<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ___________ to ___________
COMMISSION FILE NUMBER: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3297858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
AMERICAN DENTAL PARTNERS, INC.
301 EDGEWATER PLACE, SUITE 320
WAKEFIELD, MASSACHUSETTS 01880
(Address of principal executive offices, including zip code)
(781) 224-0880
(781) 224-4216 (FAX)
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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.
YES X NO (Initial public offering of securities
---- -----
April 16, 1998)
Indicate the number of shares outstanding of each of the issurer's classes of
common stock as of the latest practicable date.
Common Stock, $0.01 par value, outstanding as of May 8, 1998: 7,416,512 shares
================================================================================
Exhibit Index appears on Page 18
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1997,
March 31, 1998 (unaudited) and March 31,1998 (pro forma)........................... 3
Consolidated Statements of Earnings for the Three Months
Ended March 31, 1997 and 1998 (unaudited).......................................... 4
Consolidated Statement of Stockholders' Equity for the
Three Months Ended March 31, 1998 (unaudited) ..................................... 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1998 (unaudited)............................. 6
Notes to Interim Consolidated Financial Statements ................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................. 14
Item 2. Changes in Securities and Use of Proceeds.......................................... 14
Item 3. Defaults Upon Senior Securities ................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ............................... 15
Item 5. Other Information ................................................................. 15
Item 6. Exhibits and Reports on Form 8-K .................................................. 16
Signature.................................................................................... 17
Exhibit Index................................................................................ 18
Exhibit 27................................................................................... 19
</TABLE>
2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998
------------ ----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 4,675 $ 4,696 $11,807
Accounts receivable................................................................ 101 56 56
Receivables due from affiliated practices.......................................... 3,207 3,059 3,059
Inventories........................................................................ 387 377 377
Prepaid expenses and other receivables............................................. 1,631 2,098 1,218
------- ------- -------
Total current assets............................................................ 10,001 10,286 16,517
------- ------- -------
Property and equipment, net.......................................................... 8,752 9,330 9,330
------- ------- -------
Non-current assets:
Intangible assets, net............................................................. 28,975 32,381 32,381
Other assets....................................................................... 231 201 201
------- ------- -------
Total non-current assets........................................................ 29,206 32,582 32,582
------- ------- -------
Total assets.................................................................... $47,959 $52,198 $58,429
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 2,618 $ 2,770 $ 2,770
Accrued compensation, benefits and taxes........................................... 3,001 2,027 2,027
Accrued expenses................................................................... 2,666 2,287 2,287
Income taxes payable............................................................... 183 622 622
Current maturities of debt......................................................... 774 840 840
------- ------- -------
Total current liabilities....................................................... 9,242 8,546 8,546
------- ------- -------
Non-current liabilities:
Long-term debt..................................................................... 21,253 25,467 4,917
Deferred income tax liability...................................................... 231 231 231
Other liabilities.................................................................. 27 26 26
------- ------- -------
Total non-current liabilities................................................... 21,511 25,724 5,174
------- ------- -------
Total liabilities............................................................... 30,753 34,270 13,720
------- ------- -------
Series A convertible preferred stock, par value $0.01 per share, 400,000 shares
authorized, issued and outstanding; no pro forma shares authorized, issued
or outstanding...................................................................... 8,641 8,806 -
Series B redeemable preferred stock, par value $0.01 per share, 70,000 shares
authorized, issued and outstanding; no pro forma shares authorized, issued
or outstanding...................................................................... 7,656 7,815 -
Stockholders' equity:
Preferred stock, par value $0.01 per share, 530,000 shares authorized, no shares
issued or outstanding; 1,000,000 pro forma shares authorized, no pro forma
shares issued or outstanding..................................................... - - -
Common stock, par value $0.01 per share, 25,000,000 shares authorized, 2,394,212
and 2,429,017 shares issued and outstanding; 7,416,512 pro forma shares
issued and outstanding........................................................... 24 24 74
Additional paid-in capital......................................................... 2,307 2,230 45,582
Unearned compensation.............................................................. (49) (43) (43)
Accumulated deficit................................................................ (1,373) (904) (904)
------- ------- -------
Total stockholders' equity...................................................... 909 1,307 44,709
------- ------- -------
Commitments and contingencies
Total liabilities and stockholders' equity...................................... $47,959 $52,198 $58,429
======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Net revenue............................................................................ $11,226 $18,171
------- -------
Operating expenses:
