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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2003

Commission File Number: 0-23363

AMERICAN DENTAL PARTNERS, INC.

(Exact name of registrant as specified in our charter)

American Dental Partners, Inc.

201 Edgewater Drive, Suite 285

Wakefield, Massachusetts 01880

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (781) 224-0880 / (781) 224-4216 (fax)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

(Title of Class)

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Act.)  ¨

The aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was approximately $38,413,623 on June 30, 2003, based on the closing price of such stock, as reported on the NASDAQ National Market System.

The number of shares of Common Stock, $0.01 par value, outstanding as of March 12, 2004 was 7,460,763.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive 2004 Proxy Statement for our 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.

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AMERICAN DENTAL PARTNERS, INC.

INDEX

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this Annual Report on Form 10-K 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).

PART I

ITEM 1. BUSINESS

Overview

American Dental Partners, Inc. (“ADPI”) is a leading provider of business services to multi-disciplinary dental groups in selected markets throughout the United States. We are committed to the growth and success of our affiliated dental groups, and we make substantial investments to support each affiliated dental group’s growth. We assist our affiliates with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems; marketing and payor relations; and financial planning, reporting and analysis. At December 31, 2003, we were affiliated with 19 dental groups, comprising 396 dentists practicing in 171 locations in 17 states.

Dental Care Industry

The market for dental care is large, growing and highly fragmented. Based on Centers for Medicare & Medicaid Services statistics, estimated expenditures for dental care grew 7% annually from 1990 to 2002 reaching $70 billion in 2002. Expenditures are expected to be approximately $108 billion by 2010. We believe that the growth in expenditures for dental care will continue to be driven by both increases in costs and increases in demand for services due to:

We believe that this growth will benefit not only dentists, but companies that provide services to the dental care industry, including dental management service organizations. However, the failure of any of these factors to materialize could offset increases in demand for dental care, and any such increases may not correlate with growth in our business.

Unlike many other sectors of the health care services industry, the dental care profession remains dominated by practices owned and operated by just one or two dentists. Although the provision of dental care remains

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highly fragmented, the trend towards group practice is growing. According to the American Dental Association (“ADA”), in 2000, approximately 14% of the 156,000 dentists in the United States were practicing in a group setting of three or more. We believe the trend towards the delivery of dental care in the group practice setting will continue as a result of high educational debt levels and a change in gender profile of graduating dentists.

Most dental care performed in the United States is categorized as general dentistry. According to the ADA, in 2000, general dentistry was estimated to represent approximately 81% of all dental services performed in the United States. General dentistry includes preventative care, diagnosis and treatment planning, as well as procedures such as fillings, crowns, bridges, dentures and extractions. Specialty dentistry, which includes orthodontics, periodontics, endodontics, prosthodontics and pediatric dentistry, represented the remaining 19% of dental care services.

Historically, dental care was not covered by insurers and consequently was paid for by patients on a fee-for-service basis. An increasing number of employers have responded to the desire of employees for enhanced benefits by providing coverage from third party payors for dental care. These third party payors offer indemnity insurance, PPO plans, capitated managed care plans and dental referral plans. Under an indemnity insurance plan, the dental provider charges a fee for each service provided to the insured patient, which is typically the same as that charged to a patient not covered by any type of dental insurance. We categorize indemnity insurance plans as fee-for-service plans. Under a PPO plan, the dentist charges a discounted fee for each service provided based on a schedule negotiated with the dental benefit provider. Under a capitated managed care plan, the dentist receives a fixed monthly fee from the managed care organization for each member covered under the plan who selects that dentist as his or her provider. Capitated managed care plans also typically require a co-payment by the patient. Dental referral plans are not insurance products but are network-based products that provide access to dental care. Typically, a small monthly fee is paid by an individual or employer for a list of dentists who have agreed to accept certain negotiated fees or a discount from their normal fees. Under network referral plans, full reimbursement for dental care provided is made directly by a patient to the participating dentist, as compared to indemnity, PPO and capitation plans in which some level of reimbursement is provided by the payor to the participating dentist.

The National Association of Dental Plans (“NADP”) estimated that 155 million people, or 54% of the population of the United States, were covered by some form of dental care plan in 2002. This compares with 140 million people, or 52% of the population, in 1997. Of the 155 million people with coverage, 42% were covered by PPO plans, 35% by indemnity insurance plans, 8% by dental referral plans, and 15% by capitated managed care plans. The remaining 46% of the population in 2002 did not have dental benefit coverage. We believe that the number of people with dental benefits will continue to increase and that the majority of this growth will be in PPO plans. For instance, according to the NADP, the number of people covered by PPO plans increased from 29 million in 1997 to 65 million in 2002, representing a 17% compound annual growth rate.

Business Objective and Strategy

Our objective is to be the leading business partner to dental group practices in selected markets throughout the United States. In order to achieve our objective, our strategy is to provide value-added resources and support to each of our affiliated dental groups in order that they may become the market leading, high quality dental group of each of their respective communities. We believe the core attributes of such a leading dental group include the following: (i) common identity and clinical philosophy, (ii) professional recruiting and mentoring programs, (iii) formalized peer review and quality assurance initiatives, (iv) functional and well-maintained dental facilities, (v) advanced information systems, and (vi) qualified local management team with well-defined responsibilities and accountability.

In executing our strategy, we assist our affiliated dental groups with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems; marketing and payor

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relations; and financial planning, reporting and analysis. In order to execute our strategy successfully, we are continually enhancing or expanding our capabilities and resources, including vertical integration of ancillary dental activities. As an example, we expanded our procurement capabilities in 2002 with the acquisition and integration of two dental labs.

Successful execution of our strategy will result in growth from the following areas: (i) assisting our current affiliated dental groups to increase their market presence, (ii) completing additional affiliations with dental groups in attractive new markets and (iii) adding additional capabilities or resources to our service offering through the acquisition of related businesses. Our objective is to help our affiliated dental group practices grow their patient revenue 8 to 10% per annum, and supplement our growth through completion of additional affiliations in new markets. We are constantly evaluating potential affiliations with dental groups and acquisition of companies that would expand our business capabilities. Although we have completed many affiliations and acquisitions since November 1996, there can be no assurance that additional affiliation or acquisitions candidates can be identified or that they can be consummated or successfully integrated into our operations. The number of new affiliations and acquisitions over the next twelve months could be at levels greater or less than we have achieved during each of the past two years.

Affiliation Philosophy

We believe that dental care is an important part of an individual’s overall health care. Because the practitioner is best qualified to manage the clinical aspects of dentistry, the provision of dental care must be centered around the dentist. However, current market trends in health care are increasing the complexity of operating a dental group. In addition, the principals of many dental groups are reaching retirement age and are beginning to investigate means for transitioning the non-clinical leadership and management of their dental groups. Consequently, many dental groups are engaging professional consultants to assist with these complexities and challenges, and in certain instances are choosing to affiliate with business partners, or dental management service organizations, that can manage the non-clinical aspects of dentistry and provide the necessary organizational and operating structure for continued growth and success.

We believe that, similar to other sectors of the health care delivery system, the delivery of dental care is fundamentally a local business. Therefore, we operate our business in a decentralized manner, and each affiliated dental group maintains its local identity and operating philosophy. In each affiliation, we strive to maintain the local culture of the affiliated group, and we encourage it to continue using its name, continue its presence in community events, maintain its relationship with patients and local dental benefit providers and maintain and strengthen the existing management organization.

