AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
(1) Description of Business
American Dental Partners, Inc. (the Company) is a leading provider of dental facilities, support
staff and business services to multidisciplinary dental group practices in selected markets throughout the United States. The Company customarily acquires selected assets of the dental practices with which it affiliates and enters into long-term
service agreements with professional corporations, professional associations or service corporations which are not owned by the Company. The Company is responsible for providing all services necessary for the administration of the non-clinical
aspects of the dental operations, while the affiliated dental practices are responsible for providing dental care to patients. Services provided to the affiliated practices include providing assistance with organizational planning and development;
recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems and practice technology; marketing and payor relations; and
financial planning, reporting and analysis. The Company operates in one segment.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of American Dental Partners, Inc., its wholly-owned subsidiaries
and its Arizonas Tooth Doctor for Kids (Tooth Doctor) subsidiary which is owned 85% by the Company (see Note 4; Acquisitions and Affiliations) and its ADP of Minnesota subsidiary which is owned 90% by the Company. All material
intercompany balances and transactions have been eliminated in consolidation. Management has determined that, based on the provisions of its service agreements, the Company is not required to consolidate the financial statements of the affiliated
practices which are affiliated with the Company by means of a long-term service agreement with its own.
Use of Estimates
The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The
Companys carrying amount of accounts receivable, net, requires management to make estimates and assumptions regarding the collectability of accounts receivable in its consolidated financial statements. The Companys affiliation and
acquisition transactions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that the Company will incur. The determination of the value of such
intangible assets requires management to make estimates and assumptions that affect the consolidated financial statements. The Company and the affiliated practices maintain insurance coverage for various business activities. Certain of the coverages
have retentions which require the Company to make estimates and assumptions regarding losses below applicable retention levels. There can be no assurance that actual results will not differ from those estimates.
Reclassifications
Amounts due to affiliated practices of $566,000
for 2006 have been reclassified from accounts receivable, net to accounts payable to conform to 2007 presentation. Professional fees associated with the litigation among PDG, P.A. (PDG), PDHC, Ltd. (PDHC) and the Company of
$1,570,000 for 2006 have been reclassified from general corporate expense to litigation expense to conform to 2007 presentation.
46
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(2) Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company believes the
carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these items. The carrying amount of long-term debt approximates fair value because
the interest rates are approximate rates at which similar types of borrowing arrangements could be obtained by the Company.
Net Revenue
The Companys net revenue represents primarily reimbursement of expenses and fees charged to affiliated practices pursuant to the terms of the service
agreements. Under certain service agreements, the Companys service fee consists of a monthly fee which is based upon a specified percentage of the amount by which the affiliated practices patient revenue exceeds expenses. Under a certain
service agreement, the Companys service fee consists of (i) a monthly fee for the first six months of the year equal to the prior year service fee and an additional performance fee based upon a percentage of the increase of the amount by
which the affiliated practices patient revenue exceeds expenses as compared to the prior year and (ii) a monthly fee for the second six months of the year which is based upon a specified percentage of the amount by which the affiliated
practices patient revenue exceeds expenses. Under certain service agreements, the Companys service fee consists entirely of a fixed monthly fee determined by agreement of the Company and the affiliated practice in a formal planning
process. Under a certain service agreement, the Companys service fee consists of a fixed monthly fee and an additional performance fee based upon a percentage of the amount by which the affiliated practices patient revenue exceeds
expenses as compared to the planned amount for the current year. In all instances, the service fee is negotiated as fair market value for services and capital provided by the Company to the affiliated practices. Additionally, the Companys net
revenue includes amounts from patient revenue of Tooth Doctor, dental benefits third party administrator (TPA) fees and dental laboratory fees.
Inventories
Inventories consist primarily of dental supplies and are stated at the lower of cost or market, with cost being determined
under the weighted average method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the related assets which are 30-40 years for buildings, 3-12 years for equipment and 5-7
years for furniture and fixtures, and the remaining life of the lease for leasehold improvements. Development costs incurred for computer software development or obtained for internal use are capitalized and amortized in accordance with Statement of
Position No. 98-1,
Accounting for the Costs of Computer Software Developed for Internal Use.
Goodwill
Goodwill results from the excess of the purchase price of an acquisition over the estimated fair value of the tangible and intangible assets acquired and liabilities
assumed. The Company determines impairment by
47
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(2) Summary of Significant Accounting Policies (Continued)
comparing the fair value to the carrying value of each reporting unit based on discounted future cash flows using a discount rate reflecting the
Companys average cost of funds. If impairment were determined, an appropriate adjustment to goodwill to reduce the assets carrying value would be made. The Company has not recorded any impairment charges on goodwill as of
December 31, 2007.
Service Agreements and Other Intangible Assets
The Companys affiliations with dental group practices by means of service agreements are not business combinations, and as such, do not result in recognition of goodwill. The Company recognizes capitalized
service agreement costs which are accounted for as definite-lived intangible assets acquired in other than a business combination and recorded at fair value. In determining the fair value of a service agreement recognized in connection with an
affiliation, management estimates the timing, amount and value of future expected cash flows.
These service agreements have contractual terms of 40 years
but the asset is generally amortized on a straight-line basis over a period of 25 years. Customer relationship intangible assets associated with the acquisition of dental laboratories are amortized on a straight-line basis over 15 years. Customer
relationship intangible assets associated with the acquisition of Tooth Doctor are amortized over five years on an accelerated basis. The tradename intangible asset associated with acquisition of Metropolitan Dental Holdings, Inc.
(Metro) is amortized on a straight-line basis over five years. The tradename intangible asset associated with the Tooth Doctor acquisition is indefinite-lived and not amortized. In the event a service agreement is terminated, the related
affiliated practice is required, at the Companys option in nearly all instances, to purchase the remaining unamortized balance of intangible assets at the current book value.
Management performs an impairment test on definite-lived intangible assets when facts and circumstances exist which would suggest that the intangible assets may be impaired by comparing the undiscounted net cash flows
of the asset to its carrying value. If impairment were determined, an appropriate adjustment to the intangible asset would be made to reduce the assets carrying value to fair value. Fair value is determined by calculating the projected
discounted operating net cash flows of the asset using a discount rate reflecting the Companys average cost of funds. The Company has not recorded any impairment charges or write-downs on definite-lived intangibles as of December 31,
2007.
Based on an evaluation of historical financial trends, the Company determined that the intangible assets associated with certain in-market
affiliations which were combined with existing affiliated practices were expected to generate future cash flows for a longer period than previously estimated and, accordingly, increased the amortization period relating to these intangible assets. As
a result, the amortization period for certain previously completed in-market affiliations were increased to 25 years in 2005. This change in estimate impacted 5% of the Companys intangible assets at that time and had the effect of reducing
amortization expense by approximately $97,000, net of tax, in 2007 and $92,000, net of tax, in 2006.
Insurance
The Company maintains various insurance coverages for our business, including property-casualty, business interruption, workers compensation and general liability, among
others. In addition, the affiliated practices are required to maintain, or cause to be maintained, professional liability insurance with the Company as a named insured. As of January 1, 2007, certain of the Companys insurances are reinsured by
a wholly-owned captive insurance company licensed in the state of Vermont. Several of these insurance programs have retention
48
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(2) Summary of Significant Accounting Policies (Continued)
levels in which the Company and its captive insurance company are financially obligated for insured losses below certain financial thresholds before the
insurer is financially obligated for insured losses. The Company and its captive insurance company maintain reserves for certain of these programs, which are based upon estimates provided by third-party actuaries or by individual case-basis
valuations. Amounts accrued for workers compensation insurance, including estimates for losses below retention levels, were $1,500,000 for 2007 and $1,600,000 for 2006. Changes in trends of loss severity or loss frequency may affect the calculation
of these estimates and create the need for subsequent adjustments to estimated loss reserves.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences
between the consolidated financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of changes in the tax rate is recognized in operations in the period that includes the enactment date.
