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, 2011
Commission File Number: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
DELAWARE
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04-3297858
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(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
401 Edgewater Place, Suite 430
Wakefield, Massachusetts 01880
(Address of Principal Executive Offices, Including Zip Code)
(781)
224-0880
(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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).
x
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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¨
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Accelerated filer
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x
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Non-accelerated filer
|
|
¨
(Do not check if a smaller reporting company)
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|
Smaller reporting company
|
|
¨
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
¨
Yes
x
No
The number of shares of the registrants common stock outstanding as of August 5, 2011 was 15,452,308.
AMERICAN DENTAL PARTNERS, INC.
INDEX
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, or the Securities Act. For this purpose, any statements contained in this quarterly report regarding our strategy,
future plans or operations, financial position, future revenues, projected costs, prospects, and objectives of management, other than statements of historical facts, may be deemed to be forward-looking statements. Without limiting the foregoing, the
words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We
cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in forward-looking statements. There are a number of factors that could cause actual events or results to differ materially from those
indicated or implied by such forward-looking statements, many of which are beyond our control, including the factors discussed in Part I - Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2010, and as referenced in Part II - Item 1A of this report. In addition, the forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our
estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in
other factors affecting such forward-looking statements or otherwise.
2
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
June
30,
2011
|
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December
31,
2010
|
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ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,657
|
|
|
$
|
4,798
|
|
Short-term investments
|
|
|
1,850
|
|
|
|
|
|
Accounts receivable, net
|
|
|
19,379
|
|
|
|
19,403
|
|
Inventories
|
|
|
2,874
|
|
|
|
2,942
|
|
Prepaid expenses and other current assets
|
|
|
4,339
|
|
|
|
4,555
|
|
Prepaid/refundable income taxes
|
|
|
1,024
|
|
|
|
1,652
|
|
Deferred income taxes
|
|
|
3,861
|
|
|
|
3,936
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
37,984
|
|
|
|
37,286
|
|
|
|
|
Property and equipment, net
|
|
|
55,690
|
|
|
|
53,095
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
90,750
|
|
|
|
90,750
|
|
Service agreements and other intangible assets, net
|
|
|
182,581
|
|
|
|
185,669
|
|
Other
|
|
|
5,254
|
|
|
|
5,556
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
278,585
|
|
|
|
281,975
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
372,259
|
|
|
$
|
372,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
19,231
|
|
|
$
|
16,807
|
|
Accrued compensation and benefits
|
|
|
9,933
|
|
|
|
9,943
|
|
Accrued expenses
|
|
|
6,911
|
|
|
|
5,857
|
|
Current maturities of debt
|
|
|
8,078
|
|
|
|
8,156
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
44,153
|
|
|
|
40,763
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
78,500
|
|
|
|
92,250
|
|
Deferred income taxes
|
|
|
41,905
|
|
|
|
38,707
|
|
Other liabilities
|
|
|
4,079
|
|
|
|
5,202
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
124,484
|
|
|
|
136,159
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
168,637
|
|
|
|
176,922
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|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
521
|
|
|
|
462
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
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|
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|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share, 1,000,000 shares authorized, no shares issued or outstanding
|
|
|
|
|
|
|
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|
Common stock, par value $0.01 per share, 25,000,000 shares authorized, 16,423,169 and 16,382,330 shares issued; 15,434,370 and
15,393,531 shares outstanding at June 30, 2011 and December 31, 2010, respectively
|
|
|
163
|
|
|
|
163
|
|
Additional paid-in capital
|
|
|
106,904
|
|
|
|
105,641
|
|
Treasury stock, at cost (988,799 shares)
|
|
|
(8,572
|
)
|
|
|
(8,572
|
)
|
Accumulated comprehensive income
|
|
|
(740
|
)
|
|
|
(1,184
|
)
|
Retained earnings
|
|
|
105,346
|
|
|
|
98,924
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
203,101
|
|
|
|
194,972
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
372,259
|
|
|
$
|
372,356
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
3
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
|
Six Months
Ended
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
Net revenue
|
|
$
|
73,953
|
|
|
$
|
72,366
|
|
|
$
|
148,775
|
|
|
$
|
144,220
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
29,196
|
|
|
|
28,735
|
|
|
|
58,444
|
|
|
|
58,337
|
|
Lab fees and dental supplies
|
|
|
11,790
|
|
|
|
10,668
|
|
|
|
23,369
|
|
|
|
21,736
|
|
Office occupancy
|
|
|
9,509
|
|
|
|
9,131
|
|
|
|
18,983
|
|
|
|
18,256
|
|
Other operating expense
|
|
|
7,682
|
|
|
|
6,878
|
|
|
|
15,002
|
|
|
|
13,425
|
|
General corporate expense
|
|
|
4,160
|
|
|
|
3,669
|
|
|
|
7,949
|
|
|
|
7,316
|
|
Depreciation
|
|
|
3,070
|
|
|
|
2,862
|
|
|
|
5,935
|
|
|
|
5,707
|
|
Amortization of intangible assets
|
|
|
2,559
|
|
|
|
2,464
|
|
|
|
5,099
|
|
|
|
4,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
67,966
|
|
|
|
64,407
|
|
|
|
134,781
|
|
|
|
129,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
5,987
|
|
|
|
7,959
|
|
|
|
13,994
|
|
|
|
14,573
|
|
Interest expense
|
|
|
1,525
|
|
|
|
2,726
|
|
|
|
3,108
|
|
|
|
5,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
4,462
|
|
|
|
5,233
|
|
|
|
10,886
|
|
|
|
9,195
|
|
Income taxes
|
|
|
1,818
|
|
|
|
2,082
|
|
|
|
4,405
|
|
|
|
3,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
2,644
|
|
|
|
3,151
|
|
|
|
6,481
|
|
|
|
5,563
|
|
Less: Net earnings attributable to non-controlling interests
|
|
|
15
|
|
|
|
39
|
|
|
|
54
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to American Dental Partners, Inc.
|
|
$
|
2,629
|
|
|
$
|
3,112
|
|
|
$
|
6,427
|
|
|
$
|
5,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to common stockholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.20
|
|
|
$
|
0.42
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.19
|
|
|
$
|
0.41
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,430
|
|
|
|
15,728
|
|
|
|
15,422
|
|
|
|
15,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
15,753
|
|
|
|
16,056
|
|
|
|
15,738
|
|
|
|
16,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Interests
|
|
Balance at December 31, 2009
|
|
|
16,273
|
|
|
|
(582
|
)
|
|
$
|
162
|
|
|
$
|
103,151
|
|
|
$
|
87,661
|
|
|
$
|
(3,874
|
)
|
|
$
|
(1,641
|
)
|
|
$
|
185,459
|
|
|
$
|
1,857
|
|
Issuance of common stock for employee stock purchase plan
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
Issuance of common stock for exercised stock options
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
Income tax shortfall from stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
134
|
|
|
|
|
|
Fair value adjustment of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
1,095
|
|
|
|
(1,095
|
)
|
Noncontrolling interest distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359
|
)
|
Purchase of additional interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,457
|
|
|
|
|
|
|
|
|
|
|
|
5,457
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
16,311
|
|
|
|
(582
|
)
|
|
$
|
162
|
|
|
$
|
104,191
|
|
|
$
|
94,213
|
|
|
$
|
(3,874
|
)
|
|
$
|
(1,507
|
)
|
|
$
|
193,185
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
16,382
|
|
|
|
(989
|
)
|
|
$
|
163
|
|
|
$
|
105,641
|
|
|
$
|
98,924
|
|
|
$
|
(8,572
|
)
|
|
$
|
(1,184
|
)
|
|
$
|
194,972
|
|
|
$
|
462
|
|
Issuance of common stock for employee stock purchase plan
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211
|
|
|
|
|
|
Issuance of common stock for exercised stock options, including tax benefit of $3
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
Income tax shortfall from stock option plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933
|
|
|
|
|
|
Unrealized-gain on available for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
437
|
|
|
|
|
|
Fair value adjustment of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
5
|
|
Noncontrolling interest contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,427
|
|
|
|
|
|
|
|
|
|
|
|
6,427
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
|
16,423
|
|
|
|
(989
|
)
|
|
$
|
163
|
|
|
$
|
106,904
|
|
|
$
|
105,346
|
|
|
$
|
(8,572
|
)
|
|
$
|
(740
|
)
|
|
$
|
203,101
|
|
|
$
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
5
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
$
|
6,481
|
|
|
$
|
5,563
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,935
|
|
|
|
5,707
|
|
Stock-based compensation
|
|
|
933
|
|
|
|
823
|
|
Amortization of intangible assets
|
|
|
5,099
|
|
|
|
4,870
|
|
Other amortization
|
|
|
1,050
|
|
|
|
1,551
|
|
Deferred income tax benefit
|
|
|
3,261
|
|
|
|
44
|
|
Amortization of premium on available-for-sale securities
|
|
|
18
|
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
1
|
|
|
|
9
|
|
Changes in assets and liabilities, net of acquisitions and affiliations:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
92
|
|
|
|
502
|
|
Other current assets
|
|
|
273
|
|
|
|
(325
|
)
|
Accounts payable and accrued expenses
|
|
|
2,399
|
|
|
|
957
|
|
Accrued compensation and benefits
|
|
|
(10
|
)
|
|
|
(492
|
)
|
Income taxes payable/refundable, net
|
|
|
628
|
|
|
|
(1,357
|
)
|
Other, net
|
|
|
(719
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,441
|
|
|
|
17,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(2,713
|
)
|
|
|
(17,998
|
)
|
Capital expenditures
|
|
|
(6,845
|
)
|
|
|
(3,109
|
)
|
Contingent and deferred payments
|
|
|
|
|
|
|
(1,800
|
)
|
Purchase of available-for-sale securities
|
|
|
(1,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,332
|
)
|
|
|
(22,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from credit facilities
|
|
|
71,389
|
|
|
|
178,100
|
|
Repayments under revolving and term credit facilities
|
|
|
(85,139
|
)
|
|
|
(171,000
|
)
|
Repayments of debt
|
|
|
(78
|
)
|
|
|
(109
|
)
|
Contributions from (distributions to) noncontrolling interest holders
|
|
|
12
|
|
|
|
(359
|
)
|
Purchase of additional interest in subsidiary
|
|
|
|
|
|
|
(45
|
)
|
Proceeds from shares issued under employee stock purchase plan
|
|
|
211
|
|
|
|
219
|
|
Proceeds from issuance of common stock for exercise of stock options
|
|
|
116
|
|
|
|
49
|
|
Tax benefit on exercise of stock options
|
|
|
3
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(764
|
)
|
|
|
(1,930
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided in financing activities
|
|
|
(14,250
|
)
|
|
|
4,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(141
|
)
|
|
|
(253
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
4,798
|
|
|
|
6,807
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,657
|
|
|
$
|
6,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
2,117
|
|
|
$
|
3,954
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
765
|
|
|
$
|
5,187
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures accrued for, not paid
|
|
$
|
285
|
|
|
$
|
287
|
|
|
|
|
|
|
|
|
|
|
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 business services, support staff and dental
facilities 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 those dental practices, which are organized as professional corporations, professional associations or service corporations and 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 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; payor contracting;
and financial planning, reporting and analysis. The Company operates in one segment.