Our affiliation model is designed to create a partnership in management between the affiliated dental group practice and us that allows each party to maximize its strengths and retain its autonomy. Under our affiliation model, the affiliated dentists continue to own their practice and have sole purview over the clinical aspects of the practice while we manage the business aspects of the dental group. This affiliation model is consistent across dental groups and, even where permitted by law, we do not employ practicing dentists.

We believe the core values of a business partnership are shared governance and shared financial objectives and have structured our affiliation model to achieve these goals. Shared governance is achieved by the formation of a joint policy board for each affiliated dental group which is comprised of an equal number of representatives from the affiliated dental group practice and us. Together, members of the joint policy board develop strategies and decide on major business initiatives. Shared financial objectives are achieved through the joint implementation of an annual planning process that establishes the financial performance standards for the affiliated dental group practice and us.

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Affiliated Dental Groups

From November 1996 (the date of our first affiliation) through December 31, 2003, we completed 54 affiliation transactions, which now comprise 19 dental groups in 17 states. The following table lists our affiliated dental groups as of December 31, 2003.

Operations

Operating Structure

We operate under a decentralized organizational structure. Within a dental practice location, where permitted by applicable state law, we generally employ the hygienists, dental assistants and administrative staff. At each dental practice, a practice manager typically oversees the day-to-day business operations. The practice manager and administrative staff are responsible for, among other things, facility staffing, patient scheduling, on-site patient billing and ordering office and dental supplies.

We have regional management teams that supervise the non-clinical operations of one or more affiliated dental groups. These teams provide support in areas such as developing and implementing operating policies and procedures; recruiting, hiring and training staff; administering employee benefits and processing payroll; maintaining information systems; producing accounting and financial reporting information; developing and maintaining facilities; and marketing. As our smaller affiliated dental groups grow in size, they may add local resources and assume some or all of the support functions provided by regional management teams.

Each regional management team reports to one of our operating vice presidents. An operating vice president is responsible for monitoring the operating performance of multiple affiliated dental groups in multiple markets. Each operating vice president participates as a member of the joint policy board of each of the affiliated dental groups for which he or she has management oversight responsibilities. The operating vice presidents are responsible for overseeing the development of annual operating plans and monitoring actual results.

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On a national level, we support our affiliated dental groups in several ways. We assist with:

We also take advantage of economies of scale by contracting for various goods and services. For example, we have arranged for national contracts for the purchase of dental supplies and equipment, long distance telephone services, professional, casualty and general liability insurance, employee benefits such as a 401(k) plan, flexible spending program, life insurance and disability insurance and payroll processing.

National Professional Advisory Forum

We have organized the National Professional Advisory Forum (“NPAF”) to facilitate sharing of information by our affiliated dental group practices with respect to the clinical aspects of dentistry. Leading dentists from our affiliated dental group practices are selected to participate in the NPAF. The NPAF meets on a national basis and a regional basis each year and provides a forum for dentists to share the best clinical practices of their respective dental group practices and an opportunity for them to build professional relationships with other dental group practices affiliated with us. These dentists, as a result of their affiliation with us, share common long-term goals. This enables the discussion at the NPAF to be more open than it may be with other professional organizations. While the primary emphasis of the NPAF is on the clinical aspects of dentistry, it also provides our management an opportunity to continue to build strong, mutually beneficial partner relationships with our affiliated dental group practices.

Accreditation Association for Ambulatory Health Care

We have selected the Accreditation Association for Ambulatory Health Care (“AAAHC”) as means for advancing the quality initiatives of our affiliated dental groups. The AAAHC is a peer-based, not-for-profit organization that is nationally recognized for conducting extensive evaluations of ambulatory health care organizations. The AAAHC evaluates a number of areas in granting accreditation, such as patients’ rights, governance, administration, clinical records, professional development, quality management and improvement and facilities. We work with our affiliated dental groups to achieve accreditation. Depending on the level of development and organization of the affiliate, achieving accreditation can take several years of preparation. Currently, six of our affiliated dental groups have achieved accreditation status from the AAAHC.

Training and Development

We believe that quality of care encompasses more than technical dental quality. It also includes the level of service provided to patients. Improving the level of service provided to patients requires on-going training and development of both clinical and administrative staff. We have devoted significant resources to develop an innovative, proprietary training and development programs arranged around three broad areas, leadership excellence, service excellence and technical excellence. The programs are modular. Modules exist, for example, for improving recruiting skills, developing effective mentoring processes, managing time, improving telephone etiquette and managing unhappy patients. We make these programs available at the local practice level of the affiliated dental groups and at our National Professional Advisory Forum. At a local level, we assist our affiliated dental groups in selecting a local person who is responsible for implementing and maintaining continuous training and development programs. Once implemented, our affiliated dental groups have on-going sessions with additional modules as they are developed and with new staff members as they join the dental group.

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Payor Relationships and Reimbursement Mix

We believe that our affiliated dental group practices’ clinical philosophy should not be compromised by economic decisions. We recognize, however, that the source of payment for services affects operating and financial performance. We assist our affiliated dental group practices in analyzing their revenue and payor mix on an ongoing basis and recommend methods by which they can improve operating efficiency while not compromising their clinical practice philosophy. As a general rule, we believe that growth in a market is best facilitated where the payor mix of each of our affiliated dental group practices mirrors the payor mix for its community. We assist each of our affiliated dental group practices in evaluating and negotiating dental benefit provider contracts.

We believe it is advantageous to be affiliated with dental group practices that have successfully provided care to patients under all reimbursement methodologies. Since a shift is taking place in the dental benefits market from capitated managed care dental plans to PPO plans, dental referral networks, and, to a lesser extent, traditional fee-for-service plans, we believe that our affiliates’ experience in operating under all of these plans provides them with an advantage as it relates to increasing their market presence. Most of our affiliated dental group practices provide care under traditional fee-for-service plans and non-fee-for-service plans. The following table provides the aggregate payor mix of our affiliated dental group practices for the years ended December 31:

Many of our affiliated dental group practices are challenged with both strong patient demand and tight labor markets. This combination can create a challenging practice environment which negatively impacts staff retention. Given these dynamics, in selected markets, our affiliated dental group practices have been realigning their reimbursement mix away from deeply discounted dental benefit plans. This has largely been accomplished with the cooperation of the dental benefit provider community in general. There can be no assurance, however, that the shift in reimbursement mix will not result in the termination of certain third party payor contracts.

Facilities Development and Management

We believe an inviting professional environment is a critical aspect of overall patient satisfaction. Each of our dental facilities is constructed to be warm, attractive and inviting to the patients in addition to being highly functional. Our dental facilities typically have eight to ten operatories and accommodate general and specialty dentists, hygienists and dental assistants, a practice manager and a receptionist. Generally, our facilities are either stand alone or located within a professional office building or medical facility.

We work with each of our affiliated dental groups in analyzing utilization of existing capacity and identifying facility upgrade and expansion priorities. We also provide our affiliates guidance in the site selection process. We initially construct each facility as appropriate for the market and add or equip additional operatories as necessary based on capacity and utilization analyses.

