UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2009
Commission File Number: 0-23363
AMERICAN DENTAL PARTNERS,
INC.
(Exact name of registrant as specified in its charter)
|
|
|
DELAWARE
|
|
04-3297858
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
American Dental Partners, Inc.
401 Edgewater Place, Suite 430
Wakefield, Massachusetts 01880
(Address of principal executive offices, including zip code)
(781) 224-0880
(781) 224-4216 (fax)
(Registrants telephone number, including area code)
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨
Yes
¨
No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Indicate by check mark whether the registrant is a
shell company, as defined in Rule 12b-2 of the Act
¨
Yes
x
No
The number of shares of Common Stock, $0.01 par value, outstanding as of May 4, 2009 was 12,948,575.
EXPLANATORY NOTE
This Form 10-Q/A (the Amendment) amends our Form 10-Q for the period ended March 31, 2009, which was filed with the Securities and Exchange Commission
on May 11, 2009 (the Original Filing). We are filing this Form 10-Q/A to amend
Item 1 Financial Statements and Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations. Specifically, we have provided revised disclosure under Footnote (1) to the Financial Statements and under Liquidity and Capital Resources Current Credit Market Conditions.
In connection with the filing of this Form 10-Q/A and pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, we are including with this Form
10-Q/A certain currently dated certifications.
There have been no changes from the original Form 10-Q other than as described above. This Amendment
No. 1 does not reflect events occurring after the original filing of the Form 10-Q, or modify or update in any way disclosures made in the Form 10-Q, except as stated above.
AMERICAN DENTAL PARTNERS, INC.
INDEX
2
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,568
|
|
|
$
|
6,626
|
|
Accounts receivable, net
|
|
|
27,888
|
|
|
|
25,875
|
|
Inventories
|
|
|
2,504
|
|
|
|
2,447
|
|
Prepaid expenses and other current assets
|
|
|
4,177
|
|
|
|
4,745
|
|
Prepaid/refundable income taxes
|
|
|
|
|
|
|
798
|
|
Deferred income taxes
|
|
|
3,858
|
|
|
|
4,193
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
44,995
|
|
|
|
44,684
|
|
|
|
|
Property and equipment, net
|
|
|
53,485
|
|
|
|
54,542
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
76,122
|
|
|
|
76,122
|
|
Service Agreements and other intangible assets, net
|
|
|
173,295
|
|
|
|
175,527
|
|
Deferred income taxes
|
|
|
1,913
|
|
|
|
1,912
|
|
Other
|
|
|
432
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
251,762
|
|
|
|
254,027
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
350,242
|
|
|
$
|
353,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
14,655
|
|
|
$
|
14,763
|
|
Accrued compensation and benefits
|
|
|
9,753
|
|
|
|
9,436
|
|
Accrued expenses
|
|
|
6,040
|
|
|
|
6,620
|
|
Income taxes payable
|
|
|
133
|
|
|
|
|
|
Deferred income taxes
|
|
|
82
|
|
|
|
81
|
|
Current maturities of debt
|
|
|
126,149
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
156,812
|
|
|
|
31,096
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
293
|
|
|
|
131,441
|
|
Deferred income taxes
|
|
|
38,377
|
|
|
|
38,499
|
|
Other liabilities
|
|
|
5,446
|
|
|
|
5,135
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
44,116
|
|
|
|
175,075
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
200,928
|
|
|
|
206,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
1,173
|
|
|
|
584
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, per value $0.01 per share, 1,000,000 shares authorized, no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, per value $0.01 per share, 25,000,000 shares authorized, 13,531,075 and 13,484,241 shares issued; 12,948,575 and 12,901,741
shares outstanding at March 31, 2009 and December 31, 2008, respectively
|
|
|
135
|
|
|
|
135
|
|
Additional paid-in capital
|
|
|
71,748
|
|
|
|
71,096
|
|
Treasury stock, at cost (582,500 shares)
|
|
|
(3,874
|
)
|
|
|
(3,874
|
)
|
Accumulated comprehensive income
|
|
|
(2,036
|
)
|
|
|
(2,059
|
)
|
Retained earnings
|
|
|
82,168
|
|
|
|
81,200
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
148,141
|
|
|
|
146,498
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
350,242
|
|
|
$
|
353,253
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
3
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in
thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Net revenue
|
|
$
|
69,385
|
|
$
|
79,811
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
29,566
|
|
|
35,501
|
|
Lab fees and dental supplies
|
|
|
10,293
|
|
|
11,981
|
|
Office occupancy
|
|
|
8,499
|
|
|
9,013
|
|
Other operating expense
|
|
|
6,578
|
|
|
6,772
|
|
General corporate expense
|
|
|
3,360
|
|
|
3,630
|
|
Depreciation
|
|
|
2,715
|
|
|
2,774
|
|
Amortization of intangible assets
|
|
|
2,425
|
|
|
2,387
|
|
Litigation settlement (income)
|
|
|
|
|
|
(30,127
|
)
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
63,436
|
|
|
41,931
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
5,949
|
|
|
37,880
|
|
Interest expense
|
|
|
3,370
|
|
|
2,455
|
|
Earnings before income taxes
|
|
|
2,579
|
|
|
35,425
|
|
Income taxes
|
|
|
1,021
|
|
|
13,760
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
1,558
|
|
|
21,665
|
|
Noncontrolling interest
|
|
|
137
|
|
|
140
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,421
|
|
$
|
21,525
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
12,935
|
|
|
12,839
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,994
|
|
|
13,084
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
4
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND NONCONTROLLING INTEREST
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder's Equity
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Issued
|
|
Common
Stock in
Treasury
|
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
|
Treasury
Stock at
Cost
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Stockholders
Equity
|
|
|
Noncontrolling
Interest
|
|
Balance at December 31, 2007
|
|
13,397
|
|
(582
|
)
|
|
$
|
134
|
|
$
|
68,332
|
|
$
|
51,082
|
|
|
$
|
(3,874
|
)
|
|
$
|
(771
|
)
|
|
$
|
114,903
|
|
|
$
|
894
|
|
Issuance of common stock for employee stock purchase plan including tax benefit of - $2
|
|
29
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
Issuance of common stock for exercised stock options, including tax benefit of - $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(777
|
)
|
|
|
(777
|
)
|
|
|
|
|
Noncontrolling interest distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(492
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,525
|
|
|
|
|
|
|
|
|
|
|
|
21,525
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
13,426
|
|
(582
|
)
|
|
$
|
134
|
|
$
|
69,108
|
|
$
|
72,607
|
|
|
$
|
(3,874
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
136,427
|
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
13,484
|
|
(582
|
)
|
|
$
|
135
|
|
$
|
71,096
|
|
$
|
81,200
|
|
|
$
|
(3,874
|
)
|
|
$
|
(2,059
|
)
|
|
$
|
146,498
|
|
|
$
|
584
|
|
Issuance of common stock for employee stock purchase plan including tax benefit of - $0
|
|
39
|
|
|
|
|
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
|
|
Issuance of common stock for exercised stock options, including tax benefit of - $5
|
|
8
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
Cumulative adjustment of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(453
|
)
|
|
|
|
|
|
|
|
|
|
|
(453
|
)
|
|
|
453
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,421
|
|
|
|
|
|
|
|
|
|
|
|
1,421
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
13,531
|
|
(582
|
)
|
|
$
|
135
|
|
$
|
71,748
|
|
$
|
82,168
|
|
|
$
|
(3,874
|
)
|
|
$
|
(2,036
|
)
|
|
$
|
148,141
|
|
|
$
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
$
|
1,558
|
|
|
$
|
21,665
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,715
|
|
|
|
2,774
|
|
Stock-based compensation
|
|
|
339
|
|
|
|
526
|
|
Amortization of intangible assets
|
|
|
2,425
|
|
|
|
2,387
|
|
Other amortization
|
|
|
272
|
|
|
|
39
|
|
Deferred income tax benefit
|
|
|
214
|
|
|
|
12,896
|
|
Loss on disposal of property and equipment
|
|
|
3
|
|
|
|
76
|
|
Accrued litigation expense
|
|
|
|
|
|
|
(30,968
|
)
|
Assets transferred to PDG as part of settlement of litigation
|
|
|
|
|
|
|
9,246
|
|
Changes in assets and liabilities, net of acquisitions, affiliations and assets transferred:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(2,013
|
)
|
|
|
(16,464
|
)
|
Other current assets
|
|
|
247
|
|
|
|
(323
|
)
|
Accounts payable and accrued expenses
|
|
|
(543
|
)
|
|
|
1,584
|
|
Accrued compensation and benefits
|
|
|
317
|
|
|
|
(2,585
|
)
|
Income taxes payable/refundable, net
|
|
|
932
|
|
|
|
637
|
|
Other, net
|
|
|
376
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,842
|
|
|
|
1,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash paid for acquisition and affiliation transactions
|
|
|
(75
|
)
|
|
|
(2,149
|
)
|
Capital expenditures, net
|
|
|
(1,794
|
)
|
|
|
(3,929
|
)
|
Payment of affiliation costs
|
|
|
(7
|
)
|
|
|
(99
|
)
|
Contingent and deferred payments
|
|
|
(142
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,018
|
)
|
|
|
(6,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
(Repayments) borrowings under revolving line of credit, net of repayments
|
|
|
(5,150
|
)
|
|
|
5,350
|
|
Repayments of debt
|
|
|
(45
|
)
|
|
|
(32
|
)
|
Distributions to noncontrolling interest holders
|
|
|
|
|
|
|
(492
|
)
|
Proceeds from shares issued under employee stock purchase plan
|
|
|
272
|
|
|
|
248
|
|
Proceeds from issuance of common shares for exercise of stock options
|
|
|
36
|
|
|
|
|
|
Tax benefit on exercise of stock options
|
|
|
5
|
|
|
|
|
|
Tax benefit on disqualified dispositions
|
|
|
|
|
|
|
2
|
|
Payment of debt issuance costs
|
|
|
|
|
|
|
(553
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(4,882
|
)
|
|
|
4,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(58
|
)
|
|
|
(258
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
6,626
|
|
|
|
6,376
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,568
|
|
|
$
|
6,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
2,733
|
|
|
$
|
2,350
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes, net
|
|
$
|
60
|
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures and intangibles accrued for, not paid
|
|
$
|
59
|
|
|
$
|
4,635
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
6
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(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.