(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 (GAAP) and include the accounts of the Company, its wholly-owned subsidiaries, its Arizonas Tooth Doctor for Kids (Arizona Tooth Doctor) subsidiary, which is owned 94% by the Company, and
its CFK of Texas, LLC subsidiary, which is owned 99% by the Company. All 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 that are affiliated with the Company by means of those service agreements.
The accompanying interim consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements and the notes to these statements included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010. 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 in these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
(3) Variable Interest Entities
Accounting guidance under Accounting Standards Codification, (or ASC) 810, Consolidation, requires the Company to
consolidate the financial statements of a practice that is affiliated with it by means of a service agreement with its financial results if the affiliated practice is a variable interest entity, or VIE, and is the primary beneficiary of
such VIE. The Companys evaluation is subjective in nature and incorporates both qualitative and quantitative factors to determine if an affiliated practice is a VIE and if the Company is the primary beneficiary such that financial statement
consolidation would be required. An affiliated practice would be considered a VIE if (a) it is thinly capitalized (i.e., the equity is not sufficient to fund the affiliated practices activities without additional subordinated financial
support) or (b) the equity holders of the affiliated practice as a group have one of the following four characteristics: (i) lack the power to direct the activities that most significantly affect the affiliated practices economic performance,
(ii) possess nonsubstantive voting rights, (iii) lack the obligation to absorb the affiliated practices expected losses or (iv) lack the right to receive the affiliated practices expected residual returns. Although the characteristics of
(b) do not exist, with respect to (a) the Company may and does provide advances to certain affiliated practices in instances when their cash flow is not sufficient to meet their working capital obligations, which may indicate that an affiliated
practice is thinly capitalized. These circumstances led the Company to conduct an analysis, pursuant to ASC 810, and conclude that certain of its affiliated practices may be VIEs.
The analysis included a review of the Companys contractual agreements with each of the affiliated practices to ascertain whether it had the power to direct the activities of the affiliated practice
that most significantly affect its economic performance and the obligation to absorb losses or the right to receive benefits of the affiliated practice. The Company would be considered the primary beneficiary of a VIE, to the extent the affiliated
practice is a VIE, if it met both of the criteria. Based upon the Companys assessment of the affiliated practices, the Company believes that operating risk (including sales volume risk, price risk and other operating cost risk) is the risk
that will have the most significant impact on an affiliated practices economic performance. The Company believes that the
7
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
activities that most significantly affect an affiliated practices economic performance are with respect to patient revenue; expenses, including those attributable to dentist compensation
and benefits; and collection policies. Following its review of the terms of the service agreements with each of the affiliated practices, the Company has determined that it does not have the power to direct the activities of the affiliated practices
that most significantly affect their economic performance. The Company has no other obligation to absorb the affiliated practices losses nor does the Company have the right to receive the affiliated practices benefits. Therefore, the
Company is not the primary beneficiary of the VIEs, to the extent they exist, and it has not consolidated the financial statements of the practices that are affiliated with the Company by means of a service agreement with its financial statements
for all periods presented. The Company considers each time that it enters into a new service agreement or enters into material amendments to an existing service agreement whether the terms of such agreements or amendments would change the elements
it considers important to the primary beneficiary conclusion.
As of June 30, 2011, the Company was not the primary beneficiary for its
VIEs, to the extent any affiliated practice is a VIE. The Companys maximum risk of loss related to these possible VIEs is limited to its receivables due from affiliated practices of approximately $16,236,000 and $16,806,000 at June 30,
2011 and December 31, 2010, respectively.
(4) Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Companys carrying amount of accounts
receivable, net, requires management to make estimates and assumptions regarding the collectability of accounts receivable in its consolidated financial statements. The Companys acquisitions accounted for as business combinations 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 Companys acquisitions that are accounted for as acquisitions of
assets typically result in other intangible assets, which affect the amount of future period amortization expense. The determination of the value of these 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 that require the Company to make estimates and assumptions regarding
losses below applicable retention levels. There can be no assurance that actual results will not differ from those estimates.
(5) Recent Acquisitions
During the second quarter of 2011, the Company completed seven in-market acquisitions of dental facilities. Cash paid, net of cash
acquired, in connection with these in-market acquisitions amounted to $2,563,000. In connection with these transactions, the Company recorded approximately $2,011,000 in intangibles relating to the service agreements, with an amortization period of
25 years. The terms of these transactions do not provide for contingent payments.
8
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Intangible Assets and Goodwill
Intangible assets consisted of the following as of June 30, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Agreements
|
|
|
Customer
Relationships
|
|
|
Covenants not
to
Compete
|
|
|
Trade Names
|
|
|
Total
|
|
As of June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
251,618
|
|
|
$
|
674
|
|
|
$
|
440
|
|
|
$
|
|
|
|
$
|
252,702
|
|
Accumulated amortization
|
|
|
(75,782
|
)
|
|
|
(527
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
(76,380
|
)
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,259
|
|
|
|
6,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$
|
175,836
|
|
|
$
|
337
|
|
|
$
|
149
|
|
|
$
|
6,259
|
|
|
$
|
182,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
249,866
|
|
|
$
|
605
|
|
|
$
|
220
|
|
|
$
|
|
|
|
$
|
250,691
|
|
Accumulated amortization
|
|
|
(70,715
|
)
|
|
|
(518
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
(71,281
|
)
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,259
|
|
|
|
6,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$
|
179,151
|
|
|
$
|
87
|
|
|
$
|
172
|
|
|
$
|
6,259
|
|
|
$
|
185,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset amortization expense for the three and six months ended June 30, 2011 was $2,559,000 and
$5,099,000, respectively. Intangible asset amortization expense for the three and six months ended June 30, 2010 was $2,464,000 and $4,870,000, respectively. Excluding any future acquisitions, annual amortization expense for each of the next
five fiscal years will be approximately $10,221,000. The amortization period for service agreements is 25 years.
The weighted average
remaining life of customer relationships is five years. The weighted average remaining life of covenants not to compete is four years. The weighted average remaining life of all intangible assets, excluding indefinite-lived trade names, is
approximately 19 years.
There was no change in the carrying amount of goodwill during the first six months of 2011 (in thousands):
|
|
|
|
|
|
|
2011
|
|
|
|
Balance as of January 1
|
|
$
|
90,750
|
|
|
|
Goodwill acquired
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30
|
|
$
|
90,750
|
|
|
|
|
|
|
9
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(7) Stock-based Compensation
Options granted under the Companys Amended 2005 Equity Incentive Plan, as amended, have a ten-year term and a vesting period of
four years. Options granted under the Companys Amended 2005 Directors Stock Option Plan, as amended, have a ten-year term and a vesting period of three years. At June 30, 2011, options for 1,763,672 shares were vested under all of the
Companys equity incentive plans. At June 30, 2011, 549,900 shares were available for future grants under the Amended 2005 Equity Incentive Plan and 160,000 shares were available for future grants under the Amended 2005 Directors Stock Option
Plan. No shares are available for issuance under any of the Companys other equity incentive plans. 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, as amended (ESPP). A total of 613,027 shares have been purchased under the ESPP since inception of the plan, and 186,973 shares were available for purchase as of June 30, 2011. The
Company issues new shares for ESPP purchases.
Performance shares granted to date under the Companys Amended 2005 Equity Incentive Plan
have a performance period of three years based upon achievement of specific annual financial performance goals. The performance shares are subject to restrictions on transfer for an additional one-year period following the performance period. At
June 30, 2011, 66,100 performance shares were granted under the Companys Amended 2005 Equity Incentive Plan. All performance shares were unvested as of June 30, 2011.
The Company recognized stock-based compensation expense for options granted under its Amended 2005 Equity Incentive Plan, Amended 2005 Directors Stock Option Plan and ESPP of $507,000 and $432,000 during
the three months ended June 30, 2011 and 2010, respectively. The Company recognized stock-based compensation expense for options granted under its Amended 2005 Equity Incentive Plan, Amended 2005 Directors Stock Option Plan and ESPP of $895,000 and
$823,000 during the six months ended June 30, 2011 and 2010, respectively. This 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 for option grants of $188,000 and $105,000 during the three months ended June 30, 2011 and 2010, respectively. The Company recorded a deferred tax benefit associated with stock-based compensation for option
grants of $329,000 and $227,000 during the six months ended June 30, 2011 and 2010, respectively. The Company recognized stock-based compensation expense for performance shares granted under its Amended 2005 Equity Incentive Plan of $38,000 during
the three and six months ended June 30, 2011. This 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 for performance shares of $9,000 during the three and six months ended June 30, 2011. The remaining unrecognized stock-based compensation expense for unvested awards as of June 30, 2011 was approximately $3,710,000, and the weighted
average period of time over which this cost will be recognized is 1.8 years.
The fair value for these options, employee stock purchase rights
and performance shares granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the first six months of 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
Performance
Shares
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.48
|
%
|
|
|
2.29
|
%
|
|
|
2.57
|
%
|
|
|
2.75
|
%
|
|
|
3.01
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
51.26
|
%
|
|
|
28.69
|
%
|
|
|
51.26
|
%
|
|
|
52.35
|
%
|
|
|
41.08
|
%
|
Expected life (years)
|
|
|
6.1 years
|
|
|
|
0.5 years
|
|
|
|
3.75 years
|
|
|
|
6.0 years
|
|
|
|
0.5 years
|
|
Expected forfeiture
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
Weighted average fair value of options / purchase rights / performance shares granted during the quarter
|
|
$
|
6.59
|
|
|
$
|
1.16
|
|
|
$
|
13.12
|
|
|
$
|
6.88
|
|
|
$
|
1.57
|
|
The Company calculated the volatility assumption using a blend of a historical volatility rate for a period equal to the
expected term. The Company estimated the expected life of its stock options using the weighted average of the actual term of all stock option exercises. Expected life of the Companys ESPP purchase rights reflects the length of each plan period
(six months) at the end of which shares are purchased. The Company estimated the expected life of its performance shares using the actual performance and restruction periods. The Company estimates forfeitures based on historical experience.
10
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes stock option transactions during the first six months of 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
Performance Shares Unvested
|
|
|
|
Shares (in
thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Shares
(in
thousands)
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
2,252
|
|
|
$
|
10.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
396
|
|
|
|
12.85
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
13.12
|
|
Exercised
|
|
|
(20
|
)
|
|
|
5.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(16
|
)
|
|
|
12.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011
|
|
|
2,612
|
|
|
$
|
11.03
|
|
|
|
5.47
|
|
|
$
|
7,617
|
|
|
|
66
|
|
|
$
|
13.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and unvested expected to vest at June 30, 2011
|
|
|
2,502
|
|
|
$
|
10.97
|
|
|
|
5.41
|
|
|
$
|
7,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2011
|
|
|
1,764
|
|
|
$
|
10.62
|
|
|
|
3.98
|
|
|
$
|
6,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds and intrinsic value related to total stock options exercised during the first six months of 2011 and 2010
are provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Proceeds from stock options exercised
|
|
$
|
119
|
|
|
$
|
49
|
|
Tax benefit related to stock options exercised
|
|
$
|
3
|
|
|
$
|
|
|
Intrinsic value of stock options exercised
|
|
$
|
147
|
|
|
$
|
72
|
|
(8) Accounts Receivable, Net and Net Revenue
Accounts Receivable, Net
Accounts receivable, net, reflects receivables due from the affiliated practices and represents amounts due pursuant to the terms of the service agreements and other receivables, which include trade
receivables of Arizona Tooth Doctor, the Companys captive insurance subsidiary, its dental laboratories and its dental benefits third-party administrator subsidiary. The following table lists receivables due from the affiliated practices and
other receivables as of June 30, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June
30,
2011
|
|
|
December
31,
2010
|
|
|
|
|
Receivables due from affiliated practices
|
|
$
|
16,236
|
|
|
$
|
16,806
|
|
Other receivables, net
|
|
|
3,143
|
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
19,379
|
|
|
$
|
19,403
|
|
|
|
|
|
|
|
|
|
|
Receivables due from Northland Dental Partners, PLLC, the affiliated practice at Metro Dentalcare, represented
approximately 14% and 17% of the Companys consolidated accounts receivable, net, as of June 30, 2011 and December 31, 2010, respectively. Receivables due from Wisconsin Dental Group, S.C., the affiliated practice at ForwardDental,
represented approximately 19% and 18% of the Companys consolidated accounts receivable, net, as of June 30, 2011 and December 31, 2010, respectively. No other receivables exceeded 10% of the Companys receivables due from
affiliated practices as of June 30, 2011 and December 31, 2010.
