UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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
|
|
¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
|
|
¨
|
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 August 3, 2009 was 13,063,330.
AMERICAN DENTAL PARTNERS, INC.
INDEX
2
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,164
|
|
|
$
|
6,626
|
|
Accounts receivable, net
|
|
|
24,806
|
|
|
|
25,875
|
|
Inventories
|
|
|
2,421
|
|
|
|
2,447
|
|
Prepaid expenses and other current assets
|
|
|
4,429
|
|
|
|
4,745
|
|
Prepaid/refundable income taxes
|
|
|
|
|
|
|
798
|
|
Deferred income taxes
|
|
|
3,823
|
|
|
|
4,193
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
42,643
|
|
|
|
44,684
|
|
|
|
|
Property and equipment, net
|
|
|
52,458
|
|
|
|
54,542
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
76,122
|
|
|
|
76,122
|
|
Service Agreements and other intangible assets, net
|
|
|
170,936
|
|
|
|
175,527
|
|
Deferred income taxes
|
|
|
1,913
|
|
|
|
1,912
|
|
Other
|
|
|
426
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
249,397
|
|
|
|
254,027
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
344,498
|
|
|
$
|
353,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
15,242
|
|
|
$
|
14,763
|
|
Accrued compensation and benefits
|
|
|
10,662
|
|
|
|
9,436
|
|
Accrued expenses
|
|
|
6,623
|
|
|
|
6,620
|
|
Income taxes payable
|
|
|
194
|
|
|
|
|
|
Deferred income taxes
|
|
|
82
|
|
|
|
81
|
|
Current maturities of debt
|
|
|
114,051
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
146,854
|
|
|
|
31,096
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
227
|
|
|
|
131,441
|
|
Deferred income taxes
|
|
|
38,829
|
|
|
|
38,499
|
|
Other liabilities
|
|
|
5,403
|
|
|
|
5,135
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
44,459
|
|
|
|
175,075
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
191,313
|
|
|
|
206,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
1,299
|
|
|
|
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 June 30, 2009 and December 31, 2008, respectively
|
|
|
135
|
|
|
|
135
|
|
Additional paid-in capital
|
|
|
72,133
|
|
|
|
71,096
|
|
Treasury stock, at cost (582,500 shares)
|
|
|
(3,874
|
)
|
|
|
(3,874
|
)
|
Accumulated comprehensive income
|
|
|
(1,726
|
)
|
|
|
(2,059
|
)
|
Retained earnings
|
|
|
85,218
|
|
|
|
81,200
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
151,886
|
|
|
|
146,498
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
344,498
|
|
|
$
|
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
2009
|
|
2008
|
|
Net revenue
|
|
$
|
70,378
|
|
$
|
74,639
|
|
|
$
|
139,763
|
|
$
|
154,450
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
29,183
|
|
|
31,355
|
|
|
|
58,749
|
|
|
66,856
|
|
Lab fees and dental supplies
|
|
|
10,321
|
|
|
11,143
|
|
|
|
20,614
|
|
|
23,124
|
|
Office occupancy
|
|
|
8,542
|
|
|
8,480
|
|
|
|
17,041
|
|
|
17,493
|
|
Other operating expense
|
|
|
6,422
|
|
|
6,708
|
|
|
|
13,000
|
|
|
13,480
|
|
General corporate expense
|
|
|
3,332
|
|
|
3,465
|
|
|
|
6,692
|
|
|
7,095
|
|
Depreciation
|
|
|
2,700
|
|
|
2,684
|
|
|
|
5,415
|
|
|
5,458
|
|
Amortization of intangible assets
|
|
|
2,424
|
|
|
2,409
|
|
|
|
4,849
|
|
|
4,796
|
|
Litigation settlement (income)
|
|
|
|
|
|
(687
|
)
|
|
|
|
|
|
(30,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,924
|
|
|
65,557
|
|
|
|
126,360
|
|
|
107,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
7,454
|
|
|
9,082
|
|
|
|
13,403
|
|
|
46,962
|
|
Interest expense
|
|
|
2,187
|
|
|
2,419
|
|
|
|
5,557
|
|
|
4,874
|
|
Earnings before income taxes
|
|
|
5,267
|
|
|
6,663
|
|
|
|
7,846
|
|
|
42,088
|
|
Income taxes
|
|
|
2,091
|
|
|
2,539
|
|
|
|
3,112
|
|
|
16,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
3,176
|
|
|
4,124
|
|
|
|
4,734
|
|
|
25,789
|
|
Noncontrolling interest
|
|
|
164
|
|
|
151
|
|
|
|
301
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,012
|
|
$
|
3,973
|
|
|
$
|
4,433
|
|
$
|
25,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
$
|
1.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.23
|
|
$
|
0.30
|
|
|
$
|
0.34
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,949
|
|
|
12,862
|
|
|
|
12,942
|
|
|
12,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
13,099
|
|
|
13,117
|
|
|
|
13,059
|
|
|
13,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders 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
|
)
|
|
$
|
135
|
|
$
|
68,332
|
|
$
|
51,082
|
|
|
$
|
(3,874
|
)
|
|
$
|
(771
|
)
|
|
$
|
114,904
|
|
|
$
|
894
|
|
Issuance of common stock for employee stock purchase plan including tax benefit of - $2
|
|
29
|
|
|
|
|
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444
|
|
|
|
|
|
Issuance of common stock for exercised stock options, including tax benefit of - $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
Noncontrolling interest distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(492
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,498
|
|
|
|
|
|
|
|
|
|
|
|
25,498
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
13,426
|
|
(582
|
)
|
|
$
|
135
|
|
$
|
69,781
|
|
$
|
76,580
|
|
|
$
|
(3,874
|
)
|
|
$
|
(762
|
)
|
|
$
|
141,860
|
|
|
$
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
Issuance of common stock for exercised stock options, including tax benefit of - $5
|
|
8
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333
|
|
|
|
333
|
|
|
|
|
|
Cumulative adjustment of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
(415
|
)
|
|
|
415
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,433
|
|
|
|
|
|
|
|
|
|
|
|
4,433
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
13,531
|
|
(582
|
)
|
|
$
|
135
|
|
$
|
72,133
|
|
$
|
85,218
|
|
|
$
|
(3,874
|
)
|
|
$
|
(1,726
|
)
|
|
$
|
151,886
|
|
|
$
|
1,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
$
|
4,734
|
|
|
$
|
25,789
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,415
|
|
|
|
5,458
|
|
Stock-based compensation
|
|
|
764
|
|
|
|
1,005
|
|
Amortization of intangible assets
|
|
|
4,849
|
|
|
|
4,797
|
|
Other amortization
|
|
|
522
|
|
|
|
161
|
|
Deferred income tax benefit
|
|
|
701
|
|
|
|
12,798
|
|
Loss on disposal of property and equipment
|
|
|
5
|
|
|
|
192
|
|
Accrued litigation expense
|
|
|
|
|
|
|
(30,968
|
)
|
Assets transferred to PDG as part of settlement of litigation
|
|
|
|
|
|
|
9,399
|
|
Changes in assets and liabilities, net of acquisitions, affiliations and assets transferred:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
1,069
|
|
|
|
(11,823
|
)
|
Other current assets
|
|
|
(170
|
)
|
|
|
(525
|
)
|
Accounts payable and accrued expenses
|
|
|
664
|
|
|
|
1,422
|
|
Accrued compensation and benefits
|
|
|
1,204
|
|
|
|
(1,931
|
)
|
Income taxes payable/refundable, net
|
|
|
993
|
|
|
|
(820
|
)
|
Other, net
|
|
|
437
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
21,187
|
|
|
|
15,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash paid for acquisition and affiliation transactions
|
|
|
(150
|
)
|
|
|
(2,149
|
)
|
Capital expenditures, net
|
|
|
(3,203
|
)
|
|
|
(6,786
|
)
|
Payment of affiliation costs
|
|
|
(33
|
)
|
|
|
(132
|
)
|
Contingent and deferred payments
|
|
|
(177
|
)
|
|
|
(9,227
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,563
|
)
|
|
|
(18,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
1
|
|
(Repayments) borrowings under revolving line of credit, net of repayments
|
|
|
(17,250
|
)
|
|
|
4,350
|
|
Repayments of debt
|
|
|
(109
|
)
|
|
|
(99
|
)
|
Distributions to noncontrolling interest holders
|
|
|
|
|
|
|
(492
|
)
|
Proceeds from shares issued under employee stock purchase plan
|
|
|
232
|
|
|
|
248
|
|
Proceeds from issuance of common shares for exercise of stock options
|
|
|
36
|
|
|
|
186
|
|
Tax benefit on exercise of stock options
|
|
|
5
|
|
|
|
7
|
|
Tax benefit on disqualified dispositions
|
|
|
|
|
|
|
3
|
|
Payment of debt issuance costs
|
|
|
|
|
|
|
(553
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(17,086
|
)
|
|
|
3,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
538
|
|
|
|
541
|
|
Cash and cash equivalents at beginning of period
|
|
|
6,626
|
|
|
|
6,376
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,164
|
|
|
$
|
6,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
4,664
|
|
|
$
|
3,938
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes, net
|
|
$
|
2,068
|
|
|
$
|
4,401
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures and intangibles accrued for, not paid
|
|
$
|
28
|
|
|
$
|
680
|
|
|
|
|
|
|
|
|
|
|
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 June 30,
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.