Uncertain Tax Positions
In June 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109
. FIN
No. 48 establishes a single model to address accounting for uncertain tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN No. 48 also provides guidance on de-recognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized no material adjustment in the
liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, the Company had $253,000 of gross unrecognized income tax benefits. Gross unrecognized income tax benefits increased to $393,000 during the twelve months
ended December 31, 2007, of which $386,000 would impact the Companys effective tax rate if recognized.
The Companys policy for recording
interest and penalties associated with audits is to record such items as a component of income before taxes. As of December 31, 2007, the Company has approximately $104,000 of accrued interest and penalties related to uncertain tax positions.
Stock Option Plans
On January 1, 2006, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share Based Payments,
which revises SFAS 123,
Accounting for Stock-Based Compensation.
Prior to January 1,
2006, SFAS No. 123, as amended by SFAS No. 148
Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123,
allowed companies to recognize expense for the fair value of
stock-based awards or to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
, and disclose the effects of SFAS No. 123 as if the
fair-value-based method defined in SFAS No. 123 had been applied. Under APB Opinion No. 25, compensation expense is recognized if on the measurement date the fair value of the underlying stock exceeds the exercise price. The Company had
elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 and No. 148. Because the Company granted stock options to employees at exercise prices equal to the fair market
value on the date of grant, no stock-based compensation was recognized in periods prior to January 1, 2006.
49
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(2) Summary of Significant Accounting Policies (Continued)
The following table illustrates the effect on net income and earnings per share as if the
Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure
for the year ended December 31 (in
thousands, except per share amounts):
|
|
|
|
|
|
|
2005
|
|
Net earnings, as reported
|
|
$
|
10,291
|
|
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects
|
|
|
(847
|
)
|
|
|
|
|
|
Net earnings, proforma
|
|
$
|
9,444
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic, as reported
|
|
$
|
0.86
|
|
|
|
|
|
|
Basic, pro forma
|
|
$
|
0.79
|
|
|
|
|
|
|
Diluted, as reported
|
|
$
|
0.81
|
|
|
|
|
|
|
Diluted, pro forma
|
|
$
|
0.74
|
|
|
|
|
|
|
See Note 11, Stock-based Compensation for further detail on the Companys stock-based
compensation and stock option plans.
Earnings per Share
Earnings per share are computed based on SFAS No. 128
Earnings per Share.
SFAS No. 128 requires presentation of basic earnings per share (Basic EPS) and diluted earnings per share (Diluted
EPS) by all entities that have publicly traded common stock or potential common stock (options, warrants, convertible securities or contingent stock arrangements). Basic EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on earnings.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157
establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and will be
applied prospectively. The Company is assessing the impact of this Statement on its financial condition and results of operations, although it believes SFAS 157 will not have a significant effect on its future consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS
159). This Standard allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. SFAS 159 is
applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. The Company is assessing the impact of this Statement on its financial condition and results of operations, although it
believes SFAS 159 will not have a significant effect on its future consolidated financial statements.
50
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(2) Summary of Significant Accounting Policies (Continued)
In December, 2007, the FASB issued Statement of Financial Accounting Standards
No. 141(R)
Business Combinations
(SFAS 141(R)). SFAS 141(R) introduces significant changes in the accounting for and reporting of business acquisitions and noncontrolling interests in a subsidiary. SFAS 141(R)
continues the movement toward the greater use of fair values in financial reporting and increased transparency through expanded disclosures. SFAS 141(R) changes how business acquisitions are accounted for and will impact financial statements at the
acquisition date and in subsequent periods. In addition, SFAS 141(R) will impact the annual goodwill impairment test associated with acquisitions that close both before and after its effective date. SFAS 141(R) applies prospectively to fiscal years,
and interim periods within those fiscal years, beginning on or after December 15, 2008. An entity may not apply SFAS 141(R) before that date. The Company is assessing the impact of SFAS 141(R) on its future consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of
Accounting Research Bulletin No. 51
. SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to
the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for the Company beginning February 1, 2009. The Company is assessing the impact
of SFAS No. 160 on its future consolidated financial statements.
(3) Accounts Receivable, net and Net revenue
Accounts receivable, net
Accounts receivable, net reflects
receivables due from affiliated dental practices that represent amounts due pursuant to the terms of the service agreements and other receivables, which include trade receivables, net of any allowances for doubtful accounts, of the Companys
affiliated dental practice, captive insurance subsidiary, dental lab and TPA. The following table lists receivables due from affiliated practices and other receivables for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Receivables due from affiliated practices
|
|
$
|
20,151
|
|
$
|
14,566
|
Other receivables, net
|
|
|
3,470
|
|
|
2,373
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
23,621
|
|
$
|
16,939
|
|
|
|
|
|
|
|
51
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(3) Accounts Receivable, net and Net revenue (Continued)
Net revenue
For the years ended December 31, 2007, 2006 and 2005, net revenue consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Reimbursement of expenses:
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
88,658
|
|
$
|
76,154
|
|
$
|
68,800
|
Lab and dental supplies
|
|
|
44,269
|
|
|
37,250
|
|
|
33,791
|
Office occupancy expenses
|
|
|
28,243
|
|
|
24,371
|
|
|
21,282
|
Other operating expenses
|
|
|
18,176
|
|
|
15,485
|
|
|
14,705
|
Depreciation expense
|
|
|
7,914
|
|
|
6,672
|
|
|
6,021
|
|
|
|
|
|
|
|
|
|
|
Total reimbursement of expenses
|
|
|
187,260
|
|
|
159,932
|
|
|
144,599
|
Business service fees
|
|
|
64,088
|
|
|
51,945
|
|
|
47,380
|
|
|
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
251,348
|
|
|
211,877
|
|
|
191,979
|
Patient revenue, professional services, dental laboratory fees and other miscellaneous revenue
|
|
|
27,407
|
|
|
6,040
|
|
|
4,949
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
278,755
|
|
$
|
217,917
|
|
$
|
196,928
|
|
|
|
|
|
|
|
|
|
|
Net revenue derived from the Companys service agreement with PDG, P.A., represented approximately 23%, 29%,
and 31% of the Companys consolidated net revenue for 2007, 2006 and 2005, respectively (see Note 15 Subsequent Events). Net revenue from the Companys service agreement with Wisconsin Dental Group, S.C., the affiliated
practice at Forward Dental, represented approximately 12%, 13% and 13% of the Companys consolidated net revenue for 2007, 2006 and 2005, respectively. No other service agreement or customers accounted for greater than 10% of the Companys
consolidated net revenue.
(4) Acquisitions and Affiliations
During the year ended December 31, 2007, the Company completed fourteen acquisition and affiliation transactions. The Company acquired selected assets of ten dental practices that joined existing affiliated practices and three platform
affiliations in California, Minnesota and Texas, which included execution of a new service agreement between the Company and the affiliated practices. Finally, the Company acquired 100% of the outstanding capital stock of Metro and entered into a
platform affiliation with Metro Dentalcare, PLC, which included the execution of a new service agreement between the Company and the affiliated practice. All transactions completed in 2007 are referred to as 2007 Transactions. The
aggregate purchase price paid in connection with these transactions consisted of approximately $119,123,000 in cash, net of cash acquired. Excluding Metro, contingent payments associated with six 2007 Transactions are based on revenue, for an agreed
upon period after the transaction, meeting or exceeding a predetermined threshold, and in total cannot exceed $2,220,000.