The
Companys revolving credit facility and term loan mature on January 20, 2010 and accordingly have been classified as a current liability at March 31, 2009. The availability of senior secured debt has been significantly reduced in the
current credit market which has resulted in increased borrowing rates, reduced financial covenants and higher upfront fees. Although we have discussed with our existing lenders the terms for extending the maturity of our credit facilities, we
believe it is in the best interests of our shareholders to seek to refinance our indebtedness on a longer term basis at this time rather than incur the costs associated with a short-term extension of the maturity. We are pursuing alternatives for
refinancing our credit facilities with our existing and new lenders, but we cannot assure you that we will be able to refinance our credit facilities on satisfactory terms. We may be able to refinance only a portion of our revolving credit facility
and term loan, which would require us to seek to issue subordinated debt, preferred stock or common stock, or some combination of such securities to replace a portion of our credit facilities. Such securities may include interest or dividends,
voting rights or other dilutive effects to our existing shareholders. We cannot assure you that we would be able to issue such securities on satisfactory terms.
We do not anticipate having available cash from operations to pay the outstanding balance under our credit facilities that mature on January 20, 2010 and therefore we must complete a refinancing or extension prior to such maturity date. We
cannot assure you that such financing will be available or on terms acceptable to us. We believe that cash generated from operations and amounts available under our current revolving credit facility will be sufficient to fund our anticipated
operating cash needs for working capital, capital expenditures, affiliations and acquisitions through the maturity date of our credit facilities.
(2)
|
Basis of Presentation
|
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. 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.
The accompanying interim consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. In the opinion of management, all adjustments, which consist only of normal and recurring adjustments, necessary for a fair presentation of
financial position and results of operations, have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
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 from affiliates that affect the 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. Actual results may differ from managements estimates.
7
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
During the first quarter 2009, the Company
completed one in-market affiliation that joined an existing affiliated practice, Wisconsin Dental Group, S.C., and became subject to an existing service agreement. Cash paid, net of cash acquired, in connection with this transaction amounted to
$75,000. In connection with this transaction, the Company recorded approximately $31,000 in intangibles relating to the service agreements with the affiliated practices, with an amortization period of 25 years. The terms of this affiliation do not
provide for any contingent payments.
Intangible assets consisted of the following as
of March 31, 2009 and December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Service agreements
|
|
$
|
223,910
|
|
$
|
(53,957
|
)
|
|
$
|
169,953
|
Trade name
|
|
|
4,035
|
|
|
(838
|
)
|
|
|
3,197
|
Customer relationships
|
|
|
605
|
|
|
(460
|
)
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
228,550
|
|
$
|
(55,255
|
)
|
|
$
|
173,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Service agreements
|
|
$
|
223,718
|
|
$
|
(51,684
|
)
|
|
$
|
172,034
|
Trade name
|
|
|
4,035
|
|
|
(700
|
)
|
|
|
3,335
|
Customer relationships
|
|
|
605
|
|
|
(447
|
)
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
228,358
|
|
$
|
(52,831
|
)
|
|
$
|
175,527
|
|
|
|
|
|
|
|
|
|
|
|
Intangible amortization expense for the three months ended March 31, 2009 and 2008 was $2,425,000 and
$2,387,000, respectively. Estimated annual amortization expense for each of the next five fiscal years is approximately $9,479,000. The weighted average amortization period for service agreements is 25 years. The weighted average amortization period
for customer relationships is approximately three years. The amortization period of the Metro Dentalcare tradename intangible is five years. The trade name intangible asset associated with the Tooth Doctor is indefinite lived and not amortized. The
weighted average remaining life of all intangible assets is approximately 18 years.
8
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(6)
|
Stock-based Compensation
|
Options granted under the Companys
stock option plans generally have a ten-year term and generally have a vesting period of four years, except for the 2005 Directors Stock Option Plan which vests over three years. At March 31, 2009, options for 1,536,023 shares were vested
and 271,075 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. The Company grants
employee stock purchase rights under its 1997 Employee Stock Purchase Plan (ESPP). A total of 487,672 shares have been purchased under the ESPP and 62,328 shares are available for purchase as of March 31, 2009. The Company issues
new shares for ESPP purchases.
The Company recognizes stock-based compensation in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 (R),
Share-Based Payment.
The Company recognized stock-based compensation expense of $379,741 and $525,622 during the three months ended March 31, 2009 and 2008, respectively, which
was recorded within general corporate expenses on the Companys consolidated statement of income. In addition, the Company recorded a deferred tax benefit associated with stock-based compensation of $122,626 and $172,305 during the three months
ended March 31, 2009 and 2008, respectively, and no amounts were capitalized. The remaining unrecognized stock-based compensation expense for unvested stock option awards at March 31, 2009, was approximately $4,029,000 and the weighted
average period of time over which this cost will be recognized is 3.4 years.
The fair value of each option grant and employee stock purchase right is
estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants issued in the first quarters of 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
Stock
Options
|
|
|
ESPP
|
|
Risk free interest rate
|
|
|
2.03
|
%
|
|
|
1.90
|
%
|
|
|
3.03
|
%
|
|
|
3.32
|
%
|
Expected life
|
|
|
6.1 years
|
|
|
|
0.5 years
|
|
|
|
6.0 years
|
|
|
|
0.5 years
|
|
Expected volatility
|
|
|
57.94
|
%
|
|
|
50.46
|
%
|
|
|
85.72
|
%
|
|
|
144.00
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected forfeiture
|
|
|
4
|
%
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
Weighted average fair value of options
|
|
$
|
3.60
|
|
|
$
|
1.01
|
|
|
$
|
7.02
|
|
|
$
|
3.96
|
|
The Company calculated the volatility assumption for stock options 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.
The Company calculated the volatility assumption for ESPP purchases using an expected volatility rate based on recent activity.
The expected life of ESPP purchases is six months.
9
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes the stock option transactions during the first quarter of 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in
thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in
years)
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
Outstanding at December 31, 2008
|
|
1,816
|
|
|
$
|
10.78
|
|
5.66
|
|
|
798
|
Granted
|
|
320
|
|
|
|
6.53
|
|
|
|
|
|
Exercised
|
|
(9
|
)
|
|
|
4.83
|
|
|
|
|
|
Forfeited or expired
|
|
(4
|
)
|
|
|
8.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009
|
|
2,123
|
|
|
$
|
10.16
|
|
6.11
|
|
$
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and unvested expected to vest as of March 31, 2009
|
|
2,059
|
|
|
$
|
10.10
|
|
6.03
|
|
$
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009
|
|
1,536
|
|
|
$
|
9.76
|
|
4.99
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the first quarter
of 2009 and 2008 are provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Proceeds from stock options exercised
|
|
$
|
36
|
|
$
|
|
Tax benefit related to stock options exercised
|
|
$
|
5
|
|
$
|
|
Intrinsic value of stock options exercised
|
|
$
|
12
|
|
$
|
|
(7)
|
Accounts Receivable, net and Net Revenue
|
Accounts Receivable,
net
Accounts receivable, net, reflects receivables due from affiliated dental practices and represents 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 dental benefits third party administrator
(TPA). The following table lists receivables due from affiliated practices and other receivables as of March 31, 2009 and December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
December 31,
2008
|
Receivables due from affiliated practices
|
|
$
|
25,162
|
|
$
|
22,511
|
Other receivables, net
|
|
|
2,726
|
|
|
3,364
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
27,888
|
|
$
|
25,875
|
|
|
|
|
|
|
|
10
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Net Revenue
The
Companys net revenue represents reimbursement of expenses and fees charged to affiliated practices pursuant to the terms of the service agreements. Additionally, the Companys net revenue includes amounts from patient revenue of Tooth
Doctor, fees earned by the Companys TPA, dental laboratory and in 2008, revenue earned under the transition services agreement with PDG, P.A. (PDG). (See Note 9 Accrued Litigation Expense for further discussion.)
The Companys net revenue from the reimbursement of expenses is accounted for on an accrual basis and is recognized when these expenses are incurred
and charged to the affiliated practices. Reimbursement of expenses includes costs incurred by the Company for the operation and administration of the dental facilities that include salaries and benefits for non-dentist personnel working at the
dental facilities; 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.
Net revenue consisted of the following for` the three months ended March 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2009
|
|
2008
|
Reimbursement of expenses:
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
21,338
|
|
$
|
22,241
|
Lab and dental supplies
|
|
|
11,170
|
|
|
11,528
|
Office occupancy expense
|
|
|
7,524
|
|
|
7,215
|
Other operating expense
|
|
|
5,098
|
|
|
5,085
|
Depreciation expense
|
|
|
2,281
|
|
|
2,093
|
|
|
|
|
|
|
|
Total reimbursement of expenses
|
|
|
47,411
|
|
|
48,162
|
Business service fees
|
|
|
15,144
|
|
|
14,777
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
62,555
|
|
|
62,939
|
Patient revenue, professional services and dental laboratory fees
|
|
|
6,830
|
|
|
7,116
|
Revenue earned under transition service agreement with PDG
|
|
|
|
|
|
9,756
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
69,385
|
|
$
|
79,811
|
|
|
|
|
|
|
|
Net revenue from the Companys service agreement with Metro Dentalcare, P.L.C, the affiliated practice at
Metro Dentalcare (Metro), represented approximately 22% and 20% of consolidated net revenue for the three months ended March 31, 2009 and 2008, respectively. Net revenue from the Companys service agreement with Wisconsin
Dental Group, S.C., the affiliated practice at Forward Dental, represented approximately 14% and 11% of consolidated net revenue for the three months ended March 31, 2009 and 2008, respectively. Net revenue from the Companys transition
services agreement with PDG represented approximately 12% of consolidated net revenue for the three months ended March 31, 2008. No other service agreement or customer accounted for greater than 10% of the Companys consolidated net
revenue in the three months ended March 31, 2009 and 2008.
