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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period June 30, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period ___________ to ___________
Commission File Number: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3297858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
American Dental Partners, Inc.
201 Edgewater Drive, Suite 285
Wakefield, Massachusetts 01880
(Address of principal executive offices, including zip code)
(781) 224-0880
(781) 224-4216 (fax)
(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.
X YES _____ NO
------
Indicate the number of shares outstanding of each of the issurer's classes of
common stock as of the latest practicable date.
Common Stock, $0.01 par value, outstanding as of August 12, 2002,
7,232,667 shares
================================================================================
AMERICAN DENTAL PARTNERS, INC.
INDEX
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Page
----
Part I. Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets at December 31, 2001
and June 30, 2002 (unaudited) ............................................................. 3
Consolidated Statements of Earnings for the Three Months and Six Months
Ended June 30, 2001 and 2002 (unaudited) .................................................. 4
Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 2002 (unaudited) ................................................ 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2002 (unaudited) .................................................. 6
Notes to Interim Consolidated Financial Statements ........................................ 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................... 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk ................................ 21
Part II. Other Information
Item 1. Legal Proceedings ......................................................................... 22
Item 2. Changes in Securities and Use of Proceeds ................................................. 22
Item 3. Defaults Upon Senior Securities ........................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 22
Item 5. Other Information ......................................................................... 23
Item 6. Exhibits and Reports on Form 8-K .......................................................... 23
Signatures ........................................................................................... 24
Exhibit Index ........................................................................................... 25
2
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, June 30,
2001 2002
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 1,540 $ 1,677
Accounts receivable, net ..................................................... 250 774
Receivables due from affiliated dental groups ................................ 19,366 18,577
Income taxes receivable ...................................................... 821 53
Inventories .................................................................. 1,816 1,839
Prepaid expenses and other receivables ....................................... 1,972 2,186
Deferred income taxes ........................................................ 486 486
--------- ---------
Total current assets .................................................... 26,251 25,592
--------- ---------
Property and equipment, net ....................................................... 29,605 29,493
--------- ---------
Non-current assets:
Goodwill, net ................................................................ 2,704 5,369
Intangible assets, net ....................................................... 85,146 83,514
Other assets ................................................................. 629 543
--------- ---------
Total non-current assets ................................................ 88,479 89,426
--------- ---------
Total assets ............................................................ $ 144,335 $ 144,511
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 7,608 $ 7,951
Accrued compensation, benefits and taxes ..................................... 3,686 3,751
Accrued expenses ............................................................. 3,981 4,051
Accrued special charges ...................................................... 256 90
Current maturities of debt ................................................... 1,597 1,580
--------- ---------
Total current liabilities ............................................... 17,128 17,423
--------- ---------
Non-current liabilities:
Long-term debt ............................................................... 54,840 51,965
Deferred income tax .......................................................... 10,324 10,324
Other liabilities ............................................................ 267 377
--------- ---------
Total non-current liabilities ........................................... 65,431 62,666
--------- ---------
Total liabilities ....................................................... 82,559 80,089
--------- ---------
Stockholders' equity:
Preferred stock, par value $0.01 per share, 1,000,000 shares
authorized, no shares issued or outstanding .................................. - -
Common stock, par value $0.01 per share, 25,000,000 shares authorized,
7,754,893 and 7,791,970 shares issued and 7,172,393 and 7,209,470 shares
outstanding at December 31, 2001 and June 30, 2002, respectively ............. 78 78
Additional paid-in capital ................................................... 47,606 47,752
Retained earnings ............................................................ 17,966 20,466
Treasury stock, at cost, 582,500 shares ...................................... (3,874) (3,874)
--------- ---------
Total stockholders' equity .............................................. 61,776 64,422
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity .............................. $ 144,335 $ 144,511
========= =========
See accompanying notes to interim consolidated financial statements.
3
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
2001 2002 2001 2002
---- ---- ---- ----
Net Revenue ....................................... $36,568 $ 37,836 $ 74,664 $ 74,687
------- --------- --------- ---------
Operating expenses:
Salaries and benefits ............................. 17,300 17,319 35,327 34,486
Lab fees and dental supplies ...................... 5,801 6,305 11,645 11,955
Office occupancy .................................. 4,027 4,442 8,071 8,847
Other operating expenses .......................... 2,941 3,196 6,116 6,443
General corporate expense ......................... 1,272 1,458 3,105 2,886
Depreciation ...................................... 1,320 1,209 2,630 2,432
Amortization of goodwill and intangible assets .... 1,037 997 2,041 1,985
Special charges ................................... - - 1,004 -
--------------------------------------------------- ------- --------- --------- ---------
Total operating expenses .................. 33,698 34,926 69,939 69,034
------- --------- --------- ---------
Earnings from operations .......................... 2,870 2,910 4,725 5,653
Interest expense, net ..................... 1,141 770 2,428 1,586
------- --------- --------- ---------
Earnings before income taxes ...................... 1,729 2,140 2,297 4,067
Income taxes .............................. 718 817 919 1,567
------- --------- --------- ---------
Net earnings .............................. $ 1,011 $ 1,323 $ 1,378 $ 2,500
======= ========= ========= =========
Net earnings per common share:
Basic ..................................... $ 0.14 $ 0.18 $ 0.19 $ 0.35
Diluted ................................... $ 0.14 $ 0.18 $ 0.19 $ 0.34
Weighted average common shares outstanding:
Basic ..................................... 7,218 7,207 7,199 7,205
Diluted ................................... 7,362 7,461 7,384 7,425
See accompanying notes to interim consolidated financial statements
4
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(in thousands)
(unaudited)
Number of Shares
----------------
Common Common Additional Treasury Total
Stock Stock in Common Paid - in Retained Stock at Stockholders'
Issued Treasury Stock Capital Earnings Cost Equity
Balance at
December 31, 2001 ....... 7,755 (582) $ 78 $ 47,606 $ 17,966 $(3,874) $ 61,776
Issuance of
common stock
for employee stock
purchase plan ........ 32 - - 115 - - 115
Issuance of
common stock for
exercised
stock options,
including tax benefit
of $7,000 ............ 5 - - 31 - - 31
Net - - - - 2,500 - 2,500
earnings ............ ----- ----- ------ -------- -------- ------- ---------
Balance at June ........ 7,792 (582) $ 78 $ 47,752 $ 20,466 $(3,874) $ 64,422
30, 2002 ===== ===== ====== ======== ======== ======= =========
See accompanying notes to interim consolidated financial statements.