We use architectural design services to improve the facility design process and to ensure that all facilities are properly constructed and meet the standards set forth by the AAAHC, Occupational Safety and Health Administration (“OSHA”) and Americans with Disabilities Act (“ADA”). To this end, we work with each affiliated dental group to establish a defined set of standards which are consistent with the desires of the affiliated dental group. We believe such facility standards are necessary to speed the site development process and create consistency across newly developed facilities, leading to enhanced staff and dentist productivity.

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Financial Planning and Financial Information System

We assist each affiliated dental group with financial planning. In conjunction with each affiliated dental group practice, we develop on an annual basis an operating plan for the affiliated dental group which sets specific goals for revenue growth, operating expenses and capital expenditures. Once a plan has been approved, we measure the financial performance of each affiliated dental group, which includes both the affiliated dental group practice and us, on a monthly basis and compare actual performance to plan.

Our financial information system enables us to measure, monitor and compare the financial performance of each affiliated dental group on a standardized basis. The system also allows us to track and control costs and facilitates the accounting and financial reporting process. This financial system is used with all of our affiliated dental groups.

Practice Management Systems

We use various dental practice management software systems to facilitate patient scheduling, to bill patients and insurance companies, to assist with facility staffing and for other practice related activities. In connection with our affiliation with Park Dental, we acquired the rights to Comdent, a practice management system designed for use by multi-specialty dental groups. Comdent has been used continuously at Park Dental since 1987 and continuously enhanced by Park Dental and us since 1987. We believe that Comdent’s scheduling, electronic data interchange and data management features are superior to others that are commercially available. In addition, Comdent is scalable and capable of accommodating large, multi-site dental groups. We have converted nine of our multi-speciality dental groups to Comdent. Four of our multi-specialty dental groups use Quality Systems, Inc.’s commercially available practice management system, and the remaining four of our multi-specialty dental groups use various other commercially available practice management systems. Orthodontic Care Specialists, our affiliated dental group which exclusively provides orthodontic services, utilizes a proprietary practice management system designed specifically for the unique requirements of the orthodontics specialty.

We are currently in the process of developing Improvis, a replacement system to Comdent. Improvis will include expanded clinical, managerial, and financial capabilities. We intend to begin implementation of Improvis in late 2004, but there can be no assurance that Improvis will be successfully developed by the targeted date or that it will function satisfactorily in the practice environment.

Affiliation Structure

We have entered into a service agreement with each affiliated dental group practice, or professional corporation (“PC”), pursuant to which we perform all administrative, non-clinical aspects of the dental group. We expect that each new affiliated PC will enter into a similar service agreement or become a party to an existing service agreement at the time of affiliation with us. We are dependent on our service agreements for the vast majority of our operating revenue. The termination of one or more of these service agreements could have a material adverse effect on us.

Pursuant to the service agreement, the affiliated PC is responsible for all clinical aspects of the dental operations of the affiliated dental group. These clinical aspects include recruiting and hiring dentists, other licensed dental personnel and unlicensed dental assistants necessary to provide dental care, providing dental care, implementing and maintaining quality assurance and peer review programs, setting patient fee schedules, entering into dental benefit plan provider contracts and maintaining professional and comprehensive general liability insurance covering the PC and each of its dentists. We do not assume any authority, responsibility, supervision or control over the provision of dental care to patients. The service agreement also requires the affiliated PC to abide by non-competition and confidentiality provisions. The non-competition provisions of the service agreement prohibit the affiliated PC from owning or operating a dental facility, or having any interest in any business which competes with us, within the contractually agreed upon service territory. The affiliated PC is not restricted from owning and operating a dental practice outside of the agreed upon service territory, including providing for the administrative aspects of that practice.

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The service agreement requires the affiliated PC to enter into an employment or independent contractor agreement with each dentist retained by the affiliated PC. The employment agreements with full-time dentists who are owners of the affiliated PCs at the time of affiliation with us generally are for a specified initial term of up to five years and may not be terminated by the dentists without cause during the initial term. The employment agreements with other dentists may be for terms up to 18 months and are usually terminable by either the affiliated PC or the dentist upon advance written notice, which in most cases is 90 days, and are terminable by the PC for cause immediately upon written notice to the dentist. These agreements typically contain non-competition provisions which prohibit a dentist from engaging in the practice of dentistry or otherwise performing professional dental services within a specified geographic area, usually a specified number of miles from the relevant dental facility, following termination. The non-competition restrictions are generally for one to two years following termination.

Pursuant to the service agreement, we are responsible for providing all services necessary for the administration of the non-clinical aspects of the dental operations of the affiliated dental group. These services include assisting with organizational planning and development; providing recruiting, retention and training programs; supporting quality assurance initiatives of the affiliated dental group; providing on-going facilities development, maintenance and management; administering employee benefits and payroll; procuring supplies and other necessary resources; maintaining necessary information systems; assisting with marketing and payor relations; and providing financial planning, reporting and analysis.

As mandated by the service agreement, we and each affiliated PC establish a joint policy board which is responsible for developing and implementing management and administrative policies for the affiliated dental group. The joint policy board consists of an equal number of representatives designated by us and the affiliated PC. The joint policy board members designated by the affiliated PC must be licensed dentists employed by the affiliated PC. The joint policy board’s responsibilities include the review and approval of the long-term strategic and short-term operational goals, objectives, and plans for the dental facilities, all annual capital and operating plans, all renovation and expansion plans and capital equipment expenditures with respect to the dental facilities, all advertising and marketing services, and staffing plans regarding provider and support personnel for the affiliated dental group. The joint policy board also reviews and monitors the financial performance of the affiliated dental group and the affiliated PC with respect to the attainment of the affiliated dental group’s and the affiliated PC’s financial goals. The joint policy board also has the authority to approve or disapprove any merger or combination with, or acquisition of, any dental practice by the affiliated PC. Finally, the joint policy board reviews and makes recommendations with respect to contractual relationships between the affiliated PC and dental benefit providers and the affiliated PC’s patient fee schedules, although these and all other clinical decisions, as enumerated above, remain the exclusive decision of the affiliated PC through its joint policy board members.

The PC reimburses us for actual expenses incurred on its behalf in connection with the operation and administration of the dental facilities and pays fees to us for business services and capital provided. Under certain service agreements, our 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 our service fees consist of a fixed monthly fee and an additional variable fee. Under certain service agreements, our service fee consists entirely of a fixed monthly fee. The fixed monthly fees are determined by agreement between us and the affiliated PC in a formal financial planning process. The structure of the service fee, whether comprised of variable, fixed and variable or fixed components, is dictated by laws of each state in which we operate. The PC is also responsible for provider expenses, which generally consist of the salaries, benefits, and certain other expenses of the dentists. Pursuant to the terms of the service agreements, we bill patients and third party payors on behalf of the affiliated PCs. Such funds are applied in the following order of priority:

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Each of our current service agreements is for an initial term of 40 years and automatically renews for successive five-year terms, unless terminated by notice given at least 120 days prior to the end of the initial term or any renewal term. In addition, the service agreement may be terminated earlier by either party upon the occurrence of certain events involving the other party, such as our dissolution, bankruptcy, liquidation, or our failure, which continues through the applicable notice and cure period, to perform our material duties and obligations under the service agreement. In the event a service agreement is terminated, the related affiliated PC is required to reimburse us for unpaid expenses incurred in connection with the operation and administration of the dental facilities, repay advances and pay us for unpaid service fees. In addition, the related affiliated PC is required, at our option in nearly all instances, to purchase the unamortized balance of intangible assets at the current book value, purchase other assets at the greater of fair market value or book value, and assume our leases and other liabilities related to the performance of our obligations under the service agreement.