During the year ended
December 31, 2006, the Company completed thirteen acquisition and affiliation transactions. The Company acquired selected assets of eleven dental practices, ten that joined existing affiliated practices and one platform affiliation in
Wisconsin, which included execution of a new service agreement between the Company and the affiliated practice. In another transaction, the Company developed de novo dental facilities in Minnesota, rather than acquiring selected clinical assets, and
executed a service agreement between the Company and the affiliated practice. Finally, the Company acquired the assets of Arizonas Tooth Doctor for Kids (Tooth Doctor), the assets of Tooth Doctor being contributed to a newly
created subsidiary which is owned 85% by the Company, which became a new platform affiliation in Arizona. The Company did not execute a new service agreement as Tooth Doctor employs dentists. All transactions completed in 2006 are referred to as
52
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(4) Acquisitions and Affiliations (Continued)
2006 Transactions. The aggregate purchase price paid in connection with these transactions consisted of approximately $25,802,000 in cash and a
$50,000 deferred payment that was accrued at the transaction date and was paid in the first quarter of 2007. Excluding Tooth Doctor, contingent payments associated with five 2006 Transactions are based on revenue, for an agreed upon period after the
transaction, meeting or exceeding a predetermined threshold, and three were paid in 2007 for approximately $135,000 and two were not achieved. The Company records contingent payments in the period they are resolved.
The 2007 and 2006 Transactions are as follows:
|
|
|
|
|
Date
|
|
Affilated Practice
|
|
Location(s)
|
December 2007
|
|
Michael Sabeti, D.D.S., M.S.
|
|
Pearland, TX
|
December 2007
|
|
Michael Berman, D.D.S.
|
|
Killeen, TX
|
September 2007
|
|
Metro Dentalcare
|
|
Minneapolis, MN
|
September 2007
|
|
Larry J. Gaydos, D.D.S.
|
|
St. Louis, MO
|
September 2007
|
|
Jeffrey W. Ausen, D.D.S.
|
|
Waukesha, WI
|
August 2007
|
|
Barzman, Kasimov & Vieth, D.D.S.
|
|
Buffalo, NY
|
July 2007
|
|
Virginia A. Plaisted, D.D.S.
|
|
Delmar, NY
|
June 2007
|
|
Mark Moskowitz, D.D.S.
|
|
Queensbury, NY
|
June 2007
|
|
Sacramento Oral Surgery
|
|
Sacramento, CA
|
May 2007
|
|
Valley Dental Group
|
|
Golden Valley, MN
|
May 2007
|
|
Mark H. Karakourtis, M.D., D.D.S.
|
|
Austin, TX
|
March 2007
|
|
Donald L. Roberts, D.D.S.
|
|
Houston, TX
|
February 2007
|
|
James T. Shoptaw, D.D.S.
|
|
Killeen/Temple, TX
|
January 2007
|
|
Jeffrey & Paul Morrison, D.D.S.
|
|
Bethesda, MD
|
December 2006
|
|
Arizonas Tooth Doctor for Kids
|
|
Phoenix/Globe, AZ
|
December 2006
|
|
Gregory A. Wadleigh, D.D.S., M.S.
|
|
Sun Prarie/Middleton, WI
|
October 2006
|
|
John E. Moser, D.D.S.
|
|
Brookfield, WI
|
July 2006
|
|
Dental-Net, Inc.
|
|
Tucson/Glendale, AZ
|
June 2006
|
|
Gary R. Ricketts, D.D.S.
|
|
Houston, TX
|
June 2006
|
|
Fred J. Leydecker, D.D.S.
|
|
Blasdell, NY
|
June 2006
|
|
Michael E. Grady, D.D.S.
|
|
Milwaukee, WI
|
June 2006
|
|
Associated Dental Care
|
|
Albertville/Blaine, MN
|
May 2006
|
|
J. Mark LaVoy, D.D.S.
|
|
Glendale, AZ
|
April 2006
|
|
Deerwood Orthodontics
|
|
Franklin, WI
|
March 2006
|
|
Complete Dental Care
|
|
Madison Heights, MI
|
February 2006
|
|
Kenneth E. Miller, D.D.S.
|
|
Oklahoma City, OK
|
January 2006
|
|
Michael A. Talluto, D.D.S.
|
|
Seneca, NY
|
The accompanying consolidated financial statements include the results of operations under the service agreements
from the date of affiliation. The following tables show total consideration paid, the estimated fair value of net assets acquired and intangible assets associated with 2007 and 2006 Transactions, excluding Metro (in thousands):
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Total consideration paid
|
|
$
|
35,419
|
|
$
|
7,056
|
Fair value of net tangible assets acquired and liabilities assumed
|
|
|
1,688
|
|
|
530
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
33,731
|
|
$
|
6,526
|
|
|
|
|
|
|
|
53
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(4) Acquisitions and Affiliations (Continued)
On September 25, 2007, the Company acquired 100% of the outstanding capital stock of
Metro. In connection with the acquisition, a subsidiary of Metro entered into a 40-year service agreement with an affiliated professional limited liability. The purchase price paid in connection with the acquisition was approximately $87,044,000 in
cash, and a contingent earn-out of up to $10,000,000 payable in 2008 based on Metros earnings before interest, taxes, depreciation and amortization for the fiscal year ended December 31, 2007. As of December 31, 2007, the Company had
accrued approximately $4,575,000, reflected in accrued expense, in connection with the Metro earnout. The Company is still reviewing the calculation of the earnout and this amount may be adjusted in 2008. The following table summarizes the estimated
fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
|
|
|
|
|
|
|
September 25, 2007
|
|
Current assets
|
|
$
|
4,137
|
|
Property, plant and equipment
|
|
|
9,054
|
|
Intangible assets
|
|
|
51,460
|
|
Goodwill
|
|
|
43,482
|
|
Non-current assets
|
|
|
3,631
|
|
|
|
|
|
|
Total assets acquired
|
|
|
111,764
|
|
|
|
|
|
|
Current liabilities
|
|
|
(3,084
|
)
|
Non-current liabilities
|
|
|
(21,636
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(24,720
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
87,044
|
|
|
|
|
|
|
In connection with the Metro acquisition, the Company recorded $48,700,000 of intangible assets relating to the
service agreement with the affiliated practice, which is not expected to be deductible for tax purposes and will be amortized over 25 years, and $2,760,000 of intangible assets classified as a tradename intangible, which is not expected to be
deductible for tax purposes and will be amortized over five years. The Company recorded goodwill of $43,482,000 which is not expected to be deductible for tax purposes. The Company also incurred approximately $640,000 in transaction costs in
connection with the acquisition. The Company continues to value certain intangible assets, and therefore, the allocation of the purchase price is subject to adjustment.
The following unaudited pro forma financial information presents results as if the Metro and Tooth Doctor acquisition had occurred at the beginning of 2006, for the year ended December 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
|
2006
|
Net revenue
|
|
$
|
320,035
|
|
|
$
|
280,739
|
Net income (losses)
|
|
|
(8,038
|
)
|
|
|
8,849
|
Earnings (losses) per share-basic
|
|
|
(0.63
|
)
|
|
|
0.72
|
Earnings (losses) per share-diluted
|
|
|
(0.63
|
)
|
|
|
0.69
|
These pro forma results have been prepared for comparative purposes only and include certain adjustments such as
additional amortization expense as a result of identifiable intangible assets arising from the acquisition and from increased interest expense on acquisition debt. The pro forma results are not necessarily indicative either of the results of
operations that actually would have resulted had the acquisition been in effect at the beginning of the respective periods or of future results.