5
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
2001 2002
---- ----
Cash flows from operating activities:
Net earnings ........................................................................ $ 1,378 $ 2,500
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation. .................................................................. 2,630 2,432
Amortization of goodwill and intangible assets ................................. 2,041 1,985
Other amortization ............................................................. 114 114
Gain on disposal of property and equipment ..................................... - (20)
Changes in operating assets and liabilities, net of acquisitions and
affiliations:
Accounts receivable ....................................................... (41) (20)
Receivables due from affiliated dental groups ............................. (909) 789
Other current assets ...................................................... (340) (205)
Accounts payable and accrued expenses ..................................... (234) 68
Accrued compensation, benefits and taxes .................................. (580) (160)
Accrued special charges .......................................... 647 (166)
Income taxes payable and receivable, net ......................... 97 783
-------- --------
Net cash provided by operating activities ............................ 4,803 8,100
-------- --------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired ................................. (1,028) (2,982)
Capital expenditures, net ........................................................... (3,856) (2,023)
Contingent and deferred payments .................................................... (530) (80)
Other ............................................................................... 58 (124)
-------- --------
Net cash used for investing activities ............................... (5,356) (5,209)
-------- --------
Cash flows from financing activities:
Borrowings (repayments) under revolving line of credit, net ......................... 2,300 (2,350)
Repayment of borrowings ............................................................. (559) (543)
Common stock issued for the employee stock purchase plan ............................ 147 115
Proceeds from issuance of common stock for exercise of stock options ................ 64 24
Repurchase of common stock .......................................................... (630) -
-------- --------
Net cash provided by (used for) financing activities ................. 1,322 (2,754)
-------- --------
Increase in cash and cash equivalents .................................................... 769 137
Cash and cash equivalents at beginning of period ......................................... 472 1,540
-------- --------
Cash and cash equivalents at end of period ............................................... $ 1,241 $ 1,677
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net ....................................... $ 2,346 $ 1,390
======== ========
Cash paid during the period for income taxes, net ................................... $ 822 $ 798
======== ========
Acquisitions and affiliations:
Assets acquired ..................................................................... $ 1,098 $ 3,814
Liabilities assumed and issued ...................................................... (70) (733)
-------- --------
Cash paid ........................................................................... 1,028 3,081
Less cash acquired .................................................................. - (99)
-------- --------
Net cash paid for acquisitions and affiliations ...................... $ 1,028 $ 2,982
======== ========
See accompanying notes to interim consolidated financial statements.
6
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The interim consolidated financial statements include the accounts of
American Dental Partners, Inc. and its wholly-owned subsidiaries (the
"Company"). All intercompany balances and transactions have been eliminated in
consolidation.
The Company does not own any interests in or control the activities of the
affiliated dental practices. Accordingly, the financial statements of the
affiliated dental practices are not consolidated with those of the Company.
The interim consolidated financial statements are unaudited, but in the
opinion of management include all adjustments, which consist only of normal and
recurring adjustments, necessary for a fair presentation of the Company's
financial position and results of operations. Results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year. Certain reclassifications have been made to 2001 interim
consolidation financial statements to conform with current year presentation.
These consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements as of and for the year ended
December 31, 2001 included in the annual report on Form 10-K.
(2) Significant Accounting Policies
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" to be effective for all fiscal years beginning after
December 15, 2001. As part of the adoption of SFAS No. 142, the Company will no
longer amortize goodwill. The Company will test for impairment of goodwill at
least annually and will use a two-step approach to assess any impairment to
goodwill at the established reporting unit level. The Company has completed the
transitional impairment test and has designated the first quarter for its annual
review of impairment.
The Company has adopted SFAS No. 142 effective the first quarter of
2002 and will no longer amortize goodwill, thereby eliminating annual goodwill
amortization of approximately $130,000. At June 30, 2002, the Company had
unamortized goodwill of approximately $5.4 million. The Company will evaluate
goodwill, at least, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable. The
Company has recognized no impairment loss as of June 30, 2002 in connection with
the adoption of SFAS No. 142. There can be no assurance that future goodwill
impairment tests will not result in a charge to earnings.
Goodwill as of June 30, 2002 consists of the following (in thousands):
Goodwill $ 5,933
Less: accumulated amortization (564)
-------
Goodwill, net $ 5,369
=======
7
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Had the Company adopted SFAS No.142 as of January 1, 2001, the pro forma
effects on net earnings and earnings per share for the Company for the three and
six months ended June 30, 2001 is as follows (in thousands):
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Net earnings as reported $ 1,011 $ 1,378
Add back: Goodwill amortization expense, net tax effect 19 40
------- -------
Adjusted net earnings $ 1,030 $ 1,418
======= =======
Basic earnings per share, as reported $ 0.14 $ 0.19
Add back: Goodwill amortization expense, net tax effect - 0.01
------- -------
Pro forma basic earnings per share $ 0.14 $ 0.20
======= =======
Diluted earnings per share, as reported $ 0.14 $ 0.19
Add back: Goodwill amortization expense, net tax effect - -
------- -------
Pro forma diluted earnings per share $ 0.14 $ 0.19
======= =======
(3) Adjusted Gross Revenue and Net Revenue
Adjusted Gross Revenue - Affiliated Dental Groups
The Company does not consolidate the financial statements of its affiliated
dental groups with those of the Company. The adjusted gross revenue and amounts
retained by the affiliated dental groups are presented below for illustrative
purposes only (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2001 2002 2001 2002
-------- -------- -------- --------
Adjusted gross revenue - affiliated dental groups ......... $ 51,690 $ 53,460 $105,381 $106,417
Amounts retained by affiliated dental groups .............. 17,812 18,808 36,030 37,733
-------- -------- -------- --------
Business services provided to affiliated dental groups .... $ 33,878 $ 34,652 $ 69,351 $ 68,684
======== ======== ======== ========
8
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net Revenue
The Company's net revenue represents reimbursement of expenses and fees
charged to affiliated dental groups pursuant to the terms of the service
agreements. Additionally, the Company's net revenue includes amounts from dental
benefit providers related to the arrangement of the provision of care to
patients and dental lab services. Net revenue consisted of the following (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2001 2002 2001 2002
---- ---- ---- ----
Reimbursement of expenses:
Clinic salaries and benefits ................................... $ 13,264 $ 12,869 $ 26,996 $ 25,668
Lab and dental supplies ........................................ 5,801 6,200 11,645 11,850
Office occupancy ............................................... 3,753 4,122 7,505 8,220
Depreciation expense ........................................... 1,131 1,022 2,231 2,045
Other operating expenses ....................................... 2,494 2,709 4,919 5,374
-------- -------- -------- --------
Total reimbursement of expenses ............................ 26,443 26,922 53,296 53,157
-------- -------- -------- --------
Business service fees .......................................... 7,435 7,730 16,055 15,527
-------- -------- -------- --------
Business services provided to affiliated dental groups ..... 33,878 34,652 69,351 68,684
Revenue related to the arrangement of the provision of care to
patients, dental laboratory fees and other ....................... 2,690 3,184 5,313 6,003
-------- -------- -------- --------
Total net revenue .......................................... $ 36,568 $ 37,836 $ 74,664 $ 74,687
======== ======== ======== ========
Net revenue from the Company's service agreement with Park Dental
represented approximately 33% and 31% of its consolidated net revenue for the
three months ended June 30, 2001 and 2002, and 32% and 31% for the six-month
periods ending June 30, 2001 and 2002, respectively.