The Company has a revolving credit facility in the amount of
$75,000,000. The facility matures on January 20, 2010 and can be used for general corporate purposes, including working capital, acquisitions and affiliations and capital expenditures. Borrowings under the credit facility bear interest at
either prime or LIBOR plus a margin, at the Companys option. The margin is based upon the Companys debt coverage ratio and ranges from 4.25% to 4.50% for both prime and LIBOR borrowings. At March 31, 2009, the LIBOR interest rate
under the credit facility, including borrowing margin, was approximately 5.76% and the prime interest rate under the credit facility, including borrowing margin, was 7.75%. In addition, the Company pays a commitment fee on the unused balance of its
credit facility ranging from 0.375% to 0.5%. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and amortization, adjusted for certain items, and are collateralized by a first lien on substantially
all of the Companys assets, including a pledge of the stock of the Companys subsidiaries. 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. The Company was in compliance with its covenants as of March 31, 2009. The
11
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
outstanding balance under this line as of March 31, 2009 was $25,950,000, and the Company had stand-by letters of credit amounting to $1,669,200 at
March 31, 2009. The unused balance under this revolving credit facility as of March 31, 2009 was $47,380,000 and based on borrowing covenants, reduced by the stand-by letter of credit, $40,381,000 was available for borrowing.
The Company has a term loan in the amount of $100,000,000. The loan matures on January 20, 2010 and was used to fund the Companys 2007 acquisitions and
affiliations. Interest on the term loan is at LIBOR plus a margin. The margin for the first 90 days from October 24, 2008 is 450 basis points and increased 50 basis points March 1, 2009 and each 90 days thereafter. 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.
The
Companys revolving credit facility and term loan mature on January 20, 2010 and accordingly have been classified as current liability as of March 31, 2009. In the event that we are not able to complete a refinancing or extension
on satisfactory terms by January 20, 2010 we do not anticipate having available cash from operations to pay the outstanding debt at maturity and in such case we would be in default under the terms of our credit facility and term loan.
Pursuant to amendments to both the revolving credit facility and term loan, the Company is permitted to borrow up to $15,000,000 annually for capital
expenditures, $15,000,000 annually for acquisitions and up to $13,000,000 for earnout and contingent payments on previously completed acquisitions, subject to various financial covenants, including a maximum debt to earnings before interest, taxes,
depreciation and amortization leverage ratio of 3.75x.
(9)
|
Accrued Litigation Expense
|
In December 2007, the Company entered
into a settlement agreement with respect to litigation among PDHC Ltd., (PDHC) one of its Minnesota subsidiaries, and PDG. Under the terms of the definitive agreements contemplated by the settlement agreement and in release of the PDG
litigation, the Company transferred to PDG the leases and operating assets of 25 of the 31 Park Dental facilities and associated trade names to PDG, effective February 29, 2008. Pursuant to Financial Accounting Standards No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144) the Company realized a net gain of $30,763,000 which represents the fair value of the assets transferred in excess of the book value of the
assets transferred. In addition, the Company recorded an interim management services fee, during the first quarter of 2008, totaling $3,333,333 offset by the costs to provide these services including severance costs.
The parties also entered into a transition services agreement. Under the agreement, the Company agreed to provide interim management services to PDG for a period of up
to nine months through September 30, 2008 for $19,000,000. PDG paid the interim management services fee and the Company provided the services. The parties are completing the final steps in the separation of PDHC and PDG.
Basic earnings per share is computed by
dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the
period plus the dilutive effect of outstanding stock options using the treasury stock method. The computation of diluted earnings per share does not include the effect of outstanding stock options that would be antidilutive.
12
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings
per share computation for the three months ended March 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2009
|
|
2008
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
1,421
|
|
$
|
21,525
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,935
|
|
|
12,839
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.11
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
1,421
|
|
$
|
21,525
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,935
|
|
|
12,839
|
Add: Dilutive effect of options (1)
|
|
|
59
|
|
|
245
|
|
|
|
|
|
|
|
Weighted average common shares as adjusted
|
|
|
12,994
|
|
|
13,084
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.11
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
(1)
|
1,249,847 and 798,543 options were excluded from the computation of diluted net earnings per share for the three months ended March 31, 2009 and 2008, respectively, due to
their antidilutive effect.
|
(11)
|
Internal Use Software
|
Since 2002
,
the Company has been
developing Improvis, a proprietary practice management system. As of March 31, 2009, 19 affiliated practices comprising 185 dental facilities were using Improvis. The Company has recorded aggregate capitalized software costs amounting to
$2,346,800, which includes approximately $242,400 in capitalized interest, in connection with this project as of March 31, 2009, 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 $314,000 of amortization expense as of March 31, 2009. The capitalized development costs for the first phase is being amortized over 10 years.
13
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(12)
|
Fair Value Measurement
|
In September 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements
(SFAS 157) which is effective for fiscal years beginning after November 15, 2007. This statement defines fair value, establishes
a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a
fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
Relative to SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS 13,
Accounting for Leases
(SFAS 13) and its related interpretive accounting
pronouncements that address leasing transactions. The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities which was adopted
January 1, 2009, as required by FSP 157-2.
The Company uses the market approach technique to value its financial instruments and there were no
changes in valuation techniques during the three months ended March 31, 2009. The Companys financial assets and liabilities are primarily comprised of cash equivalents and an interest rate swap.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad
levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either
directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs that are not corroborated by market data based on assumptions of the Company used to measure
assets and liabilities at fair value. A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
Level 3
|
|
Total
|
|
Interest rate swap
|
|
$
|
|
|
$
|
(2,036
|
)
|
|
$
|
|
|
$
|
(2,036
|
)
|
Cash equivalents
|
|
|
4,575
|
|
|
|
|
|
|
|
|
|
4,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,575
|
|
$
|
(2,036
|
)
|
|
|
|
|
$
|
2,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
Level 3
|
|
Total
|
|
Interest rate swap
|
|
$
|
|
|
$
|
(2,059
|
)
|
|
$
|
|
|
$
|
(2,059
|
)
|
Cash equivalents
|
|
|
4,105
|
|
|
|
|
|
|
|
|
|
4,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,105
|
|
$
|
(2,059
|
)
|
|
|
|
|
$
|
2,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys debt is carried at cost and is more fully described in Note 8. As of March 31, 2009, the
estimated fair value of the Companys revolving line of credit was $24,771,000 and the fair value of the term loan was $95,542,000.
14
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company adopted Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no
material adjustment in the liability for unrecognized income tax benefits. As of December 31, 2008, the Company had $386,000 of gross unrecognized income tax benefits, of which $386,000 would affect the Companys effective tax rate if
recognized. Gross unrecognized income tax benefits did not change significantly during the three months ended March 31, 2009.
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 March 31, 2009, the Company has approximately $125,410 of accrued interest and penalties related to
uncertain tax positions.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. In
the normal course of business, the Company is subject to examination by U.S. federal and state taxing authorities. The tax years 2004 to 2008 remain open to examination by taxing jurisdictions to which the Company is subject.
On May 9, 2007, the Company entered into
an interest rate swap arrangement to fix the interest rate on $20,000,000 of its borrowings under the credit facility as a cash flow hedging instrument that matures in February 2012. The terms of this agreement provide that the Company exchange its
variable rate 3-month LIBOR payment, plus a credit spread, for a fixed rate of 5%, plus a credit spread. Swaps are generally held to maturity and are intended to mitigate the interest rate risk inherent with variable rate debt. Accordingly, interest
expense associated with the hedge reflects the fixed rate, and the change in the fair value of the hedge as of March 31, 2009 included in other non-current liabilities, with an offset to other comprehensive income (OCI). The impact
of the interest swap hedge on the Companys consolidated financial statements for the periods ending March 31, 2009 and December 31, 2008 is depicted below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
December 31,
2008
|
|
Balance Sheet Location
|
Interest Rate Swap (1)
|
|
$
|
2,036
|
|
$
|
2,059
|
|
Other non-current liabilities
|
|
|
|
|
|
|
|
|
|
The impact on OCI from the interest rate swap for the periods ended March 31, 2009 and December 31, 2008
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Amount of Gain
(Loss)
Recognized in
OCI
|
|
|
|
2009
|
|
2008
|
|
Interest Rate Swap (1)
|
|
$
|
23
|
|
$
|
(1,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Derivative designated as cash flow hedging instrument
|
15
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(15)
|
Recent Accounting Pronouncements
|
Effective January 1, 2009,
the Company adopted SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). The purpose of the statement is to replace current guidance in SFAS No.141, to better represent the economic value of a
business combination transaction. The changes from the previous guidance include, but are not limited to: (1) acquisition costs are recognized separately from the acquisition; (2) known contractual contingencies at the time of the
acquisition are considered part of the liabilities acquired and measured at their fair value; all other contingencies are part of the liabilities acquired and measured at their fair value only if it is more likely than not that they meet the
definition of a liability; (3) contingent consideration based on the outcome of future events is recognized and measured at the time of the acquisition; (4) business combinations achieved in stages (step acquisitions) recognize the
identifiable assets and liabilities, as well as noncontrolling interests, in the acquiree, at the full amounts of their fair values; and (5) a bargain purchase (defined as a business combination in which the total acquisition-date fair value of
the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree) requires that excess to be recognized as a gain attributable to the acquirer. The provisions of SFAS
141(R) are only applicable for the Companys transactions that qualify as business combinations and not the Companys affiliation transactions.
Effective January 1, 2009, the Company adopted SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research Bulletin No. 51
(SFAS 160),
which was issued to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in
the consolidated financial statements. Moreover, FASB Statement No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity
transactions. In evaluating the impact of FASB Statement No. 160, the Company determined the relationship with its noncontrolling interest holders requires the application of EITF (Emerging Issues Task Force ) D-98 (EITF
D-98)
Classification and Measurement of Redeemable Securities.
EITF D-98, issued in regards to Rule 5-02.28 of Securities and Exchange Commission (SEC) Regulation S-X, requires preferred securities, including
noncontrolling interests, that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the
holder, or (3) upon the occurrence of an event that is not solely within the control of the issuer. Accordingly, the Company has classified noncontrolling interest in mezzanine equity and not as part of equity as prescribed by SFAS 160.
Effective January 1, 2009, the Company adopted SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities an
amendment of FASB Statement No. 133 (SFAS 161)
. This Statement requires enhanced disclosures about an entitys derivative and hedging activities and encourages, but does not require, comparative disclosures for
earlier periods at initial adoption. The additional disclosures about our derivative and hedging activities did not have a material impact on our consolidated financial statements.
16
AMERICAN DENTAL PARTNERS, INC.