11
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Net Revenue
The Companys net revenue includes management fees earned by the Company pursuant to the terms of the service agreements with the affiliated practices, as well as reimbursement of other expenses paid
by the Company on behalf of the affiliated practices, and other revenue, which includes patient revenue of Arizona Tooth Doctor, fees earned by the Companys dental benefits third-party administrator subsidiary, fees earned by the
Companys dental laboratories and other miscellaneous revenue.
The Companys net revenue from the reimbursement of expenses is
accounted for on an accrual basis and is recognized when these expenses are incurred by the affiliated practices. Reimbursement of expenses includes costs incurred by the Company for the operation and administration of the dental facilities, which
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 dental hygienists); lab fees and 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, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Reimbursement of expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
21,498
|
|
|
$
|
20,424
|
|
|
$
|
42,991
|
|
|
$
|
41,246
|
|
Lab fees and dental supplies
|
|
|
12,787
|
|
|
|
11,717
|
|
|
|
25,576
|
|
|
|
23,730
|
|
Office occupancy expenses
|
|
|
8,614
|
|
|
|
8,169
|
|
|
|
17,206
|
|
|
|
16,289
|
|
Other operating expenses
|
|
|
6,417
|
|
|
|
5,885
|
|
|
|
12,732
|
|
|
|
11,546
|
|
Depreciation expense
|
|
|
2,699
|
|
|
|
2,471
|
|
|
|
5,190
|
|
|
|
4,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reimbursement of expenses
|
|
|
52,015
|
|
|
|
48,666
|
|
|
|
103,695
|
|
|
|
97,708
|
|
Business service fees
|
|
|
16,920
|
|
|
|
17,468
|
|
|
|
34,676
|
|
|
|
33,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
68,935
|
|
|
|
66,134
|
|
|
|
138,371
|
|
|
|
131,636
|
|
Patient revenue, professional services, dental laboratory fees and other miscellaneous revenue
|
|
|
5,018
|
|
|
|
6,232
|
|
|
|
10,404
|
|
|
|
12,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
73,953
|
|
|
$
|
72,366
|
|
|
$
|
148,775
|
|
|
$
|
144,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue derived from the Companys service agreement with Northland Dental Partners, PLLC, the affiliated
practice at Metro Dentalcare, represented approximately 21% of the Companys consolidated net revenue for the three and six months ended June 30, 2011 and 22% for the three and six months ended June 30, 2010. Net revenue from the
Companys service agreement with Wisconsin Dental Group, S.C., the affiliated practice at ForwardDental, represented approximately 12% of the Companys consolidated net revenue for the three and six months ended June 30, 2011 and
approximately 12% and 13% of the Companys consolidated net revenue for the three and six months ended June 30, 2010, respectively. No other service agreement or customer accounted for greater than 10% of the Companys consolidated
net revenue for the three and six months ended June 30, 2011 and 2010.
(9) Debt
In May 2011, the Company entered into an amendment to its senior secured credit facility. The $180,000,000 senior secured credit
facility, has a $100,000,000 revolving line of credit and an $80,000,000 term loan. The senior secured credit facility matures in May 2016 and can be used for general corporate purposes, including working capital, acquisitions and capital
expenditures. Borrowings under the senior secured credit facility bear interest at the Companys option of the Base Rate plus a margin or the LIBOR plus a margin. The Base Rate is defined as the greater of Bank of Americas
prevailing prime rate, which was 3.25% as of June 30, 2011; the Federal Funds rate plus 0.50%; or the LIBOR rate plus 1.00%. The margin is based upon the Companys leverage ratio and ranges from 0.50% to 2.25% for Base Rate borrowings and
1.50% to 3.25% for LIBOR borrowings. In addition, the Company pays a commitment fee ranging from 0.25% to 0.50% on the unused balance of the revolving line of credit based on its leverage ratio.
12
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company is required to make quarterly payments of principal on the term loan in an amount equal to
$2,000,000 beginning in June 2011 and ending in May 2016 and a $40,000,000 payment at maturity. The total amount of repayments in 2011 is scheduled to be $8,000,000.
Pursuant to the senior secured credit facility, the aggregate consideration paid for all acquisitions made during the same fiscal year may not exceed $50,000,000. The aggregate amount of all share
repurchases over the term of the senior secured credit facility may not exceed $50,000,000 and on an annual basis may not exceed $20,000,000. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and
amortization, (EBITDA), adjusted for certain items, and are collateralized by a first lien on substantially all of the Companys assets, including a pledge of the stock of the Companys subsidiaries.
The Company must comply with financial and other covenants under its senior secured credit facility. The Companys senior secured credit facility
required that its net worth as of June 30, 2011 be no less than $168,585,000, its maximum EBITDA leverage ratio be no more than 3.0 and its fixed charge minimum coverage be no less than 1.15. As of June 30, 2011, the Company was in
compliance with these financial covenants. As per covenant calculations, the Companys net worth was $203,101,000, its EBITDA leverage ratio was 1.8 and its fixed charge coverage was 1.4.
The outstanding balance with respect to the senior secured credit facility as of June 30, 2011 was $78,000,000 under the term loan and $8,500,000
under the revolving line of credit. The Company had stand-by letters of credit amounting to $1,512,291 at June 30, 2011, and based on borrowing covenants, reduced by the stand-by letters of credit, approximately $61,500,000 was available
for borrowing under the revolving line of credit.
(10) Litigation
On March 17, 2011, Dental Associates, P.C., the affiliated practice at Redwood Dental Group, filed a lawsuit against the Company and
its subsidiary, American Dental Partners of Michigan, LLC, in the Wayne County Circuit Court in Michigan, Case No. 11-003213-CK. On April 15, 2011, the Company filed all necessary papers to move the lawsuit to the United States District Court for
the Eastern District of Michigan, where the action is now pending, Case No. 2:11-cv-11624-DPH-MJH.
The complaint claims, among other things,
(i) that the Company and its subsidiary breached fiduciary duties owed to Dental Associates; (ii) that its subsidiary breached the service agreement between it and Dental Associates; (iii) that the Company and its subsidiary tortiously interfered
with Dental Associates relationships with its employees, patients, prospective patients and the state of Michigan; and (iv) that the Company and its subsidiary were unjustly enriched by these alleged actions.
The complaint seeks, among other things, (i) unspecified monetary damages; (ii) attorneys fees and litigation costs; (iii) certain injunctive
relief, including termination of the service agreement; (iv) the establishment of a constructive trust with respect to certain Dental Associates funds managed by the Company; (v) a detailed audit and accounting with respect to revenues
generated by Dental Associates and the payment of those funds to or for the benefit of the Company and its subsidiary; and (vi) such other equitable or just relief as the Court finds appropriate. The Company is unable to provide a range of potential
damages with respect to this action.
On May 9, 2011, the Company and its subsidiary filed a Rule 12(b)(1) and (6) motion to dismiss the
complaint for lack of subject matter jurisdiction and failure to state a claim and to compel arbitration, or alternatively to stay litigation pending arbitration. The Court has scheduled a hearing on this motion for September 27, 2011. The Company
and its subsidiary intend to defend themselves vigorously with respect to this matter.
For the year ended December 31, 2010 and the six
months ended June 30, 2011, the net revenue the Company received under the service agreement with Dental Associates represented approximately 2% of its consolidated net revenue for both periods and earnings before interest, taxes, depreciation and
amortization represented approximately 3% and 2%, respectively, of its consolidated earnings before interest, taxes, depreciation and amortization.
13
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(11) Short-term Investments
All short-term investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported
as a component of stockholders equity. The fair value of short-term investments and unrealized gains at June 30, 2011 were as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Fair
Value
|
|
U.S. federal government securities
|
|
$
|
909
|
|
|
$
|
8
|
|
|
$
|
917
|
|
Corporate bonds
|
|
|
929
|
|
|
|
4
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
1,838
|
|
|
$
|
12
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company periodically reviews its investments for other than temporary decline in fair value and writes down
investments to their fair value when an other-than-temporary decline occurs. When investments are evaluated for other-than-temporary impairment, factors considered include the length of time and extent to which fair value has been below cost basis,
the financial condition of the issuer, the Companys intent to sell the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis. The Company
evaluated its short-term investment portfolio and concluded that there had been no decline in market value at June 30, 2011 that was considered to be other-than-temporary.
(12) 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 anti-dilutive.
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three
and six months ended June 30, 2011 and 2010 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
2,629
|
|
|
$
|
3,112
|
|
|
$
|
6,427
|
|
|
$
|
5,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
15,430
|
|
|
|
15,728
|
|
|
|
15,422
|
|
|
|
15,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.20
|
|
|
$
|
0.42
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
2,629
|
|
|
$
|
3,112
|
|
|
$
|
6,427
|
|
|
$
|
5,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
15,430
|
|
|
|
15,728
|
|
|
|
15,422
|
|
|
|
15,721
|
|
Add: Dilutive effect of options (1)
|
|
|
323
|
|
|
|
328
|
|
|
|
316
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares as adjusted
|
|
|
15,753
|
|
|
|
16,056
|
|
|
|
15,738
|
|
|
|
16,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.19
|
|
|
$
|
0.41
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
515,797 and 485,547 options were excluded from the computation of diluted net earnings per share for the three months ended June 30, 2011 and 2010, respectively,
due to their antidilutive effect. 543,910 and 469,563 options were excluded from the computation of diluted net earnings per share for the six months ended June 30, 2011 and 2010, respectively, due to their antidilutive effect.
|
14
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(13) Internal Use Software
The Company has a proprietary practice management software system, Improvis
®
. The Company has recorded aggregate capitalized software development costs amounting to $3,224,000, which includes
approximately $410,000 in capitalized interest, in connection with this system as of June 30, 2011. These costs are being depreciated over ten years. Improvis currently has six separate modules, including scheduling/billing, electronic dental
record, timekeeping, management dashboard, digital radiography and orthodontics. The Company began to depreciate costs associated with the scheduling/billing module in October 2005, costs associated with the timekeeping module in April 2009, costs
associated with the management dashboard module in October 2010 and costs associated with the electronic dental record in January 2011. Depreciation expense for the three and six months ended June 30, 2011 was $58,000 and $116,000,
respectively. Depreciation expense for the three and six months ended June 30, 2010 was $27,000 and $55,000, respectively. Accumulated depreciation as of June 30, 2011 was $628,000.