(4) Special Charges and Other Unusual Expenses
Special Charges
In January 2001, three of the Company's affiliated dental groups,
Associated Dental Care Providers, Park Dental, and University Dental Associates,
received notices of contract terminations from Cigna Dental, and Associated
Dental Care Providers received a notice of contract termination from Protective
Life Corporation. These affiliated dental groups subsequently received proposals
from Cigna Dental and Protective Life to continue as dental care providers but
on financial terms that were materially different from their existing
agreements. These groups chose not to continue as participants in the dental
plans offered by Cigna Dental and Protective Life and the three Cigna Dental
contracts terminated as follows: (i) March 31, 2001 for Associated Dental Care
Providers; (ii) March 31, 2001 for University Dental Associates; and (iii) July
31, 2001 for Park Dental. The Protective Life contract terminated April 8, 2001
for Associated Dental Care Providers. These contracts represented approximately
$24.1 million of affiliate adjusted gross revenue in 2000.
9
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company believes the contract terminations should have minimal
long-term impact on Park Dental and University Dental Associates. However, given
that several of the offices in Phoenix were acquired from Cigna Dental and
previously operated by Cigna Dental as staff model dental practices, Associated
Dental's financial performance was heavily dependent upon its contract with
Cigna Dental. As a result, Associated Dental and the Company took decisive
action to bring costs in line with expected financial performance. Specifically,
Associated Dental and the Company decided to close three dental offices and to
operate others on less than a full time schedule. In addition, the Company made
various changes to its management structure, including a consolidation of its
administrative resource centers. The Company and Associated Dental notified 43
employees prior to March 31, 2001 of their termination. The Company and
Associated Dental provided severance to 26 of the 43 employees, comprised of 14
clinical staff, six dentists and six administrative positions; the remaining 17
employees were not eligible for severance. Severance was provided based on
length of employment and continued employment through the separation date. The
Company also accrued for certain provisions for facility closure costs,
consisting primarily of lease exit costs, abandoned leasehold improvements and
computer and dental equipment. Total special charges recorded in the first
quarter of 2001 were $1,004,000.
The following table summarizes the recorded accruals and uses of the above
special charges:
Patient
Facility Reduction in Communication
Closures Work Force and Other Total
-------- ---------- --------- -----
Balance as of December 31, 2000 .......... $ - $ - $ - $ -
New charges .............................. 540,000 425,000 39,000 1,004,000
Non-cash items ........................... (35,000) - - (35,000)
Cash payments ............................ (222,000) (267,000) (64,000) (553,000)
Reversal of charges ...................... (77,000) (83,000) - (160,000)
Other adjustments ........................ - (25,000) 25,000 -
------------ ------------ -------------- ------------
Balance as of December 31, 2001 .......... 206,000 50,000 - 256,000
Cash payments ............................ (137,000) (29,000) - (166,000)
------------ ------------ -------------- ------------
Balance as of June 30, 2002 .............. $ 69,000 $ 21,000 $ - $ 90,000
============ ============ ============== ============
During the fourth quarter of 2001, the Company reversed $160,000 of special
charges. This resulted from the Company negotiating a lump sum buyout on two
facility leases and severance payouts being less than anticipated. It is
expected that approximately $30,000 of the remaining $90,000 of special charges
will be paid in the third quarter of 2002 and the remaining balance will be paid
over the terms of the leases through April 2004 and an employment contract
through December 2002.
(5) Earnings Per Share
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of common shares outstanding during the period plus the dilutive
effect of outstanding stock options using the "treasury stock" method. The
computation of diluted earnings per share does not include the effect of
outstanding stock options that would be antidilutive.
10
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of basic and diluted earnings per share computations for the
three months and six months ended June 30 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
2001 2002 2001 2002
---- ---- ---- ----
Basic Earnings Per Share
Net earnings available to common stockholders ........... $ 1,011 $ 1,323 $ 1,378 $ 2,500
======= ======= ======= =======
Weighted average common shares outstanding .............. 7,218 7,207 7,199 7,205
======= ======= ======= =======
Net earnings per share .................................. $ 0.14 $ 0.18 $ 0.19 $ 0.35
======= ======= ======= =======
Diluted Earnings Per Share
Net earnings available to common stockholders ........... $ 1,011 $ 1,323 $ 1,378 $ 2,500
======= ======= ======= =======
Weighted average common shares outstanding .............. 7,218 7,207 7,199 7,205
Add: Dilutive effect of options/(1)/ .................. 144 254 185 220
------- ------- ------- -------
Weighted average common shares as adjusted .............. 7,362 7,461 7,384 7,425
======= ======= ======= =======
Net earnings per share .................................. $ 0.14 $ 0.18 $ 0.19 $ 0.34
======= ======= ======= =======
(1) Total options excluded from the computation of diluted earnings per
share due to their antidilutive effect were 1,054,104 and 411,603 for
the three months ended June 30, 2001 and 2002, and 699,270 and 415,268
for the six-month period ending June 30, 2001 and 2002, respectively.