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Introduction
The following information should be read in conjunction with the financial statements and notes thereto
in Part I, Item 1 of this Quarterly Report and with Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
Cautionary Statement Regarding Forward-Looking Statements
Some of
the information in this Annual Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate,
project, and similar expressions, among others, identify forward-looking statements. Forward-looking statements speak only as of the date the statement was made. Such forward-looking statements are subject to uncertainties and other
factors that could cause actual results to differ materially from those projected, anticipated or implied. Certain factors that might cause such a difference include, among others, the Companys risks associated with its ability to refinance
its credit facilities on satisfactory terms, overall or regional economic conditions, dependence upon affiliated dental practices, contracts its affiliated practices have with third-party payors, dependence upon service agreements and government
regulation of the dental industry, the impact of any terminations or potential terminations of such contracts, and the Companys acquisition and affiliation strategy. Additional risks, uncertainties and other factors are described in
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.
Overview
American Dental Partners is a leading provider of dental facilities, support staff, and business services to multi-disciplinary dental group practices in selected markets
throughout the United States. We are committed to the success of the affiliated practices, and we make substantial investments to support each affiliated practices growth. We provide or assist 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. At March 31, 2009, we were affiliated with 26 dental group practices, comprising 542 full-time equivalent dentists practicing in 243 dental facilities in 18 states.
Our net revenue depends primarily on revenue generated by the affiliated practices. We estimate approximately 85% of the patients of our affiliated practices have dental
insurance, and demand for dental care is heavily influenced by dental insurance. In general, dental insurance covers 100% of preventative care, only 80% of basic restorative procedures and 50% of more extensive restorative procedures. In addition,
dental insurance often caps benefits at an annual maximum of $1,000 to $1,500. As a result, patients, with or without dental insurance, are financially responsible for a considerable portion of their dental expenditures. With the deteriorating
economic conditions initially emanating from consumer indebtedness, consumer spending patterns have changed. Our affiliated practices have observed patients either delaying care or, for those patients with dental insurance, opting for dental
procedures that are largely covered by insurance. As a result, revenue growth rates of the affiliated practices have decreased and revenue mix has shifted towards lower cost and lower profitability dental procedures. The effect to us is lower net
revenue and lower profit margins. We believe economic conditions will continue to adversely impact us during 2009, although we are unable to predict the likely duration or severity of the current adverse economic conditions or the severity of the
effect of those conditions on our business and results of operations.
17
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Affiliation and Acquisition Summary
When affiliating with a dental practice, we customarily acquire selected assets and enter into a long-term service agreement with the affiliated practice. 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 affiliated practice is responsible for the provision of dental care. Each of our service agreements is for an initial term of 40 years.
During the first quarter 2009, we completed one affiliation which joined an existing affiliated practice, Wisconsin Dental Group, S.C., and became subject
to an existing service agreement Cash paid, net of cash acquired, in connection with this transaction amounted to $75,000. In connection with this transaction, we recorded approximately $31,000 in intangibles relating to the service agreements with
the affiliated practices, with an amortization period of 25 years.
We are constantly evaluating potential acquisition and affiliation transactions with
dental practices and acquisitions of other dental-related companies that would expand our business capabilities. However, our revolving credit agreement and term loan limit amounts which can be borrowed to fund affiliations and acquisitions, and we
expect that the number of new affiliations and acquisitions in 2009 will be at levels lower than we achieved in recent years. (see Liquidity and Capital Resources)
Litigation Settlement Agreements
In December 2007, we entered into a settlement agreement in which the service
agreement with PDG, P.A. was terminated effective December 31, 2007, and we transferred the operating assets of 25 of the 31 Park Dental facilities and the Park Dental trade name to PDG. We retained the remaining six dental
facilities which were combined with Metro Dentalcare. We also entered into a transition services agreement with PDG to provide services for a period of nine months through September 30, 2008 for $19,000,000. We completed the transition
services, received the related $19,000,000 payment and are completing the final steps in the separation of the companies. As a result of these agreements, our results of operations are not comparable and may not reflect the results of operations to
be expected in future periods.
Revenue Overview
Net Revenue
Our net revenue includes management fees earned by us pursuant to the terms of the service agreements with the affiliated
practices, as well as reimbursement of clinic expenses paid by us on their behalf, and other revenue which includes patient revenue of Arizonas Tooth Doctor for Kids (Tooth Doctor), fees earned by our dental benefits third party
administrator (TPA), fees earned by our dental laboratory and in 2008 revenue earned under the transition services agreement with PDG.
18
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
The following table provides the components of our net revenue for the three months ended March 31, 2009 and
2008 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2009
|
|
2008
|
Reimbursement of expenses
|
|
$
|
47,411
|
|
$
|
48,162
|
Business service fees
|
|
|
15,144
|
|
|
14,777
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
62,555
|
|
|
62,939
|
Other revenue
|
|
|
6,830
|
|
|
7,116
|
Revenue earned under transition service agreement with PDG
|
|
|
|
|
|
9,756
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
69,385
|
|
$
|
79,811
|
|
|
|
|
|
|
|
Both the affiliated dental practices and Company-owned businesses can be affected by changes in the US economy
that may influence discretionary spending for dental services not covered by dental benefit plans. The Tooth Doctor business is directly affected by patient services reimbursed by state Medicaid programs. Revenue earned under service agreements
include reimbursement of expenses incurred by us on behalf of the affiliated practices in connection with the operation and administration of dental facilities and service fees charged to the affiliated practices pursuant to the terms of the service
agreements for management services and capital committed by us. Net revenue from the reimbursement of expenses is accounted for on an accrual basis and is recognized when these expenses are incurred and billed to the affiliated practices.
Reimbursement of expenses includes costs incurred by us for the operation and administration of the dental facilities that 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.
Other revenue includes patient revenue from the Tooth Doctor, professional services, dental
laboratory fees and other miscellaneous revenue.
For additional information on components of our net revenue, see Note 7 of Notes to Interim
Consolidated Financial Statements.
Patient Revenue of the Affiliated Practices
We believe it is important to understand patient revenue of the affiliated practices. This includes the practices that we do not control, nor own any equity interests in, and are affiliated with us by means of service
agreements. We do not consolidate the financial statements of these affiliated practices with ours, and accordingly their patient revenue is not a measure of our financial performance under generally accepted accounting principles because it is not
our revenue. It is, however, a financial measure we use, along with the patient revenue of Tooth Doctor, to monitor operating performance and to help identify and analyze trends of the affiliated practices which may impact our business. Most of the
operating expenses incurred by us, pursuant to service agreements, are on behalf of the affiliated practices in the operation of dental facilities. These expenses are significantly affected by the patient revenue of the affiliated practices.
The affiliated practices generate revenue from providing care to patients and receive payment from patients and dental benefit providers, or payors, under
fee-for-service, PPO plans and managed care capitation plans. Patient revenue reflects the amounts billed
19
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
by an affiliated practice at its established rates reduced by any contractual adjustments and allowances for uncollectible accounts. Contractual adjustments
represent discounts off established rates negotiated pursuant to certain dental benefit plan provider contracts. While payor mix varies from market to market, the following table provides the aggregate payor mix of all affiliated practices,
including Tooth Doctor, for the three months ended March 31:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Fee-for-service
|
|
17
|
%
|
|
25
|
%
|
PPO and dental referral plans
|
|
74
|
%
|
|
65
|
%
|
Capitated managed care plans
|
|
9
|
%
|
|
10
|
%
|
For the affiliated practices that we do not own and are affiliated with us by means of a service agreement, after
collection of fees from patients and third-party insurers for the provision of dental care and payment to us of our service fee and reimbursement of clinic expenses incurred by us on their behalf, the amounts remaining are used by these affiliated
practices for compensation of dentists and, in certain states, hygienists and/or dental assistants who are employed by these affiliated practices.
The
following table sets forth for the three months ended March 31, 2009 and 2008, the patient revenue of all the affiliated practices, patient revenue earned by Tooth Doctor, the amounts due to us under service agreements, and amounts retained by
the affiliated practices we do not own for compensation of dentists and, where applicable, other clinical staff (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
%
Change
|
|
|
|
2009
|
|
2008
|
|
Patient revenue of affiliated practices:
|
|
|
|
|
|
|
|
|
|
Platform dental group practices affiliated with us in both periods of comparison
|
|
$
|
106,271
|
|
$
|
107,301
|
|
-1.0
|
%
|
Platform dental group practices that affiliated with us during periods of comparison
|
|
|
486
|
|
|
73
|
|
565.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Total patient revenue
|
|
|
106,757
|
|
|
107,374
|
|
-0.6
|
%
|
Patient revenue of Arizonas Tooth Doctor for Kids
|
|
|
6,124
|
|
|
6,122
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Patient revenue of platform dental group practices affiliated with us by means of service agreements
|
|
|
100,633
|
|
|
101,252
|
|
-0.6
|
%
|
Amounts due to us under service agreements
|
|
|
62,555
|
|
|
62,795
|
|
-0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Amounts retained by platform dental group practices affiliated with us by means of service agreements
|
|
$
|
38,078
|
|
$
|
38,457
|
|
-1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Same market patient revenue growth was -1.0% for the three months ended March 31, 2009. Same market patient
revenue growth excludes platform affiliations that occurred after January 1, 2008. For the current quarter, same market patient revenue growth was comprised of a 0.4% increase in provider hours and a 0.5% improvement in provider productivity,
offset by a 1.9% deterioration related to reimbursement rates received from dental benefit insurers.
20
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Amounts retained by affiliated practices we do not own decreased 1.0% to $38,078,000 for the three months ended
March 31, 2009 from $38,457,000 for the three months ended March 31, 2008. As a percentage of their patient revenue, amounts retained by affiliated practices decreased to 37.8% for the three months ended March 31, 2009, compared to
38.0% for the three months ended March 31, 2008 due to reduced provider compensation offset by increased profitability of the affiliated practices and increased salary and benefits of dentists, dental hygienists and/or dental assistants
employed by affiliated practices in states where required by law.