Competition

The dental services industry is highly competitive. Our affiliated dental groups compete with other dental groups and individual dentists in their respective markets. We estimate that we compete with approximately twelve companies in our current service areas that provide business services to dentists and dental groups through service agreement arrangements. We believe that the principal factors of competition between companies that provide business services to dental groups are their affiliation methods and models, the number and reputation of their existing affiliates, their management expertise and experience, the sophistication of their management information, accounting, finance and other systems, their operating methods and access to capital. We believe that we compete effectively with other companies that provide business services to dental groups with respect to these factors.

Government Regulation

General

The practice of dentistry is highly regulated, and our operations and those of our affiliated dental group practices are subject to numerous state and federal laws and regulations. Furthermore, we may become subject to additional laws and regulations as we expand into new markets. There can be no assurance that the regulatory environment in which we and our affiliated dental group practices operate will not change significantly in the future. Our ability to operate profitably will depend, in part, upon us and our affiliated dental group practices obtaining and maintaining all necessary licenses, certifications and other approvals and operating in compliance with applicable laws. In light of this, our service agreements provide that if there is any change in any law of regulation, or any ruling or interpretation by any court or governing body, that materially and adversely affects the way in which either party is to perform or be compensated under the service agreement, or which makes the service agreement unlawful, then the parties are obligated to use their best efforts to revise their relationship in a way that complies with the applicable regulatory development and approximates as closely as possible the economic positions of the parties prior to that development.

State Regulation

Each state imposes licensing and other requirements on dentists. Except for Wisconsin, the laws of the states in which we currently operate prohibit, either by specific statutes, case law or as a matter of general public policy, entities not wholly owned or controlled by dentists, such as American Dental Partners, from practicing dentistry, employing dentists and, in certain circumstances, dental assistants and dental hygienists, exercising control over the provision of dental services, splitting fees or receiving fees for patient referrals. Many states prohibit or restrict the ability of a person other than a licensed dentist to own, manage or control the assets, equipment or offices used in a dental practice. The laws of some states prohibit the advertising of dental services

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under a trade or corporate name and require all advertisements to be in the name of the dentist. A number of states also regulate the content of advertisements of dental services and the use of promotional gift items. These laws and their interpretation vary from state to state and are enforced by regulatory authorities with broad discretion.

There are certain regulatory issues associated with our role in negotiating and administering managed care contracts. To the extent that we or any affiliated dental group practice contracts with third party payors, including self-insured plans, under a capitated or other arrangement which causes us or such affiliated dental group practice to assume a portion of the financial risk of providing dental care, we or such affiliated dental group practice may become subject to state insurance laws. If we or any affiliated dental group practice is determined to be engaged in the business of insurance, we may be required to change the method of payment from third party payors or to seek appropriate licensure. Any regulation of us or our affiliated dental group practices under insurance laws could have a material adverse effect on our business, financial condition and results of operations. Through our role in negotiating and administering managed care and other provider contracts, we are also subject to regulation in certain states as an administrator and must ensure that our activities comply with relevant regulation.

Many states’ laws and regulations relating to the practice of dentistry were adopted prior to the emergence of providers of business services to dental groups like us. As a result, a number of states, including states in which we currently operate, are in the process of reviewing and/or amending their laws or regulations relating to the practice of dentistry and dentists’ business arrangements with unlicensed persons like us. There can be no assurance that any amendments or new laws or regulations, or the interpretation or application of existing or new laws or regulations, will not have a material adverse effect on our business, financial condition and results of operations.

Federal Regulation

The dental industry is also regulated at the federal level to the extent that dental services are reimbursed under federal programs. Participation by the affiliated dental group practices and their dentists in such programs subjects them, and potentially us, to significant regulation regarding the provision of services to beneficiaries, submission of claims and related matters, including the types of regulations discussed below. Violation of these laws or regulations can result in civil and criminal penalties, including possible exclusion of individuals and entities from participation in federal payment programs.

The federal anti-kickback statutes prohibit, in part, and subject to certain safe harbors, the payment or receipt of remuneration in return for, or in order to induce, referrals, or arranging for referrals, for items or services which are reimbursable under federal payment programs. Other federal laws impose significant penalties for false or improper billings or inappropriate coding for dental services regardless of the payor source. The federal self-referral law, or “Stark law,” prohibits dentists from making referrals for certain designated health services reimbursable under federal payment programs to entities with which they have financial relationships unless a specific exception applies. The Stark law also prohibits the entity receiving such referrals from submitting a claim for services provided pursuant to such referral. We may be subject to federal payor rules prohibiting the assignment of the right to receive payment for services rendered unless certain conditions are met. These rules prohibit a billing agent from receiving a fee based on a percentage of collections and may require payments for the services of the dentists to be made directly to the dentist providing the services or to a lock-box account held in the name of the dentist or his or her dental group. In addition, these rules provide that accounts receivables from federal payors are not saleable or assignable.

Finally, dental practices are also subject to compliance with federal regulatory standards in the areas of safety, health and access.

Insurance

We maintain insurance coverage that we believe is appropriate for our business, including property-casualty, business interruption for certain practice locations and general liability, among others. In addition, our affiliated dental group practices are required to maintain, or cause to be maintained, professional liability

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insurance with us as a named insured. While we believe that our current insurance coverage is adequate for our current operations, it may not be sufficient for all future claims. In addition, the costs, retention levels and availability of certain insurance have fluctuated significantly in recent years, and there can be no assurance that our current insurance coverages will continue to be available in adequate amounts or at a reasonable cost in the future or that reserve estimates for potential losses below applicable retention levels under certain insurance coverages will be sufficient.

Employees

As of December 31, 2003, we employed 1,611 people. This included 695 hygienists and dental assistants and 916 administrative and management personnel located at our dental facilities, local management offices and our corporate office. In addition, we are affiliated with 396 dentists, as well as 312 hygienists and dental assistants located in states which prohibit our employment of dental assistants and/or hygienists, all of whom were employees or independent contractors of their respective affiliated PCs. We consider our relations with our employees to be good.

Available Information

We make available, free of charge, through our website (www.amdpi.com), our Annual Report or Form 10-K, Quarterly Reports or Form 10-Q, current reports or Form 8-K, all amendments to these reports, and other filings with the United States Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC. The public can also obtain access to our reports at the SEC’s Public Reference Room at 450 fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s web site at www.sec.gov.

Executive Officers of the Registrant

The following table sets forth information concerning each of our executive officers:

Mr. Serrao founded American Dental Partners, Inc. and has served as our President, Chief Executive Officer and a Director since December 1995 and as Chairman since October 1997. From 1992 through December 1995, Mr. Serrao served as the President of National Specialty Services, Inc., a subsidiary of Cardinal Health, Inc. (“Cardinal Health”). From 1991 to 1992, Mr. Serrao served as Vice President - Corporate Development of Cardinal Health. Before joining Cardinal Health, Mr. Serrao was an investment banker at Dean Witter Reynolds Inc. where he co-founded its health care investment banking group and specialized in mergers, acquisitions and public equity offerings.