(6) Subsequent Events
On August 1, 2002 the Company acquired selected assets of a dental
practice management company affiliated with three dental group practices in
Massachusetts, New York and Vermont. The Company entered into 40-year service
agreements with each of the affiliated dental groups. This affiliation resulted
in the addition of 14 dental facilities with 102 operatories. The aggregate
purchase price paid in connection with these transactions consisted of
approximately $3.3 million in cash, $0.6 million in subordinated promissory
notes and a future contingent payment based on a multiple of earnings before
interest and taxes in excess of a predetermined threshold for the year ending
December 31, 2004.
11
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
Some of the information in this Report on Form 10-Q contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe," "expect," "anticipate,"
"project," and similar expressions, among others, identify forward-looking
statements. Forward-looking statements speak only as of the date the statement
was made. Such forward-looking statements are subject to uncertainties and other
factors that could cause actual results to differ materially from those
projected, anticipated or implied. Certain factors that might cause such a
difference include, among others, the Company's risks associated with overall or
regional economic conditions, its affiliated dental groups' contracts with third
party payors and the impact of any terminations or potential terminations of
such contracts, the cost of and access to capital, fluctuations in labor
markets, the Company's acquisition and affiliation strategy, management of rapid
growth, dependence upon affiliated dental groups, dependence upon service
agreements and government regulation of the dental industry. Additional risks,
uncertainties and other factors are set forth in the "Risk Factors" section of
the Company's Registration Statement on Form S-4 (File No. 333-56941).
Overview
American Dental Partners, Inc. is a leading provider of business
services to multi-disciplinary dental groups in selected markets throughout the
United States. We were formed in December 1995, commenced operations in January
1996 and began providing business services to dental groups in November 1996,
concurrent with the completion of our first dental group affiliation. Our rapid
growth has resulted primarily from our affiliations with dental groups. From
November 1996 to June 30, 2002, we completed 47 affiliation transactions,
comprised of 19 dental groups which have 154 dental facilities with 1,361
operatories located in 14 states.
During the quarter we acquired the outstanding stock and selected
assets of two full service dental laboratories, which will operate as a wholly
owned subsidiary. We believe there are other segments of the dental services
market that compliment our core business and provide attractive long term growth
prospects. The dental laboratory business is one such business as it
demonstrates attractive trends due to the increasing popularity of aesthetic
dental services and the development of innovative new materials provides growth
opportunity.
Affiliation Summary
When affiliating with a dental group, we acquire selected assets and enter
into a long-term service agreement with the affiliated dental group or
professional corporation ("PC"). Under our service agreements, we are
responsible for providing all services necessary for the administration of the
non-clinical aspects of the dental operations. The PC is responsible for the
provision of dental care. Each of our service agreements is for an initial term
of 40 years.
We are currently in discussions with a number of dentists and owners of
dental groups about possible affiliations with us. While we continue to evaluate
new affiliation opportunities, we intend to focus primarily on internal
operations during the remainder of 2002. Accordingly, there can be no assurance
that we will consummate any additional affiliations.
12
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Affiliate Adjusted Gross Revenue Compared to Net Revenue
Affiliated Adjusted Gross Revenue and Payor Mix
We do not own or control the affiliated dental groups and, accordingly, do
not consolidate the financial statements of the PCs with ours. Our affiliated
dental groups generate revenue from patients and dental benefit providers under
fee-for-service, PPO plans and capitated managed care plans. The affiliated
dental groups record revenue at established rates reduced by contractual
adjustments and allowances for doubtful accounts to arrive at adjusted gross
revenue. Contractual adjustments represent the difference between gross billable
charges at established rates and the portion of those charges reimbursed
pursuant to certain dental benefit plan provider contracts. While payor mix
varies from market to market, the aggregate payor mix percentage of our
affiliated groups for the six months ended June 30, 2001 was approximately 47%
fee-for-service, 24% PPO plans and 29% capitated managed care plans. For the six
months ended June 30, 2002, the aggregate payor mix percentage of our affiliated
groups was approximately 47% fee-for-service, 27% PPO plans and 26% capitated
managed care plans.
The PCs reimburse us for expenses incurred on their behalf in connection
with the operation and administration of the dental facilities and pay fees to
us for business services. Expenses incurred for the operation and administration
of the dental facilities include salaries and benefits for non-dentist personnel
working at the dental facilities (the administrative staff and, where permitted
by law, the dental hygienists and dental assistants), lab fees, dental supplies,
office occupancy costs of the dental facilities, depreciation related to the
fixed assets at the dental facilities and other expenses such as professional
fees, marketing costs and general and administrative expenses.
The PCs are responsible for the salaries, benefits and other expenses of
the dentists. In addition, in certain states where the PCs must employ dental
hygienists and dental assistants, the PCs are responsible for salaries, benefits
and other expenses of such non-dentist employees. Since 1998, we have entered
into affiliation transactions with a number of dental practices located in
states where dental hygienists and dental assistants are required to be employed
by the PCs. In recent years, due to the increasing demand for dental services
relative to a decreasing supply of dentists nationally, dentist compensation has
been increasing generally and for our affiliated dental groups specifically. We
expect this trend to moderate during 2002. As a result of these two factors, the
percentage of affiliate adjusted gross revenue retained by the PCs has increased
from 34% in the second quarter of 2001 to 35% in the second quarter of 2002 and
from 34% to 35% for the six months ended June 30, 2001 and 2002, respectively.
We incur costs to operate and support the affiliate adjusted gross revenue at
the dental facilities. Consequently, it is helpful to analyze operating trends
as a percentage of affiliate adjusted gross revenue as well as a percentage of
our net revenue.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2001 2002 2001 2002
-------- -------- -------- --------
Adjusted gross revenue - affiliated dental groups ....... $ 51,690 $ 53,460 $105,381 $106,417
Amounts retained by affiliated dental groups ............ 17,812 18,808 36,030 37,733
-------- -------- -------- --------
Business services provided to affiliated dental groups .. $ 33,878 $ 34,652 $ 69,351 $ 68,684
======== ======== ======== ========
13
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Net Revenue
The Company's net revenue represents primarily reimbursement of
expenses and fees charged to affiliated dental groups pursuant to the terms of
the service agreements. Under such agreements, the affiliated dental groups
reimburse the Company for actual expenses incurred on their behalf in connection
with the operation and administration of the dental facilities and pay fees to
the Company for its business services. Under certain service agreements, the
Company's service fee consists of a variable monthly fee which is based upon a
specified percentage of the amount by which the PC's adjusted gross revenue
exceeds expenses incurred in connection with the operation and administration of
the dental facilities. Under certain service agreements, the Company's service
fees consist of a fixed monthly fee and an additional variable fee. To the
extent that there is operating income after payment of the fixed monthly fee,
reimbursement of expenses incurred in connection with the operation and
administration of the dental facilities and payment of provider expenses, an
additional variable fee is paid to the Company in the amount of such excess up
to budgeted operating income and a percentage of such excess over budgeted
operating income. Under certain service agreements, the Company's service fee
consists entirely of a fixed monthly fee. The fixed monthly fees are determined
by agreement of the Company and the affiliated dental groups in a formal
budgeting process. Additionally, the Company's net revenue includes amounts from
dental benefit providers related to the arrangement of the provision of care to
patients and dental laboratory fees. For additional information on affiliate
adjusted gross revenue and components of our net revenue, see Note 3 of "Notes
to Interim Consolidated Financial Statements."