7
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(3) Use of Estimates
The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Companys carrying amount of accounts receivable, net, requires management to make
estimates and assumptions regarding the collectability of accounts receivable 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.
(4) Recent Affiliations
During the second 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 $28,000 in intangibles
relating to the service agreements with an amortization period of 25 years. The terms of this affiliation do not provide for any contingent payments.
(5) Intangible Assets
Intangible assets consisted of the following as of June 30, 2009 and December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Service agreements
|
|
$
|
223,976
|
|
$
|
(56,232
|
)
|
|
$
|
167,744
|
Trade name
|
|
|
4,035
|
|
|
(976
|
)
|
|
|
3,059
|
Customer relationships
|
|
|
605
|
|
|
(472
|
)
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
228,616
|
|
$
|
(57,680
|
)
|
|
$
|
170,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and six months ended June 30, 2009 was $2,424,000 and
$4,849,000, respectively. Intangible amortization expense for the three and six months ended June 30, 2008 was $2,409,000 and $4,796,000, respectively. Estimated annual amortization expense for each of the next five fiscal years is
approximately $9,483,000. 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 17 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 June 30, 2009, options for 1,536,023 shares were vested and 271,158 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 312,328
shares are available for purchase as of June 30, 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 $385,000 and
$479,000 during the three months ended June 30, 2009 and 2008, respectively. The Company recognized stock-based compensation expense of $764,000 and $1,005,000 during the six months ended June 30, 2009 and 2008, respectively. Stock-based
compensation expense was recorded within general corporate expense on the Companys consolidated statement of income. In addition, the Company recorded a deferred tax benefit associated with stock-based compensation of $153,857 and $157,768
during the three months ended June 30, 2009 and 2008, respectively, and no amounts were capitalized. The Company recorded a deferred tax benefit associated with stock-based compensation of $276,483 and $330,073 during the six months ended
June 30, 2009 and 2008, respectively, and no amounts were capitalized. The remaining unrecognized stock-based compensation expense for unvested stock option awards at June 30, 2009, was approximately $3,431,000 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 six months of 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
Stock
Options
|
|
|
ESPP
|
|
Risk free interest rate
|
|
|
2.05
|
%
|
|
|
1.90
|
%
|
|
|
3.03
|
%
|
|
|
3.32
|
%
|
Expected life
|
|
|
6.0 years
|
|
|
|
0.5 years
|
|
|
|
6.0 years
|
|
|
|
0.5 years
|
|
Expected volatility
|
|
|
57.95
|
%
|
|
|
50.46
|
%
|
|
|
85.72
|
%
|
|
|
144.00
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected forfeiture
|
|
|
4
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
Weighted average fair value of options
|
|
$
|
3.63
|
|
|
$
|
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 six months 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
|
|
327
|
|
|
|
6.57
|
|
|
|
|
|
Exercised
|
|
(7
|
)
|
|
|
4.83
|
|
|
|
|
|
Forfeited or expired
|
|
(13
|
)
|
|
|
17.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
2,123
|
|
|
$
|
10.13
|
|
5.87
|
|
$
|
3,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and unvested expected to vest as of June 30, 2009
|
|
862
|
|
|
$
|
13.15
|
|
8.22
|
|
$
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009
|
|
1,536
|
|
|
$
|
9.75
|
|
4.73
|
|
$
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the first six
months of 2009 and 2008 are provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Proceeds from stock options exercised
|
|
$
|
36
|
|
$
|
186
|
Tax benefit related to stock options exercised
|
|
$
|
5
|
|
$
|
7
|
Intrinsic value of stock options exercised
|
|
$
|
12
|
|
$
|
81
|
(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 June 30, 2009 and December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
June 30,
2009
|
|
December 31,
2008
|
Receivables due from affiliated practices
|
|
$
|
21,545
|
|
$
|
22,511
|
Other receivables, net
|
|
|
3,261
|
|
|
3,364
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
24,806
|
|
$
|
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 and six months ended June 30, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Reimbursement of expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
21,298
|
|
$
|
22,122
|
|
$
|
42,676
|
|
$
|
44,794
|
Lab and dental supplies
|
|
|
11,256
|
|
|
11,693
|
|
|
22,469
|
|
|
23,232
|
Office occupancy expense
|
|
|
7,603
|
|
|
7,318
|
|
|
15,153
|
|
|
14,560
|
Other operating expense
|
|
|
5,181
|
|
|
5,025
|
|
|
10,331
|
|
|
9,635
|
Depreciation expense
|
|
|
2,301
|
|
|
2,201
|
|
|
4,602
|
|
|
4,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reimbursement of expenses
|
|
|
47,639
|
|
|
48,359
|
|
|
95,231
|
|
|
96,521
|
Business service fees
|
|
|
15,776
|
|
|
14,673
|
|
|
30,738
|
|
|
29,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
63,415
|
|
|
63,032
|
|
|
125,969
|
|
|
125,971
|
Patient revenue, professional services and dental laboratory fees
|
|
|
6,963
|
|
|
7,000
|
|
|
13,794
|
|
|
14,116
|
Revenue earned under transition service agreement with PDG
|
|
|
|
|
|
4,607
|
|
|
|
|
|
14,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
70,378
|
|
$
|
74,639
|
|
$
|
139,763
|
|
$
|
154,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from the Companys service agreement with Metro Dentalcare, P.L.C, the affiliated practice at
Metro Dentalcare (Metro), represented approximately 22% of consolidated net revenue for the three and six months ended June 30, 2009 and represented approximately 20% of consolidated net revenue for the three and six months ended
June 30, 2008. Net revenue from the Companys service agreement with Wisconsin Dental Group, S.C., the affiliated practice at Forward Dental, represented approximately 14% of consolidated net revenue for the three and six months ended
June 30, 2009 and represented approximately 12% and 11% of consolidated net revenue for the three and six months ended June 30, 2008, respectively. No other service agreement or customer accounted for greater than 10% of the Companys
consolidated net revenue in the three and six months ended June 30, 2009 and 2008.
(8) Debt
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 June 30, 2009, the LIBOR interest rate under the credit facility, including borrowing margin, was approximately 6.15% and the prime interest rate under
the credit facility, including borrowing margin, was 7.50%. In addition, the Company pays a commitment fee on the unused balance of its credit facility ranging from 0.375% to 0.50%. 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.
11
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 June 30, 2009. The outstanding balance under this line as of June 30, 2009 was
$13,850,000, and the Company had stand-by letters of credit amounting to $1,669,200 at June 30, 2009. The unused balance under this revolving credit facility as of June 30, 2009 was $59,480,800 and based on borrowing covenants, reduced by
the stand-by letters of credit, $55,511,513 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 was 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 June 30,
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 represented 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 six
months of 2008 totaling $6,666,667 offset by the costs to provide these services.
(10) Earnings Per Share
Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options using the treasury stock method. The computation of
diluted earnings per share does not include the effect of outstanding stock options that would be antidilutive.
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 and six months ended June 30, 2009 and 2008 (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
3,012
|
|
$
|
3,973
|
|
$
|
4,433
|
|
$
|
25,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,949
|
|
|
12,862
|
|
|
12,942
|
|
|
12,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.23
|
|
$
|
0.31
|
|
$
|
0.34
|
|
$
|
1.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
3,012
|
|
$
|
3,973
|
|
$
|
4,433
|
|
$
|
25,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,949
|
|
|
12,862
|
|
|
12,942
|
|
|
12,850
|
Add: Dilutive effect of options (1)
|
|
|
150
|
|
|
255
|
|
|
117
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares as adjusted
|
|
|
13,099
|
|
|
13,117
|
|
|
13,059
|
|
|
13,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.23
|
|
$
|
0.30
|
|
$
|
0.34
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
1,266,378 and 811,786 options were excluded from the computation of diluted net earnings per share for the three months ended June 30, 2009 and 2008, respectively, due to their
antidilutive effect. 1,172,693 and 805,165 options were excluded for the six months ended June 30, 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 June 30, 2009, 21 affiliated practices comprising 197 dental facilities were using Improvis. The Company has recorded aggregate capitalized software costs amounting to $2,446,574, which includes approximately $263,200 in
capitalized interest, in connection with this project as of June 30, 2009. Of total capitalized costs, $898,250 relates to the first development phase, $214,588 relates to the second development phase, and $1,333,736 relates to other phases in
development. The Company began to amortize costs associated with the first development phase in October 2005, and the second development phase in April 2009, and has recognized approximately $342,209 of amortization expense as of June 30, 2009.
Amortization expense associated with phase one is $336,844 and amortization expense associated with phase two is $5,365. The capitalized development costs for both phases are being amortized over 10 years.
(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.