54
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(4) Acquisitions and Affiliations (Continued)
On December 1, 2006, the Company completed an acquisition of the assets of Tooth Doctor.
The assets were contributed to a newly created subsidiary that is 85% owned by the Company. The Company has completed its asset allocation analysis. As a result, the Company recorded reclassifications of goodwill to intangible assets related to
customer relationships in the amount of $400,000 that will be amortized on an accelerated basis over five years, goodwill to inventory of approximately $275,000, property and equipment to goodwill of approximately $48,000 and accounts receivable,
net to goodwill of approximately $5,000. The Company also accrued approximately $78,000 in additional transaction costs in connection with the acquisition. Finally, the contingent payment based on 2007 financial performance associated with the
acquisition of Tooth Doctor was not achieved.
The Company affiliated with Desert Dental Specialty in 2005. In connection with the Desert Dental Specialty
transaction, the asset purchase agreement between the Company and Desert Dental Specialty included 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, 2006, less capital expenditures incurred from the date of affiliation. The amount of the contingent payment was $1,192,000 which was recorded as of December 31, 2006 in accrued expenses and was paid in the first quarter of
2007.
In 2006 and 2007, the Company entered into three platform affiliations in which its subsidiaries have minority owners. In addition to the Tooth
Doctor 15% minority owners, in the two other platform affiliations the Company acquired a 90% ownership interest, with the remaining 10% investment from a third party.
(5) Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Land and buildings
|
|
$
|
783
|
|
|
$
|
767
|
|
Equipment
|
|
|
59,776
|
|
|
|
47,899
|
|
Furniture and fixtures
|
|
|
12,851
|
|
|
|
9,743
|
|
Leasehold improvements
|
|
|
46,054
|
|
|
|
37,742
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
119,464
|
|
|
|
96,151
|
|
Less accumulated depreciation
|
|
|
(59,019
|
)
|
|
|
(49,691
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
60,445
|
|
|
$
|
46,460
|
|
|
|
|
|
|
|
|
|
|
Since 2002, the Company has been developing Improvis, a proprietary practice management system intended to replace
Comdent, the system currently used by many of the affiliated practices. Improvis has been designed to include expanded clinical, managerial, and financial capabilities. As of December 31, 2007, 12 affiliated practices, comprising 93 dental
facilities, were using Improvis. The Company has recorded aggregate capitalized software costs amounting to $1,961,000, which includes approximately $143,000 in capitalized interest, in connection with this project as of December 31, 2007, of
which $898,000 relates to the first development phase. The Company began to amortize costs associated with the first development phase in October 2005 and has recognized approximately $202,000 in amortization costs as of December 31, 2007.
These costs will be amortized over ten years.
The Company is obligated under non-cancelable operating leases for premises and equipment expiring in
various years through the year 2025. Rent expense for the years ended December 31, 2007, 2006 and 2005 amounted to $24,690,000, $19,560,000, and $17,580,000, respectively, of which $22,230,000, $18,055,000 and $16,399,000 were reimbursed under
service agreements.
55
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(5) Property and Equipment (Continued)
Minimum future rental payments under non-cancelable operating leases and amounts to be
reimbursed under service agreements as of December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount
Due
|
|
Amounts
Subject to
Reimbursement
Under Service
Agreements
|
|
Net Amount
|
2008
|
|
|
21,030
|
|
|
19,011
|
|
|
2,019
|
2009
|
|
|
18,714
|
|
|
16,967
|
|
|
1,747
|
2010
|
|
|
16,532
|
|
|
14,914
|
|
|
1,618
|
2011
|
|
|
13,758
|
|
|
12,398
|
|
|
1,360
|
2012
|
|
|
12,099
|
|
|
10,875
|
|
|
1,224
|
Thereafter
|
|
|
47,461
|
|
|
44,116
|
|
|
3,345
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
129,594
|
|
$
|
118,281
|
|
$
|
11,313
|
|
|
|
|
|
|
|
|
|
|
(6) Intangible Assets
Intangible assets consisted of the following as of December 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Service agreements
|
|
$
|
218,527
|
|
$
|
(42,742
|
)
|
|
$
|
175,785
|
Trade name
|
|
|
4,035
|
|
|
(148
|
)
|
|
|
3,887
|
Customer relationships
|
|
|
605
|
|
|
(308
|
)
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
223,167
|
|
$
|
(43,198
|
)
|
|
$
|
179,969
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Service agreements
|
|
$
|
135,782
|
|
$
|
(36,086
|
)
|
|
$
|
99,696
|
Trade name
|
|
|
1,275
|
|
|
-
|
|
|
|
1,275
|
Customer relationships
|
|
|
205
|
|
|
(63
|
)
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
137,262
|
|
$
|
(36,149
|
)
|
|
$
|
101,113
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset amortization expense for 2007, 2006 and 2005 was $7,049,000, $5,358,000, and $5,007,000,
respectively. Annual amortization expense for each of the next five fiscal years will be approximately $9,300,000. The weighted average amortization period for service agreements is 25 years. The weighted average amortization period for customer
relationships is 8.4 years. The weighted average amortization period for the Metro tradename intangible is five years. The weighted average remaining life of all intangible assets is 20 years. Based on an evaluation of historical financial trends,
the Company determined that the intangible assets associated with certain in-market affiliations which were combined with existing affiliated practices were expected to generate future cash flows for a longer period than previously estimated and,
accordingly, in 2005 the Company increased the amortization period relating to these intangible assets. As a result, the amortization period for certain previously completed in-market affiliations were increased to 25 years. This change in estimate
impacted 5% of the Companys intangible assets at that time and had the effect of reducing amortization expense by approximately $97,000 and $92,000, net of tax, in 2007 and 2006, respectively.
56
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(7) Income Taxes
Income tax (benefit) expense for the years ended December 31 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,809
|
|
|
$
|
6,854
|
|
|
$
|
6,222
|
|
State
|
|
|
881
|
|
|
|
754
|
|
|
|
754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
7,690
|
|
|
|
7,608
|
|
|
|
6,976
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(10,934
|
)
|
|
|
(634
|
)
|
|
|
(552
|
)
|
State
|
|
|
(1,037
|
)
|
|
|
172
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(11,971
|
)
|
|
|
(462
|
)
|
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
(4,281
|
)
|
|
$
|
7,146
|
|
|
$
|
6,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and
deferred tax liabilities as of December 31 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating loss and other carryforwards
|
|
$
|
876
|
|
|
$
|
594
|
|
Organization and start-up costs
|
|
|
3
|
|
|
|
23
|
|
Stock-based compensation
|
|
|
1,184
|
|
|
|
-
|
|
Litigation expense
|
|
|
16,321
|
|
|
|
-
|
|
Accrued expenses and other liabilities
|
|
|
1,539
|
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
19,923
|
|
|
|
3,200
|
|
Net valuation allowance
|
|
|
(748
|
)
|
|
|
(483
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
19,175
|
|
|
|
2,717
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(33,290
|
)
|
|
|
(14,951
|
)
|
Property and equipment
|
|
|
(941
|
)
|
|
|
(996
|
)
|
Other
|
|
|
(56
|
)
|
|
|
9
|
|
Deferred revenue
|
|
|
(3,420
|
)
|
|
|
-
|
|
Software costs
|
|
|
(833
|
)
|
|
|
(719
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(38,540
|
)
|
|
|
(16,657
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(19,365
|
)
|
|
$
|
(13,940
|
)
|
|
|
|
|
|
|
|
|
|
The Company has a valuation allowance against a portion of its deferred tax assets related to its state tax
attributes. Based upon the Companys current structure, it is more likely than not that this deferred tax asset will not be realized. The valuation allowance for deferred tax assets was $748,000 and $483,000 as of December 31, 2007 and
2006, respectively. The change in the valuation allowance for the years ended December 31, 2007 and 2006 was $265,000 and $168,000 respectively. The initial recognition (that is, by elimination of the valuation allowance) of the state tax
benefits in the future will be primarily recorded to additional paid-in capital, not consolidated statements of income.