Salaries and benefits.................................................................. 6,189 9,649
Lab fees and dental supplies........................................................... 1,334 2,196
Office occupancy....................................................................... 1,008 1,609
Other operating expenses............................................................... 1,366 1,645
General corporate expenses............................................................. 735 975
Depreciation........................................................................... 356 556
Amortization of intangible assets...................................................... 93 333
------- -------
Total operating expenses........................................................... 11,081 16,963
------- -------
Earnings from operations............................................................... 145 1,208
Interest expense (income), net...................................................... (27) 439
------- -------
Earnings before income taxes........................................................... 172 769
Income taxes........................................................................ - 300
------- -------
Net earnings........................................................................ $ 172 $ 469
======= =======
Net earnings (loss) per common share:
Basic............................................................................... $(0.06) $0.06
Diluted............................................................................. $(0.06) $0.06
Weighted average common shares outstanding:
Basic............................................................................... 2,213 2,429
Diluted............................................................................. 2,213 2,632
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN UNEARNED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------------------- ------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997............ 2,394 $24 $2,307 $(49) $(1,373) $ 909
Issuance of common stock for
acquisitions........................ 35 - 247 - - 247
Amortization of unearned
compensation........................ - - - 6 - 6
Dividends on Series A convertible
preferred stock..................... - - (165) - - (165)
Dividends on Series B redeemable
preferred stock..................... - - (159) - - (159)
Net earnings.......................... - - - - 469 469
----- --- ------ ---- ------- ------
Balance at March 31, 1998............... 2,429 $24 $2,230 $(43) $ (904) $1,307
===== === ====== ==== ======= ======
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1998
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings.................................................................... $ 172 $ 469
Adjustments to reconcile net earnings to net cash provided by (used for)
operating activities:
Depreciation................................................................ 356 556
Amortization of intangible assets........................................... 93 333
Other amortization.......................................................... 6 25
Changes in assets and liabilities, net of acquisitions and affiliations:
Accounts receivable....................................................... 759 45
Receivables due from affiliated practices................................. (863) 148
Other current assets...................................................... (348) (433)
Accounts payable and accrued expenses..................................... (171) (281)
Accrued compensation, benefits and taxes.................................. (625) (622)
------- -------
Net cash provided by (used for) operating activities............. (621) 240
------- -------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired............................. (1,913) (2,590)
Capital expenditures, net....................................................... (1,028) (669)
Other........................................................................... (398) (423)
------- -------
Net cash used for investing activities........................... (3,339) (3,682)
------- -------
Cash flows from financing activities:
Borrowings under revolving line of credit, net.................................. - 3,850
Repayment of borrowings......................................................... (658) (387)
Payment of debt issuance costs.................................................. (42) -
------- -------
Net cash provided by (used for) financing activities............. (700) 3,463
------- -------
Increase (decrease) in cash and cash equivalents.................................. (4,660) 21
Cash and cash equivalents at beginning of period.................................. 5,836 4,675
------- -------
Cash and cash equivalents at end of period........................................ $ 1,176 $ 4,696
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest......................................... $ 19 $ 341
======= =======
Cash paid during the period for income taxes..................................... $ 2 $ 96
======= =======
Acquisitions and Affiliations:
Assets acquired................................................................. $ 2,906 $ 4,228
Liabilities assumed and issued.................................................. (917) (1,391)
Common stock issued............................................................. (14) (247)
------- -------
Cash paid....................................................................... 1,975 2,590
Less cash acquired.............................................................. (62) -
------- -------
Net cash paid for acquisitions and affiliations.................. $ 1,913 $ 2,590
======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The interim consolidated financial statements include the accounts of American
Dental Partners, Inc. and its wholly-owned subsidiaries (the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
The Company does not own any interests in or control the activities of the
affiliated dental practices. Accordingly, the financial statements of the
affiliated dental practices are not consolidated with those of the Company.
The interim consolidated financial statements are unaudited, but in the
opinion of management include all adjustments, which consist only of normal and
recurring adjustments, necessary for a fair presentation of its financial
position and results of operations. Results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with the
consolidated financial statements of the Company as of and for the year ended
December 31, 1997 included in the Company's Prospectus dated April 15, 1998.