Results of Operations
The following table sets forth our net revenue and results of operations for the three months ended March 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2009
|
|
|
Three Months Ended
March 31, 2008
|
|
|
|
|
|
|
Amount
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
% Change
|
|
Net revenue
|
|
$
|
69,385
|
|
100.0
|
%
|
|
$
|
79,811
|
|
|
100.0
|
%
|
|
-13.1
|
%
|
Salaries and benefits
|
|
|
29,566
|
|
42.6
|
%
|
|
|
35,501
|
|
|
44.5
|
%
|
|
-16.7
|
%
|
Lab fees and dental supplies
|
|
|
10,293
|
|
14.8
|
%
|
|
|
11,981
|
|
|
15.0
|
%
|
|
-14.1
|
%
|
Office occupancy
|
|
|
8,499
|
|
12.2
|
%
|
|
|
9,013
|
|
|
11.3
|
%
|
|
-5.7
|
%
|
Other operating expenses
|
|
|
6,578
|
|
9.5
|
%
|
|
|
6,772
|
|
|
8.5
|
%
|
|
-2.9
|
%
|
General corporate expenses
|
|
|
3,360
|
|
4.8
|
%
|
|
|
3,630
|
|
|
4.5
|
%
|
|
-7.4
|
%
|
Depreciation expense
|
|
|
2,715
|
|
3.9
|
%
|
|
|
2,774
|
|
|
3.5
|
%
|
|
-2.1
|
%
|
Amortization of intangible assets
|
|
|
2,425
|
|
3.5
|
%
|
|
|
2,387
|
|
|
3.0
|
%
|
|
1.6
|
%
|
Litigation settlement (gain) expense
|
|
|
|
|
0.0
|
%
|
|
|
(30,127
|
)
|
|
-37.7
|
%
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
63,436
|
|
91.4
|
%
|
|
|
41,931
|
|
|
52.5
|
%
|
|
51.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
5,949
|
|
8.6
|
%
|
|
|
37,880
|
|
|
47.5
|
%
|
|
-84.3
|
%
|
Interest expense
|
|
|
3,370
|
|
4.9
|
%
|
|
|
2,455
|
|
|
3.1
|
%
|
|
37.3
|
%
|
Earnings before income taxes
|
|
|
2,579
|
|
3.7
|
%
|
|
|
35,425
|
|
|
44.4
|
%
|
|
-92.7
|
%
|
Income taxes
|
|
|
1,021
|
|
1.5
|
%
|
|
|
13,760
|
|
|
17.2
|
%
|
|
-92.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
1,558
|
|
2.2
|
%
|
|
|
21,665
|
|
|
27.1
|
%
|
|
-92.8
|
%
|
Noncontrolling interest
|
|
|
137
|
|
0.2
|
%
|
|
|
140
|
|
|
0.2
|
%
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,421
|
|
2.0
|
%
|
|
$
|
21,525
|
|
|
27.0
|
%
|
|
-93.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Presentation of Litigation Settlement
On February 29, 2008, under the terms of a settlement agreement effective December 31, 2007 among American Dental Partners, Inc., PDHC, one of our Minnesota
subsidiaries, PDG, Dental Specialists of Minnesota, P.A. and Northland Dental Partners, P.L.L.C. to settle outstanding litigation among the parties, we transferred the operating assets of 25 of 31 Park Dental facilities and associated tradenames to
PDG, forgave outstanding accounts receivable due from PDG and entered into a transition services agreement with PDG to provide interim management services through September 30, 2008.
21
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
In addition to our actual results, we believe it is necessary to provide a pro forma financial presentation to
exclude temporary and non-recurring items related to the litigation settlement as we believe that such pro forma presentation is important to understanding future trends of our underlying operations. The pro forma information are non-GAAP financial
measures.
The following table reconciles the actual results of operations to our pro forma results of operations for the three months ended March 31,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2008 Pro
Forma Adjustments
|
|
|
|
|
As Reported
2008
|
|
|
Settlement
Assets
|
|
|
Management
Services
|
|
Pro Forma
2008
|
Net revenue
|
|
$
|
79,811
|
|
|
$
|
6,423
|
|
|
$
|
3,333
|
|
$
|
70,055
|
Salaries and benefits
|
|
|
35,501
|
|
|
|
3,755
|
|
|
|
852
|
|
|
30,894
|
Lab fees and dental supplies
|
|
|
11,981
|
|
|
|
1,301
|
|
|
|
|
|
|
10,680
|
Office occupancy expenses
|
|
|
9,013
|
|
|
|
863
|
|
|
|
60
|
|
|
8,090
|
Other operating expenses
|
|
|
6,772
|
|
|
|
252
|
|
|
|
108
|
|
|
6,412
|
General corporate expenses
|
|
|
3,630
|
|
|
|
|
|
|
|
|
|
|
3,630
|
Depreciation
|
|
|
2,774
|
|
|
|
252
|
|
|
|
14
|
|
|
2,508
|
Amortization
|
|
|
2,387
|
|
|
|
|
|
|
|
|
|
|
2,387
|
Litigation settlement income
|
|
|
(30,127
|
)
|
|
|
(30,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
41,931
|
|
|
|
(23,704
|
)
|
|
|
1,034
|
|
|
64,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
37,880
|
|
|
|
30,127
|
|
|
|
2,299
|
|
|
5,454
|
Interest expense, net
|
|
|
2,455
|
|
|
|
|
|
|
|
|
|
|
2,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
35,425
|
|
|
|
30,127
|
|
|
|
2,299
|
|
|
2,999
|
Income taxes
|
|
|
13,760
|
|
|
|
|
|
|
|
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
21,665
|
|
|
|
|
|
|
|
|
|
|
1,834
|
Noncontrolling interest
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
21,525
|
|
|
|
|
|
|
|
|
|
$
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments for settlement assets include the following items: (i) revenue of $6,423,000 due to us
from PDG for the operating expenses of the 25 dental facilities prior to their transfer to PDG on February 29, 2008 and the operating expenses associated with the PDG doctors who temporarily practiced in the six dental facilities we retained,
(ii) a non-cash gain on disposal of assets of $30,763,000, pursuant to Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long Lived Assets
which represents the fair market
value of the assets transferred to PDG of $39,968,000 in settlement of the litigation less the book value of the net assets transferred of $9,205,000 and (iii) professional fees and other expenses associated with the litigation of $636,000.
Pro forma adjustments for management services include revenue earned under the transition services agreement with PDG, estimated expenses to provide such
services and salaries and benefits, including severance, of those management personnel eliminated as a result of the February 29, 2008 settlement and subsequent realignment of our Minnesota-based management team.
22
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
The following table sets forth the percentage change between the actual results of operations for the three months
ended March 31, 2009 and the pro forma non-GAAP financial measures for the three months ended March 31, 2008 (in dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2009
|
|
|
Three Months Ended
March 31, 2008
|
|
|
|
|
|
|
Actual
Amounts
|
|
% of Net
Revenue
|
|
|
Pro Forma
Amounts
|
|
% of Net
Revenue
|
|
|
% Change
|
|
Net revenue
|
|
$
|
69,385
|
|
100.0
|
%
|
|
$
|
70,055
|
|
100.0
|
%
|
|
-1.0
|
%
|
Salaries and benefits
|
|
|
29,566
|
|
42.6
|
%
|
|
|
30,894
|
|
44.1
|
%
|
|
-4.3
|
%
|
Lab fees and dental supplies
|
|
|
10,293
|
|
14.8
|
%
|
|
|
10,680
|
|
15.2
|
%
|
|
-3.6
|
%
|
Office occupancy expenses
|
|
|
8,499
|
|
12.2
|
%
|
|
|
8,090
|
|
11.5
|
%
|
|
5.1
|
%
|
Other operating expenses
|
|
|
6,578
|
|
9.5
|
%
|
|
|
6,412
|
|
9.2
|
%
|
|
2.6
|
%
|
General corporate expenses
|
|
|
3,360
|
|
4.8
|
%
|
|
|
3,630
|
|
5.2
|
%
|
|
-7.4
|
%
|
Depreciation
|
|
|
2,715
|
|
3.9
|
%
|
|
|
2,508
|
|
3.6
|
%
|
|
8.3
|
%
|
Amortization
|
|
|
2,425
|
|
3.5
|
%
|
|
|
2,387
|
|
3.4
|
%
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
63,436
|
|
91.4
|
%
|
|
|
64,601
|
|
92.2
|
%
|
|
-1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
5,949
|
|
8.6
|
%
|
|
|
5,454
|
|
7.8
|
%
|
|
9.1
|
%
|
Interest expense, net
|
|
|
3,370
|
|
4.9
|
%
|
|
|
2,455
|
|
3.5
|
%
|
|
37.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
2,579
|
|
3.7
|
%
|
|
|
2,999
|
|
4.3
|
%
|
|
-14.0
|
%
|
Income taxes
|
|
|
1,021
|
|
1.5
|
%
|
|
|
1,165
|
|
1.7
|
%
|
|
-12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
1,558
|
|
2.2
|
%
|
|
|
1,834
|
|
2.6
|
%
|
|
-15.1
|
%
|
Noncontrolling interest
|
|
|
137
|
|
0.2
|
%
|
|
|
140
|
|
0.2
|
%
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,421
|
|
2.0
|
%
|
|
$
|
1,694
|
|
2.4
|
%
|
|
-16.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma financial table above excludes the results of operations, and associated business service fees, of
the 25 dental facilities transferred to PDG from 2008 results and temporary and non-recurring items related to the litigation settlement. Management believes that such pro forma presentation provides a better understanding of our results of
operations and potential future trends of our underlying operations.
Net Revenue
Net revenue decreased 13% to $69,385,000 for the three months ended March 31, 2009 from $79,811,000 for the three months ended March 31, 2008. Net revenue earned under our transition services agreement with
PDG represented approximately 12% of our consolidated net revenue for the three months ended March 31, 2008.
Net revenue decreased 1% to $69,385,000
for the three months ended March 31, 2009 from pro forma net revenue of $70,055,000 for the three months ended March 31, 2008. The decrease over the prior year is attributed to a decline in patient revenue.
Net revenue earned from our service agreement with Metro Dentalcare, P.L.C represented 22% of our consolidated net revenue for the three months ended March 31, 2009
and 22% of pro forma consolidated net revenue for the three months ended March 31, 2008. Net revenue earned from our service agreement with Wisconsin Dental Group, S.C. represented 14% of our consolidated net revenue for the three months ended
March 31, 2009 and 13% of pro forma consolidated net revenue for the three months ended March 31, 2008. The termination of either of the Metro Dentalcare, P.L.C or Wisconsin Dental Group, S.C. service agreement could have a material
adverse effect on our business, financial condition and results of operations. No other service agreement or customer accounted for more than 10% of consolidated net revenue during the three month periods ended March 31, 2009 and 2008.