13
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 June 30, 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 June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
Level 3
|
|
Total
|
|
Interest rate swap
|
|
$
|
|
|
$
|
(1,726
|
)
|
|
$
|
|
|
$
|
(1,726
|
)
|
Cash equivalents
|
|
|
4,702
|
|
|
|
|
|
|
|
|
|
4,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,702
|
|
$
|
(1,726
|
)
|
|
|
|
|
$
|
2,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2009, the
estimated fair value of the Companys revolving line of credit was $13,055,000 and the fair value of the term loan was $94,259,000.
(13) Income
Taxes
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 benefit remained unchanged during the six months ended June 30, 2009.
The Companys policy for recording interest and penalties associated with audits is to record such items as a component of the provision for income taxes. As of June 30, 2009, the Company has approximately $131,000 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 2006, 2007 and 2008 remain open to examination by taxing jurisdictions to which the
Company is subject.
14
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(14) Interest Rate Swap
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 and or term loan 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 June 30, 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 June 30, 2009 and December 31, 2008 is depicted below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2009
|
|
December 31,
2008
|
|
Balance Sheet Location
|
Interest Rate Swap (1)
|
|
$
|
1,726
|
|
$
|
2,059
|
|
Other non-current liabilities
|
|
|
|
|
|
|
|
|
|
The impact on OCI from the interest rate swap for the periods ended June 30, 2009 and December 31, 2008
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
Recognized in OCI
|
|
|
|
2009
|
|
2008
|
|
Interest Rate Swap (1)
|
|
$
|
333
|
|
$
|
(1,288
|
)
|
|
|
|
|
|
|
|
|
(1) Derivative designated as cash flow hedging instrument
|
|
(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.
15
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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.
Effective April 2009, the FASB issued FSP FAS 157-4,
Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP 157-4), and FSP FASB 107-1 and Accounting Principles Board (APB) 28-1,
Interim
Disclosures about Fair Value of Financial Instruments
(FSP 107-1). These two staff positions relate to fair value measurements and related disclosures. The FASB also issued a third FSP relating to the accounting for impaired
debt securities titled FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2). These standards are effective for interim and annual periods ending after June 15, 2009. The Company
has determined that FSP 157-4 and FSP 115-2 do not currently apply to its activities and has adopted the disclosure requirements of FSP 107-1. (See Note 12 Fair Value for further discussion)
Effective May 2009, the FASB issued SFAS No. 165,
Subsequent Events
(SFAS 165). This Statement incorporates guidance into
accounting literature that was previously addressed only in auditing standards. The statement refers to subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as recognized subsequent
events. Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements are referred to as non-recognized subsequent events. It also requires
companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date the financial statements were available to be issued.
Effective June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets
,
an amendment to SFAS No. 140
(SFAS 166).
SFAS 166 eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entitys continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is
effective for fiscal years beginning after November 15, 2009. The Company is evaluating the impact it will have on the consolidated results of the Company.
16
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Effective June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS
167). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary
to reassess who should consolidate a variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company is
evaluating the impact it will have on the consolidated results of the Company.
(16) Subsequent events
The Company has evaluated all subsequent events through August 7, 2009, which represents the filing date of this Form 10-Q with the Securities and Exchange
Commission, to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2009, and events which occurred subsequent to June 30, 2009 but were not recognized in the
financial statements. As of August 7, 2009, there were no subsequent events which required recognition or disclosure.
17
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 June 30, 2009, we were affiliated with 26 dental group practices, comprising 538 full-time equivalent dentists practicing in 242 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.
18
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 second 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 $28,000 in intangibles related to the service
agreement 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
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.
Under the transition services agreement, we provided management services to PDG for a period of nine months through
September 30, 2008 for $19,000,000, with $10,000,000 recognized as net revenue in 2008 and $9,000,000 recognized as an offset to loss contingency in 2007. We completed the transition services and received the related $19,000,000 payment. As a
result of these agreements, our results of operations for 2008 and 2009 are not comparable. The parties are completing the final steps in the separation of PDHC and PDG.
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.
19
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 and six months ended June 30, 2009
and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Reimbursement of expenses
|
|
$
|
47,639
|
|
$
|
48,359
|
|
$
|
95,231
|
|
$
|
96,521
|
Business service fees
|
|
|
15,776
|
|
|
14,673
|
|
|
30,738
|
|
|
29,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
63,415
|
|
|
63,032
|
|
|
125,969
|
|
|
125,971
|
Other revenue
|
|
|
6,963
|
|
|
7,000
|
|
|
13,794
|
|
|
14,116
|
Revenue earned under transition service agreement with PDG
|
|
|
|
|
|
4,607
|
|
|
|
|
|
14,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
70,378
|
|
$
|
74,639
|
|
$
|
139,763
|
|
$
|
154,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 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.
20
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
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 six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Fee-for-service
|
|
16
|
%
|
|
20
|
%
|
PPO and dental referral plans
|
|
75
|
%
|
|
69
|
%
|
Capitated managed care plans
|
|
9
|
%
|
|
11
|
%
|
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 and six months ended June 30, 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 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
%
Change
|
|
|
Six Months Ended
June 30,
|
|
%
Change
|
|
|
|
2009
|
|
2008
|
|
|
2009
|
|
2008
|
|
Patient revenue of affiliated practices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platform dental group practices affiliated with us in both periods of comparison
|
|
$
|
106,814
|
|
$
|
105,952
|
|
0.8
|
%
|
|
$
|
212,686
|
|
$
|
212,812
|
|
-0.1
|
%
|
Platform dental group practices that affiliated with us during periods of comparison
|
|
|
232
|
|
|
|
|
100.0
|
%
|
|
|
1,119
|
|
|
514
|
|
117.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total patient revenue
|
|
|
107,046
|
|
|
105,952
|
|
1.0
|
%
|
|
|
213,805
|
|
|
213,326
|
|
0.2
|
%
|
Patient revenue of Arizonas Tooth Doctor for Kids
|
|
|
6,274
|
|
|
6,043
|
|
3.8
|
%
|
|
|
12,398
|
|
|
12,164
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient revenue of platform dental group practices affiliated with us by means of service agreements
|
|
|
100,772
|
|
|
99,909
|
|
0.9
|
%
|
|
|
201,407
|
|
|
201,162
|
|
0.1
|
%
|
Amounts due to us under service agreements
|
|
|
63,415
|
|
|
63,032
|
|
0.6
|
%
|
|
|
125,969
|
|
|
125,971
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts retained by platform dental group practices affiliated with us by means of service agreements
|
|
$
|
37,357
|
|
$
|
36,877
|
|
1.3
|
%
|
|
$
|
75,438
|
|
$
|
75,191
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same market patient revenue growth was 0.8% for the three months ended June 30, 2009. Same market patient
revenue growth for the three months ended June 30, 2009 excludes platform affiliations that occurred on or after April 1, 2008. Same market patient revenue growth was comprised of a 0.6% increase in provider hours and a 1.4% improvement in
provider productivity, offset by 1.2% deterioration in reimbursement rates received from dental benefit insurers. Same market patient revenue growth was -0.1% for the six months ended June 30, 2009. Same market patient revenue growth for the
six months ended June 30, 2009 excludes platform affiliations that occurred on or after January 1, 2008. Same market patient revenue growth was comprised of a 0.5% increase in provider hours and a 1.8% improvement in provider productivity,
offset by 2.4% deterioration in reimbursement rates received from dental benefit insurers.