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Mr. Feigh has served as our Executive Vice President – Chief Financial Officer and Treasurer since November 2003. Mr. Feigh was Vice President – Chief Financial Officer and Treasurer from January 2001 to October 2003, Vice President – Strategic Initiatives from January 2000 to December 2000 and was Director – Corporate Development from October 1997 to December 1999. Prior to joining us, Mr. Feigh was employed in the health care mergers and acquisition group of Robertson, Stephens & Company from 1996 to 1997. From 1994 to 1996, he was employed in the Latin American investment banking group of ING Barings, and from 1989 to 1993, he was employed in the health care investment banking group of Dean Witter Reynolds Inc.

Mr. Vaughan has served as our Executive Vice President – Chief Operating Officer since November 2003 Mr. Vaughan was Senior Vice President – Chief Operating Officer from October 2001 to October 2003, Senior Vice President – Regional Operations from January 2001 to September 2001 and Vice President – Operations from January 2000 to December 2000. From 1996 to December 1999, Mr. Vaughan served as Regional Vice President for Cardinal Distribution, a subsidiary of Cardinal Health. From 1988 to 1995, Mr. Vaughan held the positions of Vice President and General Manager of Cardinal Distribution’s Knoxville, Tennessee and Zanesville, Ohio facilities and also Vice President of Strategic Initiatives. Prior to joining Cardinal Health, Mr. Vaughan worked for McKesson HBOC in various sales management positions.

Dr. D’Allaird has served as our Senior Vice President – Regional Operations since August 2002. In January 2000, Dr D’Allaird founded 1^st Advantage Dental Management, LLC and served as its President and CEO until its acquisition by us in August 2002. From 1986 to December 1999, Dr. D’Allaird served as Dental Director for Community Health Plan and its successor Kaiser Permanente in New York, Massachusetts and Vermont. Dr. D’Allaird began his career in dentistry with eight years in private practice near Albany, New York.

Mr. Gill has served as our Senior Vice President – Regional Operations since January 2001. From October 1993 to December 2000, Mr. Gill served as Administrator for Riverside Dental Group, one of our affiliated dental groups. From September 1991 to September 1993, Mr. Gill served as Community Development Director for the City of Moreno Valley, California. Before working for the City of Moreno Valley, Mr. Gill served as a career Air Force officer and pilot. His last assignment was as Commander of March Air Force Base in Riverside, California.

Mr. Brock has served as our Vice President – Finance since October 2001. Mr. Brock was Vice President – Financial Planning from January 2001 to September 2001, Director – Financial Planning from February 1998 to December 2000 and Assistant Controller from September 1996 to January 1998. Prior to joining us, Mr. Brock worked for American Medical Response, Inc., (“AMR”) a national provider of ambulance services, as a corporate financial analyst from 1995 to 1996 and as an accounting manager and financial analyst from 1991 to 1995 with AMR of Connecticut, Inc., one of AMR’s four founding subsidiaries.

Mr. Duncan has served as our Vice President – Information Services since July 2002. From March 1998 to June 2002, Mr. Duncan served as Vice President of Information Technology Services for National City Bank of Minneapolis N.A. From October 1995 to February 1998, Mr. Duncan served as Manager of Distributed Computing Services for Alltel Information Services. From 1992 to 1995, Mr. Duncan served as Manager of Technical Support for American Bank, N.A. From 1985 to 1992, Mr. Duncan served as Assistant Vice President of Support Services for First Banks Systems N.A., now US BancCorp.

Dr. Ruff has served as our Vice President – Chief Professional Officer since January 1999 and has chaired our National Professional Advisory Forum since January 1997. From 1992 to December 1998, Dr. Ruff served as President of Wisconsin Dental Group, S.C., one of our affiliated dental groups, where he was employed as a practicing dentist and held a variety of positions since 1985. In 1994, Dr. Ruff served on the Board of Directors of the National Association of Prepaid Dental Plans. From 1983 to 1991, Dr. Ruff was an Assistant Professor at the Marquette University School of Dentistry and an adjunct faculty member from 1991 to 1996, where he held a variety of clinical faculty and grant-related positions.

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Mr. Swenson has served as our Vice President – Market Development for the Company since January 2000. Mr. Swenson was Director – Market Development from January 1998 to December 1999 and Director – Facility Development from January 1997 to December 1997. From 1994 to 1996, Mr. Swenson was Manager – Facilities Development of Park Dental, one of our affiliated dental groups. Mr. Swenson is the son of one of the members of our Board of Directors.

Mr. Sullivan has served as our Vice President – Human Resources since August 2003. From August 2000 to March 2003, Mr. Sullivan was Vice President of Human Resources of Creo Americas, Inc. From May 1998 to August 2000, Mr. Sullivan was Area Director, Human Resources for The Martin-Brower Company and from 1994 to April 1998 Mr. Sullivan was Director, Human Resources of Cardinal Health.

Mr. Vargo has served as our Vice President – Chief Accounting Officer since May 2003. From May 2000 to August 2002, Mr. Vargo was Vice President of Finance and Administration for International Garden Products, Inc. (“IGP”), during which he served as Chief Financial Officer of IGP’s Langeveld business unit from October 2001 to August 2002. From January 1999 to February 2000, Mr. Vargo was Global Controller of EMC, Inc. From 1990 to January 1999, Mr. Vargo served in several senior management positions at Anixter International Inc. including Vice President of Finance of the Structured Cabling Division and North American Controller. Mr. Vargo is a certified public accountant and began his professional accounting career with a predecessor to KPMG LLP.

ITEM 2. PROPERTIES

We lease most of our facilities. Typically, each acquired dental facility is located at the site used by the dental group prior to affiliating with us. As of December 31, 2003 we leased 169 dental facilities, two dental lab facilities, 12 local management offices and our corporate office. We also owned two dental facilities and one dental lab facility. Our corporate office is located at 201 Edgewater Drive, Suite 285, Wakefield, Massachusetts 01880, in approximately 8,300 square feet occupied under a lease which expires in March 2007. We consider our properties in good condition, well maintained and generally suitable and adequate to carry on our business activities.

In 2003, our dental facilities operated at levels of utilization which varied from affiliate to affiliate, but overall were satisfactory. The majority of our dental facilities have excess capacity to allow for future growth.

ITEM 3. 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. Our affiliated dental group practices and the dentists and independent contractors employed or retained by them are from time to time subject to professional liability or other 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Market Information, Holders and Dividends

Our Common Stock is traded on the NASDAQ National Market system under the symbol “ADPI”. The following table sets forth the range of the reported high and low sales prices of our Common Stock for the years ended December 31, 2002 and 2003:

As of March 12, 2004, there were approximately 30 holders of record of Common Stock, as shown on the records of the transfer agent and registrar of Common Stock. The number of record holders does not bear any relationship to the number of beneficial owners of the Common Stock.

We have the ability to pay cash dividends on our Common Stock but have not to date. The terms of our revolving credit facility allow us to pay dividends and repurchase shares of our Common Stock in conjunction with our authorized stock repurchase program without the lenders’ consent up to certain maximums and compliance with certain covenants. Our Board of Directors intends for the foreseeable future to retain earnings to finance the continued operations and the expansion of our business.

Summary of Equity Plans

See Item 12 of Part III for a summary of equity plans as of December 31, 2003.