(2) INITIAL PUBLIC OFFERING
Effective April 16, 1998, the Company sold 2,250,000 shares of Common Stock in
an initial public offering at $15.00 per share. Effective May 4, 1998, the
Company sold an additional 337,500 shares of Common Stock at $15.00 per share
pursuant to the over-allotment option granted to the underwriters. Net proceeds
to the Company after deducting underwriting discounts and commissions and
offering expenses, including the over-allotment option, were approximately
$34,596,000. Such proceeds have been used to (i) redeem all the Series B
Redeemable Preferred Stock, including unpaid dividends, in the amount of
$7,851,000 and (ii) repay outstanding indebtedness under the Company's revolving
credit facility, including accrued interest, in the amount of $20,651,000. The
remaining balance will be used for general corporate purposes, including
affiliations with additional dental group practices.
In connection with the offering, all 400,000 shares of Series A Convertible
Preferred Stock were converted to 2,399,995 shares of Common Stock.
(3) PRO FORMA INFORMATION
Pro Forma Balance Sheet Information
The pro forma consolidated balance sheet at March 31, 1998 gives effect to (1)
the sale of 2,587,500 shares of Common Stock (including the underwriters' over-
allotment option) at the initial public offering price of $15.00 per share and
receipt and application of the net proceeds therefrom, estimated to be
approximately $34,596,000 after deducting underwriting discounts and commissions
and offering expenses, to (i) redeem the Series B Redeemable Preferred Stock in
the amount of $7,815,000 and (ii) repay indebtedness of $20,550,000 under the
revolving credit facility; and (2) the conversion of 400,000 shares of Series A
Convertible Preferred Stock into 2,399,995 shares of Common Stock, as if such
transactions occurred on March 31, 1998.
7
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro Forma Net Earnings and Net Earnings Per Share Information
Pro forma net earnings give effect to (i) the sale of 2,587,500 shares of
Common Stock; (ii) receipt and application of the net proceeds therefrom to
repay indebtedness of $20,550,000 under the revolving credit facility; (iii) the
resulting reduction of interest expense of approximately $317,000 and (iv) an
increase in income tax expense of approximately $124,000, as if such transaction
occurred on January 1, 1998.
Pro forma net earnings per share include the issuance of 2,587,500 shares from
the initial public offering, the conversion of 400,000 shares of Series A
Convertible Preferred Stock into 2,399,995 shares of Common Stock and the
dilutive effect of options, as if such transactions occurred on January 1, 1998.
Pro forma interest expense, earnings before income taxes, income taxes, net
earnings and pro forma net earnings per share for the three months ended March
31, 1998 are as follows (in thousands, except per share amounts):
<TABLE>
<S> <C>
Earnings from operations............................................................... $1,208
Interest expense, net.................................................................. 122
------
Earnings before income taxes........................................................... 1,086
Income taxes........................................................................... 424
------
Net earnings........................................................................... $ 662
======
Net earnings per common share:
Basic................................................................................ $ 0.09
Diluted.............................................................................. $ 0.09
Weighted average common shares outstanding:
Basic................................................................................ 7,417
Diluted.............................................................................. 7,620
</TABLE>
(4) ACQUISITIONS AND AFFILIATIONS
During 1997, the Company acquired substantially all the assets of six dental
practices and Orthocare, Ltd., a related entity of one of these practices, and
simultaneously entered into 40-year service agreements with four of the
affiliated dental groups (two practices joined existing affiliates). The
aggregate purchase price paid in connection with these transactions consisted of
approximately $16.8 million in cash, $2.4 million in subordinated promissory
notes and 180,834 shares of Common Stock. All transactions completed in 1997
are referred to as the "1997 Transactions."
On January 1, 1998, the Company acquired substantially all the assets of a
dental group practice and simultaneously entered into a 40-year service
agreement with the affiliated dental group, Associated Dental Care Providers,
P.C., in Tucson, Arizona. The aggregate consideration for this transaction
(referred to as the "1998 Transaction") consisted of approximately $2.6 million
in cash, $0.5 million in subordinated promissory notes and 34,800 shares of
Common Stock.
The 1997 and 1998 Transactions completed through March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
DATE AFFILIATED GROUP LOCATION
---- ---------------- --------
<S> <C> <C>
March 1997................................. Malcolm R. Scott, D.D.S San Marcos, TX
March 1997................................. Lakeside Dental Care Metairie, LA
May 1997................................... Soster Dental Group Pittsburgh, PA
July 1997.................................. Northpoint Dental Group Milwaukee, WI
October 1997............................... Wilkens Dental Group Milwaukee, WI
October 1997............................... Orthocare Group Minneapolis, MN
January 1998............................... Associated Dental Care Tucson, AZ
</TABLE>
8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying interim consolidated financial statements include the results
of operations under the service agreements from the date of acquisition. The
excess of the purchase price of all the 1997 and 1998 Transactions over the
estimated fair value of the net assets acquired has been recorded as intangible
assets.