21
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 increased 1.3% to $37,357,000 for the three months ended
June 30, 2009 from $36,877,000 for the three months ended June 30, 2008. As a percentage of their patient revenue, amounts retained by affiliated practices increased to 37.1% for the three months ended June 30, 2009, compared to 36.9%
for the three months ended June 30, 2008 due to increased profitability of the affiliated practices resulting from reduced provider expense and reduced salaries and benefits expense for 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 and six months ended June 30, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2009
|
|
|
Three Months Ended
June 30, 2008
|
|
|
% Change
|
|
|
|
Amount
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Net revenue
|
|
$
|
70,378
|
|
100.0
|
%
|
|
$
|
74,639
|
|
|
100.0
|
%
|
|
-5.7
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
29,183
|
|
41.5
|
%
|
|
|
31,355
|
|
|
42.0
|
%
|
|
-6.9
|
%
|
Lab fees and dental supplies
|
|
|
10,321
|
|
14.7
|
%
|
|
|
11,143
|
|
|
14.9
|
%
|
|
-7.4
|
%
|
Office occupancy
|
|
|
8,542
|
|
12.1
|
%
|
|
|
8,480
|
|
|
11.4
|
%
|
|
0.7
|
%
|
Other operating expenses
|
|
|
6,422
|
|
9.1
|
%
|
|
|
6,708
|
|
|
9.0
|
%
|
|
-4.3
|
%
|
General corporate expenses
|
|
|
3,332
|
|
4.7
|
%
|
|
|
3,465
|
|
|
4.6
|
%
|
|
-3.8
|
%
|
Depreciation expense
|
|
|
2,700
|
|
3.8
|
%
|
|
|
2,684
|
|
|
3.6
|
%
|
|
0.6
|
%
|
Amortization of intangible assets
|
|
|
2,424
|
|
3.4
|
%
|
|
|
2,409
|
|
|
3.2
|
%
|
|
0.6
|
%
|
Litigation settlement (income)
|
|
|
|
|
0.0
|
%
|
|
|
(687
|
)
|
|
-0.9
|
%
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,924
|
|
89.4
|
%
|
|
|
65,557
|
|
|
87.8
|
%
|
|
-4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
7,454
|
|
10.6
|
%
|
|
|
9,082
|
|
|
12.2
|
%
|
|
-17.9
|
%
|
Interest expense
|
|
|
2,187
|
|
3.1
|
%
|
|
|
2,419
|
|
|
3.2
|
%
|
|
-9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
5,267
|
|
7.5
|
%
|
|
|
6,663
|
|
|
8.9
|
%
|
|
-21.0
|
%
|
Income taxes
|
|
|
2,091
|
|
3.0
|
%
|
|
|
2,539
|
|
|
3.4
|
%
|
|
-17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
3,176
|
|
4.5
|
%
|
|
|
4,124
|
|
|
5.5
|
%
|
|
-23.0
|
%
|
Noncontrolling interest
|
|
|
164
|
|
0.2
|
%
|
|
|
151
|
|
|
0.2
|
%
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,012
|
|
4.3
|
%
|
|
$
|
3,973
|
|
|
5.3
|
%
|
|
-24.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2009
|
|
|
Six Months Ended
June 30, 2008
|
|
|
|
|
|
|
Amount
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
% Change
|
|
Net revenue
|
|
$
|
139,763
|
|
100.0
|
%
|
|
$
|
154,450
|
|
|
100.0
|
%
|
|
-9.5
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
58,749
|
|
42.0
|
%
|
|
|
66,856
|
|
|
43.3
|
%
|
|
-12.1
|
%
|
Lab fees and dental supplies
|
|
|
20,614
|
|
14.7
|
%
|
|
|
23,124
|
|
|
15.0
|
%
|
|
-10.9
|
%
|
Office occupancy
|
|
|
17,041
|
|
12.2
|
%
|
|
|
17,493
|
|
|
11.3
|
%
|
|
-2.6
|
%
|
Other operating expenses
|
|
|
13,000
|
|
9.3
|
%
|
|
|
13,480
|
|
|
8.7
|
%
|
|
-3.6
|
%
|
General corporate expenses
|
|
|
6,692
|
|
4.8
|
%
|
|
|
7,095
|
|
|
4.6
|
%
|
|
-5.7
|
%
|
Depreciation expense
|
|
|
5,415
|
|
3.9
|
%
|
|
|
5,458
|
|
|
3.5
|
%
|
|
-0.8
|
%
|
Amortization of intangible assets
|
|
|
4,849
|
|
3.5
|
%
|
|
|
4,796
|
|
|
3.1
|
%
|
|
1.1
|
%
|
Litigation settlement (income)
|
|
|
|
|
0.0
|
%
|
|
|
(30,814
|
)
|
|
-20.0
|
%
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
126,360
|
|
90.4
|
%
|
|
|
107,488
|
|
|
69.6
|
%
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
13,403
|
|
9.6
|
%
|
|
|
46,962
|
|
|
30.4
|
%
|
|
-71.5
|
%
|
Interest expense
|
|
|
5,557
|
|
4.0
|
%
|
|
|
4,874
|
|
|
3.2
|
%
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
7,846
|
|
5.6
|
%
|
|
|
42,088
|
|
|
27.3
|
%
|
|
-81.4
|
%
|
Income taxes
|
|
|
3,112
|
|
2.2
|
%
|
|
|
16,299
|
|
|
10.6
|
%
|
|
-80.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
4,734
|
|
3.4
|
%
|
|
|
25,789
|
|
|
16.7
|
%
|
|
-81.6
|
%
|
Noncontrolling interest
|
|
|
301
|
|
0.2
|
%
|
|
|
291
|
|
|
0.2
|
%
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
4,433
|
|
3.2
|
%
|
|
$
|
25,498
|
|
|
16.5
|
%
|
|
-82.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
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.
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 with PDG as we believe that such pro forma
presentation is important to understanding 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 June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
Pro Forma Adjustments
|
|
|
|
|
As Reported
2008
|
|
|
Settlement
Assets
|
|
|
Management
Services
|
|
Pro Forma
2008
|
Net revenue
|
|
$
|
74,639
|
|
|
$
|
1,274
|
|
|
$
|
3,333
|
|
$
|
70,032
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
31,355
|
|
|
|
962
|
|
|
|
355
|
|
|
30,038
|
Lab fees and dental supplies
|
|
|
11,143
|
|
|
|
135
|
|
|
|
|
|
|
11,008
|
Office occupancy expenses
|
|
|
8,480
|
|
|
|
229
|
|
|
|
60
|
|
|
8,191
|
Other operating expenses
|
|
|
6,708
|
|
|
|
(117
|
)
|
|
|
108
|
|
|
6,717
|
General corporate expenses
|
|
|
3,465
|
|
|
|
|
|
|
|
|
|
|
3,465
|
Depreciation
|
|
|
2,684
|
|
|
|
65
|
|
|
|
14
|
|
|
2,605
|
Amortization
|
|
|
2,409
|
|
|
|
|
|
|
|
|
|
|
2,409
|
Litigation settlement (income)
|
|
|
(687
|
)
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,557
|
|
|
|
587
|
|
|
|
537
|
|
|
64,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
9,082
|
|
|
|
687
|
|
|
|
2,796
|
|
|
5,599
|
Interest expense, net
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
6,663
|
|
|
|
687
|
|
|
|
2,796
|
|
|
3,180
|
Income taxes
|
|
|
2,539
|
|
|
|
|
|
|
|
|
|
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
4,124
|
|
|
|
|
|
|
|
|
|
|
1,969
|
Noncontrolling interest
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,973
|
|
|
|
|
|
|
|
|
|
$
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments for settlement assets include the following items: (i) revenue due to us from PDG for
the operating expenses associated with the PDG doctors who practiced temporarily in the six dental facilities retained by us, (ii) insurance proceeds of $1,002,000 received for professional fees that were partially reimbursable pursuant to
insurance coverage and (iii) professional fees and other expenses associated with the litigation of $315,000.
Pro forma adjustments for management
services include revenue earned under the transition services agreement with PDG and estimated expenses to provide such services.
23
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
The following table reconciles the actual results of operations to our pro forma results of operations for the six
months ended June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
Pro Forma Adjustments
|
|
|
|
|
As Reported
2008
|
|
|
Settlement
Assets
|
|
|
Management
Services
|
|
Pro Forma
2008
|
Net revenue
|
|
$
|
154,450
|
|
|
$
|
7,697
|
|
|
$
|
6,667
|
|
$
|
140,086
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
66,856
|
|
|
|
4,717
|
|
|
|
1,207
|
|
|
60,932
|
Lab fees and dental supplies
|
|
|
23,124
|
|
|
|
1,436
|
|
|
|
|
|
|
21,688
|
Office occupancy expenses
|
|
|
17,493
|
|
|
|
1,092
|
|
|
|
120
|
|
|
16,281
|
Other operating expenses
|
|
|
13,480
|
|
|
|
135
|
|
|
|
215
|
|
|
13,130
|
General corporate expenses
|
|
|
7,095
|
|
|
|
|
|
|
|
|
|
|
7,095
|
Depreciation
|
|
|
5,458
|
|
|
|
317
|
|
|
|
28
|
|
|
5,113
|
Amortization
|
|
|
4,796
|
|
|
|
|
|
|
|
|
|
|
4,796
|
Litigation settlement (income)
|
|
|
(30,814
|
)
|
|
|
(30,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
107,488
|
|
|
|
(23,117
|
)
|
|
|
1,570
|
|
|
129,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
46,962
|
|
|
|
30,814
|
|
|
|
5,097
|
|
|
11,051
|
Interest expense, net
|
|
|
4,874
|
|
|
|
|
|
|
|
|
|
|
4,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
42,088
|
|
|
|
30,814
|
|
|
|
5,097
|
|
|
6,177
|
Income taxes
|
|
|
16,299
|
|
|
|
|
|
|
|
|
|
|
2,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
25,789
|
|
|
|
|
|
|
|
|
|
|
3,881
|
Noncontrolling interest
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
25,498
|
|
|
|
|
|
|
|
|
|
$
|
3,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments for settlement assets include the following items: (i) revenue 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 practiced temporarily in the six dental facilities retained by us, (ii) a
non-cash gain 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 $9,200,000, (iii) insurance proceeds of $1,002,000 received for professional fees that were partially reimbursable pursuant to insurance
coverage and (iii) professional fees and other expenses associated with the litigation of $951,000.
Pro forma adjustments for management services
include revenue earned under the transition services agreement with PDG and estimated expenses to provide such services.