Results of Operations
Overview
Our net earnings amounted to $1,011,000 or diluted earnings per share of
$0.14 for the three months ended June 30, 2001, as compared with net earnings of
$1,323,000 or diluted earnings per share of $0.18 for the three months ended
June 30, 2002. Our net earnings amounted to $1,378,000 or diluted earnings per
share of $0.19 for the six months ended June 30, 2001, as compared with net
earnings of $2,500,000 or diluted earnings per share of $0.34 for the six months
ended June 30, 2002. Excluding special charges of $1,004,000 and other unusual
expenses of $470,000 and the related tax effects of $588,000, net earnings would
have amounted to $2,264,000 or diluted earnings per share of $0.31 for the six
months ended June 30, 2001. The increase in net earnings from the same period in
2001 is primarily attributable to the $1,474,000 recorded in the first quarter
of 2001 for special charges and other unusual expenses offset by the disruption
and loss of business associated with the contract terminations that impacted our
revenue from three of our affiliates in 2002. These contracts represented
approximately $24 million of affiliate adjusted gross revenue in 2000. (see Note
4 to "Notes to Interim Consolidated Financial Statements").
Net Revenue
Net revenue increased 3% from $36,568,000 for the three months ended June
30, 2001 to $37,836,000 for the three months ended June 30, 2002. Net revenue
remained flat at $74,664,000 for the six months ended June 30, 2001 and
$74,687,000 for the six months ended June 30, 2002, which was attributable to
revenue growth that was offset by the contract terminations that had an impact
on the net revenue of our three affected affiliates after the end of the first
quarter of 2001.
Net revenue derived from our service agreement with Park Dental represented
approximately 33% and 31% of our consolidated net revenue for the three months
ended June 30, 2001 and 2002 and 32% and 31% of our consolidated net revenue for
the six months ended June 30, 2001 and 2002, respectively. Net revenue derived
from our service agreement with Associated Dental Care Providers decreased 41%
from $3,526,000 for the six months ended June 30, 2001 to $2,069,000 for the six
months ended June 30, 2002, primarily due to the contract terminations.
14
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Salaries and Benefits
Salaries and benefits expense includes costs for personnel working for us
at the dental facilities as well as local and regional management. At the
facility level, we generally employ the administrative staff and, where
permitted by state law, the dental hygienists and dental assistants. The local
and regional operating management teams supervise and support certain staff at
the dental facilities.
Salaries and benefits expense as a percentage of net revenue decreased from
47.3% for the three months ended June 30, 2001 to 45.8% for the three months
ended June 30, 2002 and from 47.3% for the six months ended June 30, 2001 to
46.2% for the six months ended June 30, 2002. This is primarily related to the
reduction in staff and administrative positions at Associated Dental and Park
Dental, as a result of the contract terminations. This reduction in staffing
salaries and benefits is offset by wage inflation due to fluctuations in labor
markets in the dental sector.
Lab Fees and Dental Supplies
Lab fees and dental supplies expense varies from affiliate to affiliate and
is affected by the volume and type of procedures performed. Lab fees and dental
supplies expense as a percentage of net revenue increased from 15.9% to 16.7%
for the three months ended June 30, 2001 and 2002, respectively and increased
from 15.6% for the six months ended June 30, 2001 to 16.0% for the six months
ended June 30, 2002. We are continuing our efforts to offset dental supply
manufacturer price increases with the economies of scale realized through our
national dental supply purchasing and rebate programs.
Office Occupancy
Office occupancy expense includes rent expense and certain other operating
costs such as utilities associated with dental facilities and the local
administrative offices. Such costs vary based on the size of each facility and
the market rental rate for dental office space in the particular geographic
market.
Office occupancy expense as a percentage of net revenue increased from
11.0% for the three months ended June 30, 2001 to 11.7% for the three months
ended June 30, 2002 and from 10.8% for the six months ended June 30, 2001 to
11.8% for the six months ended June 30, 2002 primarily as a result of the
investment in the relocation and addition of new dental facilities and a
decrease in facility utilization as a result of the managed care contract
terminations at three of our affiliates. During the six months ended June 30,
2001, we relocated and expanded seven dental facilities. During the six months
ended June 30, 2002, we relocated and expanded five dental facilities and one
administrative office, and added a new administrative office. Due to the loss of
the Cigna Dental and Protective Life contracts in Arizona, our available
capacity increased in those markets allowing for future growth.
We expect office occupancy expense to continue to increase as we invest in
the relocation and expansion of dental facilities. These increases should be
partially or fully offset by better utilization of capacity in existing dental
facilities. The excess capacity arising from the contract terminations in
certain markets will likely continue in the near future.
Other Operating Expenses
Other operating expenses increased as a percentage of net revenue from 8.0%
for the three months ended June 30, 2001 to 8.4% for the three months ended June
30, 2002 and from 8.2% for the six months ended June 30, 2001 to 8.6% for the
six months ended June 30, 2002 due primarily to the impact of the lost business
associated with the contract terminations by Cigna Dental and Protective Life.
Our other operating expense may increase in 2002 due to increased insurance
costs, however, we hope to offset these increases with continued management of
discretionary spending.
15
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
General Corporate Expenses
General corporate expenses consist of compensation expense for our
corporate personnel and administrative staff, as well as facility and other
administrative costs of our corporate office. General corporate expenses as a
percentage of net revenue increased from 3.5% to 3.9% for the three month period
ended June 30, 2001 and 2002, respectively. General corporate expenses as a
percentage of net revenue decreased from 4.2% for the six months ended June 30,
2001 to 3.9% for the six months ended June 30, 2002 due to the inclusion of
unusual expenses in the first quarter of 2001 of $292,000 related to costs
associated with management personnel changes and relocations. It is anticipated
that general corporate expenses will continue to decrease as a percentage of net
revenue.