Recent Sales of Unregistered Securities

None.

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ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share amounts and statistical data)

The following selected consolidated financial and operating data set forth below with respect to the Company’s consolidated statements of income for fiscal years 2003, 2002 and 2001 and consolidated balance sheets as of December 31, 2003 and 2002 are derived from the Company’s Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Data with respect to the consolidated statements of income for fiscal years 2000 and 1999 and consolidated balance sheets as of December 31, 2001, 2000 and 1999 are derived from the Company’s Consolidated Financial Statements. The data set forth below should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

American Dental Partners, Inc. (“ADPI”) is a leading provider of business services to multi-disciplinary dental groups in selected markets throughout the United States. We are committed to the growth and success of our affiliated dental groups, and we make substantial investments to support each affiliated dental group’s growth. We assist our affiliates with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems; marketing and payor relations; and financial planning, reporting and analysis. At December 31, 2003, we were affiliated with 19 dental groups, comprising 396 dentists practicing in 171 locations in 17 states.

Affiliation and Acquisition Summary

When affiliating with a dental group, we acquire selected assets and enter into a long-term service agreement with the affiliated dental group practice 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.

During 2003, 2002 and 2001, we completed seven, four and three transactions in which we acquired non-clinical dental assets, respectively, and simultaneously entered into 40-year service agreements in two of these transactions (the assets of twelve of the transactions were combined with existing affiliated dental group practices). In total, these fourteen affiliations resulted in the addition of 25 dental facilities and 175 operatories. In addition during 2002, we acquired the outstanding stock of a dental laboratory and selected assets of a second laboratory. See Note 5 of “Notes to Consolidated Financial Statements” for further information on acquisitions and affiliations. We are constantly evaluating potential affiliations with dental groups and acquisition of companies that would expand our business capabilities. The number of new affiliations and acquisitions over the next twelve months could be at levels greater or less than we have achieved during each of the past two years.

Affiliate Adjusted Gross Revenue, Net Revenue and Total Revenue

Affiliate Adjusted Gross Revenue and Payor Mix

We do not own or control the affiliated dental group practices and, accordingly, do not consolidate the financial statements of the PCs with ours. Our affiliated dental group practices generate revenue from patients and dental benefit providers under fee-for-service, PPO and capitated managed care plans. The affiliated dental group practices 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 following table provides the aggregate payor mix percentages of our affiliated dental group practices for the years ended December 31:

Faced with strong patient demand and tight labor markets, several of our affiliated dental group practices have been realigning their reimbursement mix away from capitated managed care plans that carry significant discounts. Concurrently, the dental industry is witnessing growth in PPO plans. We anticipate that our affiliated dental group practices will continue to witness growth in PPO plans and potentially a reduction in capitated

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managed care plans. This change in reimbursement mix has largely been accomplished with the cooperation of the dental benefit provider community in general. There can be no assurance, however, that the shift in reimbursement mix will not result in the termination of certain third party payor contracts.

The affiliated dental group practices 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 assistants and hygienists), 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. (See “Business—Operations—Operating Structure.”) After reimbursement of expenses and payment of all service fees to us, the amounts retained by the affiliated dental group practices is used to compensate dentists and in certain states where the affiliated dental group practices must employ dental hygienists and/or dental assistants, compensate such non-dentist employees.

The following table sets forth for 2003, 2002 and 2001, the adjusted gross revenue of, the amounts retained by our affiliated dental group practices and the amounts paid to us under our service agreements for reimbursement of expenses incurred in the operation and administration of dental facilities and our service fees (in thousands):

Net Revenue

The Company’s net revenue comprises fees earned under service agreements, fees received from dental benefit providers related to the arrangement of the provision of care to patients and dental laboratory fees.

The following table sets forth for 2003, 2002 and 2001, the components of net revenue in our consolidated statements of income (in thousands):

Fees earned under service agreements include reimbursement of expenses incurred by the Company on behalf of the affiliated dental group practices in connection with the operation and administration of dental facilities and service fees charged to affiliated dental group practices pursuant to the terms of the service agreement for business and management services provided by us. Under certain service agreements, our service fee consists of a variable monthly fee which is based upon a specified percentage of the amount by which the affiliated dental group practice’s adjusted gross revenue exceeds expenses incurred in connection with the operation and administration of the dental facilities. Under certain service agreements, our 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

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of the dental facilities and payment of provider expenses, an additional variable fee is paid to us. Under certain service agreements, our service fee consists entirely of a fixed monthly fee. The fixed monthly fees are determined by agreement of us and the affiliated dental group practice in a formal budgeting process. In all instances, the service fee is negotiated as fair market value for services and capital provided by us to our affiliated dental group practices.

As part of our objective of being the leading provider of services to dental group practices, we are continually expanding our resources and capabilities, including vertical integration of ancillary dental activities. We work with and receive fees from dental benefit providers on behalf of our affiliates to arrange programs for the provision of care to their patients. In 2002, we acquired two dental laboratories to expand our procurement capabilities. Although both activities earn revenue from dental practices not affiliated with us, we expect that the growth of both of these activities will come primarily from the growth of our affiliated dental groups.

For additional information on components of our net revenue, see Note 3 of “Notes of Consolidated Financial Statements.”

Total Revenue

Although we do not own or control our affiliated dental group practices, we believe that it is more meaningful to analyze our revenue, expenses and margins in terms of total revenue, including the adjusted gross revenue of our affiliated dental group practices. Total revenue and adjusted gross revenue are not measures of financial performance under GAAP, but our expenses and business services fees are incurred or earned in support of the adjusted gross revenue of our affiliated dental group practices. We use these and other non-GAAP financial measures to analyze operating trends and to help manage our business.

The following table sets forth for 2003, 2002 and 2001, the components of total revenue, a reconciliation of total revenue to net revenue and the percentage of total revenue for items in our consolidated statements of income (in thousands):

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Results of Operations

Total Revenue (Unaudited)

Total revenue increased 5.2% from $212,642,000 in 2001 to $223,781,000 in 2002 and 12.6% to $252,058,000 in 2003. The increase in 2002 was primarily the result of new affiliations and the acquisition of dental laboratories offset by the disruption of business associated with the managed care contract terminations in 2001. See Note 4 of “Notes to Consolidated Financial Statements” for further information on the managed care contract terminations. Same market affiliate adjusted gross revenue growth was 1.7% in 2002. The increase in 2003 was primarily the result of new affiliations along with growth at our existing affiliated dental groups. Same market affiliate adjusted gross revenue growth was 5.5% in 2003.

The following table sets forth for 2001, 2002 and 2003 same market affiliate adjusted gross revenue, percentage change and a reconciliation to net revenue (in thousands):

Amounts Retained by Affiliated Dental Group Practices (Unaudited)

Amounts retained by affiliated dental group practices increased 8.3% from $71,090,000 in 2001 to $76,971,000 in 2002 and 14.8% to $88,351,000 in 2003. The amounts retained by affiliated dental groups as a percentage of total revenue increased from 33.4% in 2001 to 34.4% in 2002 to 35.0% in 2003.