Subsequent to March 31, 1998, the Company acquired substantially all the
assets of three dental groups. These dental groups joined existing affiliates
in the Wisconsin and Louisiana markets.
(5) EARNINGS PER SHARE
Earnings per share are computed based on Statement of Financial Accounting
Standard No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or contingent
stock arrangements). Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings. Accordingly, the assumed conversion of
Series A Convertible Preferred Stock was not included in the calculation of
actual Diluted EPS for the three months ended March 31, 1997 and 1998, and the
effect of stock options was not included in the calculation of actual Diluted
EPS for the three months ended March 31, 1997, as the inclusion of these items
would have been antidilutive.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings (loss) per share computations for
the three months ended March 31:
<TABLE>
<CAPTION>
Actual
------------------ Pro Forma
1997 1998 1998
--------------------------------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Net earnings.............................................................................. $ 172 $ 469 $ 662
Less: Dividends on Series A Convertible Preferred Stock............................... (158) (165) -
Dividends on Series B Redeemable Preferred Stock................................ (140) (159) -
------ ------ ------
Net earnings (loss) available to common stockholders..................................... $ (126) $ 145 $ 662
====== ====== ======
Weighted average common shares outstanding................................................ 2,213 2,429 2,429
Add: Conversion of Series A Convertible Preferred Stock (1).......................... - - 2,400
Shares issued in connection with the initial public offering.................... - - 2,588
------ ------ ------
Weighted average common shares as adjusted................................................ 2,213 2,429 7,417
====== ====== ======
Net earnings (loss) per share............................................................. $(0.06) $0.06 $0.09
====== ====== ======
DILUTED EARNINGS (LOSS) PER SHARE
Net earnings.............................................................................. $ 172 $ 469 $ 662
Less: Dividends on Series A Convertible Preferred Stock............................... (158) (165) -
Dividends on Series B Redeemable Preferred Stock................................ (140) (159) -
------ ------ ------
Net earnings (loss) available to common stockholders...................................... $ (126) $ 145 $ 662
====== ====== ======
Weighted average common shares outstanding............................................... 2,213 2,429 2,429
Add: Dilutive effect of options...................................................... - 203 203
Conversion of Series A Convertible Preferred Stock (1).......................... - - 2,400
Shares issued in connection with the initial public offering.................... - - 2,588
------ ------ ------
Weighted average common shares as adjusted................................................ 2,213 2,632 7,620
====== ====== ======
Net earnings (loss) per share............................................................. $(0.06) $0.06 $0.09
====== ====== ======
</TABLE>
(1) In connection with the initial public offering, all 400,000 shares of
Series A Convertible Preferred Stock were converted into 2,399,995 shares
of Common Stock.
9
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto included in the Company's Prospectus dated April
15, 1998. This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include, among others, the Company's limited operating history, acquisition
strategy, management of rapid growth, dependence upon affiliated dental groups,
dependence upon service agreements and the government regulation of the dental
industry. These and other risks are further described in the Company's
Securities and Exchange Commission filings, including the Company's Registration
Statement on Form S-1(File No. 333-39981).
OVERVIEW
American Dental Partners, Inc. and its subsidiaries (the "Company") is a
leading provider of dental practice management services to multi-disciplinary
dental group practices in selected markets in the United States. The Company was
formed in December 1995, commenced operations in January 1996 and began engaging
in dental practice management operations in November 1996, concurrent with the
completion of its first dental group practice affiliation. The Company's rapid
growth has resulted primarily from the Company's affiliations with dental group
practices. Since its inception through April 30, 1998, the Company has
successfully completed affiliations with 13 dental group practices and currently
operates 90 dental facilities with 679 operatories in six states.
AFFILIATION SUMMARY
When affiliating with a dental group practice, the Company acquires
substantially all its assets, except those required by law to be owned or
maintained by dentists (such as third party contracts, certain governmental
receivables and patient records), and enters into a long-term service agreement
with the affiliated dental practice or professional corporation (the "PC").
Under its service agreements, the Company is responsible for providing all
services necessary for the administration of the non-clinical aspects of the
dental operations. The PC is responsible for the provision of dental care. Each
of the Company's service agreements is for an initial term of 40 years. The
Company does not own or control the affiliated dental practices and,
accordingly, does not consolidate the financial statements of the PCs with those
of the Company.
1997 Transactions
During 1997, the Company acquired substantially all the assets of six dental
group practices and Orthocare Ltd., a related entity of one of these practices,
and simultaneously entered into 40-year service agreements with four of these
affiliated dental groups (two practices joined existing affiliates).