(14) Fair Value Measurement
Authoritative guidance establishes a framework for measuring fair value and the related disclosure requirements. 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. Based upon the
authoritative guidance for fair value measurement and disclosures, accounting for leases and leasing transactions are excluded. The Company adopted the authoritative guidance as of January 1, 2008, with the exception of the application of the
statement to non-recurring non-financial assets and non-financial liabilities, which the Company adopted as of January 1, 2009. This statement did not have a material impact on the Companys consolidated financial statements.
The Company uses the market approach technique to value its financial instruments. There were no changes in valuation techniques during the six months
ended June 30, 2011. The Companys financial assets and liabilities are primarily composed of cash equivalents, available-for-sale securities and an interest rate swap.
The authoritative guidance for fair value measurement and disclosure 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. The financial assets in Level 1 are money market funds and available-for-sale securities. 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, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest rate swap
|
|
$
|
|
|
|
$
|
(747
|
)
|
|
$
|
|
|
|
$
|
(747
|
)
|
Cash equivalents
|
|
|
1,827
|
|
|
|
|
|
|
|
|
|
|
|
1,827
|
|
U.S. federal government securities
|
|
|
917
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
Corporate bonds
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,677
|
|
|
$
|
(747
|
)
|
|
$
|
|
|
|
$
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest rate swap
|
|
$
|
|
|
|
$
|
(1,184
|
)
|
|
$
|
|
|
|
$
|
(1,184
|
)
|
Cash equivalents
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,463
|
|
|
$
|
(1,184
|
)
|
|
$
|
|
|
|
$
|
2,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
As of June 30, 2011, there had been no change in classification between Level 1 and Level 2
financial assets.
The Companys long-term debt is carried at cost and is more fully described in Note 9. As of June 30, 2011, the
estimated fair value of the Companys revolving line of credit was $8,103,000 and the estimated fair value of the term loan was $71,861,000.
(15) Income Taxes
As of June 30, 2011, the Company had $569,000 of gross unrecognized income tax benefits, of which $461,000 would have affected the
Companys effective tax rate if recognized. Gross unrecognized income tax benefit increased from $552,000 to $569,000 during the six months ended June 30, 2011 primarily due to the recognition of interest and penalties.
The Company recognizes interest and penalties associated with uncertain tax positions as a component of the provision for income taxes. As of
June 30, 2011, the Company had approximately $128,000 of accrued interest and penalties related to uncertain tax positions.
The Company
and its subsidiaries are subject to U.S. federal income tax and 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 2008,
2009 and 2010 remain open to examination by both federal and state authorities.
(16) Interest Rate Swap
The Company entered into an interest rate swap arrangement on May 9, 2007 to fix the interest rate on $20,000,000 of borrowings
under its senior secured credit facility as a cash flow hedging instrument that matures in February 2012. The terms of this agreement provide that the Company exchange its variable rate three-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, 2011 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 ended June 30, 2011 and December 31, 2010 is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2011
|
|
|
December 31,
2010
|
|
|
|
|
Interest Rate Swap (a) (b)
|
|
$
|
747
|
|
|
$
|
1,184
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Derivative designated as cash flow hedging instrument
|
(b)
|
As of June 30, 2011 the interest rate swap was classified as an other current liability
|
As of December 31, 2010 the interest rate swap was classified as a long-term liability
The impact on OCI from the interest rate swap for the quarter ended June 30, 2011 and the full year ended December 31, 2010 was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
Recognized in OCI
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Interest Rate Swap (a)
|
|
$
|
213
|
|
|
$
|
457
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Derivative designated as cash flow hedging instrument
|
16
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Pursuant to authoritative guidance for accounting for derivative instruments and hedging activities, the
Company performed its hedge effectiveness analysis for the period ended June 30, 2011 and concluded that the interest rate swap was effective.
(17) Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board, (FASB), issued authoritative guidance on improving disclosure
requirements about fair value measurements. The guidance improves disclosures originally required under accounting for fair value. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the
disclosure requirements about purchases, sales, issuances and settlements in the roll-forward of activity in Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years beginning after December 15, 2010 and for
interim periods within those years. The guidance effective for interim and annual periods beginning after December 15, 2009 did not have an impact on the Companys consolidated financial statements. The guidance effective for fiscal years
beginning after December 15, 2010 did not have an impact on the Companys consolidated financial statements.
In March 2010, the
FASB issued authoritative guidance on derivatives and hedging with a focus on embedded credit derivatives. The guidance improves disclosures originally required under accounting for derivatives and hedging and is effective for interim and annual
periods beginning after June 15, 2010. The guidance did not have an impact on the Companys consolidated financial statements.
In
December 2010, the FASB issued authoritative guidance for disclosure requirements of supplementary pro forma information for business combinations. The amendment in this update specifies that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) occurred during the current year and had occurred as of the beginning of the comparable prior annual reporting period only. The
guidance is effective for fiscal years beginning after December 15, 2010 and did not have an impact on the Companys consolidated financial statements.
(18) Subsequent events
The Company has determined that there were no subsequent events to disclose in these unaudited consolidated financial statements.
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 accompanying notes in Part I - Item 1 of this quarterly report and with Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial
statements and accompanying notes contained in our annual report on Form 10-K for the year ended December 31, 2010.
As used in this
quarterly report, practice refers to a dentist-owned professional corporation, professional association, professional limited liability company or service corporation that is responsible for providing dental care to patients. Group
practice refers to a practice that employs multiple dentists and typically is owned by more than one dentist. Affiliated practice refers to a practice that has entered into a long-term service agreement with one of our subsidiary
service companies. Affiliated dental group refers collectively to the affiliated practice and service company that are parties to the service agreement. An affiliated dental group typically comprises several dental facilities in a given
metropolitan market. The terms affiliated practice and affiliated dental group also include Arizonas Tooth Doctor for Kids, or Arizona Tooth Doctor, a corporation that is 94% owned by us and, as permitted by applicable
state law, employs dentists.
Overview
We are a leading provider of business services, support staff and dental facilities to multidisciplinary dental group practices in selected markets throughout the United States. We are committed to the
success of the affiliated practices and make substantial investments to support their operations. We provide dental facilities and support staff to the affiliated practices and provide or assist with organizational planning and development; staff
recruitment; employee retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems and technology; marketing; payor contracting; and
financial planning, reporting and analysis. At June 30, 2011, we were affiliated with 26 dental group practices, comprising 579 full-time equivalent dentists practicing in 278 dental facilities in 21 states.
Acquisition Summary
Platform
acquisitions are acquisitions in which we acquire non-clinical assets of a practice and simultaneously enter into a 40-year service agreement with the practice. If the assets acquired and liabilities assumed in a platform acquisition
constitute a business, specifically a dental practice management business or management service organization, we account for them as a business combination; otherwise we account for them as an acquisition of assets.
In-market acquisitions are acquisitions in which we acquire non-clinical assets of a practice and simultaneously the seller agrees to merge
the remaining clinical assets of the practice with another practice that has previously entered into a service agreement with one of our subsidiary service companies and thereby becomes subject to that existing service agreement. The assets acquired
and liabilities assumed in an in-market acquisition generally do not constitute a business, specifically a dental practice management business or management service organization, and under these circumstances we account for the transaction as an
asset acquisition rather than a business combination.
During the second quarter of 2011, we completed seven in-market acquisitions. Cash paid
in connection with these transactions, net of cash acquired, totaled $2,563,000. In connection with these acquisitions, we recorded $2,011,000 in intangible assets. Acquisitions completed during the quarter generated approximately $692,000 of
patient revenue in the quarter and are expected to generate patient revenue of approximately $3,300,000 on an annualized basis.
18
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
The terms of these acquisitions do not provide for contingent payments. All transactions were accounted
for as acquisitions of assets.
We are constantly evaluating potential acquisition transactions with practices and acquisitions of other
dental-related companies that would expand our business capabilities.
Revenue Overview
Net Revenue
Our net revenue includes
business service 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 behalf of the affiliated practices, and other revenue, which includes patient
revenue of Arizona Tooth Doctor, fees earned by our dental benefits third-party administrator subsidiary, fees earned by our dental laboratories and other miscellaneous revenue.
The following table provides the components of our net revenue for the three and six months ended June 30, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Reimbursement of expenses
|
|
$
|
52,015
|
|
|
$
|
48,666
|
|
|
$
|
103,694
|
|
|
$
|
97,708
|
|
Business service fees
|
|
|
16,920
|
|
|
|
17,468
|
|
|
|
34,677
|
|
|
|
33,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
68,935
|
|
|
|
66,134
|
|
|
|
138,371
|
|
|
|
131,636
|
|
Other revenue
|
|
|
5,018
|
|
|
|
6,232
|
|
|
|
10,404
|
|
|
|
12,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
73,953
|
|
|
$
|
72,366
|
|
|
$
|
148,775
|
|
|
$
|
144,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees 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 business service fees charged to the affiliated practices pursuant to the terms of the service agreements for management services and capital committed by us. We
account for net revenue from the reimbursement of expenses on an accrual basis and recognize revenue when these expenses are incurred. Reimbursement of expenses includes costs incurred by us for the operation and administration of the dental
facilities, which 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 dental 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.
We own 94% of Arizona Tooth Doctor. Arizona Tooth Doctor has seven locations in the greater Phoenix area and Globe, Arizona. As permitted by applicable
state law, Arizona Tooth Doctor employs dentists and dental assistants in addition to administrative staff. Accordingly, we recognize patient revenue of Arizona Tooth Doctor. While we employ the dentists, we do not exercise control over, or
otherwise influence, their clinical judgment, decisions or practice. Approximately 90% of Arizona Tooth Doctors revenue is derived from PPO health plans that are contracted with the Arizona Health Care Cost Containment System, or AHCCCS, the
states Medicaid program. In October 2009, AHCCCS reduced reimbursement to participating health plans by 5%, and these plans passed this reduction on to Arizona Tooth Doctor. AHCCCS reduced reimbursement by an additional 5% effective
April 1, 2011, and two of the six major PPO health plans, representing approximately 25% of Arizona Tooth Doctors patient revenue, agreed not to pass this reimbursement reduction on to Arizona Tooth Doctor.
Our net revenue depends primarily on revenue generated by the affiliated practices. We estimate approximately 90% of patients at the affiliated practices
have dental insurance. In general, dental insurance covers 100% of preventative care, 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 per person. As a result, even patients with dental insurance are financially responsible for a considerable portion of their dental expenditures. We believe the affiliated practices have been affected by high rates of unemployment.
The affiliated
19
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
practices have observed patients either delaying care or, for those patients with dental insurance, opting for dental procedures that are largely covered by insurance. We anticipate that high
levels of unemployment will continue to adversely affect our business for the foreseeable future, although we are unable to predict the likely duration or severity of those conditions or the magnitude of the effect on our business or results of
operations. We do not, however, believe that these conditions will lessen the dental care needs of patients and do not therefore expect lasting long-term impact on the dental care industry. Under these conditions, existing facility growth was
negative for 2010 and unchanged for the six months ended June 30, 2011.