Depreciation
Depreciation expense includes depreciation charges related to leasehold
improvements and furniture, fixtures and equipment used to operate the dental
facilities, local and regional management offices and our corporate office.
Depreciation expense decreased as a percentage of net revenue from 3.6% for the
three months ended June 30, 2001 to 3.2% for the three months ended June 30,
2002 and from 3.5% for the six months ended June 30, 2001 to 3.3% for the six
months ended June 30, 2002 primarily due to some of our assets becoming fully
depreciated.
We expect to continue to invest in the relocation and expansion of our
physical capacity, although at a lower amount than historical levels.
Accordingly, depending on the amount and timing of such future capital
expenditures, depreciation could increase.
Amortization of Goodwill and Intangible Assets
Total amortization expense decreased slightly for the three and six months
ended June 30, 2002 as a result of non-amortization of goodwill of approximately
$33,000 per quarter offset in part by the intangible assets recorded in
connection with the five affiliation transactions completed in 2001 and 2002.
Management continues to evaluate the appropriateness of the useful lives of its
intangible assets. Amortization of intangible assets could increase in the
future as a result of definite lived intangibles recorded in connection with
future acquisitions and affiliations, although over the next twelve months we
expect to complete fewer affiliations than we have historically.
Special Charges
Special charges represent a provision for costs associated with reductions
in physical capacity in Arizona and patient communications as a result of
contract terminations received by three of our affiliates from Cigna Dental and
Protective Life. These costs include facility closure and lease exit costs of
three dental offices in Phoenix and regional resource centers, employee
termination costs, patient communication and other expenses. For further
information on these special charges, see Note 4 to "Notes to Interim
Consolidated Financial Statements."
Interest Expense, Net
Net interest expense decreased from $1,141,000 to $770,000 for the three
months ended June 30, 2001 and 2002, respectively, and from $2,428,000 to
$1,586,000 for the six months ended June 30, 2001 and 2002, respectively, due to
a lower overall interest rate and lower debt balance. We believe interest
expense will decrease in 2002 compared to 2001 due to a lower average level of
indebtedness and lower interest rates.
Income Taxes
Our effective tax rate was approximately 40.0% and 38.5% for the six months
ended June 30, 2001 and 2002, respectively. We anticipate the annual effective
tax rate for 2002 to be approximately 38.5%, which is lower than the effective
rate recorded for the full years of 2000 and 2001. The effective tax rate
decreased due to fluctuations in taxable income in various state and the
elimination of certain permanent differences.
16
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Liquidity and Capital Resources
We have financed our operating and capital needs, including cash used for
acquisitions and affiliations, capital expenditures and working capital, from
sales of equity securities, borrowings under our revolving line of credit,
issuance of subordinated notes and cash generated from operations.
For the six months ended June 30, 2001 and 2002, cash provided by operating
activities amounted to $4,803,000 and $8,100,000, respectively. Net earnings and
therefore cash from operations in the first half of 2001 was impacted by the
special charges recorded as a result of contract terminations. Our receivable
due from affiliated dental groups decreased in the first half of 2002 due to
increased cash collections of patient receivables at our affiliated dental
groups. Cash from operations was impacted by an increase in receivables due from
affiliated dental groups of $909,000 in 2001 as compared to a decrease of
$789,000 in 2002.
For the six months ended June 30, 2001 and 2002, cash used in investing
activities amounted to $5,356,000 and $5,209,000, respectively. Cash used for
investing activities included cash used for acquisitions and affiliations and
for capital expenditures. Cash used for acquisitions and affiliations, net of
cash acquired, was $1,028,000 and $2,982,000 for the first half of 2001 and
2002, respectively. Cash used for capital expenditures was $3,856,000 and
$2,023,000 for the first half of 2001 and 2002, respectively. Capital
expenditures for the first half of 2001 included costs associated with the
relocation and expansion of seven dental facilities. Capital expenditures for
the first half of 2002 included costs associated with the relocation and
expansion of five dental facilities and one administrative office. Although we
expect to continue to make meaningful capital expenditures, we do not expect
capital expenditures in 2002 to continue at the same levels as 2000 and 2001.
For the six months ended June 30, 2001, cash provided by financing
activities amounted to $1,322,000. For the six months ended June 30, 2002, cash
used for financing activities amounted to $2,754,000. Cash provided by financing
activities in 2001 resulted from net borrowings under our revolving line of
credit of $2,300,000, proceeds from the issuance of Common Stock for the
employee stock purchase plan of $147,000, proceeds from the issuance of Common
Stock for stock options exercised of $64,000, offset by the repayment of
indebtedness of $559,000 and the repurchase of 112,500 shares of our Common
Stock for $630,000. Cash used for financing activities in 2002 resulted from
repayments of our revolving line of credit of $2,350,000 and the repayment of
certain indebtedness of $543,000, offset by the proceeds from the issuance of
Common Stock for the employee stock purchase plan of $115,000 and proceeds from
the issuance of common stock for stock options exercised of $24,000.
In July 2000, we amended our existing revolving line of credit, increasing
the total available amount from $50 million to $75 million. The credit facility
is being used for general corporate purposes including affiliations and capital
expenditures. Borrowings under this line of credit bear interest at either prime
or LIBOR plus a margin, at our option. The margin is based upon our debt
coverage ratio and ranges from 0.00% to 0.75% for prime loans and 1.75% to 2.75%
for LIBOR loans. In addition, we pay a commitment fee which ranges from 0.25% to
0.375% of the average daily balance of the unused line. Borrowings are limited
by an availability formula based on adjusted EBITDA. The credit facility is
secured by a first lien on substantially all of our assets, including a pledge
of the stock of our subsidiaries. We are also required to comply with certain
financial and other covenants. The line of credit matures in July 2004. The
outstanding balance under this line as of June 30, 2002 was $47,807,000. The
unused balance at June 30, 2002 was $27,193,000 and based on covenants of the
credit facility $6,540,000 was available for borrowing.