57
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(7) Income Taxes (Continued)
Tax benefits associated with tax deductions for stock option exercises were credited to additional paid-in capital in the amounts of
$2,426,000 and $579,000 for the years ended December 31, 2007 and 2006, respectively.
The net deferred tax assets and liabilities consisted of the
following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
15,775
|
|
|
$
|
1,645
|
|
|
$
|
17,420
|
|
|
$
|
1,655
|
|
|
$
|
280
|
|
|
$
|
1,935
|
|
Non-current
|
|
|
569
|
|
|
|
1,186
|
|
|
|
1,755
|
|
|
|
233
|
|
|
|
558
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
16,344
|
|
|
|
2,831
|
|
|
|
19,175
|
|
|
|
1,888
|
|
|
|
838
|
|
|
|
2,726
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(3,054
|
)
|
|
|
(422
|
)
|
|
|
(3,476
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-current
|
|
|
(29,061
|
)
|
|
|
(6,003
|
)
|
|
|
(35,064
|
)
|
|
|
(13,243
|
)
|
|
|
(3,423
|
)
|
|
|
(16,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(32,115
|
)
|
|
|
(6,425
|
)
|
|
|
(38,540
|
)
|
|
|
(13,243
|
)
|
|
|
(3,423
|
)
|
|
|
(16,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(15,771
|
)
|
|
$
|
(3,594
|
)
|
|
$
|
(19,365
|
)
|
|
$
|
(11,355
|
)
|
|
$
|
(2,585
|
)
|
|
$
|
(13,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has state net operating loss carryforwards of $17,280,000 as of December 31, 2007 which expire at
various times from 2008 through 2025.
The following table reconciles the Federal statutory income tax rate to the Companys effective income tax rate
for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Income taxes at Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Differential due to graduated rate
|
|
0.8
|
|
|
0.0
|
|
|
(0.2
|
)
|
State taxes, net of Federal benefit
|
|
0.8
|
|
|
3.3
|
|
|
3.6
|
|
SFAS No. 123(R) expense for employee stock purchase plan
|
|
(0.3
|
)
|
|
0.4
|
|
|
0.0
|
|
Other permanent differences
|
|
(0.6
|
)
|
|
0.4
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
35.7
|
%
|
|
39.1
|
%
|
|
39.1
|
%
|
|
|
|
|
|
|
|
|
|
|
In the Companys opinion, adequate tax liabilities have been established for all years. Federal tax years
prior to 2003 are closed.
58
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(7) Income Taxes (Continued)
The Company adopted the provisions of FIN 48 on January 1, 2007. There was no material impact on our results of operations or financial
position as a result of the implementation of FIN 48. The amount of gross unrecognized tax benefits at December 31, 2007 was $393,000, of which $386,000 would impact the Companys effective tax rate if recognized. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
Gross
Amounts
|
|
Balance, January 1, 2007
|
|
$
|
253
|
|
Additions for tax positions during the current year
|
|
|
63
|
|
Additions for tax positions for prior years
|
|
|
190
|
|
Reductions for tax positions of prior years for:
|
|
|
|
|
Changes in judgment
|
|
|
-
|
|
Settlements during the period
|
|
|
(15
|
)
|
Lapses of applicable statute of limitations
|
|
|
(98
|
)
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
393
|
|
|
|
|
|
|
It is expected that the amount of unrecognized tax benefits will change in the next twelve months; however, the
Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.
The Company
recognizes interest and penalties accrued in connection with unrecognized tax benefits as a component of income before taxes in the Consolidated Statements of Income, which is consistent with the recognition of these items in prior reporting
periods. Accrued interest and penalties were $67,000 and $104,000 as of January 1, 2007 and December 31, 2007, respectively.
(8) Debt
Long-term debt obligations consist of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Revolving line of credit advances, collateralized by substantially all assets of the Company, LIBOR-based and prime interest rates ranging
from approximately 6.10% to 7.75%
|
|
$
|
40,450
|
|
$
|
33,700
|
Term loan, ranks
pari passu
in right of payment to all of the obligations of revolving credit facility, LIBOR-based and prime interest
rate of 6.62%
|
|
|
100,000
|
|
|
-
|
Subordinated notes payable to stockholders and former owners, bearing interest at 7%, maturing through 2010
|
|
|
107
|
|
|
188
|
Note payable to River Road Dental, collateralized by substantially all assets of the Metro-Brooklyn Center clinic, bearing interest at 6.00%,
maturing through 2011
|
|
|
577
|
|
|
-
|
Note payable to Bloomington Southgate, bearing interest at 5.00%, maturing through 2009
|
|
|
40
|
|
|
-
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
141,174
|
|
|
33,888
|
Less current maturities
|
|
|
188
|
|
|
81
|
|
|
|
|
|
|
|
Long-term debt, non-current portion
|
|
$
|
140,986
|
|
$
|
33,807
|
|
|
|
|
|
|
|
59
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(8) Debt (Continued)
Annual maturities of long-term debt as of December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
Long-term
Debt
|
2008
|
|
$
|
140,638
|
2009
|
|
|
195
|
2010
|
|
|
185
|
2011
|
|
|
156
|
2012
|
|
|
-
|
Thereafter
|
|
|
-
|
|
|
|
|
Total payments
|
|
$
|
141,174
|
|
|
|
|
Revolving Line of Credit and Term Loan
In September 2007, the Company increased the capacity of its revolving credit facility from $75,000,000 to $130,000,000, and extended the maturity from February 2012 to September 2012, expecting to use of this
increased capacity for general corporate purposes, including working capital, acquisitions and affiliations and capital expenditures. Borrowings under the credit facility are at either prime rate or LIBOR plus a margin, at the Companys option.
The margin is based upon the Companys debt coverage ratio and ranges from 0.0% to 0.875% for prime borrowings and 0.875% to 1.75% for LIBOR borrowings. The Company is also required to comply with financial and other covenants, including
minimum net worth, leverage and fixed charge coverage ratios and maximum capital expenditures as defined by the credit agreement. On May 9, 2007, the Company entered into an interest rate swap to hedge $20,000,000 of borrowings under the credit
facility. Under this arrangement, the Company has effectively converted its 3-month, floating LIBOR interest rate exposure, plus a credit spread, to fixed 5.0%, plus a credit spread, until February 2012. Through December 2007, the Company also paid
a commitment fee on the unused balance of its credit facility ranging from 0.175% to 0.375%. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and amortization, adjusted for certain items, and is
collateralized by a first lien on substantially all of the Companys assets, including a pledge of the stock of its subsidiaries. The outstanding balance under this line as of December 31, 2007 was $40,450,000, and the Company had stand-by
letters of credit amounting to approximately $1,974,000 at December 31, 2007.
In September 2007, the Company entered into a Term Loan Agreement in
the amount of $100,000,000. The term loan was used to finance the Metro acquisition and pay down a portion of the Companys outstanding balance under its revolving credit facility. The maturity date of the term loan is September 24, 2008.
Interest on the term loan is at either prime or LIBOR plus a margin, at the Companys option. The margin for the first 90 days was 125 basis points, and increases 50 basis points each 90 days thereafter. The Company is also required to comply
with financial and other covenants, including minimum net worth, leverage and fixed charge coverage ratios and maximum capital expenditures as defined by the credit agreement. All of the obligations under this term loan facility rank
pari
passu
in right of payment to all of the obligations of the Companys revolving credit facility.