Patient Revenue of the Affiliated Practices
We do not consolidate the financial statements of the affiliated practices other than Arizona Tooth Doctor. Patient revenue of the affiliated practices
is, however, a financial measure used by our management to monitor operating performance and to help identify and analyze trends of the affiliated practices that may affect 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 third-party payors on a fee-for-service
basis and under indemnity plans, PPO and dental referral plans, managed care capitation plans, and Medicaid and Childrens Health Insurance Programs, or CHIP. 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 contracts between the affiliated practices and
third-party payors. While payor mix varies from market to market, the following table provides the aggregate payor mix of all affiliated practices for the six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June
30,
|
|
|
|
2011
|
|
|
2010
|
|
Fee-for-service and indemnity plans
|
|
|
12
|
%
|
|
|
16
|
%
|
PPO and dental referral plans
|
|
|
78
|
%
|
|
|
73
|
%
|
Capitated managed care plans
|
|
|
5
|
%
|
|
|
6
|
%
|
Medicaid and CHIP programs
|
|
|
5
|
%
|
|
|
5
|
%
|
For the affiliated practices, except Arizona Tooth Doctor, after collection of fees from patients and third-party payors
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 available to and used by these affiliated practices as each affiliated practice so
determines, including for compensation of dentists and, in certain states, dental hygienists and/or dental assistants who are employed by them.
20
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
The following table sets forth for the three and six months ended June 30, 2011 and 2010, same
market patient revenue of all the affiliated practices, amounts due to us under service agreements, and amounts retained by the affiliated practices for compensation of dentists and, where applicable, other clinical staff (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
%
|
|
|
Six Months Ended
June 30,
|
|
|
%
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
Total patient revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platform dental group practices affiliated with us in both periods of comparison
|
|
$
|
111,320
|
|
|
$
|
110,169
|
|
|
|
1.0
|
%
|
|
$
|
224,031
|
|
|
$
|
220,955
|
|
|
|
1.4
|
%
|
Platform dental group practices that affiliated with us from April 1, 2010 to June 30, 2011
|
|
|
4,633
|
|
|
|
1,737
|
|
|
|
166.7
|
%
|
|
|
9,510
|
|
|
|
1,737
|
|
|
|
447.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total patient revenue
|
|
|
115,953
|
|
|
|
111,906
|
|
|
|
3.6
|
%
|
|
|
233,541
|
|
|
|
222,692
|
|
|
|
4.9
|
%
|
Patient revenue of Arizona Tooth Doctor
|
|
|
4,592
|
|
|
|
5,639
|
|
|
|
-18.6
|
%
|
|
|
9,644
|
|
|
|
11,405
|
|
|
|
-15.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient revenue of practice affiliated with us by means of service agreements
|
|
|
111,361
|
|
|
|
106,267
|
|
|
|
4.8
|
%
|
|
|
223,897
|
|
|
|
211,287
|
|
|
|
6.0
|
%
|
Net revenue due to us under service agreements
|
|
|
68,935
|
|
|
|
66,134
|
|
|
|
4.2
|
%
|
|
|
138,371
|
|
|
|
131,636
|
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts retained by practices affiliated with us by means of service agreements
|
|
$
|
42,426
|
|
|
$
|
40,133
|
|
|
|
5.7
|
%
|
|
$
|
85,526
|
|
|
$
|
79,651
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same market patient revenue increased 1.0% for the three months ended June 30, 2011 from the same period in the
prior year, which was composed of a 0.8% increase in provider hours, a 3.3% increase in provider productivity per hour and a 3.1% deterioration in effectivity. Same market patient revenue growth for the three months ended June 30, 2011 excludes
platform acquisitions that occurred after April 1, 2010. Same market patient revenue increased 1.4% for the six months ended June 30, 2011 from the same period in the prior year. The increase was composed of a 0.8% increase in provider
hours, a 3.7% increase in provider productivity per hour and a 3.1% deterioration in effectivity. Same market patient revenue growth for the six months ended June 30, 2011 excludes platform acquisitions that occurred after January 1, 2010.
Effectivity is the negotiated contractual reimbursement rate as a percentage of usual and customary fees, and a deterioration reflects negotiated rate increases were less than the increase in usual and customary fees.
Amounts retained by the affiliated practices, other than Arizona Tooth Doctor, increased as a percentage of patient revenue of the affiliated practices
to 38.1% for the three months ended June 30, 2011 from 37.8% for the three months ended June 30, 2010. The increase was primarily due to the Cincinnati Dental platform acquisition, where the dental assistants and dental hygienists are
employed by the affiliated practice and the related compensation expense is incurred by the affiliated practice.
21
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Results of Operations
The following table sets forth our net revenue and results of operations for the three and six months ended June 30, 2011 and 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2011
|
|
|
Three Months Ended
June 30, 2010
|
|
|
|
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
% Change
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
73,953
|
|
|
|
100.0
|
%
|
|
$
|
72,366
|
|
|
|
100.0
|
%
|
|
|
2.2
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
29,196
|
|
|
|
39.5
|
%
|
|
|
28,735
|
|
|
|
39.7
|
%
|
|
|
1.6
|
%
|
Lab fees and dental supplies
|
|
|
11,790
|
|
|
|
15.9
|
%
|
|
|
10,668
|
|
|
|
14.7
|
%
|
|
|
10.5
|
%
|
Office occupancy
|
|
|
9,509
|
|
|
|
12.9
|
%
|
|
|
9,131
|
|
|
|
12.6
|
%
|
|
|
4.1
|
%
|
Other operating expenses
|
|
|
7,682
|
|
|
|
10.4
|
%
|
|
|
6,878
|
|
|
|
9.5
|
%
|
|
|
11.7
|
%
|
General corporate expenses
|
|
|
4,160
|
|
|
|
5.6
|
%
|
|
|
3,669
|
|
|
|
5.1
|
%
|
|
|
13.4
|
%
|
Depreciation expense
|
|
|
3,070
|
|
|
|
4.2
|
%
|
|
|
2,862
|
|
|
|
4.0
|
%
|
|
|
7.3
|
%
|
Amortization of intangible assets
|
|
|
2,559
|
|
|
|
3.5
|
%
|
|
|
2,464
|
|
|
|
3.4
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
67,966
|
|
|
|
91.9
|
%
|
|
|
64,407
|
|
|
|
89.0
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
5,987
|
|
|
|
8.1
|
%
|
|
|
7,959
|
|
|
|
11.0
|
%
|
|
|
-24.8
|
%
|
Interest expense
|
|
|
1,525
|
|
|
|
2.1
|
%
|
|
|
2,726
|
|
|
|
3.8
|
%
|
|
|
-44.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
4,462
|
|
|
|
6.0
|
%
|
|
|
5,233
|
|
|
|
7.2
|
%
|
|
|
-14.7
|
%
|
Income taxes
|
|
|
1,818
|
|
|
|
2.5
|
%
|
|
|
2,082
|
|
|
|
2.9
|
%
|
|
|
-12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
2,644
|
|
|
|
3.6
|
%
|
|
|
3,151
|
|
|
|
4.4
|
%
|
|
|
-16.1
|
%
|
Net earnings attributed to noncontrolling interest
|
|
|
15
|
|
|
|
0.0
|
%
|
|
|
39
|
|
|
|
0.1
|
%
|
|
|
-61.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
2,629
|
|
|
|
3.6
|
%
|
|
$
|
3,112
|
|
|
|
4.3
|
%
|
|
|
-15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2011
|
|
|
Six Months Ended
June 30, 2010
|
|
|
|
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
% Change
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
148,775
|
|
|
|
100.0
|
%
|
|
$
|
144,220
|
|
|
|
100.0
|
%
|
|
|
3.2
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
58,444
|
|
|
|
39.3
|
%
|
|
|
58,337
|
|
|
|
40.5
|
%
|
|
|
0.2
|
%
|
Lab fees and dental supplies
|
|
|
23,369
|
|
|
|
15.7
|
%
|
|
|
21,736
|
|
|
|
15.1
|
%
|
|
|
7.5
|
%
|
Office occupancy
|
|
|
18,983
|
|
|
|
12.8
|
%
|
|
|
18,256
|
|
|
|
12.7
|
%
|
|
|
4.0
|
%
|
Other operating expenses
|
|
|
15,002
|
|
|
|
10.1
|
%
|
|
|
13,425
|
|
|
|
9.3
|
%
|
|
|
11.7
|
%
|
General corporate expenses
|
|
|
7,949
|
|
|
|
5.3
|
%
|
|
|
7,316
|
|
|
|
5.1
|
%
|
|
|
8.7
|
%
|
Depreciation expense
|
|
|
5,935
|
|
|
|
4.0
|
%
|
|
|
5,707
|
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Amortization of intangible assets
|
|
|
5,099
|
|
|
|
3.4
|
%
|
|
|
4,870
|
|
|
|
3.4
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
134,781
|
|
|
|
90.6
|
%
|
|
|
129,647
|
|
|
|
89.9
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
13,994
|
|
|
|
9.4
|
%
|
|
|
14,573
|
|
|
|
10.1
|
%
|
|
|
-4.0
|
%
|
Interest expense
|
|
|
3,108
|
|
|
|
2.1
|
%
|
|
|
5,378
|
|
|
|
3.7
|
%
|
|
|
-42.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
10,886
|
|
|
|
7.3
|
%
|
|
|
9,195
|
|
|
|
6.4
|
%
|
|
|
18.4
|
%
|
Income taxes
|
|
|
4,405
|
|
|
|
3.0
|
%
|
|
|
3,632
|
|
|
|
2.5
|
%
|
|
|
21.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
6,481
|
|
|
|
4.4
|
%
|
|
|
5,563
|
|
|
|
3.9
|
%
|
|
|
16.5
|
%
|
Net earnings attributed to noncontrolling interest
|
|
|
54
|
|
|
|
0.0
|
%
|
|
|
106
|
|
|
|
0.1
|
%
|
|
|
-49.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
6,427
|
|
|
|
4.3
|
%
|
|
$
|
5,457
|
|
|
|
3.8
|
%
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Income Statement Impact of Recent Acquisitions
We acquired the non-clinical assets of Cincinnati Dental Services, Inc. and Dentco, Inc., or collectively Cincinnati Dental, on June 1, 2010, which
affected our net revenue, operating expenses and margins. Pursuant to state laws, the dental hygienists and dental assistants at Cincinnati Dental are employed by the affiliated practice, rather than by us. As a result, the net revenue we earn from
Cincinnati Dental in the form of expense reimbursement and the expenses we incur in the form of salaries and benefits are less than many of our other affiliated practices and our overall consolidated results of operations. This additionally affected
our consolidated operating margins for the three and six months ended June 30, 2011 by decreasing salaries and benefits as a percentage of net revenue and increasing our other operating expenses as a percentage of net revenue.
Net Revenue
Net revenue increased 2.2%
to $73,953,000 for the three months ended June 30, 2011 from $72,366,000 for the three months ended June 30, 2010. Net revenue increased 3.2% to $148,775,000 for the six months ended June 30, 2011 from $144,220,000 for the six months ended June 30,
2010. For the three and six months ended June 30, 2011, the increase was primarily the result of revenue contribution from the Cincinnati Dental platform acquisition, offset by decreased revenue at Arizona Tooth Doctor as a result of reduced AHCCCS
reimbursement rates.
Net revenue derived from our service agreement with Northland Dental Partners, PLLC, the affiliated practice at Metro
Dentalcare, represented approximately 21% of our consolidated net revenue for the three and six months ended June 30, 2011 and represented approximately 22% of our consolidated net revenue for the three and six months ended June 30, 2010.
Net revenue from our service agreement with Wisconsin Dental Group, S.C., the affiliated practice at ForwardDental, represented approximately 12% of our consolidated net revenue for the three and six months ended June 30, 2011 and represented
approximately 12% and 13% of our consolidated net revenue for the three and six months ended June 30, 2010. No other service agreement or customer accounted for greater than 10% of our consolidated net revenue for the three and six months ended
June 30, 2011 and 2010.