23
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Salaries and Benefits
Salaries and benefits expense includes costs of personnel working for us in the dental facilities, dental laboratories and local and regional shared service centers. At the facility level, we generally employ the administrative staff and,
where permitted by state law, the dental hygienists and dental assistants. The personnel at the local and regional shared service centers support the staff at the dental facilities.
Salaries and benefits expense as a percentage of net revenue decreased to 42.6% for the three months ended March 31, 2009 from 44.5% for the three months ended March 31, 2008. Salaries and benefits expense
as a percentage of net revenue decreased to 42.6% for the three months ended March 31, 2009 from 44.1% of the pro forma net revenue for the three months ended March 31, 2008. The decrease is primarily due to the integration of Metro
Dentalcare and Northland Dental as well as our continuing focus on staffing costs at all of our affiliates in response to current economic conditions.
Lab Fees and Dental Supplies
Lab fees and dental supplies expense varies from affiliate to affiliate and is affected by the volume and type
of procedures performed.
Lab fees and dental supplies expense as a percentage of net revenue decreased to 14.8% of net revenue for the three months ended
March 31, 2009 from 15.0% for the three months ended March 31, 2008 and 15.2% of the pro forma net revenue for the three months ended March 31, 2008. The decrease as a percentage of the pro forma results is due to reduced lab fees, we
believe results from a shift in patient procedure mix away from procedures requiring lab services as a result of current economic conditions.
Office
Occupancy
Office occupancy expense includes rent expense and certain other operating costs, such as utilities, associated with dental facilities, our
dental laboratory and the local and regional shared service centers. Such costs vary based on the size of each facility and the market rental rate for dental office and administrative space in each particular geographic market.
Office occupancy expense as a percentage of net revenue increased to 12.2% for the three months ended March 31, 2009 from 11.3% for the three months ended
March 31, 2008 and 11.5% of the pro forma net revenue for the three months ended March 31, 2008. The increase as a percentage of the pro forma results is largely associated with the six facilities we retained as part of the PDG litigation
settlement and to a lesser extent from costs associated with our new pediatric affiliate in Texas.
During the three months ended March 31, 2009, we
completed two de novo facilities. We expect total office occupancy expenses to increase as we continue to invest in the relocation and expansion of dental facilities.
Other Operating Expenses
Other operating expenses include non-employment related insurance expense, professional
fees, marketing costs and other general and administrative expenses.
Other operating expenses as a percentage of net revenue increased to 9.5% for the
three months ended March 31, 2009 from 8.5% for the three months ended March 31, 2008 and 9.2% of the pro forma net revenue for the three months ended March 31, 2008. The increase as a percentage of pro forma results is attributed to
2008 affiliation activity and our new pediatric affiliate in Texas.
24
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
General Corporate Expenses
General corporate expenses consist of compensation and travel expenses for our corporate personnel and administrative staff, facility and other administrative costs of our corporate office and professional fees,
including legal and accounting.
General corporate expenses as a percentage of net revenue increased to 4.8% for the three months ended March 31, 2009
from 4.5% for the three months ended March 31, 2008 but decreased from 5.2% of the pro forma net revenue for the three months ended March 31, 2008. During the three months ended March 31, 2008, we incurred incremental auditing fees
and consulting fees required by our banks in response to the PDG litigation outcome, thus providing a favorable comparison with this year.
We recognized
$379,000 of stock-based compensation expense for the three months ended March 31, 2009 compared to $526,000 for the three months ended March 31, 2008. We estimate stock-based compensation expense for the full year 2009 will be
approximately $1,675,000.
Depreciation
Depreciation
expense, including amortization of leasehold improvements, as a percentage of net revenue increased to 3.9% for the three months ended March 31, 2009 from 3.5% for the three months ended March 31, 2008 and 3.6% of the pro forma net revenue
for the three months ended March 31, 2008. The increase is the result of facility development projects in 2008.
We expect to continue to invest in
the development of new dental facilities and the relocation and/or expansion of existing dental facilities in 2009 but at lower levels than we have in past years. Accordingly, depending on the amount and timing of such future capital expenditures,
depreciation may increase in 2009 at a rate greater than our net revenue.
Amortization of Service Agreements and Other Intangible Assets
Amortization expense, principally relating to our service agreements with affiliated practices, as a percentage of net revenue increased to 3.5% for
the three months ended March 31, 2009 from 3.0% for the three months ended March 31, 2008 and 3.4% of the pro forma net revenue for the three months ended March 31, 2008. The increase was due to affiliations completed in 2008.
Amortization of intangible assets may increase in the future as a result of additional intangible assets recorded in connection with future affiliations
and, if applicable, earned contingent payments on already completed affiliations.
Earnings from Operations
Earnings from operations decreased to $5,949,000 for the three months ended March 31, 2009 from $37,880,000 for the three months ended March 31, 2008 but
increased from the pro forma earnings from operations of $5,454,000 for the three months ended March 31, 2008. As a percentage of net revenue, earnings from operations increased to 8.6% for the three months ended March 31, 2009 from 7.8%
of the pro forma net revenue for the three months ended March 31, 2008. The increase is primarily due to decreased salary expense and to a less extent decreased lab fees and dental supplies expense and general corporate expense somewhat offset
by increased office occupancy expense.
25
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Interest Expense
Net interest expense increased to $3,370,000 for the three months ended March 31, 2009 from $2,455,000 for the three months ended March 31, 2008. The increase is the result of increased credit spreads over LIBOR, an increase in
LIBOR rates and an increase in amortization of bank fees associated with our amended credit facilities.
Income Taxes
Our effective tax rate increased to 39.6% for the three months ended March 31, 2009 as compared to 39.0% for the three months ended March 31, 2008. This
increase is due to increased state tax rates. We expect our effective tax rate to approximate 39.6% for the year.
Consolidated Net Earnings
As a result of the foregoing, net earnings decreased to $1,558,000 for the three months ended March 31, 2009 from $21,665,000 for the three months
ended March 31, 2008. Net earnings decreased to $1,558,000 for the three months ended March 31, 2009 when compared to the pro forma net earnings of $1,834,000 for the three months ended March 31, 2008. As a percentage of net revenue,
net earnings decreased to 2.2% for the three months ended March 31, 2009 from 2.6% of the pro forma net revenue for the three months ended March 31, 2008. The decrease is primarily due to increased interest expense and increased
depreciation expense somewhat offset by a decrease in income tax expense
Noncontrolling Interest
For the three months ended March 31, 2009 and March 31, 2008, we recorded noncontrolling interest expense of $137,000 and $140,000, respectively, representing
the gains attributable to noncontrolling interest holders. The decrease in 2009 is due to a decrease in net earnings of Tooth Doctor.
Liquidity and
Capital Resources
Overview
We have financed our
operating and capital needs, including cash used for acquisitions and affiliations, capital expenditures and working capital, principally from operating cash flows and borrowings under our revolving line of credit and term loan. We have, in the
past, also used proceeds from the sale of equity securities and the issuance of subordinated promissory notes to finance certain capital needs, but have not done so in recent years.
Current Credit Market Conditions
The credit markets have recently experienced unprecedented volatility, which has
affected both the availability and cost of debt financing. In this current volatile credit environment, we have taken a number of initiatives to maintain our liquidity, including the following:
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we largely eliminated 2008 incentive compensation expense accruals and as a result cash bonus payments associated with these accruals were significantly reduced
during the first quarter of 2009;
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we have delayed 2009 compensation increases until the economic environment and our financial performance merit such increases;
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we have implemented a hiring freeze for non-clinical positions and are evaluating all non-essential positions;
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we have reduced valuations for affiliations and acquisitions and will complete only those that make both strategic and economic sense;
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and we have reduced 2009 capital expenditure expectations to approximately $7,000,000.
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We have a $75,000,000 revolving credit facility and $100,000,000 term loan both of which are senior secured facilities and are provided by commercial banks. Both
facilities have maturities of January 20, 2010 and accordingly have been classified as current liabilities. At March 31, 2009, the outstanding balances under our credit facility and term loan were $26.0 million (plus stand-by
26
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
letters of credit amounting to $1.7 million) and $100.0 million, respectively. The availability of senior secured debt has been significantly reduced in the
current credit markets, which has resulted in increased borrowing rates, reduced financial covenants and higher upfront fees. Although we have discussed with our existing lenders the terms for extending the maturity of our credit facilities, we
believe it is in the best interests of our shareholders to seek to refinance our indebtedness on a longer term basis at this time rather than incur the costs associated with a short-term extension of the maturity. We are pursuing alternatives for
refinancing our credit facilities with our existing and new lenders, but we cannot assure you that we will be able to refinance our credit facilities on satisfactory terms. We may be able to refinance only a portion of our revolving credit facility
and term loan, which would require us to seek to issue subordinated debt, preferred stock or common stock, or some combination of such securities to replace a portion of our credit facilities. Such securities may include interest or dividends,
voting rights or other dilutive effects to our existing shareholders. We cannot assure you that we would be able to issue such securities on satisfactory terms.
We do not anticipate having available cash from operations to pay the outstanding balance under our credit facilities that mature on January 20, 2010 and therefore we must complete a refinancing or extension prior to such maturity date. We
cannot assure you that such financing will be available or on terms acceptable to us. We believe that cash generated from operations and amounts available under our current revolving credit facility will be sufficient to fund our anticipated
operating cash needs for working capital, capital expenditures, affiliations and acquisitions through the maturity date of our credit facilities.
Operating Activities
For the three months ended March 31, 2009
and 2008, cash provided by operating activities amounted to $6,842,000 and $1,524,000, respectively. For the three months ended March 31, 2009, cash provided by operations primarily resulted from consolidated net earnings after adjusting for
non-cash items and increases in income taxes payable, accrued compensation and benefits as well as other current assets partially offset by in increase in accounts receivable and accrued expenses. As compared to the same period in 2008, cash flow
from operations increased primarily as a result of an improvement in accounts receivable and accrued compensation and benefits offset by cash used for accounts payable and accrued expenses. During 2008, cash used for accounts receivable was related
to amounts owed to us by PDG, a delay in insurance reimbursement for the six dental facilities retained as part of the settlement of litigation with PDG as the affiliated practice did not enter into new payor contracts until late in the quarter, a
deposit in transit of approximately $1,000,000 at March 31, 2008 from one of our affiliated practices to us and a slow down in patient accounts receivable collection at one of our affiliated practices which had converted to our Improvis
practice management system. During 2009, payment of incentive compensation related to 2008 bonus accruals was significantly reduced as a result of our 2008 financial performance thus providing a favorable comparison with 2008 cash used for accrued
compensation and benefits.