1998 Transaction (completed through March 31, 1998)
On January 1, 1998, the Company acquired substantially all the assets of a
dental group practice and simultaneously entered into a 40-year service
agreement with the affiliated dental group, Associated Dental Care Providers,
P.C., in Tucson, Arizona.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Overview
The Company's net earnings amounted to $172,000 or $(0.06) per share for the
three months ended March 31, 1997, as compared with net earnings of $469,000 or
$0.06 per share for the three months ended March 31, 1998. The increase in net
earnings resulted from incremental earnings provided from completed acquisitions
and affiliations and from internal growth.
10
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Results of Operations
Net Revenue. Net revenue for the Company represents the aggregate fees charged
to the affiliated dental practices pursuant to the terms of the long-term
service agreements under which the Company agrees to manage the non-clinical
aspects of the dental practice. Under such agreements, the affiliated dental
group practices reimburse the Company for expenses incurred in connection with
the operation and administration of the dental facilities and pay fees to the
Company for its management services. Additionally, the Company's net revenue
includes amounts from third party payors related to the arrangement of the
provision of care to patients.
Net revenue increased from $11,226,000 for 1997 to $18,171,000 for 1998, an
increase of approximately 62%. The increase in net revenue in 1998 is due
primarily to the inclusion of revenue derived from service agreements entered
into in connection with the 1997 and 1998 Transactions for the entire period.
In addition, same market growth from the Company's affiliates in Austin,
Milwaukee and Minneapolis resulted from the addition and expansion of the
Company's facilities, the addition of dentists to the Company's affiliated
dental group network and increases in certain affiliates' fees. Net revenue
included expense reimbursements ($7,833,000 for 1997 as compared with
$12,204,000 for 1998), management service fees ($2,399,000 for 1997 as compared
with $3,925,000 for 1998) and revenue related to the arrangement of the
provision of care to patients ($994,000 for 1997 as compared with $2,042,000 for
1998). Expense reimbursments included rent expense ($728,000 for 1997 as
compared with $1,164,000 for 1998) and other operating expenses ($7,105,000 for
1997 as compared with $11,040,000 for 1998). Management service fees included a
monthly fee ($2,299,000 for 1997 as compared with $3,740,000 for 1998) and an
additional variable fee ($100,000 for 1997 as compared with $185,000 for 1998).
Net revenue derived from the Company's service agreement with Park Dental
represented approximately 63% and 44% of the Company's consolidated net revenue
for 1997 and 1998, respectively.
Salaries and Benefits Expense. Salaries and benefits expense are for
personnel working for the Company at the dental facilities, as well as the local
operating management. At the facility level, the Company generally employs the
dental hygienists, dental assistants and administrative staff. The local
operating management team supervises and supports the staff at the dental
facilities. Salaries and benefits amounted to $6,189,000 or approximately 55%
of net revenue for 1997, as compared with $9,649,000 or approximately 53% of net
revenue for 1998. The decrease in salaries and benefits as a percentage of net
revenue resulted from a combination of more efficient utilization of staff and
the acquisition of facilities with a generally lower ratio of staffing costs to
net revenue in their respective markets compared to the existing base of
facilities.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $1,334,000 for 1997 to $2,196,000 for 1998. Lab fees and dental
supplies expense varies from affiliate to affiliate and is affected by the
volume and type of procedures performed. As a percentage of net revenue, these
costs remained relatively consistent at approximately 12% for 1997 and for 1998.
Office Occupancy Expense. Office occupancy includes rent expense and certain
other operating costs such as utilities associated with dental facilities and
the local administrative offices. Such costs vary based on the size of each
facility and the market rental rate for dental office space in the particular
geographic market. The Company generally assumes existing lease obligations of
the affiliated dental group practice upon completion of affiliation. Office
occupancy expense amounted to $1,008,000 for 1997, as compared with $1,609,000
for 1998. As a percentage of net revenue, these costs remained relatively
consistent from 1997 to 1998 at approximately 9%.
Other Operating Expenses. Other operating expenses consist of professional
fees, marketing costs and other general and administrative expenses at the
dental facilities. Other expenses amounted to $1,366,000 or approximately 12% of
net revenue for 1997, as compared with $1,645,000 or approximately 9% of net
revenue for 1998. Other costs decreased as a percentage of net revenue due to
the regionalization of administrative functions in certain markets, a reduction
of consulting costs as a result of hiring certain personnel and efficiencies
from managing certain expenses, such as professional fees and other costs
associated with operating a stand alone dental group practice, on a national
level, as opposed to on a local level.