S
alaries and Benefits
Salaries and benefits expense includes costs for our personnel working at the dental facilities, dental laboratories and local and regional shared service centers. At the facility level, we employ the
administrative staff and, where permitted by state law, the dental hygienists and dental assistants. We also employ the dentists at Arizona Tooth Doctor. The personnel at the local and regional shared service centers provide management support to
the dental facilities.
Salaries and benefits expense as a percentage of net revenue decreased to 39.5% for the three months ended
June 30, 2011 from 39.7% for the three months ended June 30, 2010. Salaries and benefits expense as a percentage of net revenue decreased to 39.3% for the six months ended June 30, 2011 from 40.5% for the six months ended
June 30, 2010. For the three and six months ended June 30, 2011, the decrease was primarily due to staffing adjustments at Arizona Tooth Doctor in response to reduced AHCCCS reimbursement rates.
Lab Fees and Dental Supplies
Lab fees
and dental supplies expense varies among affiliated practices and is affected by the volume and type of procedures performed.
Lab fees and
dental supplies expense as a percentage of net revenue increased to 15.9% of net revenue for the three months ended June 30, 2011 from 14.7% for the three months ended June 30, 2010. The increase was primarily attributable to lab fees, and to a
lesser extent dental supplies. Cincinnati Dental contributed the majority of the increase in lab fees with the remainder spread across many affiliated dental groups, which we believe can be attributed to price increases by dental labs in response to
higher precious metal costs. The increase in dental supplies was
23
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
spread across a number of affiliated dental groups as a result of our dental supplier passing price increases from manufacturers to us. Lab fees and dental supplies expense as a percentage of net
revenue increased to 15.7% of net revenue for the six months ended June 30, 2011 from 15.1% for the six months ended June 30, 2010. The increase was primarily attributable to labs fees. Cincinnati Dental contributed the majority of the increase in
lab fees with the remainder spread across many affiliated dental groups, which we believe can be attributed to price increases by dental labs in response to higher precious metal costs.
Office Occupancy
Office occupancy expense includes rent expense and certain other
operating costs, such as utilities, associated with dental facilities, dental laboratories and local and regional shared service centers. These 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 12.9% for the
three months ended June 30, 2011 from 12.6% for the three months ended June 30, 2010. Office occupancy expense as a percentage of net revenue increased to 12.8% for the six months ended June 30, 2011 from 12.7% for the six months
ended June 30, 2010. For the three and six months ended June 30, 2011, the increase was primarily attributable to the Cincinnati Dental platform acquisition and de novo facilities completed in 2010 and the one de novo facility completed in
2011 at Texas Tooth Doctor for Kids.
Other Operating Expenses
Other operating expenses includes general and administrative expenses, marketing costs, repairs and maintenance, non-employment related insurance expenses and professional fees.
Other operating expenses as a percentage of net revenue increased to 10.4% for the three months ended June 30, 2011 from 9.5% for the three months
ended June 30, 2010. Other operating expenses as a percentage of net revenue increased to 10.1% for the six months ended June 30, 2011 from 9.3% for the six months ended June 30, 2010. For the three and six months ended June 30,
2011, the increase was primarily attributable to the Cincinnati Dental platform acquisition and de novo facilities completed in 2010 and the one de novo facility completed in 2011 at Texas Tooth Doctor for Kids. The remaining increase was
attributable to professional fees, including legal expense associated with the litigation with Redwood Dental Group.
General Corporate
Expense
General corporate expense consists 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
expense as a percentage of net revenue increased to 5.6% for the three months ended June 30, 2011 from 5.1% for the three months ended June 30, 2010. General corporate expense as a percentage of net revenue increased to 5.3% for the six
months ended June 30, 2011 from 5.1% for the six months ended June 30, 2010. For the three and six months ended June 30, 2011, the increase was primarily attributable to higher legal fees and stock-based compensation expense.
Stock-based compensation expense was $545,000 and $432,000 for the three months ended June 30, 2011 and 2010, respectively. Stock-based
compensation expense was $933,000 and $823,000 for the six months ended June 30, 2011 and 2010, respectively.
Depreciation
Depreciation expense, including amortization of leasehold improvements, as a percentage of net revenue increased to 4.2% for the three
months ended June 30, 2011 from 4.0% for the three months ended June 30, 2010. The increase was primarily due to de novo facilities completed in 2010 and the one de novo facility completed in 2011 at Texas Tooth Doctor for Kids.
Depreciation expense, including amortization of leasehold improvements, as a percentage of net revenue remained unchanged at 4.0% for the six months ended June 30, 2011 and 2010.
24
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Amortization of Service Agreements and Other Intangible Assets
Amortization expense, principally relating to our service agreements with the affiliated practices, as a percentage of net revenue increased to 3.5% for
the three months ended June 30, 2011 from 3.4% for the three months ended June 30, 2010. The increase was primarily the result of amortization of intangible assets associated with the Cincinnati Dental platform acquisition. Amortization
expense, principally relating to our service agreements with the affiliated practices, as a percentage of net revenue remained unchanged at 3.4% for the six months ended June 30, 2011 and 2010.
Earnings from Operations
Earnings from
operations decreased 24.8% to $5,987,000 for the three months ended June 30, 2011 from $7,959,000 for the three months ended June 30, 2010. As a percentage of net revenue, earnings from operations decreased to 8.1% for the three months
ended June 30, 2011 from 11.0% for the three months ended June 30, 2010. Earnings from operations decreased 4.0% to $13,994,000 for the six months ended June 30, 2011 from $14,573,000 for the six months ended June 30, 2010. As a
percentage of net revenue, earnings from operations decreased to 9.4% for the six months ended June 30, 2011 from 10.1% for the six months ended June 30, 2010. For the three and six months ended June 30, 2011, the decrease in earnings
from operations was primarily due to increased lab fees and dental supplies expense, other operating expenses, and general corporate expenses.
Interest Expense
Net interest expense
decreased to $1,525,000 for the three months ended June 30, 2011 from $2,726,000 for the three months ended June 30, 2010. Net interest expense decreased to $3,108,000 for the six months ended June 30, 2011 from $5,378,000 for the six
months ended June 30, 2010. We refinanced our bank debt in May 2011 and May 2010. The quarter ended June 30, 2011 includes the write-off of $370,000 of previously capitalized bank fees and the prior years quarter includes the write-off of
$615,000 of previously capitalized bank fees. Excluding these write-offs, the decrease in interest expense for the three and six months ended June 30, 2011 was due to reduced debt levels and lower interest rates associated with our
refinancings.
Income Taxes
Our effective tax rate increased to 40.7% for the three months ended June 30, 2011 as compared to 39.8% for the three months ended June 30,
2010. Our effective tax rate increased to 40.5% for the six months ended June 30, 2011 as compared to 39.5% for the six months ended June 30, 2010. For the three and six months ended June 30, 2011, the increase in the effective tax
rate was due to increased earnings in states with higher tax rates. We expect our effective tax rate to be approximately 41% for the year ending December 31, 2011.
Net Earnings Attributed to Noncontrolling Interests
Net earnings attributed to
noncontrolling interests decreased to $15,000 for the three months ended June 30, 2011 as compared to $39,000 for the three months ended June 30, 2010. The decrease was primarily due to decreased earnings at Arizona Tooth Doctor as a result of a
reduction in Medicaid reimbursement rates. Net earnings attributed to noncontrolling interests decreased to $54,000 for the six months ended June 30, 2011 as compared to $106,000 for the six months ended June 30, 2010. The decrease was primarily due
to a decrease in noncontrolling interests ownership of Arizona Tooth Doctor.
Net Earnings Attributed to American Dental Partners, Inc.
Net earnings attributed to American Dental Partners, Inc. decreased 15.5% to $2,629,000 for the three months ended June 30, 2011 from
$3,112,000 for the three months ended June 30, 2010. The decrease was primarily due to increased operating expenses offset by increased revenue and decreased interest expense. Net earnings attributed to American Dental Partners, Inc. increased
17.8% to $6,427,000 for the six months ended June 30, 2011 from $5,457,000 for the six months ended June 30, 2010. The increase was primarily due to increased net revenue and decreased interest expense offset by increased operating
expenses.
25
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Non-GAAP Measures
We believe non-GAAP financial measures such as adjusted net earnings and adjusted net earnings excluding service agreement amortization are important financial measures for our investors
understanding of our financial performance. Expenses relating to our debt refinancing and professional fees related to our acquisitions have been presented separately and excluded from our adjusted net earnings, a non-GAAP financial measure, due to
their magnitude and the fact they are not part of our ongoing operations. We record on our balance sheet definite-lived intangible assets related to service agreements, and accordingly we recognize significant non-cash amortization expense.
Amortization expense of intangible assets related to service agreements with the affiliated practices is presented separately and excluded from our net earnings excluding service agreement amortization, a non-GAAP financial measure, due to its
magnitude and non-cash impact on our ongoing operations and because, unlike depreciation of our dental facilities, it does not require recurring capital investment. We do not consider adjusted net earnings excluding service agreement amortization in
evaluating our financial condition or operating performance. This non-GAAP measure is provided based on previous requests from certain of our stockholders.
The primary limitation associated with our use of non-GAAP measures is that these measures may not be directly comparable to the amounts reported by other companies. In the following table, we compensate
for this limitation by providing the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
Net earnings (as reported)
|
|
$
|
2,629
|
|
|
$
|
3,112
|
|
|
$
|
6,427
|
|
|
$
|
5,457
|
|
Add: Write-off of expenses associated with debt refinancing, net of tax (a)
|
|
|
219
|
|
|
|
370
|
|
|
|
219
|
|
|
|
372
|
|
Add: Expenses associated with Cincinnati Dental Services acquisition, net of tax (a)
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings
|
|
|
2,848
|
|
|
|
3,605
|
|
|
|
6,646
|
|
|
|
6,003
|
|
Add: Amortization related to service agreements, net of tax (a)
|
|
|
1,506
|
|
|
|
1,475
|
|
|
|
3,017
|
|
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings excluding service agreement amortization
|
|
$
|
4,354
|
|
|
$
|
5,080
|
|
|
$
|
9,663
|
|
|
$
|
8,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
15,753
|
|
|
|
16,056
|
|
|
|
15,738
|
|
|
|
16,055
|
|
Diluted adjusted net earnings per share
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.42
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted adjusted net earnings excluding service agreement amortization per share
|
|
$
|
0.28
|
|
|
$
|
0.32
|
|
|
$
|
0.61
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Tax effect calculated using consolidated tax rate in the period reported.
|
26
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Liquidity and Capital Resources
Overview
We have financed our operating and capital needs, including cash used for
acquisitions, capital expenditures and working capital, principally from cash flow from operations, borrowings under our senior secured credit facility and the issuance of common stock.
We believe that cash generated from operations and amounts available under our senior secured credit facility will be sufficient to fund our operating cash needs and commitments for the next twelve
months. We expect capital expenditures in 2011 to be between $27,000,000 and $29,000,000.