Since 2001, we have entered into affiliation transactions with a number of dental groups located in states where dental hygienists and dental assistants are required to be employed by the affiliated dental group practices. The increases in amounts retained by affiliated dental group practices as a percentage of adjusted gross revenue is mainly attributable to entering into affiliations where dental hygienists and dental assistants are employed by the affiliated dental group practices. Additionally, in 2003, there was an increase in health and workers compensation insurance costs of $426,000, representing a 22% increase over the prior year. Also due to the growth in demand for dental services exceeding the growth in the supply of dentists nationally in recent years, dentist compensation has been increasing generally and for our affiliated dental groups specifically. We expect this trend to moderate.

Net Revenue

Net revenue increased 3.7% from $141,552,000 in 2001 to $146,810,000 in 2002 and 11.5% to $163,707,000 in 2003. The increase in net revenue in 2002 was attributable to the current year impact of entering into service agreements in connection with affiliation transactions and revenues generated from two dental laboratories acquired during the year. During 2003, 6.6% of the increase was mainly attributable to the current year impact of entering into service agreements in connection with affiliation transactions during 2002 and 2003 with 4.9% of the increase attributable to same market net revenue growth.

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Net revenue derived from our service agreement with Park Dental represented approximately 31%, 32% and 34% of our consolidated net revenue for 2003, 2002 and 2001, respectively. Effective July 1, 2003, our affiliated dental group practices in Wisconsin merged into one affiliated dental group practice, thereby resulting in our net revenue from its service agreement becoming greater than 10% of our consolidated net revenue. Net revenue from our service agreement with the merged Wisconsin Dental Group represented approximately 13%, 15% and 15% of our consolidated net revenue for 2003, 2002 and 2001, respectively. No other service agreement or customers related to other revenue accounted for greater than 10% of consolidated net revenue.

Salaries and Benefits

Salaries and benefits expense includes costs for personnel working for us at the dental facilities, dental laboratory 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 the staff at the dental facilities.

Salaries and benefits expense as a percentage of total revenue decreased from 30.3% in 2001 to 29.4% in 2002 and 28.8% in 2003. The decrease in 2002 was primarily related to the reduction in staff and administrative positions at two affiliates as a result of managed contract terminations during 2001 (see Note 4 of “Notes to Consolidated Financial Statements”), partially offset by wage inflation and the addition of two dental laboratories where salaries and benefits are generally a higher percentage of total revenue. The decrease in 2003 was attributable to entering into affiliations during 2002 and 2003 where the affiliated dental group practices were required to employ the dental hygienists and dental assistants, thereby lowering our salaries and benefits expense in relation to net revenue earned. Additionally our net revenue growth was greater than our employee growth, contributing to the decrease as a percentage of total revenue. These increases were partially offset by the addition of two dental laboratories where salaries and benefits are generally a higher percentage of revenue and an increase in health insurance costs of $650,000, representing a 20% increase over 2002.

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 total revenue was 10.7% in 2001, 10.8% in 2002 and 10.7% in 2003. The increase in 2002 was due to price increases from certain lab and supply manufactures along with a change in mix of the type of procedures performed. The decrease as a percentage of total revenue in 2003 was primarily attributable a new pricing arrangement negotiated with our primary dental supply vendor as well as continued efforts to manage these expenses. We are continuing our efforts to offset dental supply manufacturer price increases with the economies of scale 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, dental laboratory and the local and regional administrative offices. Such costs vary based on the size of each facility and the market rental rate for dental office space in each particular geographic market.

Office occupancy expense as a percentage of total revenue was 7.8% in 2001, 8.2% in 2002 and 7.9% in 2003. The increase in 2002 was 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 in 2001. The decrease as a percentage of adjusted gross revenue in 2003 was primarily attributable to higher utilization of our dental facilities as evidenced by a higher level of total revenue per facility as compared to 2002. In 2001, we added three new dental facilities and relocated and/or expanded nine facilities. In 2002, we added one new facility and relocated and/or expanded ten facilities. In 2003, we relocated and/or expanded sixteen facilities.

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Other Operating Expenses

Other operating expenses include non-health related insurance expense, professional fees, marketing costs and other general and administrative expenses. Other operating expenses as a percentage of total revenue were 5.8% in 2001, 5.9% in 2002 and 5.8% in 2003. The increase in 2002 was primarily due to the impact of the lost revenue associated with the managed care contract terminations in 2001, partially offset by $147,000 of unusual expenses in 2001 related to costs associated with increased patient communications, deinstallation of certain computer equipment and the relocation of certain resource center personnel associated with the managed care contract terminations. Other operating expenses as a percentage of total revenue in 2003 stayed consistent with 2002 due to effort to manage these expenses, offset by increased insurance costs of $600,000, representing a 69% increase over 2002.

General Corporate Expenses

General corporate expenses consist of compensation expenses 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 total revenue were 2.7% in 2001, 2.6% in 2002 and 2.7% in 2003. General corporate expenses in 2001 included $192,000 of unusual expenses associated with the restructuring of management. These costs included separation and relocation of certain management personnel following the managed care contract terminations in 2001. The increase in 2003 was mainly due to our management incentive compensation plan, the addition of new management positions and increased benefit costs.

We believe general corporate expenses may increase in 2004 at a rate greater than total revenue as we continue to expand our management infrastructure, to incur professional fees to comply with new corporate governance regulations and to begin the implementation of Improvis in late 2004.

Depreciation

Depreciation expense includes charges related to leasehold improvements and furniture, fixtures and equipment used to operate the dental facilities, lab facilities, local and regional management offices and our corporate office. Depreciation expense as a percentage of total revenue decreased from 2.4% in 2001 to 2.2% in 2002 and 2.1% in 2003. The decrease in depreciation expense as a percentage of total revenue in 2002 was primarily due to some of our assets becoming fully depreciated during the year, partially offset by additional depreciation expense from the addition and relocation and/or expansion of dental facilities during 2002. The decrease in depreciation expense as a percentage of total revenue in 2003 was primarily due to higher utilization of our dental facilities as evidenced by a higher level of adjusted gross revenue per facility over 2002.

We expect to continue to invest in the development of new dental facilities and the relocation and/or expansion of existing dental facilities in 2004. Accordingly, depending on the amount and timing of such future capital expenditures, depreciation may increase in 2004 at a rate greater than total revenue.

Amortization of Goodwill and Intangible Assets

Amortization as a percentage of total revenue decreased from 1.9% in 2001 to 1.8% in 2002 and 1.7% in 2003. As a percentage of total revenue, the decrease is due to the number of affiliations and acquisitions in recent periods being less than the average since our founding as well as the impact of not amortizing goodwill in 2002 and 2003. Management continually evaluates 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 affiliations and acquisitions.

Special Charges

Special charges represent a provision for costs associated with reductions in physical capacity at Associated Dental Care Providers and patient communications at Associated Dental Care Providers and Park Dental as a result of the managed care contract terminations in 2001. 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.

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Interest Expense, Net

Net interest expense decreased from $4,295,000 in 2001 to $2,947,000 in 2002 and $2,592,000 in 2003. The decreases in 2002 and 2003 were due to a lower overall interest rate and a lower average debt balance compared to the prior year. Net interest expense in 2003 was partially offset by the expensing of $220,000 of unamortized debt issuance costs as part of terminating our existing credit facility and entering into a new credit facility. See the Liquidity and Capital Resources section for more information related to our credit facility.