24
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 and six
months ended June 30, 2009 and the pro forma non-GAAP financial measures for the three and six months ended June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2009
|
|
|
Three Months Ended
June 30, 2008
|
|
|
|
|
|
|
Actual
Amounts
|
|
% of Net
Revenue
|
|
|
Pro Forma
Amounts
|
|
% of Net
Revenue
|
|
|
% Change
|
|
Net revenue
|
|
$
|
70,378
|
|
100.0
|
%
|
|
$
|
70,032
|
|
100.0
|
%
|
|
0.5
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
29,183
|
|
41.5
|
%
|
|
|
30,038
|
|
42.9
|
%
|
|
-2.8
|
%
|
Lab fees and dental supplies
|
|
|
10,321
|
|
14.7
|
%
|
|
|
11,008
|
|
15.7
|
%
|
|
-6.2
|
%
|
Office occupancy expenses
|
|
|
8,542
|
|
12.1
|
%
|
|
|
8,191
|
|
11.7
|
%
|
|
4.3
|
%
|
Other operating expenses
|
|
|
6,422
|
|
9.1
|
%
|
|
|
6,717
|
|
9.6
|
%
|
|
-4.4
|
%
|
General corporate expenses
|
|
|
3,332
|
|
4.7
|
%
|
|
|
3,465
|
|
4.9
|
%
|
|
-3.8
|
%
|
Depreciation
|
|
|
2,700
|
|
3.8
|
%
|
|
|
2,605
|
|
3.7
|
%
|
|
3.6
|
%
|
Amortization
|
|
|
2,424
|
|
3.4
|
%
|
|
|
2,409
|
|
3.4
|
%
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,924
|
|
89.4
|
%
|
|
|
64,433
|
|
92.0
|
%
|
|
-2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
7,454
|
|
10.6
|
%
|
|
|
5,599
|
|
8.0
|
%
|
|
33.1
|
%
|
Interest expense, net
|
|
|
2,187
|
|
3.1
|
%
|
|
|
2,419
|
|
3.5
|
%
|
|
-9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
5,267
|
|
7.5
|
%
|
|
|
3,180
|
|
4.5
|
%
|
|
65.6
|
%
|
Income taxes
|
|
|
2,091
|
|
3.0
|
%
|
|
|
1,211
|
|
1.7
|
%
|
|
72.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
3,176
|
|
4.5
|
%
|
|
|
1,969
|
|
2.8
|
%
|
|
61.3
|
%
|
Noncontrolling interest
|
|
|
164
|
|
0.2
|
%
|
|
|
151
|
|
0.2
|
%
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,012
|
|
4.3
|
%
|
|
$
|
1,818
|
|
2.6
|
%
|
|
65.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2009
|
|
|
Six Months Ended
June 30, 2008
|
|
|
|
|
|
|
Actual
Amounts
|
|
% of Net
Revenue
|
|
|
Pro Forma
Amounts
|
|
% of Net
Revenue
|
|
|
% Change
|
|
Net revenue
|
|
$
|
139,763
|
|
100.0
|
%
|
|
$
|
140,086
|
|
100.0
|
%
|
|
-0.2
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
58,749
|
|
42.0
|
%
|
|
|
60,932
|
|
43.5
|
%
|
|
-3.6
|
%
|
Lab fees and dental supplies
|
|
|
20,614
|
|
14.7
|
%
|
|
|
21,688
|
|
15.5
|
%
|
|
-5.0
|
%
|
Office occupancy expenses
|
|
|
17,041
|
|
12.2
|
%
|
|
|
16,281
|
|
11.6
|
%
|
|
4.7
|
%
|
Other operating expenses
|
|
|
13,000
|
|
9.3
|
%
|
|
|
13,130
|
|
9.4
|
%
|
|
-1.0
|
%
|
General corporate expenses
|
|
|
6,692
|
|
4.8
|
%
|
|
|
7,095
|
|
5.1
|
%
|
|
-5.7
|
%
|
Depreciation
|
|
|
5,415
|
|
3.9
|
%
|
|
|
5,113
|
|
3.6
|
%
|
|
5.9
|
%
|
Amortization
|
|
|
4,849
|
|
3.5
|
%
|
|
|
4,796
|
|
3.4
|
%
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
126,360
|
|
90.4
|
%
|
|
|
129,035
|
|
92.1
|
%
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
13,403
|
|
9.6
|
%
|
|
|
11,051
|
|
7.9
|
%
|
|
21.3
|
%
|
Interest expense, net
|
|
|
5,557
|
|
4.0
|
%
|
|
|
4,874
|
|
3.5
|
%
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
7,846
|
|
5.6
|
%
|
|
|
6,177
|
|
4.4
|
%
|
|
27.0
|
%
|
Income taxes
|
|
|
3,112
|
|
2.2
|
%
|
|
|
2,296
|
|
1.6
|
%
|
|
35.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
4,734
|
|
3.4
|
%
|
|
|
3,881
|
|
2.8
|
%
|
|
22.0
|
%
|
Noncontrolling interest
|
|
|
301
|
|
0.2
|
%
|
|
|
291
|
|
0.2
|
%
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
4,433
|
|
3.2
|
%
|
|
$
|
3,590
|
|
2.6
|
%
|
|
23.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 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.
25
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Net Revenue
Net
revenue decreased 5.7% to $70,378,000 for the three months ended June 30, 2009 from $74,639,000 for the three months ended June 30, 2008 but increased 0.5% from pro forma net revenue of $70,032,000 for the three months ended June 30,
2008. The increase from pro forma net revenue was attributable to an increase in patient revenue at our affiliated practices. Net revenue decreased 9.5% to $139,763,000 for the six months ended June 30, 2009 from $154,450,000 for the six months
ended June 30, 2008 and decreased 0.2% from pro forma net revenue of $140,087,000 for the six months ended June 30, 2008. The decrease from pro forma net revenue was attributable to a decline in patient revenue at our affiliated practices.
Net revenue earned from our service agreement with Metro Dentalcare, P.L.C represented 22% of our consolidated net revenue for the three and six months
ended June 30, 2009 and 20% of pro forma consolidated net revenue for the three and six months ended June 30, 2008. Net revenue earned from our service agreement with Wisconsin Dental Group, S.C. represented 14% of our consolidated net
revenue for the three and six months ended June 30, 2009 and 12% and 11% of pro forma consolidated net revenue for the three and six months ended June 30, 2008, respectively. 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 and six month periods ended June 30, 2009 and 2008.
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 41.5% for the three months ended June 30, 2009 from 42.0% for
the three months ended June 30, 2008 and decreased from 42.9% of pro forma net revenue for the three months ended June 30, 2008. Salaries and benefits expense as a percentage of net revenue decreased to 42.0% for the six months ended
June 30, 2009 from 43.3% for the six months ended June 30, 2008 and decreased from 43.5% of pro forma net revenue for the six months ended June 30, 2008. The decrease as a percentage of pro forma net revenue is primarily due to the
integration of Metro Dentalcare and the six dental facilities we retained as part of the PDG litigation settlement as well as implementation of our initiatives to maintain liquidity, including delay of 2009 compensation increases and the evaluation
of all non-clinical and non-essential positions.
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 14.7% of net revenue for the three months ended June 30, 2009 from 14.9% for the three months ended June 30, 2008 and
decreased from 15.7% of pro forma net revenue for the three months ended June 30, 2008. Lab fees and dental supplies expense as a percentage of net revenue decreased to 14.7% of net revenue for the six months ended June 30, 2009 from 15.0%
for the six months ended June 30, 2008 and decreased from 15.5% of pro forma net revenue for the six months ended June 30, 2008. The decrease as a percentage of pro forma net revenue is primarily due to a focus on dental supplies
initiatives such as greater adherence to established formularies, and to a lesser extent a reduction in lab fees. We believe the reduction of lab fees is the result of a shift in patient procedure mix away from procedures requiring lab services as a
result of current economic conditions.
26
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
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 12.1% for the three months ended June 30, 2009 from 11.4% for the three months ended June 30, 2008 and increased from 11.7% of pro forma net revenue for the three months ended June 30, 2008.
For the three months ended June 30, 2009, the increase as a percentage of pro forma net revenue is largely due to a favorable comparison with 2008. In 2008, pursuant to the settlement agreement, PDG was required to reimburse us for the
occupancy expenses of the PDG dentists who remained in the six dental facilities through May 28, 2008. These reimbursements along with the associated costs are included in the pro forma Settlement Assets. To a lesser extent one-time CAM charges
incurred at one of our dental facilities also contributed to the increase during the 2009 quarter. Office occupancy expense as a percentage of net revenue increased to 12.2% for the six months ended June 30, 2009 from 11.3% for the six months
ended June 30, 2008 and 11.6% of pro forma net revenue for the six months ended June 30, 2008. For the six months ended June 30, 2009, the increase as a percentage of pro forma net revenue is largely due to a favorable comparison with
2008 mentioned above as well as costs associated with our new pediatric affiliate in Texas and CAM charges incurred at one of our dental facilities.
During the three months ended June 30, 2009, we expanded/relocated one dental facility. During the six months ended June 30, 2009, we expanded/relocated one dental facility and completed two de novo facilities.
We expect total office occupancy expense 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 9.1% for the three months ended June 30, 2009 from 9.0% for the three months ended June 30, 2008 and decreased from 9.6% of pro forma net revenue for the three months ended June 30, 2008. Other
operating expenses as a percentage of net revenue increased to 9.3% for the six months ended June 30, 2009 from 8.7% for the six months ended June 30, 2008 and decreased from 9.4% of pro forma net revenue for the six months ended
June 30, 2008. For the three and six months ended June 30, 2009, the decrease as a percentage of pro forma net revenue is due to a favorable comparison with 2008 which included a disposal of undepreciated assets associated with the
relocation of one dental facility and certain non-recurring professional fees.