Operating Activities
For the six months ended June 30, 2011 and 2010, cash provided by operating activities amounted to $25,441,000 and $17,729,000, respectively. Cash
provided by operations primarily resulted from cash provided by consolidated net earnings after adjusting for non-cash items, an increase in accounts payable and accrued expenses, and a decrease in income taxes receivable. The increase in accounts
payable and accrued expenses was primarily attributable to timing of payments between the periods of comparison. Cash used for taxes decreased because applied a tax receivable from the prior year and utilized tax incentives associated with the Job
Creation Act of 2010, which allows for 100% deduction of certain capital expenditures at the time they are placed in service.
Investing
Activities
For the six months ended June 30, 2011 and 2010, cash used for investing activities amounted to $11,332,000 and
$22,907,000, respectively. Cash paid for acquisitions, net of cash acquired, decreased $15,285,000 for the six months ended June 30, 2011 due to the acquisition of Cincinnati Dental on June 1, 2010. Capital expenditures increased
$3,736,000 for the six months ended June 30, 2011 as compared to the same period in 2010 due to an increased number of electronic dental record implementations at various dental facilities. Our captive insurance company, Edgewater Indemnity
Company, invested $1,774,000 of its cash into available-for-sale securities during the six months ended June 30, 2011.
Financing
Activities
For the six months ended June 30, 2011, cash used in financing activities amounted to $14,250,000. For the six months ended
June 30, 2010, cash provided by financing activities amounted to $4,925,000. For the six months ended June 30, 2011, we retired debt under our senior secured credit facility by $13,750,000 as a result of increased operating cash flow and decreased
acquisition activity. Net borrowings for the six months ended June 30, 2010 were $7,100,000 associated with the Cincinnati Dental platform acquisition less repayments from operating cash flow.
Credit Agreement
In May 2011, we
entered into an amendment to our senior secured credit facility. The $180,000,000 senior secured credit facility, has a $100,000,000 revolving line of credit and an $80,000,000 term loan. The senior secured credit facility matures in May 2016 and
can be used for general corporate purposes, including working capital, acquisitions and capital expenditures. Borrowings under the senior secured credit facility bear interest at our option of the Base Rate plus a margin or the LIBOR plus a margin.
The Base Rate is defined as the greater of Bank of Americas prevailing prime rate, which was 3.25 % as of June 30, 2011, the Federal Funds rate plus 0.50 % or the LIBOR rate plus 1.00%. The margin is based upon our
leverage ratio and ranges from 0.50% to 2.25% for Base Rate borrowings and 1.50% to 3.25% for LIBOR borrowings. In addition, we pay a commitment fee ranging from 0.25% to 0.50% on the unused balance of the revolving line of credit based on our
leverage ratio.
27
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
We are required to make quarterly payments of principal on the term loan in an amount equal to
$2,000,000 beginning in June 2011 and ending in May 2016 and a $40,000,000 payment at maturity. The total amount of repayments in 2011 is scheduled to be $8,000,000.
Pursuant to the senior secured credit facility, the aggregate consideration paid for all acquisitions made during the same fiscal year may not exceed $50,000,000. The aggregate amount of all share
repurchases over the term of the senior secured credit facility may not exceed $50,000,000 and on an annual basis may not exceed $20,000,000. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and
amortization, or EBITDA, adjusted for certain items, and are collateralized by a first lien on substantially all of our assets, including a pledge of the stock of our subsidiaries.
We must comply with financial and other covenants under our senior secured credit facility. Our senior secured credit facility required that our net worth as of June 30, 2011 be no less than
$168,585,000 our maximum EBITDA leverage ratio be no more than 3.0 and our fixed charge minimum coverage be no less than 1.15. As of June 30, 2011, we were in compliance with these financial covenants, as per covenant calculations, our net
worth was $203,101,000, our EBITDA leverage ratio was 1.8 and our fixed charge coverage was 1.4.
The outstanding balance with respect to the
senior secured credit facility as of June 30, 2011 was $78,000,000 under the term loan and $8,500,000 under the revolving line of credit. We had stand-by letters of credit amounting to $1,512,291 at June 30, 2011, and based on
borrowing covenants, reduced by the stand-by letters of credit, approximately $61,500,000 was available for borrowing under the revolving line of credit.
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, we evaluate our estimates, including those related to the carrying value of
goodwill, receivables due from the affiliated practices, other intangible assets, loss reserves for our captive insurance company and contingent accruals for litigation in accordance with authoritative guidance for accounting for contingencies. We
base our 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.
Goodwill and Intangible Assets
We have
intangible assets, including goodwill and other identifiable intangible assets, which are the result of acquisitions. The initial identification and valuation of these intangible assets and the determination of useful lives at the time of
acquisition involve the use of managements judgments and estimates. These estimates are based on, among other factors, projected future income, cash flows and, when necessary, input from accredited valuation consultants. At June 30, 2011,
goodwill and intangible assets were $273,331,000 and represented 73% of our total assets, with goodwill and indefinite-lived intangible assets representing 35% of our intangible assets and definite-lived intangible assets related to service
agreements representing 65% of our intangible assets.
28
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
We recognize capitalized service agreement costs, which we account for as definite-lived intangible
assets and record at fair value. In determining the fair value of a service agreement recognized in connection with an acquisition, management estimates the timing, amount and value of future expected cash flows. With one exception, each service
agreement has an initial contractual term of 40 years, and the agreement is 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
most 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 definite 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.
We test goodwill and indefinite-lived intangibles for impairment annually as of
October 1
st
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. Determining whether an impairment has occurred requires valuation of the respective 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.
We tested for impairment as of October 1, 2010. Our testing included various scenarios with
varying revenue, expense and capital investment assumptions. We determined there was no impairment of goodwill and indefinite-lived intangible assets. Our dental benefits third-party administrator subsidiary historically earned a significant
percentage of its revenue from administering capitated managed care plans. As a result of the continuing decline of capitated managed care plans in the dental profession, this subsidiary has developed additional product offerings, including dental
referral plans, to offset the decline of this part of its business. In 2010, this subsidiary experienced a reduction of revenue and incurred an operating loss as a result of the continuing decline of administrative services for capitated managed
care plans. If the additional product offerings are not successful, we may need to record an impairment charge related to the carrying value of the goodwill of this reporting unit, which is approximately $2,283,000.
While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units and other intangible assets, a
material change could possibly occur in the future. If our actual results are not consistent with the estimates and assumptions used in our impairment analysis, we may record material impairment of our goodwill or other intangible assets.
Variable Interest Entities
Accounting guidance under Accounting Standards Codification, or ASC, 810, Consolidation, requires us to consolidate the financial statements
of a practice that is affiliated with us by means of a service agreement with our financial results if the affiliated practice is a variable interest entity, or VIE, and we are the primary beneficiary of the VIE. Our evaluation is subjective in
nature and incorporates both qualitative and quantitative factors to determine if an affiliated practice is a VIE and if we are the primary beneficiary such that financial statement consolidation would be required. An affiliated practice would be
considered a VIE if (a) it is thinly capitalized (i.e., the equity is not sufficient to fund the affiliated practices activities without additional subordinated financial support) or (b) the equity holders of the affiliated practice
as a group have one of the following four characteristics: (i) lack the power to direct the activities that most significantly affect the affiliated practices economic performance, (ii) possess nonsubstantive voting rights,
(iii) lack the obligation to absorb the affiliated practices expected losses or (iv) lack the right to receive the affiliated practices expected residual returns. Although the characteristics of (b) do not exist, with
respect to (a) we may and do provide advances to certain affiliated practices in instances when their cash flow is not sufficient to meet their working capital obligations, which may indicate that an affiliated practice is thinly capitalized.
These circumstances led us to conduct an analysis, pursuant to ASC 810, and conclude that certain of our affiliated practices may be VIEs.
29
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
The analysis, included a review, of our contractual agreements with each of the affiliated practices to
ascertain whether we have the power to direct the activities of the affiliated practice that most significantly affect its economic performance and the obligation to absorb losses or the right to receive benefits of the affiliated practice. We would
be considered the primary beneficiary of a VIE, to the extent the affiliated practice is a VIE, if we meet both criteria. Based upon our assessment of the affiliated practices, we believe that operating risk (including sales volume risk, price risk
and other operating cost risk) is the risk that will have the most significant impact on an affiliated practices economic performance. We believe that the activities that most significantly affect an affiliated practices economic
performance are with respect to patient revenue; expenses, including those attributable to dentist compensation and benefits; and collection policies. Following our review of the terms of the service agreements with each of the affiliated practices,
we have determined that we do not have the power to direct the activities of the affiliated practices that most significantly affect their economic performance. We have no other obligation to absorb the affiliated practices losses nor do we
have the right to receive the affiliated practices benefits. Therefore, we have concluded that we are not the primary beneficiary of the VIEs, to the extent they exist, and we have not consolidated the financial statements of the practices
that are affiliated with us by means of a service agreement with our financial statements for all periods presented. We consider each time that we enter into a new service agreement or enter into material amendments to an existing service agreement
whether the terms of these agreements or amendments would change the elements we consider important to our primary beneficiary conclusion.
Valuation of Accounts Receivable
Our
accounts receivable include amounts due from the affiliated practices that have entered into service agreements with us and accounts receivable of Arizona Tooth Doctor, our dental benefits third-party administrator subsidiary and our dental
laboratory businesses. At June 30, 2011, amounts due from the affiliated practices represented 84% of our accounts receivable.
The
carrying amount of receivables due from the affiliated practices requires management to assess the collectability of the fees we earn pursuant to the service agreements. Collection of our business service fees are dependent on the economic viability
of the affiliated practices, which is 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 usual and customary rates and the portion of those charges reimbursed pursuant to certain dental benefit plan provider contracts. For contracts in which there is no defined benefit, contractual adjustments are based upon historical
collection experience and other relevant factors. Under the terms of the service agreements, we bill patients and third-party payors on behalf of the affiliated practices, and we also collect payments from patients and third-party payors on behalf
of the affiliated practices. In connection with the billing and collection services provided by us, the affiliated practices appoint us as their exclusive agents. Accordingly, we act as an agent on behalf of the affiliated practices for billing and
collection services, but we do not assume from the affiliated practices the risk of loss of their uncollectable accounts.
We estimate the
initial provision for doubtful accounts on behalf of each of the affiliated practices, and accordingly, their accounts receivable are recorded at their net realizable value. Our business service fee is calculated on the results of operations of the
affiliated practices, and therefore our net revenue and accounts receivable are recorded at net realizable value. Each 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 allowance for doubtful accounts 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 an adjustment to the allowance for doubtful accounts. 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 affect the collectability of our receivables due from the affiliated practice.
30
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Except for accounts receivable due from a former affiliated practice, which we agreed to forgive
pursuant to a settlement of litigation, to date we have not recorded any losses related to our receivables due from the affiliated practices and accordingly have not recorded any allowance for doubtful accounts. We have recorded allowance for
doubtful accounts against accounts receivable of Arizona Tooth Doctor, our dental benefits third-party administrator and our dental laboratory businesses based on historical collection experience, the aging of accounts receivable, write-off
percentages and other relevant factors.
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 insurance programs 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 the 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.
Income Taxes
Our annual tax rate is based on our earnings before income taxes, 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 in income taxes. We review our tax positions quarterly and adjust the balances as new information becomes available.
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
projections 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 obligations with respect to both the U.S. federal government
and multiple state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. The tax years 2008, 2009 and 2010 remain open to examination by both federal and state authorities.
We record interest and penalties associated with uncertain tax positions as a component of the provision for income taxes. For the six months
ended June 30, 2011, we recognized $15,000 of interest and penalties expense in our consolidated statement of income.