Income Taxes

Our effective tax rate was approximately 38.8% for 2001, 38.0% in 2002 and 40.8% in 2003. The effective tax rate in 2002 decreased from the 2001 rate primarily due to fluctuations in taxable income in various states in which we operate and the elimination of certain permanent differences between the financial statement and tax treatment of goodwill amortization. The increase in our effective tax rate for 2003 was mainly a result of recording additional expenses related to adjustments from prior periods. We anticipate that the effective tax rate for 2004 to be in a range of 39.5% to 40.5%.

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 and cash generated from operations.

From January 1, 2002 through December 31, 2003, we completed 11 dental practice affiliations and acquired the outstanding stock of one dental laboratory and selected assets of a second dental laboratory for aggregate consideration of $11,077,000 in cash, $1,501,000 in subordinated promissory notes, $330,000 in deferred payments and a future contingent payment for two affiliations based on a multiple of earnings before interest and taxes in excess of a predetermined threshold for the twelve months ending April 30, 2004 and December 31, 2004, respectively. We estimate that future contingent payments could be between $3,000,000 and $4,000,000. In future years, such contingent payments could result in additional annual amortization expense of approximately $133,000 to $177,000.

For the years ended December 31, 2003 and 2002, cash provided by operating activities amounted to $21,738,000 and $17,040,000, respectively. In 2002, cash from operations primarily resulted from increased net earnings after adding back non-cash items and a decrease in receivables due from affiliated dental group practices, partially offset by payments of special charges of $230,000. The decrease of receivables due from affiliated dental group practices, which totaled $2,055,000, was due to stability in payor mix from the prior year and a reduction in patient receivables at our affiliated dental group practices as a result of increased focus on receivables management. The days sales outstanding for the patient receivables of our affiliated dental group practices decreased from 47 days at December 31, 2001 to 40 days at December 31, 2002. In 2003, cash from operations primarily resulted from net earnings after adding back non-cash items, a decrease in receivables due from affiliated dental group practices and increases in accounts payable and accrued expenses and accrued compensation. The decrease in receivables due from affiliated dental group practices, which totaled $1,014,000, was due to better working capital management and continued focus on receivables management at our affiliated dental group practices. The days sales outstanding for the patient receivables of our affiliated dental group practices decreased from 40 days at December 31, 2002 to 36 days at December 31, 2003. We do not expect the days sales outstanding of our affiliated dental group practices to decrease in future years to a similar extent as the improvement achieved during the past two years.

For the years ended December 31, 2003 and 2002, cash used in investing activities amounted to $12,268,000 and $12,415,000, respectively. Cash used for investing activities included cash for affiliations and capital expenditures. Cash used for acquisitions and affiliations, net of cash acquired, was $4,648,000 and $6,269,000 for 2003 and 2002, respectively. Capital expenditures were $7,381,000 and $5,607,000 for 2003 and 2002, respectively. Capital expenditures for 2002 included costs associated with one new dental facility and the

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relocation and/or expansion of ten dental facilities. Capital expenditures for 2003 included costs associated with the relocation and/or expansion of fourteen dental facilities along with combining our two dental laboratories into one new laboratory facility. We expect that capital expenditures in 2004 to be higher than in past years due to the development of new dental facilities and the relocation and/or expansion of existing dental facilities, our on-going facility maintenance capital expenditure program and investment in several information technology projects.

For the years ended December 31, 2003 and 2002, cash used for financing activities amounted to $8,419,000 and $5,321,000, respectively. Cash used for financing activities in 2002 resulted from the repayment of indebtedness of $1,906,000 and net repayments under our revolving line of credit of $3,827,000, offset by proceeds from the issuance of Common Stock for the employee stock purchase plan and from stock option exercises of $239,000 and $173,000, respectively. Cash used for financing activities in 2003 resulted from the repayment of indebtedness of $1,624,000, net repayments under our revolving line of credit of $6,905,000 and payment of debt issuance costs as part of entering into a new credit facility of $653,000, offset by proceeds from the issuance of Common Stock for our employee stock purchase plan and from stock option exercises of $219,000 and $544,000, respectively.

On October 16, 2003, we terminated our existing $75,000,000 credit facility and entered into a new $75,000,000 credit facility. As part of terminating the then existing credit facility prior to its July 2004 maturity, we recorded as interest expense $220,000 of unamortized debt issuance costs in the fourth quarter of 2003. The new credit facility is being used for general corporate purposes, including working capital, affiliations, acquisitions and capital expenditures. The new credit facility matures in October 2006 and the maximum principal amount will be reduced to $70,000,000 in October 2004 and $65,000,000 in October 2005. Borrowings under the new credit facility 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 0.25% to 1.00% for prime borrowings and 1.25% to 2.00% for LIBOR borrowings. At December 31, 2003, the LIBOR and prime interest rates under the credit facility were 2.92% and 4.75%, respectively. In addition, we pay a commitment fee which ranges from 0.375% to 0.50% of the average daily balance of the unused line. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and amortization, adjusted for certain items. The credit facility is collateralized 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 financial and other covenants. The financial covenants include a minimum net worth, leverage and fixed charge coverage ratios and maximum capital expenditures as defined by the credit facility agreement. The Company was in compliance with its covenants as of December 31, 2003. The outstanding balance under this line as of December 31, 2003 was $39,425,000. The unused balance at December 31, 2003 was $35,575,000 and based on borrowing covenants $24,779,000 was available for borrowing.

The new credit facility replaced our $75,000,000 credit facility that was being used for general corporate purposes, including affiliations and capital expenditures. Borrowings under this line of credit beared interest at either prime or LIBOR plus a margin, at our option. The margin was based upon our debt coverage ratio and ranged from 0.00% to 0.75% for prime borrowings and 1.75% to 2.75% for LIBOR borrowings. In addition, we paid a commitment fee which ranged from 0.25% to 0.375% of the average daily balance of the unused line. Borrowings were limited to an availability formula based on earnings before income taxes, depreciation and amortization. The credit facility was collateralized by a first lien on substantially all of our assets, including a pledge of the stock of our subsidiaries. We were also required to comply with certain financial and other covenants.

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 and acquisitions. As of December 31, 2003, 679,878 shares and $19,165,900 of notes remain available for issuance under this Shelf Registration Statement.

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Our growth to date has resulted in large measure from our ability to affiliate with additional dental practices. Historically, we have used a combination of cash, subordinated debt and Common Stock as consideration for past affiliations and acquisitions and plan to use these sources in the future. In recent years, the consideration paid has consisted of cash and subordinated debt. In the event that our Common Stock does not maintain sufficient valuation or if potential affiliation or acquisition candidates are unwilling to accept our securities as consideration, we will continue to use cash flow from operations and our revolving credit facility for future affiliations and acquisitions. In addition, if sufficient financing is not available as needed on terms acceptable to us, our affiliation and acquisition strategy will be modified. We are constantly evaluating potential affiliations with dental groups and acquisition of companies that would expand our business capabilities. The number of new affiliations and acquisitions over the next twelve months could be at levels greater than we have achieved during each of the past two years.

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, affiliations and acquisitions for at least the next twelve months. Any excess cash will be used to reduce indebtedness or to repurchase Common Stock through our previously announced repurchase program, pursuant to which approximately $1,100,000 remains available to repurchase additional shares.

Contractual Obligations

The following table summarizes contractual obligations payable or maturing in the following years as of December 31, 2003 (in thousands):