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 4.7%
for the three months ended June 30, 2009 from 4.6% for the three months ended June 30, 2008 and decreased from 4.9% of pro forma net revenue for the three months ended June 30, 2008. The decrease as a percentage of pro forma net
revenue is attributed to reduced travel and audit related expenses. General corporate expenses as a percentage of net revenue increased to 4.8% for the six months ended June 30, 2009 from 4.6% for the six months ended June 30, 2008 and
decreased from 5.1% of pro forma net revenue for the six months ended June 30, 2008. During the six months ended June 30, 2008, the decrease as a percentage of pro forma net revenue is due to a favorable comparison with 2008 which included
additional auditing fees and consulting fees required by our banks in response to the PDG litigation outcome.
27
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
We recognized $385,000 of stock-based compensation expense for the three months ended June 30, 2009 compared to
$479,000 for the three months ended June 30, 2008. We recognized $764,000 of stock-based compensation expense for the six months ended June 30, 2009 compared to $1,005,000 for the six months ended June 30, 2008. We estimate
stock-based compensation expense for the full year 2009 will be approximately $1,597,000.
Depreciation
Depreciation expense, including amortization of leasehold improvements, as a percentage of net revenue increased to 3.8% for the three months ended June 30, 2009
from 3.6% for the three months ended June 30, 2008 and increased from 3.7% of pro forma net revenue for the three months ended June 30, 2008. Depreciation expense, including amortization of leasehold improvements, as a percentage of net
revenue increased to 3.9% for the six months ended June 30, 2009 from 3.5% for the six months ended June 30, 2008 and increased from 3.6% of pro forma net revenue for the six months ended June 30, 2008. The increase as a percentage of
net revenue is the result of facility development projects completed in 2008 and to a lesser degree accelerated amortization of leasehold improvements associated with the anticipated closing of a dental facility in 2010.
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 during the remaining of 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 3.4% for the three months ended June 30, 2009 from 3.2% for the three months ended
June 30, 2008 and remained unchanged from 3.4% of pro forma net revenue for the three months ended June 30, 2008. Amortization expense as a percentage of net revenue increased to 3.5% for the six months ended June 30, 2009 from 3.1%
for the six months ended June 30, 2008 and increased from 3.4% of pro forma net revenue for the six months ended June 30, 2008. The increase as a percentage of pro forma net revenue 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 $7,454,000 for the three months ended June 30, 2009 from $9,082,000 for the three months ended June 30, 2008 and increased
from pro forma earnings from operations of $5,599,000 for the three months ended June 30, 2008. As a percentage of net revenue, earnings from operations increased to 10.6% for the three months ended June 30, 2009 from 8.0% of pro forma net
revenue for the three months ended June 30, 2008. The increase from pro forma earnings from operations is primarily due to decreased salary expense and to a lesser extent decreased lab fees and dental supplies expense, other operating and
general corporate expense somewhat offset by increased office occupancy expense and depreciation. Earnings from operations decreased to $13,403,000 for the six months ended June 30, 2009 from $46,962,000 for the six months ended June 30,
2008 and increased from pro forma earnings from operations of $11,051,000 for the six months ended June 30, 2008. As a percentage of net revenue, earnings from operations increased to 9.6% for the six months ended June 30, 2009 from 7.9%
of pro forma net revenue for the six months ended June 30, 2008. The increase from pro forma earnings from operations is primarily due to decreased salary expense and to a lesser extent decreased lab fees and dental supplies expense, general
corporate expense and other operating expense somewhat offset by increased office occupancy expense as well as depreciation and amortization.
28
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Interest Expense
Net interest expense decreased to $2,187,000 for the three months ended June 30, 2009 from $2,419,000 for the three months ended June 30, 2008. The decrease is the result of decreased borrowing levels and reduced LIBOR rates
somewhat offset by increased credit spreads over LIBOR. Net interest expense increased to $5,557,000 for the six months ended June 30, 2009 from $4,874,000 for the six months ended June 30, 2008. The increase is the result of increased
credit spreads over LIBOR somewhat offset by a decrease in borrowing levels and LIBOR rates.
Income Taxes
Our effective tax rate increased to 39.7% for the three and six months ended June 30, 2009 as compared to 39.0% for the three and six months ended June 30,
2008. This increase is due to increases in state tax rates in Michigan and Texas. We expect our effective tax rate to range between 39% and 40% for the year.
Consolidated Net Earnings
As a result of the foregoing, consolidated net earnings decreased to $3,176,000 for the three months ended
June 30, 2009 from $4,124,000 for the three months ended June 30, 2008 and increased from pro forma consolidated net earnings of $1,969,000 for the three months ended June 30, 2008. As a percentage of net revenue, net earnings
increased to 4.5% for the three months ended June 30, 2009 from 2.8% of pro forma net revenue for the three months ended June 30, 2008. The increase is primarily due to increased earnings from operations and reduced interest expense
somewhat offset by increased income taxes. Consolidated net earnings decreased to $4,734,000 for the six months ended June 30, 2009 from $25,789,000 for the six months ended June 30, 2008 and increased from pro forma net earnings of
$3,881,000 for the six months ended June 30, 2008. As a percentage of net revenue, consolidated net earnings increased to 3.4% for the six months ended June 30, 2009 from 2.8% of pro forma net revenue for the six months ended June 30,
2008. The increase is primarily due to increased earnings from operations, somewhat offset by increased income tax and interest expense.
Noncontrolling
Interest
For the three months ended June 30, 2009 and June 30, 2008, we recorded noncontrolling interest expense of $164,000 and $151,000,
respectively, representing the gains attributable to noncontrolling interest holders. For the six months ended June 30, 2009 and June 30, 2008, we recorded noncontrolling interest expense of $301,000 and $291,000, respectively,
representing the gains attributable to noncontrolling interest holders. The increase in 2009 is due to an increase 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:
|
|
|
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 six months of 2009;
|
29
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
|
|
|
we have delayed 2009 compensation increases until the economic environment and our financial performance merit such increases;
|
|
|
|
we have implemented a hiring freeze for non-clinical positions and are evaluating all non-essential positions;
|
|
|
|
we have reduced valuations for affiliations and acquisitions and will complete only those that make both strategic and economic sense;
|
|
|
|
and we have reduced 2009 capital expenditure expectations to approximately $7,000,000.
|
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 June 30, 2009, the outstanding balances under our credit facility and term loan were $13,850,000 and $100,000,000, 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 six months ended June 30, 2009 and
2008, cash provided by operating activities amounted to $21,187,000 and $15,184,000, respectively. For the six months ended June 30, 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 account receivables. As compared to the same period in 2008, non-cash items included a net non-cash gain representing the fair market value of the
assets transferred to PDG in settlement of the litigation in excess of their book value and a deferred tax benefit associated with the litigation settlement. The increase in cash flow from working capital items was due primarily to a reduction in
accounts receivable of approximately $10,700,000 during 2008. The primary reasons for the positive impact to cash flow include collection of approximately $7,164,000 that was due from PDG at June 30, 2008 and a reduction of our receivables due
from our affiliated practices by approximately $2,437,000.
Investing Activities
For the six months ended June 30, 2009 and 2008, cash used for investing activities amounted to $3,563,000 and $18,294,000, respectively. As a result of current economic conditions and the state of the
credit markets, we have reduced our investing activities to maintain our liquidity and reduce our indebtedness. Capital expenditures were $3,203,000 and $6,786,000 for the six months ended June 30, 2009 and 2008, respectively, as we have
reduced our facility development projects. During the six months ended June 30, 2009, we completed two de novo dental facilities and one facility relocation/expansion as compared to two de novo dental facilities and six facility
relocation/expansions during the six months ended June 30, 2008.
30
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
Amounts paid for affiliations and acquisitions, including contingent amounts and affiliation costs, were $360,000 and
$11,508,000 for the six months ended June 30, 2009 and 2008, respectively as we have also reduced our affiliation and acquisition activities. During the six months ended June 30, 2009, we completed two in-market affiliations as
compared to one affiliation during the six months ended June 30, 2008. In addition, we made a contingent payment of $9,084,000 during the six months ended June 30, 2008 related to our acquisition of Metropolitan Dental Holdings, Inc.
Financing Activities
For the six months ended
June 30, 2009 and 2008, cash (used in) provided by financing activities amounted to ($17,086,000) compared to $3,651,000, 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 $17,250,000 as a result of an increase in cash flow from operations, a decrease in investing activities and debt issuance costs and 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 June 30,
2009, the LIBOR interest rate under the credit facility, including borrowing margin, was approximately 6.15% and the prime interest rate under the credit facility, including borrowing margin, was 7.50%. In addition, the Company pays a commitment fee
on the unused balance of its credit facility ranging from 0.375% to 0.50%. 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 June 30, 2009. The outstanding balance under this line as of June 30, 2009 was $13,850,000 and the Company
had stand-by letters of credit amounting to $1,669,200 at June 30, 2009. The unused balance under this revolving credit facility as of June 30, 2009 was $59,480,800 and based on borrowing covenants, reduced by the stand-by letter of
credit, $55,511,513 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 450 basis points and increases 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 3.75.