Investing Activities
For
the three months ended March 31, 2009 and 2008, cash used for investing activities amounted to $2,018,000 and $6,305,000, respectively. The decrease in cash used for investing activities compared to the same period in 2008 is due to a decrease
in capital expenditures of approximately $2,135,000, as planned. In addition, cash paid in connection with affiliations decreased approximately $2,073,000 due to a reduced number of affiliation and acquisition transactions completed in the quarter
compared to 2008.
Financing Activities
For the three
months ended March 31, 2009 and 2008, cash (used in) provided by financing activities amounted to $(4,882,000) compared to $4,523,000, respectively. As compared to the same period in 2008, the increase in cash used, in financing activities, is
primarily due to a reduction in borrowings on our revolving credit facility of $5,150,000 as a result of an increase in cash flow from operations, a decrease in investing activities and to a lesser extent a reduction in distributions to
noncontrolling interest holders.
Credit Agreements
We
have a revolving credit facility in the amount of $75,000,000. The facility matures on January 20, 2010 and can be used for general corporate purposes, including working capital, acquisitions and affiliations and capital expenditures.
Borrowings under the credit facility bear interest at either prime or LIBOR plus a margin, at the Companys option. The margin is based upon the Companys debt coverage ratio and ranges from 4.25% to 4.50% for prime and LIBOR borrowings.
At March 31, 2009, the LIBOR interest rate under the credit facility, including borrowing margin, was approximately 5.76% and the prime interest rate under the
27
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
credit facility, including borrowing margin, was 7.75%. In addition, the Company pays a commitment fee on the unused balance of its credit facility ranging
from 0.375% to 0.5%. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and amortization, adjusted for certain items, and are collateralized by a first lien on substantially all of the
Companys assets, including a pledge of the stock of the Companys subsidiaries. We are 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. We were in compliance with the covenants as of March 31, 2009. The outstanding balance under this line as of March 31, 2009 was $25,950,000, and the Company had stand-by letters of credit
amounting to $1,669,200 at March 31, 2009. The unused balance under this revolving credit facility as of March 31, 2009 was $47,380,000 and based on borrowing covenants, reduced by the stand-by letter of credit, $40,381,000 was available
for borrowing.
We have a term loan in the amount of $100,000,000. The loan matures January 20, 2010 and was used to fund the Companys 2007
acquisitions and affiliations. Interest on the term loan is at LIBOR plus a margin. The margin for the first 90 days from October 24, 2008 is 250 basis points and will increase 50 basis points each 90 days thereafter. 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.
Pursuant to amendments to both the revolving credit facility and term loan, we are permitted to borrow up to $15,000,000 annually for capital expenditures, $15,000,000 annually for acquisitions and up to $13,000,000 for earn out and
contingent payments on previously completed acquisitions, subject to various financial covenants, including a maximum debt to earnings before interest, taxes, depreciation and amortization leverage ratio of 3.75x
Our revolving credit facility and term loan mature on January 20, 2010 and accordingly have been classified as a current liability at March 31, 2009. In the
event that we are not able to complete a refinancing or extension on satisfactory terms by January 20, 2010 we do not anticipate having available cash from operations to pay the outstanding debt at maturity and in such case we would
be in default under the terms of our credit facility and term loan.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. On an on-going basis management evaluates its estimates, including those related to the carrying value of accounts receivable, goodwill and other intangible assets, amounts for potential losses below retention levels on certain
insurance coverages and stock-based compensation and income taxes. Management bases its estimates on historical experience, on various other assumptions that are believed to be reasonable under the circumstances and in certain instances actuarial
studies conducted by third parties, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We have identified the policies below as critical to our business operations and the understanding of our results of
operations.
Valuation of Accounts Receivable
Our
accounts receivable include amounts due from affiliated practices that have entered into service agreements with us and amounts due from insurance companies, patients and dentists for our Tooth Doctor, dental benefits third party administrator and
dental laboratory businesses. At March 31, 2009, amounts due from affiliated practices represented 90% of our accounts receivable.
28
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
The carrying amount of receivables due from affiliated practices requires management to assess the collectability of
the fees we earn pursuant to the service agreements. Collection of our service fees are dependent on the economic viability of the affiliated practices based on actual and expected future financial performance including collectability of the
affiliated practices patient receivables, net of contractual adjustments and allowances for doubtful accounts. The affiliated practices record revenue at established rates reduced by contractual adjustments and allowances for doubtful accounts
to arrive at patient 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. For contracts
where there is no defined benefit, contractual adjustments are based upon historical collection experience and other relevant factors. The affiliated practices provision for doubtful accounts is estimated in the period that services are
rendered and adjusted in future periods as necessary. The estimates for the provision and related allowance are based on an evaluation of historical collection experience, the aging profile of the accounts receivable, write-off percentages and other
relevant factors. Changes in these factors in future periods could result in increases or decreases in the provision. In the event that final reimbursement or bad debt experience differs from original estimates, adjustments to the affiliated
practices patient receivables would be required which could impact the collectability of our receivables due from affiliated practices.
Except for
accounts receivable due from PDG which we agreed to forgive pursuant to settlement of outstanding litigation, to date we have not recorded any losses related to our receivables due from affiliated practices and accordingly have not recorded any
reserves for uncollectability. We have recorded reserves for uncollectability against accounts receivable of our Tooth Doctor, dental benefits third party administrator and dental laboratory businesses based on historical collection experience, the
aging profile of the accounts receivable, write-off percentages and other relevant factors.
Goodwill and Intangible Assets
We have intangible assets, including goodwill and other identifiable intangibles assets, which are the result of affiliation transactions and acquisitions of businesses.
The initial identification and valuation of these intangible assets and the determination of useful lives at the time of affiliation or acquisition involve the use of management judgments and estimates. These estimates are based on, among other
factors, reviews of projected future income, cash flows, statutory regulations and, when necessary, input from accredited valuation consultants. At March 31, 2009, intangible assets were $249,417,000 and represented 71% of our total assets, and
goodwill and indefinite-lived intangible assets representing 31% of our intangible assets and definite-lived intangible assets related to service agreements representing 69% of our intangible assets.
Our affiliations with dental group practices as a result of the parties entering into a service agreement are not business combinations, and as such, do not result in
recognition of goodwill. We recognize capitalized service agreement costs which are accounted for as definite-lived intangible assets acquired in affiliations other than a business combination, and are 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. In the event a service agreement is terminated, the related affiliated practice is required, at our option in nearly all instances, to purchase the remaining unamortized balance of
intangible assets at the current book value, purchase other assets at the greater of fair value or book value and assume leases and other liabilities related to the performance of our obligations under the service agreement.
We review identified intangible assets with defined useful lives and subject to amortization for impairment whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset.
29
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
We test goodwill for impairment annually as of October 1 and whenever events or circumstances make it more
likely than not that the fair value of a reporting unit has fallen below its carrying amount, such as a significant adverse change in the assets utilized by the business. Determining whether an impairment has occurred requires valuation of the
respective reporting business unit, which we estimate using a discounted cash flow method. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. In applying this methodology, we rely on a
number of factors, including actual operating results, future business plans, economic projections and market data. If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible
and intangible asset. In this case, we would supplement the cash flow approach discussed above with independent appraisals.
Should the fair value of our
goodwill or other intangible assets decline and therefore cause necessary changes in assumptions of the impairment analysis, or other events or circumstances that may indicate impairment, recognition of impairment may be necessary in the future
which could be material.
Insurance
We maintain
various insurance coverages that we believe are appropriate for our business, including workers compensation, property, business interruption and general liability, among others. In addition, the affiliated practices are required to maintain,
or cause to be maintained, professional liability insurance with us as a named insured. Certain of our insurances are reinsured by a wholly-owned captive insurance company licensed in the state of Vermont. Several of these insurance programs have
retention levels in which we and our captive insurance company are financially obligated for insured losses below certain financial thresholds before the insurer is financially obligated for insured losses. We and our 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. 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.
Stock-Based Compensation
We account for stock-based compensation in accordance with the fair value recognition provision of SFAS No. 123(R). We use the Black-Scholes option-pricing model,
which requires the input of subjective assumptions. These assumptions include: estimating the length of time employees will retain their vested stock options before exercising them (expected life), the estimated volatility of our common stock price
over the expected life (volatility), and the number of options that will ultimately not complete their vesting requirements (forfeitures). Changes in these assumptions for future stock option grants can materially affect the estimate of the fair
value of stock-based compensation.
Income Taxes
Our
annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective
governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties under FASB Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement 109
(FIN 48). FIN 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, and also provides guidance on the de-recognition, measurement classification, interest and penalties, accounting in interim periods and disclosures. We review our tax positions quarterly and adjust the balances as new
information becomes available.
Our policy for recording interest and penalties associated with audits is to record such items as a component of income
before taxes. For the quarter ended March 31, 2009, $6,000 of interest expense was recognized in the statement of earnings, compared with $5,000 for the quarter ended March 31, 2008. No tax expense related to penalties was recognized for
the quarters ended March 31, 2009 and 2008.
30
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory
rates applicable to future years to differences between the consolidated financial statement carrying amounts and the tax basis of existing assets and liabilities, as well as from net operating loss and tax credit carry forwards. We evaluate the
recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning
strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight. To the extent we do not consider it more likely than not that a deferred
tax asset will be recovered, a valuation allowance is established.
We are subject to income tax arising from U.S. federal and multiple state
jurisdictions. In the normal course of business, we are subject to examination by U.S. federal and state taxing authorities. The tax years 2004 and 2008 remain open to examination, and on October 7, 2008, the Internal Revenue Service is
currently examining our federal income tax return for the year ending December 31, 2006.