We have a Shelf Registration Statement on file with the Securities and
Exchange Commission (Registration No. 333-56941) covering a total of 750,000
shares of Common Stock and $25,000,000 aggregate principal amount of
subordinated promissory notes to be issued in connection with future dental
practice affiliations. As of June 30, 2002, 679,878 shares and $20,666,500 of
notes remain available for issuance under this Shelf Registration Statement.
17
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Our growth to date has resulted in large measure from our ability to
affiliate with additional dental practices. Although we have affiliated with
many dental practices since our initial affiliation in November 1996, there can
be no assurance that additional affiliation candidates can be identified or the
affiliations consummated or successfully integrated into our operations. We have
used a combination of cash, common stock and subordinated debt as consideration
for past acquisitions and affiliations and plan to continue to use these sources
in the future. In recent years, the consideration paid has consisted of a higher
percentage of cash and subordinated debt and a lower percentage of Common Stock.
In the event that our Common Stock does not maintain sufficient valuation or if
potential affiliation candidates are unwilling to accept our securities as
consideration, we will be required to use more cash resources to continue our
affiliation program. In addition, if sufficient financing is not available as
needed on terms acceptable to us, our acquisition and affiliation strategy will
be modified. While we continue to evaluate new acquisition and affiliation
opportunities, we intend to focus primarily on internal operations during the
remainder of 2002. As a result, while the number of new acquisitions and
affiliations over the next twelve months could be more than in 2001, they are
expected to be less than levels in 1999 and 2000.
Any excess cash will be used to reduce indebtedness or to repurchase Common
Stock through our previously announced repurchase program, pursuant to which
approximately $1.1 million remains available to repurchase additional shares.
We believe that cash generated from operations and amounts available under
our current revolving credit facility will be sufficient to fund our anticipated
cash needs for working capital, capital expenditures and affiliations for at
least the next twelve months. Furthermore, we believe the amount available to
borrow under our revolving credit facility covenant restrictions will increase
throughout 2002.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities and revenues and expenses. On an on-going basis management evaluates
its estimates, including those related to carrying value of receivables due from
affiliated dental groups, intangible assets, income taxes and any potential
future impairment. Management bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations.
.. Valuation of receivables due from affiliated dental groups. The Company's
carrying amount of receivables due from affiliated dental groups requires
management to assess the collectibility of our affiliates' service fees. We
review the cash flows and economic viability of the dentist-owned
Professional Corporations (PC's) when assessing the collectibility of our
receivables. We have not recorded any losses related to our historical
experience with receivables due from affiliated dental groups.
18
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
.. Goodwill and other intangibles. Our business acquisitions or affiliations
typically result in goodwill and other intangible assets, which affect the
amount of future period amortization expense and possible impairment
expense that we may incur. The determination of the value of such goodwill
and intangible assets requires management to make estimates and assumptions
that affect our consolidated financial statements.
Management performs an impairment test on goodwill and indefinite lived
intangibles on an annual basis. We determine imparment by comparing the
fair value to the carrying value of the reporting units. We allocate a
portion of Corporate's assets and liabilities to the reporting units when
determining their carrying value, primarily our revolving line of credit,
subordinated debt and deferred payments. We determine the fair value of
each reporting unit by using the forecasted contribution margin of the
reporting unit and multiply it by historical purchase multiples. If
impairment were determined, we would make the appropriate adjustment to
goodwill or the indefinite lived intangible assets to reduce the asset's
carrying value.
Management performs an impairment test on definite lived intangibles when
facts and circumstances exist which would suggest that the definite lived
intangibles may be impaired (loss of key personnel, change in legal
factors, competition, etc.). We review the cash flows and projected revenue
streams when performing the impairment test on definite lived intangible
assets. If impairment were determined (aggregate undiscounted net cash
flows were less than the carrying value of definite lived intangible
assets), we would make the appropriate adjustment to the definite lived
intangible assets to reduce the asset's carrying value to fair value.
We have not recorded any impairment charges or write-downs related to our
historical experience with goodwill and other intangible assets.
.. Income Taxes. Our income tax policy records the estimated future tax
effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as tax credit carryforwards. We follow very specific and
detailed guidelines regarding the recoverability of any tax assets recorded
on the balance sheet and provide any necessary allowances as required.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations." SFAS No. 141 requires that the purchase method of accounting be
used for business combinations initiated after June 30, 2001, and eliminates the
pooling-of-interests method. In addition, SFAS No. 141 establishes specific
criteria for the recognition of intangible assets separately from goodwill and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. The provisions of this statement apply to all business
combinations initiated after June 30, 2001, and apply to all business
combinations accounted for using the purchase method for which the date of the
acquisition is July 1, 2001, or later. The adoption of SFAS No. 141 did not
change the method of accounting we used in previous business combinations.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001. SFAS No. 142 supersedes APB Opinion No. 17 "Intangible Assets," and
requires, among other things, the discontinuance of amortization related to
goodwill and indefinite-lived intangible assets. These assets will then be
subject to an impairment test at least annually. Separable intangible assets
that are not deemed to have an indefinite life will continue to be amortized
over their useful lives. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles and
reclassification of certain intangibles out of previously reported goodwill.
19
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, American Dental Partners was
required to adopt SFAS No. 142 effective January 1, 2002. At June 30, 2002,
American Dental Partners had approximately $5.4 million of goodwill, including
approximately $2.7 million related to the Orthocare, Ltd. acquisition in October
1997 and $2.7 million related to the Voss Dental Lab and Genco's Tooth Factory
acquisitions in May and June of 2002, respectively. The Company has not yet
completed its purchase price allocation. The application of the non-amortization
provisions of SFAS No. 142 for goodwill resulted in the elimination of
amortization expense of approximately $66,000 in first half of 2002.
At December 31, 2001, American Dental Partners had intangible assets of
approximately $85.1 million related to affiliations from November 1996 through
2001. Management continues to evaluate the appropriateness of the useful lives
of its intangible assets.
Pursuant to SFAS No. 142, American Dental Partners will test its goodwill
and intangible assets with indefinite lives for impairment on an annual basis
and whenever events and changes in circumstances suggest that the carrying
amount may not be recoverable. If impairment were determined, we would make the
appropriate adjustment to goodwill or the indefinite lived intangible asset to
reduce the asset's carrying value. The Company has performed the first step of
the impairment test analysis as required by SFAS No. 142, and we do not
anticipate recording any impairment in 2002 for goodwill acquired before 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supersedes FASB SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The provisions of this Statement generally
are to be applied prospectively. The adoption of SFAS No. 144 did not have an
impact on our consolidated financial statements.