Our revolving credit facility and term loan mature on January 20, 2010 and accordingly the outstanding balances under the revolving credit facility and term loan
have been classified as current liabilities at June 30, 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.
31
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
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 June 30, 2009, amounts due from affiliated practices represented 87% of our accounts receivable.
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 June 30,
2009, intangible assets were $247,058,000 and represented 72% of our total assets. Goodwill and indefinite-lived intangible assets represent 31% of our intangible assets and definite-lived intangible assets related to service agreements represent
69% of our intangible assets.
32
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
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.
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 an additional 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.
33
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
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 the
provision for income taxes. For the six months ended June 30, 2009, $13,000 of interest expense was recognized in the statement of earnings. No tax expense related to penalties was recognized for the six months ended June 30, 2009.
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 2006, 2007 and 2008 remain open to examination. 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, we 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, we 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
34
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
(unaudited)
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, we 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
Effective April 2009, the FASB issued FSP FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly
(FSP 157-4), and FSP FASB 107-1 and Accounting Principles Board (APB) 28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP 107-1). These two staff positions relate
to fair value measurements and related disclosures. The FASB also issued a third FSP relating to the accounting for impaired debt securities titled FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
(FSP 115-2). These standards are effective for interim and annual periods ending after June 15, 2009. We determined that FSP 157-4 and FSP 115-2 do not currently apply to its activities and have adopted the disclosure requirements
of FSP 107-1. (See Note 12 Fair Value for further discussion)
Effective May 2009, the FASB issued SFAS No. 165,
Subsequent
Events
(SFAS 165). This Statement incorporates guidance into accounting literature that was previously addressed only in auditing standards. The statement refers to subsequent events that provide additional evidence about
conditions that existed at the balance-sheet date as recognized subsequent events. Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements
are referred to as non-recognized subsequent events. It also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date
the financial statements were available to be issued.
Effective June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of
Financial Assets
,
an amendment to SFAS No. 140
(SFAS 166). SFAS 166 eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entitys continuing involvement in and
exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We are evaluating the impact it will have on our consolidated results.
Effective June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS 167). The amendments include: (1) the
elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a
variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. We are evaluating the impact it will have on our
consolidated results.
35
AMERICAN DENTAL PARTNERS, INC.
PART I. FINANCIAL INFORMATION
(unaudited)
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
In the
ordinary course of business, we are exposed to interest rate risk. With regard to our revolving credit facility, we are also exposed to variable rate interest for the banks applicable margins ranging from 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 June 30, 2009 under our variable rate revolving credit facility and term loan, for each
one percentage point change in interest rates would be approximately $938,500 per annum.
Item 4.
|
Controls and Procedures
|
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 June 30, 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 June 30, 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.
36
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
Shareholder Litigation
On or about January 25, 2008, February 4, 2008, February 12, 2008, and March 13, 2008, we 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 we 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, we and the other defendants filed a motion to dismiss the action. The Court denied the motion on
April 2, 2009. On June 5, 2009 and June 16, 2009, the Court issued scheduling orders, requiring any amendments to the consolidated amended complaint filed by November 2, 2009; discovery to be completed by April 1, 2010; the
lead plaintiff to file for class certification on or before April 15, 2010; and any summary judgment motions filed on or before June 15, 2010. 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 us 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.
37
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 ADPI 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.
We, and the Dyer and Musselman Individual Defendants, brought a motion to dismiss the consolidated action, which was heard by the Court on April 15, 2008. The
Court granted that motion on May 28, 2009 and entered judgments dismissing the Musselman and Dyer actions on May 29, 2009.
On June 24,
2009, the Dyer and Musselman plaintiffs filed notices of appeal. The Appeals Court of Massachusetts has not yet docketed either appeal. We intend to defend the matter vigorously.
38
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
The following risk factors supersede 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, and these factors, in addition to the other information set forth in this report, could materially affect our
business, financial condition or future results.
We may not be able to refinance our credit facilities on satisfactory terms.
Our
$75,000,000 revolving credit facility and $100,000,000 term loan mature on January 20, 2010. At June 30, 2009, the outstanding balances under our credit facility and term loan were approximately $13,850,000 (plus stand-by letters of credit
amounting to $1,669,000) and $100,000,000, respectively. The current credit markets are very limited and restrictive. 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. Our failure to extend the maturity of our revolving credit facility and term loan with
our existing lenders or to refinance our indebtedness with our existing lenders or others on satisfactory terms will have a material adverse effect on our business, financial condition and results of operations. 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. 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 are impacted by general economic conditions.
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 are 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 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. We also believe the current economic conditions will not lessen the dental care needs of patients and
therefore will not impact long term trends of the dental care industry.
We are dependent on the performance of the affiliated practices for our net
revenue
.
Our net revenue depends primarily on revenue generated by the affiliated practices. We do not employ dentists, except for Arizonas Tooth Doctor for Kids, and we do not control the clinical decisions of any of the
affiliated practices. There can be no assurance that the affiliated practices will maintain successful operations or that any of the key members of a particular affiliated practice will continue practicing with that practice. Availability of
dentists, hygienists or dental assistants could have a material adverse effect on our business. To the extent permitted by state law, each affiliated practice has entered into non-competition agreements and other restrictive covenants with dentists
under their employ and we have similar restrictive covenants with Tooth Doctors dentists. There can be no assurance that these restrictive covenants will remain in effect in all cases, are or will be sufficient to protect the interests of the
affiliated practices or that a court will enforce such agreements. Any material loss of revenue by an affiliated practice, whether due to the loss of existing dentists or the inability to recruit new ones, could have a material adverse effect on our
business, financial condition and results of operations.
39
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
We are dependent upon the service agreements we have entered into with each of the affiliated practices, except for
Tooth Doctor, for substantially all of our revenue. Revenue generated from our service agreements with Metro Dentalcare P.L.C., the affiliated dental practice at Metro Dentalcare, and with Wisconsin Dental Group, S.C., the affiliated practice at
Forward Dental, represented 20% and 12%, respectively, of our consolidated net revenue in 2008 and represented 22% and 14%, respectively, of our consolidated net revenue for the six month ended June 30, 2009. The termination of either of these
service agreements would have a material adverse effect on our business, financial condition and results of operations.
Our net revenue may be
adversely affected by third-party payor cost containment efforts.
A significant portion of the payments for dental care that is received by the affiliated practices is paid or reimbursed under insurance programs with third-party payors.
Third-party payors are continually negotiating the fees charged for dental care, with a goal of containing reimbursement and utilization rates. Loss of revenue by the affiliated practices caused by third-party payor cost containment efforts or an
inability to negotiate satisfactory reimbursement rates could have a material adverse effect on our business, financial condition and results of operations.
Our net revenue at Tooth Doctor and several other affiliated practices may be adversely affected by changes in state Medicaid programs.
Tooth Doctor is largely dependent upon reimbursements under Arizonas Medicaid
program and four of our other affiliated practices are providers under various state Medicaid programs. Changes in those programs affecting provider eligibility, reimbursement rates or specific dental procedures eligible for reimbursement, or our
affiliated practices failure to maintain its authorization as a provider under these programs, or to comply with applicable state and federal law or its contracts with the payors who administer claims and make payments under these programs, could
have a material adverse effect on our business, financial condition and results of operations.
Determinations by regulatory authorities could have a
material adverse effect on our operations.
The dental industry and dental practices are highly regulated at the state and federal levels. Many of these laws and regulations vary widely by state. In addition, these laws and regulations are
enforced by federal and state regulatory authorities with broad discretion, and our agreements or activities may be subject to review by these authorities from time to time. For example, regulatory authorities in some states in which we operate have
obtained a copy of our service agreement for review in the past, and in the future such reviews could result in changes to our service agreements. We do not, and do not intend to, control the practice of dentistry by the affiliated practices or
their compliance with the regulatory requirements directly applicable to dentists or the practice of dentistry, and we have structured our agreements and operations in a manner intended to comply with applicable law. However, there can be no
assurance that any review of our business relationships, including our relationship with the affiliated practices, by courts or other regulatory authorities, will not result in determinations that could have a material adverse effect on our
operations. In addition, violation of federal or state laws could subject us or our affiliated practices to civil or criminal penalties.
Changes in
the laws and regulatory environment could have a material adverse effect on our operations.
The laws and regulations of some states in which we currently operate or may seek to expand may require us to change our contractual relationships
with our affiliated practices in a manner that may restrict our operations in those states or may prevent us from affiliating with dental group practices or providing comprehensive business services to dental group practices in those states, or may
require us to restructure our current or future operations. Any change to federal or state laws and regulations that require us to restructure our current or future operations or restrict our operations could have a material adverse effect on our
operations. Any change in the laws and regulatory environment that would have the effect of restricting or limiting the enforceability of our service agreements could have a material adverse effect on our business, financial condition and results of
operations.
We may experience lower revenue arising from health care reform.