Stock-Based
Compensation
We account for stock-based compensation in accordance with the fair value recognition provision of authoritative guidance for
stock-based compensation. We use the Black-Scholes option-pricing model, which requires certain assumptions that include the estimated 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 and the market value of our common
stock for future stock option grants can materially affect the estimate of the fair value of stock-based compensation.
31
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board, or FASB, issued authoritative guidance on improving disclosure about fair value measurements. The guidance improves disclosures originally
required under accounting for fair value. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosure requirements about purchases, sales, issuances and settlements in the roll-forward
of activity in Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The guidance effective for interim and annual periods
beginning after December 15, 2009 did not have an impact on our consolidated financial statements. The guidance effective for fiscal years beginning after December 15, 2010 did not have an impact on our consolidated financial statements.
In March 2010, the FASB issued authoritative guidance on derivatives and hedging with a focus on embedded credit derivatives. The guidance
improves disclosures originally required under accounting for derivatives and hedging and is effective for interim and annual periods beginning after June 15, 2010. The guidance did not have an impact on our consolidated financial statements.
In December 2010, the FASB issued authoritative guidance for disclosure requirements of supplementary pro forma information for business
combinations. The amendment in this update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) occurred during the
current year and had occurred as of the beginning of the comparable prior annual reporting period only. The guidance is effective for fiscal years beginning after December 15, 2010 and did not have an impact on our consolidated financial
statements.
32
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 senior secured credit
facility, we are also exposed to variable rate interest for the banks applicable margins ranging from 0.50% to 2.25% for base rate borrowings and 1.50% to 3.25% for LIBOR borrowings based upon our debt coverage ratio. For fixed-rate debt,
interest rate changes affect the fair value, but do not affect earnings or cash flow. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value, but do affect 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
borrowings. The pre-tax earnings and cash flow impact for one year, based upon the amounts outstanding at June 30, 2011 under our variable-rate senior secured credit facility and term loan for each one percentage point change in interest rates
would be approximately $665,000.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commissions rules and forms and that
such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Our management, with the participation of our chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures,
as of the end of the period covered by this report, were effective at that reasonable assurance level.
As required by Rule 13a-15(d) under the
Exchange Act of 1934, our management, including our chief executive officer and chief financial officer, has evaluated our 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.
33
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
Stockholder
Litigation
On or about February 22 and 23, 2010, Special Situations Fund III L.P., Special Situations Cayman Fund, L.P., and Special
Situations Fund III Q.P., L.P. excluded themselves from the class action settlement resolving consolidated actions entitled In re American Dental Partners, Inc. Securities Litigation, civil action number 1:08-CV-10119-RGS, and filed an
opt-out complaint in the United States District Court for the District of Massachusetts, against us and certain of our executive officers, entitled Special Situations Fund III, L.P. et al. v. American Dental Partners, Inc. et al., civil
action number 1:10-CV-10331, which we refer to as the Opt-Out Action.
The Opt-Out Action complaint (i) asserts that the plaintiffs
purchased over 500,000 shares of our common stock during the period of February 25, 2004 through December 13, 2007; (ii) alleges that we and certain of our executive officers violated the federal securities laws, in particular,
Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, by making allegedly material misrepresentations and failing to disclose allegedly material facts concerning the lawsuit by Park Dental Group against our
subsidiary, PDHC, Ltd., entitled 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 and conduct at issue in that action during the
period of February 25, 2004 through December 13, 2007, which had the effect of artificially inflating the market price of our common stock; (iii) asserts control person claims under Section 20(a) of the Securities Exchange Act
against the executive officers named as defendants; and (iv) claims that certain of the alleged misrepresentations also violated Section 18 of the Securities Exchange Act.
The plaintiffs seek an unspecified amount of monetary damages, costs and attorneys fees and any other relief the Court deems proper. We are unable to provide a range of potential damages with
respect to this action.
On June 11, 2010, we and the other defendants filed a motion to dismiss the Opt-Out Action. On March 31, 2011,
the Court denied the motion to dismiss with respect to the Section 10(b) and Section 20(a) claims, but granted the motion to dismiss with respect to the Section 18 claim. We intend to defend ourselves vigorously with respect to this matter.
Litigation with Dental Associates, P.C.
On March 17, 2011, Dental Associates, P.C., the affiliated practice at Redwood Dental Group, filed a lawsuit against us and our subsidiary, American Dental Partners of Michigan, LLC, in the Wayne County
Circuit Court in Michigan, Case No. 11-003213-CK. On April 15, 2011, we filed all necessary papers to move the lawsuit to the United States District Court for the Eastern District of Michigan, where the action is now pending, Case No.
2:11-cv-11624-DPH-MJH.
The complaint claims, among other things, (i) that we and our subsidiary breached fiduciary duties owed to Dental
Associates; (ii) that our subsidiary breached the service agreement between it and Dental Associates; (iii) that we and our subsidiary tortiously interfered with Dental Associates relationships with its employees, patients, prospective
patients and the state of Michigan; and (iv) that we and our subsidiary were unjustly enriched by these alleged actions.
The complaint seeks,
among other things, (i) unspecified monetary damages; (ii) attorneys fees and litigation costs; (iii) certain injunctive relief, including termination of the service agreement; (iv) the establishment of a constructive trust with respect to
certain Dental Associates funds managed by us; (v) a detailed audit and accounting with respect to revenues generated by Dental Associates and the payment of those funds to or for the benefit of us and our subsidiary; and (vi) such other
equitable or just relief as the Court finds appropriate. We are unable to provide a range of potential damages with respect to this action.
On May 9, 2011, we and our subsidiary filed a Rule 12(b)(1) and (6) motion to dismiss the complaint for lack of subject matter jurisdiction and failure
to state a claim and to compel arbitration, or alternatively to stay litigation pending arbitration. The Court has scheduled a hearing on this motion for September 27, 2011. We and our subsidiary intend to defend ourselves vigorously with respect to
this matter.
34
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
For the year ended December 31, 2010 and the six months ended June 30, 2011, the net revenue we received
under the service agreement with Dental Associates represented approximately 2% of our consolidated net revenue for both periods and earnings before interest, taxes, depreciation and amortization represented approximately 3% and 2%, respectively, of
our consolidated earnings before interest, taxes, depreciation and amortization.
Litigation with OCG, Ltd.
On or about April 29, 2011, OCG, Ltd., the affiliated practice at Orthodontic Care Specialists in Minnesota, served an amended complaint against us and
our subsidiary, Apple Park Associates, Inc. The original complaint was served on us and our subsidiary on or about November 18, 2010. The complaint is captioned for the Hennepin County District Court in Minnesota. However, as of the filing date of
this quarterly report, OCG has not filed the complaint with the Court and no case number has therefore been assigned.
The original complaint
included a single count alleging that we and our subsidiary breached fiduciary duties owed to OCG and that, as a direct and proximate result, OCG was damaged in an amount in excess of $50,000. The original complaint sought, among other things, a
judgment in favor of OCG on its breach of fiduciary duty claim and an award of attorneys fees and litigation costs.
The amended
complaint claims, among other things: (i) that we and our subsidiary breached fiduciary duties owed to OCG; (ii) that we and our subsidiary breached an alleged contract pursuant to which OCG would remain neutral in litigation between us and PDG,
P.A. and provide certain orthodontic services for one clinic staffed by the orthodontic practice of Metro Dentalcare, in exchange for Metro Dentalcares orthodontic practice being merged into OCG, which merger has not occurred; (iii) promissory
estoppel with respect to alleged promises made by us and our subsidiary to OCG regarding that merger and the elimination of Metro Dentalcares orthodontic practice as a competitor to OCG; and (iv) unjust enrichment with respect to alleged
financial benefit received by us and our subsidiary from our relationship with Metro Dentalcares orthodontic practice that would have allegedly inured to the financial benefit of OCG.
The amended complaint seeks, among other things, (i) monetary damages for the breach of fiduciary duty claim in excess of $50,000; (ii) monetary damages for the breach of contract, promissory estoppel and
unjust enrichment claims in excess of $50,000; and (iii) attorneys fees and litigation costs. The amended complaint also provides notice of OCGs intent to seek leave to further amend its complaint at a future time to seek punitive
damages. We are unable to provide a range of potential damages with respect to this action.
We are our subsidiary served OCG with our
responses to the amended complaint on August 5, 2011.
For the year ended December 31, 2010 and the six months ended June 30, 2011, the net
revenue we received under the service agreement with Dental Associates represented approximately 3% of our consolidated net revenue for both periods and earnings before interest, taxes, depreciation and amortization represented approximately 5% and
4%, respectively, of our consolidated earnings before interest, taxes, depreciation and amortization.
35
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in Part I - Item 1A
under the heading Risk Factors in our Annual Report on Form 10-K for the period ended December 31, 2010 in addition to the other information included or incorporated by reference in this quarterly report before making an investment
decision regarding our common stock. If any of these risks actually occurs, our business, financial condition or operating results would likely suffer, possibly materially, the trading price of our common stock could decline and you could lose part
or all of your investment.
During the three months ended June 30, 2011, there were no material changes to the risk factors that were
disclosed in Part I - Item 1A of our Annual Report on Form 10-K for the period ended December 31, 2010.
Item 6. Exhibits
The list of exhibits, which are filed or furnished with this report or which are incorporated herein by reference, is set forth in the Exhibit Index immediately preceding the exhibits and is
incorporated herein by reference.
36
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.
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AMERICAN DENTAL PARTNERS, INC.
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August 9, 2011
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/s/ Gregory A. Serrao
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Gregory A. Serrao
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Chairman, President, and Chief Executive Officer
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(principal executive officer)
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August 9, 2011
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/s/ Breht T. Feigh
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Breht T. Feigh
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Executive Vice President, Chief Financial Officer and Treasurer
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(principal financial officer)
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August 9, 2011
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/s/ Mark W. Vargo
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Mark W. Vargo
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Vice President, Chief Accounting Officer
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(principal accounting officer)
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37
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
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Exhibit
No.
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Description
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Incorporated by Reference
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Filed
with
this
Form
10-Q
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Form or
Schedule
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SEC Filing Date
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SEC File
Number
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10.1*
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Written Description of the Companys Executive Bonus Plan
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8-K
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April 6, 2011
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000-23363
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10.2*
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Form of Nonqualified Stock Option Agreement for Amended 2005 Equity Incentive Plan with Qualified Retirement Provision
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8-K
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April 6, 2011
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000-23363
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10.3*
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Form of Performance Share Award Agreement for Amended 2005 Equity Incentive Plan
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8-K
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April 6, 2011
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000-23363
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10.4
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First Amendment to the Credit Agreement dated May 7, 2010 among American Dental Partners, Inc., its subsidiaries as Subsidiary
Guarantors, each lender from time to time a party, and Bank of America, N.A., as administrative agent for itself and the other lenders and as Letter of Credit Issuer and the Swing Line Lender
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X
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
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X
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
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X
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32
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
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X
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101
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The following items from the Companys Form 10Q for the quarterly period ended June 30, 2011 formatted in Extensible Business
Reporting Language (XBRL): (i) the unaudited Consolidated Statements of Income, (ii) the unaudited Consolidated Balance Sheets, (iii) the unaudited Consolidated Statement of Shareholders Equity, (iv) the unaudited Consolidated Statements of
Cash Flows, and (v) the unaudited Notes to the Consolidated Financial Statements
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X
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*
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Management contract or compensatory plan
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38
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