The Financial Accounting Standards Board (FASB) issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," effective for fiscal years beginning May 15,
2002 or later that rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements", and FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers". This Statement amends FASB
Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to the sale-lease back transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
Company does not believe the impact of adopting SFAS No. 145 will have a
material impact on its financial statements.
20
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Statement No. 146 is based on the
fundamental principle that a liability for a cost associated with an exit or
disposal activity should be recorded when it (1) is incurred, that is, when it
meets the definition of a liability in FASB Concepts Statement No. 6, Elements
of Financial Statements, and (2) can be measured at fair value. The principal
reason for issuing Statement No. 146 is the Board's belief that some liabilities
for costs associated with exit or disposal activities that entities record under
current accounting pronouncements, in particular EITF Issue 94-3, do not meet
the definition of a liability. Statement No. 146 nullifies EITF Issue 94-3;
thus, it will have a significant effect on practice because commitment to an
exit or disposal plan no longer will be a sufficient basis for recording a
liability for costs related to those activities. Statement No.146 is effective
for exit and disposal activities initiated after December 31, 2002. Early
application is encouraged; however, previously issued financial statements may
not be restated. An entity would continue to apply the provisions of EITF Issue
94-3 to an exit activity that it initiated under an exit plan that met the
criteria of EITF Issue 94-3 before the entity initially applied Statement
No.146. The Company does not believe that the adoption of this statement on
January 1, 2003 will have a material impact on its financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of business, we are exposed to interest rate risk.
With regard to our revolving credit facility, we are also exposed to variable
rate interest for the banks' applicable margins ranging from 1.00% to 2.75%
based upon our debt coverage ratio. As a result of amending our revolving credit
facility in July 2000, the banks' margin will initially increase by 1.00% from
prior levels. For fixed rate debt, interest rate changes affect the fair value
but do not impact earnings or cash flow. Conversely, for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact future earnings and cash flow. We do not believe a one percentage point
change in interest rates would have a material impact on the fair market value
of our fixed rate debt. The pre-tax earnings and cash flow impact for one year
based upon the amounts outstanding at June 30, 2002 under our variable rate
revolving credit facility for each one percentage point change in interest rates
would be approximately $478,000 per annum. We do not presently undertake any
specific actions to cover our exposure to interest rate risk, and we are not
party to any interest rate risk management transactions.
21
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to litigation incidental to our
business. We are not presently a party to any material litigation. The dentists
employed by, or who are independent contractors of, our affiliated PCs are from
time to time subject to malpractice claims. Such claims, if successful, could
result in damage awards exceeding applicable insurance coverage which could have
a material adverse effect on our business, financial condition and results of
operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of shareholders on May 3, 2002, at the offices
of Summit Partners at 600 Atlantic Avenue in Boston, Massachusetts. At the
meeting, the individuals listed below were elected to our Board of Directors for
a term expiring in 2005. The table below indicates the votes for and votes
withheld for such nominee:
Name Votes For Votes Withheld
---- --------- --------------
James T. Kelly 6,419,199 1,364
Martin J. Mannion 6,419,394 1,169
Gregory A. Serrao, Gregogry T. Swenson, D.D.S. and Derril W. Reeves also serve
on our Board of Directors for terms which continue after the annual meeting.
At our annual meeting of shareholders, the shareholders also approved by
the votes shown in the tables below, a proposal to increase the number of shares
of Common Stock reserved for issuance under our 1996 Stock Option Plan by
300,000 shares and a proposal to increase the number of shares of Common Stock
reserved for issuance under our 1996 Directors Stock Option Plan by 100,000
shares.
1996 Stock 1996 Directors
Option Plan Stock Option Plan
----------- -----------------
Voted for 5,449,566 5,432,903
Voted against 14,327 15,328
Abstain 1,403 17,065
Broker non-votes 955,267 955,267
22
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION - (Continued)
Item 5. Other Information
Effective December 31, 2001, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, which addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and other
intangibles with indefinite lives are no longer amortized. Instead, we will
perform an annual test for impairment of these assets. We conducted our
transitional goodwill impairment testing in the first quarter of 2002. No
impairment was indicated.
We believe that all audited financial statements incorporated by
reference into our open registration statements are fairly presented, in all
material respects, without transitional disclosure. Accordingly, we present in
this quarterly report, net earnings before goodwill amortization net of tax and
related per share amounts for the years ended December 31, 1999, 2000 and 2001
are as follows (in thousands, except per share amounts):
Year Ended
--------------------------------------------
December 31, December 31, December 31,
1999 2000 2001
--------------------------------------------
Net earnings as reported $ 6,013 $ 6,169 $ 3,271
Add back: Goodwill amortization expense, net tax effect 79 78 76
------- ------- -------
Adjusted net earnings $ 6,092 $ 6,247 $ 3,347
======= ======= =======
Basic earnings per share, as reported $ 0.80 $ 0.87 $ 0.46
Add back: Goodwill amortization expense, net tax effect 0.01 0.01 0.01
------- ------- -------
Pro forma basic earnings per share $ 0.81 $ 0.88 $ 0.47
======= ======= =======
Diluted earnings per share, as reported $ 0.78 $ 0.84 $ 0.45
Add back: Goodwill amortization expense, net tax effect 0.01 0.01 0.01
------- ------- -------
Pro forma diluted earnings per share $ 0.79 0.85 0.46
======= ======= =======
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(i) Amendment No. 6 to American Dental Partners, Inc. Amended
Restated 1996 Stock Option Plan
10(ii) Amendment No. 5 to American Dental Partners, Inc. Amended
Restated 1996 Director Stock Option Plan
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the
three-month period ended June 30, 2002.
23
AMERICAN DENTAL PARTNERS, INC.
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.
AMERICAN DENTAL PARTNERS, INC.
August 12, 2002 /s/ Gregory A. Serrao
--------------------------------------
Gregory A. Serrao
Chairman, President and Chief Executive
Officer
August 12, 2002 /s/ Breht T. Feigh
--------------------------------------
Breht T. Feigh
Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
24
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
10(i) Amendment No. 6 to American Dental Partners, Inc. Amended and
Restated 1996 Stock Option Plan.
10(ii) Amendment No. 5 to American Dental Partners, Inc. Amended and
Restated 1996 Directors Stock Option Plan.
25