Recent Accounting Pronouncements
Effective January 1, 2009, the Company adopted SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). The purpose of the
statement is to replace current guidance in SFAS No.141, to better represent the economic value of a business combination transaction. The changes from the previous guidance include, but are not limited to: (1) acquisition costs are
recognized separately from the acquisition; (2) known contractual contingencies at the time of the acquisition are considered part of the liabilities acquired and measured at their fair value; all other contingencies are part of the liabilities
acquired and measured at their fair value only if it is more likely than not that they meet the definition of a liability; (3) contingent consideration based on the outcome of future events is recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step acquisitions) recognize the identifiable assets and liabilities, as well as noncontrolling interests, in the acquiree, at the full amounts of their fair values; and (5) a
bargain purchase (defined as a business combination in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree)
requires that excess to be recognized as a gain attributable to the acquirer. The provisions of SFAS 141(R) are applicable for the Companys transactions that qualify as business combinations and not the Companys affiliation transactions.
Effective January 1, 2009, the Company adopted SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan
amendment of Accounting Research Bulletin No. 51
(SFAS 160), which was issued to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report
noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in the consolidated financial statements. Moreover, FASB Statement No. 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. In evaluating the impact of FASB Statement No. 160, we determined the relationship with our noncontrolling interest holders
requires the application of EITF (Emergency Issue Task Force ) D-98 (EITF D-98)
Classification and Measurement of Redeemable Securities.
EITF D-98, issued in regards to Rule 5-02.28 of SEC Securities and Exchange
Commission (SEC) Regulation S-X, requires preferred securities, including noncontrolling interest, that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or
determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of the issuer. Accordingly we have classified noncontrolling interest in
mezzanine equity and not as part of equity as prescribed by SFAS 160.
Effective January 1, 2009, the Company adopted SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). This Statement requires enhanced disclosures about an entitys derivative and hedging
activities and encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The additional disclosures about our derivative and hedging activities did not have a material impact on our consolidated financial
statements.
31
AMERICAN DENTAL PARTNERS, INC.
PART I. FINANCIAL INFORMATION
(unaudited)
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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In the
ordinary course of business, we are exposed to interest rate risk. With regard to our revolving credit facility, we are also exposed to variable rate interest for the banks applicable margins ranging from 4.25% to 4.50% based upon our debt
coverage ratio. For fixed rate debt, interest rate changes affect the fair value but do not impact earnings or cash flow. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future
earnings and cash flow. We do not believe a one percentage point change in interest rates would have a material impact on the fair market value of our fixed rate debt. In addition, we have entered into an interest rate swap arrangement to fix the
interest rate on $20,000,000 of our long term debt borrowings. The pre-tax earnings and cash flow impact for one year, based upon the amounts outstanding at March 31, 2009 under our variable rate revolving credit facility and term loan, for
each one percentage point change in interest rates would be approximately $1,059,500 per annum.
Item 4.
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Controls and Procedures
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An evaluation was performed under the
supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934) as of March 31, 2009. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures timely alert
them to material information relating to the Company required to be included in this report and were effective as of March 31, 2009.
As required by
Rule 13a-15(d) under the Securities Exchange Act of 1934, the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the Companys internal control over financial reporting to
determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
32
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION
Item 1.
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Legal Proceedings
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Shareholder Litigation
On or about January 25, 2008, February 4, 2008, February 12, 2008, and March 13, 2008, the Company and certain of our executive officers
were named as defendants in four actions respectively entitled
Oliphant v. American Dental Partners, Inc. et. al.,
civil action number 1:08-CV-10119-RGS,
Downey v. American Dental Partners, Inc. et. al.,
civil
action number 1:08-CV-10169-RGS,
Johnston v. American Dental Partners, Inc. et. al.,
civil action number 1:08-CA-10230-RGS, and
Monihan v. American Dental Partners, Inc., et. al
., civil action number
1:08-CV-10410-RGS, all filed in the United States District Court for the District of Massachusetts. The actions each purport to be brought on behalf of a class of purchasers of our common stock during the period August 10, 2005 through
December 13, 2007. The complaints allege that the Company and certain of our executive officers violated the federal securities laws, in particular, Section 10(b) of the Securities Exchange Act, 15 U.S.C. §§ 78, and Rule
10b-5 promulgated there under, 17 C.F.R. § 240.10b-5, by making allegedly material misrepresentations and failing to disclose allegedly material facts concerning the lawsuit by Park Dental Group against PDHC, Ltd., titled PDG, P.A. v. PDHC,
Ltd., Civ. A. Nos. 27-CV-06-2500 and 27-CV-07-13030, filed in the Fourth Judicial District of Hennepin County, Minnesota on February 3, 2006 (PDG Litigation), and conduct at issue in that action during the Class Period, which had
the effect of artificially inflating the market price of our stock. Each complaint also asserts control person claims under Section 20(a) of the Securities Exchange Act against the executive officers named as defendants. Each
plaintiff seeks class certification, an unspecified amount of money damages, costs and attorneys fees and any equitable, injunctive or other relief the Court deems proper.
On or about May 29, 2008, the Court appointed the Operating Engineers Pension Fund, as lead plaintiff and its counsel, the law firm of Grant & Eisenhofer P.A., as lead counsel. The Court also
ordered that the four pending actions be consolidated under the caption
In re American Dental Partners, Inc. Securities Litigation
, civil action number 1:08-CV-10119-RGS. On or about June 5, 2008, one of the original
named plaintiffs, W.K. Downey, agreed to enter an order that dismissed his individual claims with prejudice. On September 29, 2008, the Operating Engineers Pension Fund filed with the Court a consolidated amended complaint, which alleges a
new class period of February 25, 2004 through December 13, 2007 and asserts violations of the federal securities laws as described above. On December 5, 2008, the Company and the other defendants filed a motion to dismiss the
action. The Court denied the motion on April 2, 2009. The parties are now negotiating a joint proposed discovery order for the matter. We are unable to estimate any potential losses with respect to this action. We intend to defend the
matter vigorously.
Derivative Litigation
On or about
June 2, 2008, a derivative action was filed in the Suffolk Superior Court of the Commonwealth of Massachusetts on behalf of the Company entitled
Musselman v. Serrao et al.
, C.A. No. 08-2444-BLS. The complaint names
us as a nominal defendant and certain of our directors and executive officers (collectively, the
Musselman
Individual Defendants) as defendants. The action was filed without first making a demand on our Board of Directors to
address the allegations. The complaint was amended on July 31, 2008. The amended complaint involves factual allegations relating to the PDG Litigation and asserts claims for breach of fiduciary duties, abuse of control, gross
mismanagement, waste of corporate assets, and aiding and abetting breaches of fiduciary duties against all of the
Musselman
Individual Defendants and claims for unjust enrichment and insider selling against some of the Individual
Defendants. The relief the complaint seeks on behalf of the Company includes an unspecified amount of money damages, disgorgement from some of the Individual Defendants, corporate governance changes and any equitable, injunctive or other relief
the Court deems proper. Plaintiffs Teresa and Stephen Musselman also seek costs and attorneys fees. Because the action is derivative in nature, any damages will be for the benefit of the Company. We are unable to provide a range
of potential damages with respect to this action.
33
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
On or about July 1, 2008, a derivative action was filed in Middlesex Superior Court of the Commonwealth of
Massachusetts on behalf of the Company entitled
Dyer v. Serrao et al.
, C.A. No. 08-2417. The complaint names the Company as a nominal defendant and certain of our present directors and executive officers (collectively,
the
Dyer
Individual Defendants) as defendants. Plaintiff Dyer filed the action without first making a demand on our Board of Directors to address the allegations. The complaint involves factual allegations relating to
the PDG Litigation and asserts a claim for breach of fiduciary duty of good faith against all of the
Dyer
Individual Defendants. The relief the complaint seeks on behalf of the Company includes an unspecified amount of money damages and
any equitable, injunctive or other relief the Court deems proper. The plaintiff also seeks costs and attorneys fees. Because the action is derivative in nature, any damages will be for the benefit of the Company. We are unable
to provide a range of potential damages with respect to this action.
On August 15, 2008, on the joint motion of the parties, the
Dyer
and
the
Musselman
actions were consolidated and the
Dyer
action was ordered to be transferred to the Business Litigation Session of Suffolk Superior Court of the Commonwealth of Massachusetts. The
Dyer
action was received in
the Business Litigation Section on September 22, 2008, under the new civil action number 08-4132-BLS1.
On October 3, 2008, the Court granted
Plaintiffs Motion to Appoint Co-Lead Counsel and Liaison Counsel and for Entry of a Pre-Trial Order. Defendants filed a Motion to Stay Discovery, which the Court granted on November 20, 2008. The Company, and the
Dyer
and
Musselman
Individual Defendants, have brought a motion to dismiss the consolidated action, which was heard by the Court on April 15, 2008. We are awaiting the Courts decision on that motion. We intend to defend the matter
vigorously.
34
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
In addition to the other information set forth in
this report, you should carefully consider the factors discussed in Part 1, Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial
condition or future results. There have been no material changes from the risk factors previously disclosed.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Not applicable.
Item 3.
|
Defaults Upon Senior Securities
|
Not applicable.
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
Not applicable.
Item 5.
|
Other Information
|
Not applicable.
Exhibits (see exhibit index on page 37.)
35
AMERICAN DENTAL PARTNERS, INC.
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
AMERICAN DENTAL PARTNERS, INC.
|
|
|
|
July 29, 2009
|
|
|
|
/s/ Gregory A. Serrao
|
|
|
|
|
Gregory A. Serrao
|
|
|
|
|
Chairman, President, and Chief Executive Officer
|
|
|
|
|
(principal executive officer)
|
|
|
|
July 29, 2009
|
|
|
|
/s/ Breht T. Feigh
|
|
|
|
|
Breht T. Feigh
|
|
|
|
|
Executive Vice President,
|
|
|
|
|
Chief Financial Officer and Treasurer
|
|
|
|
|
(principal financial officer)
|
|
|
|
July 29, 2009
|
|
|
|
/s/ Mark W. Vargo
|
|
|
|
|
Mark W. Vargo
|
|
|
|
|
Vice President,
|
|
|
|
|
Chief Accounting Officer
|
|
|
|
|
(principal accounting officer)
|
36
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
10.1
|
|
Amendment No. 5 to American Dental Partners, Inc. 1997 Employee Stock Purchase Plan*
|
|
|
10.2
|
|
Amendment No. 6 to American Dental Partners, Inc. 1997 Employee Stock Purchase Plan*
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer
|
*
|
Previously filed with the Form 10-Q for the quarter ended March 31, 2009, filed with the Commission on May 11, 2009.
|
37
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