As a result of the outcome of the trial
associated with the litigation between PDG and the Company (see Note 9 Accrued litigation expense), the Company was notified by its lenders on December 13, 2007 that the jurys verdict constituted an event of default for
both the Companys revolving credit facility and term loan. On December 18, 2007, the Company entered into forbearance agreements under which the lenders agreed to not exercise certain of their default-related rights and remedies,
including acceleration of the maturity of the loans. The lenders also agreed to continue making loans and issue letters of credit under the Companys revolving credit facility of up to an aggregate principal amount of $51,424,000. Rather than
making loans under the Companys revolving credit facility at the default interest rate allowed for in the credit agreements, the lenders
60
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(8) Debt (Continued)
agreed to make such loans at LIBOR plus 250 basis points. See Footnote 15, Subsequent Events, for further information.
(9) Accrued litigation expense
In accordance with Statement of
Financial Accounting Standards No. 5,
Accounting for Contingencies
(SFAS 5), the Company accrued a loss contingency of $30,968,000, which is comprised of $39,968,000, the estimated fair value, using
discounted cash flows, of the assets being transferred, net of $9,000,000 of the $19,000,000 in cash proceeds the Company expects to receive from PDG. The $9,000,000 is deemed the amount in excess of the fair market value of management services to
be provided to PDG. In addition to the $30,968,000 accrued loss contingency, litigation expense also includes a loss reserve of $2,035,000 for the accounts receivable the Company will reserve as part of the legal settlement and professional fees of
$3,731,000. The foregoing was a result of the Company entering into a settlement agreement on December 26, 2007 with respect to the litigation among PDG, PDHC and the Company (the PDG Litigation). Under the terms of the settlement
agreement and in release of the PDG Litigation, the Company has agreed to transfer to PDG the leases and assets of 25 of the 31 dental facilities and tradename to PDG. The parties agreed that the Company will provide interim management services to
PDG for a period of up to nine months commencing on January 1, 2008. PDG will pay the Company $19,000,000 regardless of whether PDG utilizes the Companys management services during the nine month period.
(10) Stockholders Equity
Stock Dividend
On September 8, 2005, the Board of Directors approved a three-for-two split of the Companys common stock, effected in the form of a 50% stock dividend payable
October 14, 2005 to stockholders of record as of September 20, 2005. The Company issued 4,017,067 shares of common stock in connection with this transaction and recorded a charge to additional paid in capital equal to the par value of
shares issued. The accompanying consolidated financial statements and earnings per share data have been restated to reflect this stock split for all periods presented.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.01 par value.
Preferred Stock may be issued in one or more series as determined by the Board of Directors without further stockholder approval, and the Board of
Directors is authorized to fix and determine the terms, limitations and relative rights and preferences of such Preferred Stock, and to fix and determine the variations among series of Preferred Stock. Any new Preferred Stock issued would have
priority over the Common Stock with respect to dividends and other distributions, including the distribution of assets upon liquidation and dissolution. Such Preferred Stock may be subject to repurchase or redemption by the Company. The Board of
Directors, without stockholder approval, could issue Preferred Stock with voting and conversion rights that could adversely affect the voting power of the holders of Common Stock and the issuance of which could be used by the Board of Directors in
defense of a hostile takeover of the Company. As of December 31, 2007 and 2006, there were no shares of Preferred Stock issued or outstanding.
Common Stock
The Company is authorized to issue up to 25,000,000 shares of Common Stock, $0.01 par value. As of December 31, 2007,
13,397,120 shares were issued and 12,814,620 shares were outstanding. As of December 31, 2006, 12,991,137 shares were issued and 12,408,637 shares were outstanding.
61
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(10) Stockholders Equity (Continued)
Treasury Stock
On December 16, 1999, the Board of Directors authorized the Company to repurchase up to $5,000,000 of its Common Stock in the open market. Under this plan, the Company has repurchased 582,500 shares of its Common
Stock through December 31, 2006 at a cost of $3,874,000. The Companys 2005 stock dividend was not paid on the repurchased shares of Common Stock.
Cash Dividends
As of December 31, 2007 the Company does not have the ability to pay cash dividends on its Common Stock as a result of
forbearance agreements entered into with the Companys lenders on December 18, 2007 (see Note 8, Debt).
(11) Stock-based
Compensation
Options granted under the following plans generally have a ten-year term and generally have a vesting period of four years. At
December 31, 2007, options for 1,186,330 shares were vested and 358,350 shares were available for future grants under the 2005 Equity Incentive Plan and the 2005 Directors Stock Option Plan. The Company issues new shares upon stock option
exercises. No restricted shares have been awarded.
On January 1, 2006, the Company adopted SFAS No. 123(R) which revises SFAS 123. Prior to
January 1, 2006, SFAS No. 123, as amended by SFAS No. 148 allowed companies to recognize expense for the fair value of stock-based awards or to continue to apply the provisions of APB Opinion No. 25 and disclose the effects of
SFAS No. 123 as if the fair-value-based method defined in SFAS No. 123 had been applied. Under APB Opinion No. 25, compensation expense is recognized if on the measurement date the fair value of the underlying stock exceeds the
exercise price. The Company had elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 and No. 148. Because the Company granted stock options to employees and directors at
exercise prices equal to the fair market value on the date of grant, no stock-based compensation was recognized in periods prior to January 1, 2006.
Under SFAS No. 123(R), the Company is required to select a valuation technique or option-pricing model that meets the criteria as stated by the standard, which includes a binomial model and the Black-Scholes model. At the present time,
the Company is using the Black-Scholes model. The adoption of SFAS No. 123(R), applying the modified prospective method, as elected by the Company, requires the Company to estimate forfeitures in calculating the expense related to
stock-based compensation as opposed to only recognizing those forfeitures and the corresponding reduction in expense as they occur. The Company has chosen to use the short-cut method to determine the pool of windfall tax benefits as of
the adoption of SFAS No. 123(R). In addition, SFAS No. 123(R) requires the Company to reflect tax savings resulting from the tax deductions in excess of expense as a financing cash flow in its statement of cash flows rather than as an
operating cash flow as reflected prior to the adoption of SFAS No. 123(R).
The Company recognized stock-based compensation expense for options
granted and its employee stock purchase plan (ESPP) of $1,898,000 and $1,363,000 for the years ended December 31, 2007 and 2006, respectively, and this expense was recorded within general corporate expense on the Companys
consolidated statements of income. In addition, the Company recorded a deferred tax benefit associated with stock-based compensation for options grants of $622,386 and $447,745 for the years ended December 31, 2007 and 2006, respectively, and
no amounts were capitalized. The remaining unrecognized stock-based compensation expense
62
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(11) Stock-based Compensation (Continued)
for unvested stock option awards as of December 31, 2007 was approximately $4,300,000, and the weighted average period of time over which this cost will
be recognized is 3.4 years.
The fair value for these options and employee stock purchase rights granted was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
Stock
Options
|
|
|
ESPP
|
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
5.1
|
%
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
|
|
4.0
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
42
|
%
|
|
|
39
|
%
|
|
|
42
|
%
|
|
|
41
|
%
|
|
|
36
|
%
|
|
|
35
|
%
|
Expected life (years)
|
|
|
6.20
|
|
|
|
0.50
|
|
|
|
6.25
|
|
|
|
0.50
|
|
|
|
4.00
|
|
|
|
0.50
|
|
Weighted average fair value of options/purchase rights granted during the year
|
|
$
|
10.60
|
|
|
$
|
6.13
|
|
|
$
|
6.91
|
|
|
$
|
4.59
|
|
|
$
|
5.29
|
|
|
$
|
3.40
|
|
The Company calculated the volatility assumption using a blend of a historical volatility rate for a period equal
to the expected term and an expected volatility rate based on more recent activity. The Company estimated the expected life of its stock options using the simplified method for determining the expected term as prescribed by the Securities and
Exchange Commissions Staff Accounting Bulletin No. 107,
Share-based Payment.