The US Congress currently is considering comprehensive
revisions to the health care and health insurance systems. Some of the proposals under consideration, or others that may be introduced, could have a material adverse effect on our affiliated practices if adopted, and consequently on our business,
financial condition and operating results. For instance, a proposal under consideration would eliminate or reduce tax deductibility of employer-provided health insurance which would increase the cost of health insurance to employees and could lead
to reduced enrollment in dental insurance programs. Another proposal under consideration would mandate dental insurance coverage for children but not adults, which could have the effect of maintaining or increasing enrollment of children in dental
insurance programs but reducing enrollment of adults in dental insurance programs.
40
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
We believe dental insurance, and the design of dental insurance programs, impacts the decisions patients make
regarding their dental care. It is uncertain what legislative programs, if any, will be adopted in the future or what action Congress may take regarding health care reform proposals or legislation. We cannot predict the effect health care reforms
may have on our business and we can offer no assurances that any of these reforms will not have a material adverse effect on our business.
Federal
and state laws that protect the privacy and security of patient health information may increase our costs and limit our ability to collect and use that information.
Numerous federal and state laws and regulations, including The Health
Insurance and Accountability Act (HIPAA), govern the collection, dissemination, use, security and confidentiality of patient-identifiable health information, and these laws and regulations affect our operations and those of our
affiliated practices. As part of our record keeping, third-party billing, and other services, we collect and maintain patient health information. New patient health information standards, whether implemented pursuant to HIPAA, congressional or state
action, or otherwise, could have a significant effect on the manner in which we an our affiliated practices handle healthcare-related data, and compliance with these standards could impose significant costs on us or limit our ability to offer
services, thereby negatively impacting the business opportunities available to us. If we or our affiliated practices do not comply with existing or new laws and regulations related to patient health information, we or they could be subject to
monetary fines, civil penalties or criminal sanctions.
Our future affiliations may not be completed on acceptable terms or successfully integrated.
Our strategy includes expansion through affiliations with dental group practices in new and existing states and the expansion of such affiliated practices. Affiliations involve numerous risks, including failure to retain key personnel and
contracts of the affiliated practices and the inability to work successfully with us as a business partner. There can be no assurance that we will be able to complete additional affiliations on acceptable terms and conditions or that we will be able
to serve successfully as a business partner to additional practices, and this could adversely affect our business, financial condition or results of operations. In addition, our revolving credit agreement and our term loan limit the amount which can
be borrowed to fund affiliations and acquisitions, and as a result the number of new affiliations and acquisitions over the next twelve months will be at levels lower than we achieved in recent years.
We may not realize the expected value of our goodwill and intangible assets.
A significant portion of our total assets is represented by goodwill and
intangible assets, with the amount expected to increase with future affiliations. In addition, the amortization expense related to definite lived intangible assets will increase in the future as a result of additional intangible assets recorded in
connection with new affiliations. Management performs an impairment test on goodwill and indefinite lived intangible assets at least annually or when facts and circumstances exist which would suggest that the goodwill or indefinite lived intangible
asset is impaired. An impairment test on goodwill and definite lived intangible assets is performed when facts and circumstances exist which would suggest that the definite lived intangible asset may be impaired, such as loss of key personnel,
change in legal factors or competition. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. If impairment were determined, we would make the
appropriate adjustment to the intangible asset to reduce the assets carrying value to fair value. In the event of any sale or liquidation of us or a portion of our assets, there can be no assurance that the value of our intangible assets will
be realized. Any future determination requiring the write off of goodwill, indefinite lived intangibles or a significant portion of unamortized intangible assets could have a material adverse effect on our business, financial condition and results
of operations.
The outcome of pending shareholder litigation involving us may adversely affect our financial condition.
We and certain of
our executive officers are defendants in four lawsuits which have been consolidated under the caption In re American Dental Partners, Inc. Securities Litigation. The plaintiffs in this litigation allege that we and certain of our
executive officers violated the federal securities laws by making allegedly material misrepresentations and failing to disclose allegedly material facts concerning the lawsuit by Park Dental Group against our subsidiary, PDHC, Ltd. and by
misrepresenting certain financial results. We are unable to estimate any potential losses with respect to this action. We intend to defend the matter vigorously. However, there can be no assurance that the amount of any judgment against us in this
matter, or the cost of any settlement of this matter into which we may enter, or the costs of defending this matter and related derivative litigation filed against us arising out of the Park Dental Group litigation, would not exceed the proceeds of
insurance available to us. As a result, we cannot predict how we might approach the satisfaction of any such judgement or settlement.
41
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
To the extent that we are required to fund any such judgment, settlement or litigation costs in excess of the
amounts of available insurance coverage, such obligations could have a material adverse effect on our financial condition or our ability to maintain compliance with financial covenants or other terms of our revolving credit facility and term loan.
Interruptions in our information systems could limit our ability to operate our business.
Our business is dependent on information systems,
which could be vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunications failures, intentional acts of vandalism and similar events. A significant or prolonged interruption in our computer
network, data center or software applications could have a material adverse effect on our business, financial condition and results of operations.
Our operating results may be adversely affected by professional liability claims against the affiliated practices.
The affiliated practices and/or individual dentists in their employ could be exposed to the risk of
professional liability claims, and it is possible that such claims could also be asserted against us. With respect to Tooth Doctor, any such claims would likely be asserted against us. Such claims, if successful, could result in substantial damages
that could exceed the limits of any applicable insurance coverage. We are named as an insured under the professional liability insurance policy covering the affiliated practices. In addition, we also require each affiliated practice to indemnify us
for actions or omissions related to the delivery of dental care by such affiliated practice. However, a successful professional liability claim against an affiliated practice or us could have a material adverse effect on our business, financial
condition and results of operations.
A loss of the services of our key personnel could have a material adverse effect on our business
. Our
continued success depends upon the retention of our senior officers who have been instrumental in our success and upon our ability to attract and retain other highly qualified individuals. The loss of some of our senior officers, or an inability to
attract or retain other key individuals, could materially adversely affect us. Continued growth and success in our business depends, to a large degree, on our ability to retain and attract such employees.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Not applicable.
Item 3.
|
Defaults Upon Senior Securities
|
Not applicable.
42
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
We held our
annual meeting of shareholders on April 28, 2009. At the meeting, the individuals listed below were elected to our Board of Directors. The table below indicates the votes for, the votes withheld and the year in which the term expires for such
nominee:
|
|
|
|
|
|
|
Name
|
|
Votes For
|
|
Votes Withheld
|
|
Term Expiring
|
Derril W. Reeves
|
|
11,099,446
|
|
286,382
|
|
2012
|
Gregory A. Serrao
|
|
11,186,183
|
|
199,635
|
|
2012
|
Lonnie H. Norris, DMD,MPH
|
|
11,198,214
|
|
187,604
|
|
2011
|
Steven J. Semmelmayer, Gerard M. Moufflet and Robert E. Hunter also serve on our Board of Directors for terms
which continue after the annual meeting.
At our annual meeting of shareholders, the shareholders also approved, by the vote shown in the table below, an
amendment to our Employee Stock Purchase Plan to increase by 250,000 shares the number of shares available under the Plan.
|
|
|
|
|
Shares
|
Votes for
|
|
8,973,206
|
Votes against
|
|
15,663
|
Abstain
|
|
1,920
|
Broker Non-Votes
|
|
2,395,029
|
At our annual meeting of shareholders, the shareholders also approved, by the vote shown in the table below, an
amendment to our 2005 Equity Incentive Plan to increase by 450,000 shares the number of shares available under the Plan.
|
|
|
|
|
Shares
|
Votes for
|
|
5,400,350
|
Votes against
|
|
3,589,299
|
Abstain
|
|
1,140
|
Broker Non-Votes
|
|
2,395,029
|
At our annual meeting of shareholders, the shareholders also ratified, by the vote shown in the table below, the
appointment by the Board of Directors of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending December 31, 2009.
|
|
|
|
|
Shares
|
Votes for
|
|
11,218,294
|
Votes against
|
|
10,271
|
Abstain
|
|
157,253
|
Item 5.
|
Other Information
|
Not applicable.
Exhibits (see exhibit index on page 45)
43
AMERICAN DENTAL PARTNERS, INC.
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
AMERICAN DENTAL PARTNERS, INC.
|
|
|
|
August 7, 2009
|
|
|
|
/s/ Gregory A. Serrao
|
|
|
|
|
Gregory A. Serrao
|
|
|
|
|
Chairman, President, and Chief Executive Officer
|
|
|
|
|
(principal executive officer)
|
|
|
|
August 7, 2009
|
|
|
|
/s/ Breht T. Feigh
|
|
|
|
|
Breht T. Feigh
|
|
|
|
|
Executive Vice President,
|
|
|
|
|
Chief Financial Officer and Treasurer
|
|
|
|
|
(principal financial officer)
|
|
|
|
August 7, 2009
|
|
|
|
/s/ Mark W. Vargo
|
|
|
|
|
Mark W. Vargo
|
|
|
|
|
Vice President,
|
|
|
|
|
Chief Accounting Officer
|
|
|
|
|
(principal accounting officer)
|
44
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
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
|
45
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