
Specimen Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on November 25, 1997.
     
31.1
 
Rule 13a-14(a) Certification of the Chief Executive Officer.
     
31.2
 
Rule 13a-14(a) Certification of the Chief Financial Officer.
     
32.1
 
Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
BIRNER DENTAL MANAGEMENT SERVICES, INC.
     
Date:  November 13, 2009
By:
/s/ Frederic W.J. Birner
 
Name:
Frederic W.J. Birner
 
Title:
Chairman of the Board and Chief Executive Officer
   
(Principal Executive Officer)
     
Date: November 13, 2009
By:
/s/ Dennis N. Genty
 
Name:
Dennis N. Genty
 
Title:
Chief Financial Officer, Secretary, and Treasurer
   
(Principal Financial and Accounting Officer)
 
 
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