Expected life of the Companys ESPP purchase rights reflects the length of each period (six months) an employee can participate in at the
end of which shares are purchased.
The following table summarizes the stock option transactions during the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding at December 31, 2006
|
|
1,943
|
|
|
$
|
8.60
|
|
-
|
|
|
-
|
Granted
|
|
271
|
|
|
|
22.05
|
|
-
|
|
|
-
|
Exercised
|
|
(367
|
)
|
|
|
5.96
|
|
-
|
|
|
-
|
Forfeited or expired
|
|
(19
|
)
|
|
|
15.90
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
1,828
|
|
|
$
|
11.05
|
|
6.52
|
|
$
|
3,734
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and unvested expected to vest as of December 31, 2007
|
|
1,779
|
|
|
$
|
10.88
|
|
6.47
|
|
$
|
3,730
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
1,186
|
|
|
$
|
7.69
|
|
5.57
|
|
$
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the year ended
December 31 2007, 2006 and 2005 are provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Proceeds from stock options exercised
|
|
$
|
2,186
|
|
$
|
867
|
|
$
|
1,953
|
Tax benefit related to stock options exercised
|
|
$
|
2,413
|
|
$
|
565
|
|
$
|
2,079
|
Intrinsic value of stock options exercised
|
|
$
|
6,520
|
|
$
|
1,205
|
|
$
|
5,525
|
63
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(11) Stock-based Compensation (Continued)
Summaries of the Companys stock option plans as of December 31, 2007 are as
follows:
2005 Equity Incentive Plan
The
Companys 2005 Equity Incentive Plan, (the 2005 Plan), provides for the grant of stock options to key employees. The 2005 Plan permits the grant of options that qualify as incentive stock options and non-qualified options. The
exercise price of such options can be no less than the fair market value of the Common Stock at the time of grant. Options granted pursuant to the 2005 Plan generally vest over four years and expire ten years after the date of grant. At
December 31, 2007, 675,000 shares were authorized under the 2005 Plan, with 671,125 shares reserved for issuance and options for 437,775 shares outstanding. As part of the approval of the 2005 Plan, no further stock options will be granted by
the Company under the Amended and Restated 1996 Stock Option Plan and the 1999 Restricted Stock Plan has been terminated.
2005 Directors Stock Option
Plan
The Companys 2005 Directors Stock Option Plan, (the 2005 Directors Plan), provides for the granting of options to non-employee
directors. Only non-qualified options may be granted pursuant to the Directors Plan. The exercise price of such options can be no less than the fair market value of the Common Stock at the time of grant. Options granted pursuant to the 2005
Directors Plan generally vest over four years and expire ten years after the date of grant. At December 31, 2007, 225,000 shares were authorized under the Directors Plan, with 225,000 shares reserved for issuance and options for 100,000 shares
outstanding. As part of the approval of the 2005 Directors Plan, no further stock options will be granted under the Companys Amended and Restated 1996 Directors Stock Option Plan.
1996 Stock Option Plan
The Companys 1996 Stock Option Plan, as amended (the 1996 Plan), provides
for the grant of stock options to key employees. The 1996 Plan permits the granting of options that qualify as incentive stock options and non-qualified options. The exercise price of such options is no less than the fair market value of the Common
Stock at the time of grant. Options granted pursuant to the 1996 Plan generally vest over four years and expire ten years after the date of grant. At December 31, 2007, 2,359,869 shares were authorized under the 1996 Plan, with 1,017,863 shares
reserved for issuance and options for 1,017,863 shares outstanding. No further options will be granted under the 1996 Plan.
1996 Time Accelerated
Restricted Stock Option Plan
The Companys 1996 Time Accelerated Restricted Stock Option Plan, as amended (TARSOP Plan), provides for
the grant of stock options to key employees. Only non-qualified options may be granted pursuant to the TARSOP Plan. The exercise price of such options is no less than the fair market value of the Common Stock at the time of grant. Options granted
under this plan vest at the end of the nine years, subject to accelerated vesting based on achievement of certain performance measures, and generally expire after nine and a half years. In February 2003, the Companys Board of Directors
approved an amendment to prohibit future grants under the TARSOP Plan, except for options for 14,054 shares that were granted in July 2003 in connection with the Companys one-time stock option exchange program. At December 31, 2007,
options for 14,054 shares were outstanding under this Plan. All outstanding options to purchase such shares became exercisable at the completion of the IPO except for the options granted in July 2003 in connection with the Companys one-time
stock option exchange program. The TARSOP Plan expired on January 11, 2006.
64
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(11) Stock-based Compensation (Continued)
1996 Affiliate Stock Option Plan
The Companys 1996 Affiliate Stock Option Plan, as amended (the Affiliate Plan), provides for the grant of stock options to certain persons associated
with the affiliated practices. Only non-qualified options may be granted pursuant to the Affiliate Plan. The exercise price of such options is no less than the fair market value of the Common Stock at the time of grant. Options granted pursuant to
the Affiliate Plan generally vest over four years and expire ten years after the date of grant. In February 2003, the Companys Board of Directors approved an amendment to prohibit future grants under the Affiliate Plan. At December 31,
2007, no options were outstanding under the Affiliate Plan.
1996 Directors Stock Option Plan
The Companys 1996 Directors Stock Option Plan, as amended (the 1996 Directors Plan), provides for the granting of options to outside directors. Only
non-qualified options may be granted pursuant to the 1996 Directors Plan. The exercise price of such options is no less than the fair market value of the Common Stock at the time of grant. Options granted pursuant to the Directors Plan generally
vest over four years and expire ten years after the date of grant. At December 31, 2007, 577,500 shares were authorized under the 1996 Directors Plan, with 258,300 shares reserved for issuance and options for 258,300 shares outstanding. No
further options will be granted under the 1996 Directors Plan.
1997 Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan, as amended (the Employee Stock Purchase Plan or ESPP), enables eligible employees to purchase shares of
Common Stock at a discount on a periodic basis through payroll deductions and is intended to meet the requirements of Section 423 of the Internal Revenue Code. Purchases occur at the end of option periods, each of six months duration. The
purchase price of Common Stock under the ESPP is 85% of the lesser of the value of the Common Stock at the beginning or the end of the option period. Prior to each option period, participants may elect to have from 2% to 10% of their compensation
withheld and applied to the purchase of shares at the end of the option period. The ESPP imposes a maximum of $12,500 on the amount that may be withheld from any participant in any option period. A total of 550,000 shares of Common Stock has been
reserved for issuance under the ESPP, of which 389,090 shares have been issued through 2007 and 29,170 shares were committed for issuance as of December 31, 2007.
Stock Option Activity
A summary of stock option activity under all the Companys stock option plans for the
years ended December 31, 2007, 2006 and 2005 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding at beginning of year
|
|
1,942,704
|
|
$
|
8.60
|
|
1,781,531
|
|
$
|
7.65
|
|
1,957,051
|
|
$
|
6.15
|
Granted
|
|
270,650
|
|
|
22.05
|
|
284,800
|
|
|
14.17
|
|
240,150
|
|
|
15.75
|
Exercised
|
|
(366,725)
|
|
|
5.96
|
|
(115,804)
|
|
|
7.51
|
|
(399,922)
|
|
|
5.07
|
Cancelled
|
|
(18,637)
|
|
|
15.90
|
|
(7,823)
|
|
|
11.09
|
|
(15,748)
|
|
|
10.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
1,827,992
|
|
$
|
11.05
|
|
1,942,704
|
|
$
|
8.60
|
|
1,781,531
|
|
$
|
7.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
1,186,330
|
|
$
|
7.69
|
|
1,294,261
|
|
$
|
6.53
|
|
1,150,597
|
|
$
|
6.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(11) Stock-based Compensation (Continued)
The following table summarizes information about stock options outstanding at
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
$ 4.41 - $ 6.00
|
|
546,403
|
|
4.67
|
|
$
|
5.65
|
|
546,403
|
|
$
|
5.65
|
$ 6.00 - $ 13.80
|
|
772,900
|
|
6.62
|
|
|
9.54
|
|
525,816
|
|
|
8.03
|
$ 13.80 -$ 19.45
|
|
242,639
|
|
7.23
|
|
|
15.94
|
|
114,111
|
|
|
15.85
|
$ 19.45 - $ 26.02
|
|
266,050
|
|
9.21
|
|
|
22.07
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,827,992
|
|
6.50
|
|
$
|
11.05
|
|
1,186,330
|
|
$
|
7.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12) Employee Retirement Benefit Plans
The Company has a Savings and Retirement Plan (401(k) Plan), adopted October 1, 1996, which is the Companys principal defined contribution retirement plan. The plan provides for a match of up to 50% of
the first 6% of an employees eligible compensation, subject to IRS max/minimums. Total plan expense for the years ended December 31, 2007, 2006 and 2005 was $1,395,000, $1,184,000 and $1,002,000, respectively.
(13) Earnings Per Share
The following table provides a
reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
Basic Earnings (Losses) Per Share:
|
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) available to common stockholders
|
|
$
|
(7,716
|
)
|
|
$
|
11,134
|
|
$
|
10,291
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,681
|
|
|
|
12,301
|
|
|
12,006
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) per share
|
|
$
|
(0.61
|
)
|
|
$
|
0.91
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Losses) Per Share:
|
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) available to common stockholders
|
|
|
(7,716
|
)
|
|
$
|
11,134
|
|
$
|
10,291
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,681
|
|
|
|
12,301
|
|
|
12,006
|
Add: Dilutive effect of options (1)
|
|
|
-
|
|
|
|
615
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares as adjusted
|
|
|
12,681
|
|
|
|
12,916
|
|
|
12,716
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) per share
|
|
$
|
(0.61
|
)
|
|
$
|
0.86
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
(1) In 2007 the dilutive effect of 631,247 shares were excluded as the Company had a loss from
continuing operations pursuant to SFAS 128 Earnings per Share. In 2006, 461,865 options were excluded from the computation of diluted earnings per share due to their antidilutive effect.
66
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(14) Selected Quarterly Operating Results (unaudited)
The following table sets forth summary quarterly results of operations for the Company for the years ended December 31, 2007 and 2006 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
65,458
|
|
$
|
66,552
|
|
$
|
67,162
|
|
$
|
79,583
|
|
Operating expenses
|
|
|
58,235
|
|
|
58,365
|
|
|
61,910
|
|
|
106,599
|
|
Earnings (losses) from operations
|
|
|
7,223
|
|
|
8,187
|
|
|
5,252
|
|
|
(27,016
|
)
|
Earnings (losses) before income taxes
|
|
|
6,441
|
|
|
7,519
|
|
|
4,327
|
|
|
(30,284
|
)
|
Income taxes
|
|
|
2,562
|
|
|
2,991
|
|
|
1,626
|
|
|
(11,460
|
)
|
Net earnings (losses)
|
|
$
|
3,879
|
|
$
|
4,528
|
|
$
|
2,701
|
|
$
|
(18,824
|
)
|
Net earnings (losses) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
$
|
0.36
|
|
$
|
0.21
|
|
$
|
(1.47
|
)
|
Diluted
|
|
$
|
0.30
|
|
$
|
0.34
|
|
$
|
0.20
|
|
$
|
(1.47
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,456
|
|
|
12,669
|
|
|
12,779
|
|
|
12,812
|
|
Diluted
|
|
|
13,145
|
|
|
13,302
|
|
|
13,395
|
|
|
12,812
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
54,066
|
|
$
|
55,078
|
|
$
|
53,842
|
|
$
|
54,931
|
|
Operating expenses
|
|
|
48,978
|
|
|
49,355
|
|
|
49,401
|
|
|
50,001
|
|
Earnings from operations
|
|
|
5,088
|
|
|
5,723
|
|
|
4,441
|
|
|
4,930
|
|
Earnings before income taxes
|
|
|
4,604
|
|
|
5,253
|
|
|
3,992
|
|
|
4,431
|
|
Income taxes
|
|
|
1,813
|
|
|
2,070
|
|
|
1,578
|
|
|
1,685
|
|
Net earnings
|
|
$
|
2,791
|
|
$
|
3,183
|
|
$
|
2,414
|
|
$
|
2,746
|
|
Net earnings per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
$
|
0.26
|
|
$
|
0.20
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
0.22
|
|
$
|
0.25
|
|
$
|
0.19
|
|
$
|
0.21
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,269
|
|
|
12,280
|
|
|
12,308
|
|
|
12,345
|
|
Diluted
|
|
|
12,851
|
|
|
12,848
|
|
|
12,934
|
|
|
13,022
|
|
(1) The sum of the quarterly earnings per share may not equal the full-year earnings per share as the computations
of the weighted average shares outstanding for each quarter and the full year are made independently.
67
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years
Ended December 31, 2007, 2006 and 2005
(15) Subsequent Events
On January 11, 2008, the Company and its lenders entered into Amended and Restated Forbearance Agreements pursuant to which the Companys lenders committed to release the collateral under the Companys secured revolving
credit agreement and term loan agreement necessary for the Company to meet the obligations of the Settlement Agreement (see Note 9 Accrued litigation expense).
On February 21, 2008, the Company entered into agreements to amend its revolving credit facility and term loan with its existing lenders. The agreements replaced the Amended and Restated Forbearance Agreements
and waived the existing defaults under the revolving credit facility and term loan facility as of December 31, 2007. Pursuant to the agreements, the revolving credit facility will have a capacity of $75,000,000 and the term loan will have
$100,000,000 outstanding. Both facilities will mature on June 30, 2009 and therefore the Company has classified the outstanding indebtedness as long term on its balance sheet as of December 31, 2007. The Company is also required to comply
with financial and other covenants for both facilities, including minimum net worth, leverage and fixed charge coverage ratios and maximum capital expenditures as defined by the credit agreement. The Company will initially borrow on both facilities
at the LIBOR rate plus 250 basis points. The amendments to the revolving credit facility and term loan become effective upon completion of the transactions contemplated by the Settlement Agreement.
On February 29, 2008, under the terms of the Settlement Agreement and in settlement and release of the litigation between the Company, PDHC and PDG, the Company
transferred to PDG the leases and assets of 25 of the 31 Park Dental facilities and tradename to PDG. The parties agreed that the Company will provide interim management services to PDG for a period of up to nine months commencing on January 1,
2008. PDG will pay the Company a management fee of $19,000,000 in twelve equal monthly installments commencing in January 2008 regardless of whether PDG utilizes the management services during the nine month period. Pursuant to SFAS No. 144 the
Company will realize an estimated net gain of approximately $32,000,000 which represents the fair value of the assets transferred in excess of the book value of the assets transferred. The Company also agreed to reserve outstanding accounts
receivable due from PDG at December 31, 2007 of $2,035,000.
68