11
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
General Corporate Expenses. General corporate expenses consist of
compensation expense for the Company's corporate personnel and administrative
staff, as well as facility and other administrative costs of the Company's
corporate offices. The Company provides management, administrative, third party
contracting and other services to the affiliated groups. General corporate
expenses were $735,000 or approximately 7% of net revenue for 1997, as compared
with $975,000 or approximately 5% of net revenue for 1998. The Company has built
its management infrastructure in anticipation of rapid growth. This included the
hiring of key management and support staff in the areas of finance, operations
and information systems. In 1998, the Company began to leverage these costs,
resulting in a reduction of general corporate expenses as a percentage of net
revenue. The level of general corporate expenses will likely continue to
increase in the future as the Company continues to expand its management
infrastructure. However, it is anticipated that these expenses will continue to
decline as a percentage of net revenue.
Depreciation. Depreciation expense includes depreciation charges related to
leasehold improvements and furniture, fixtures and equipment used to operate the
dental facilities. Depreciation expense was $356,000 for 1997, as compared with
$556,000 for 1998. Depreciation expense, which remained relatively consistent at
approximately 3% of net revenue, included depreciation related primarily to the
assets acquired and capital expenditures incurred in connection with the
Company's completed affiliations. Depending on the amount and timing of future
capital expenditures, depreciation expense will likely increase.
Amortization of Intangible Assets. Amortization of intangibles relates to
intangible assets incurred in connection with the affiliations and acquisitions
to date. Amortization of intangibles was $93,000 or approximately 1% of net
revenue for 1997, as compared with $333,000 or approximately 2% of net revenue
for 1998. The increase in amortization resulted from intangible assets recorded
in connection with the Company's seven affiliations and one acquisition
completed during 1997 and one affiliation completed during 1998. The Company
expects that amortization of intangibles will increase in the future as a result
of intangible assets recorded in connection with future affiliations.
Interest Expense (Income), Net. Net interest expense (income) was ($27,000)
and $439,000 for 1997 and 1998, respectively. Interest income for 1997 resulted
from earnings on proceeds received from the Company's private sales of equity
securities. Interest expense for 1998 resulted from borrowings under the
Company's credit facility and the issuance of subordinated notes in connection
with completed affiliations.
Income Taxes. The Company incurred no income tax expense for 1997, as
compared with $300,000 for 1998. In 1997, the Company utilized a portion of its
net operating loss carryforward which resulted in no income tax expense. For
1998, the Company's effective tax rate was approximately 39%, resulting in
income tax expense of $300,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and capital needs, including cash used
for acquisitions, capital expenditures and working capital, from its private
sales of equity securities, borrowings under its revolving line of credit and
cash generated from operations. From November 1996 (the date of the Company's
first dental group practice affiliation) through March 31, 1998, the Company has
completed ten acquisitions and affiliations for aggregate consideration of
$26,672,000 in cash, $5,073,000 in subordinated promissory notes and 1,829,034
shares of Common Stock.
For the three months ended March 31, 1997 and 1998, cash provided by (used
for) operating activities amounted to ($621,000) and $240,000, respectively.
Cash used for operating activities during 1997 resulted primarily from the
Company's general corporate expenses, due to investment in its infrastructure,
exceeding cash generated from operating activities. In 1998, earnings
generated from same market growth and from acquisitions and affiliations were
sufficient to cover general corporate expenses and generate cash from
operations.
12
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
For the three months ended March 31, 1997 and 1998, cash used for investing
activities amounted to $3,339,000 and $3,682,000, respectively. Cash used for
investing activities included cash used for acquisitions and affiliations and
for capital expenditures. Cash used for acquisitions, net of cash acquired, was
$1,913,000 for 1997 and $2,590,000 for 1998. Cash used for capital expenditures
was $1,028,000 and $669,000 for 1997 and 1998, respectively. Capital
expenditures in 1997 included costs associated with the addition of dental
facilities in Austin and Milwaukee. Capital expenditures for 1998 included costs
associated with the addition of new operatories in Austin, Milwaukee and
Minneapolis. The establishment of new dental facilities and the expansion of
existing dental facilities in the future will require ongoing capital
expenditures. In addition, capital expenditures include the continued investment
in information systems.
For the three months ended March 31, 1997 and 1998, cash provided from (used
for) financing activities amounted to ($700,000) and $3,463,000, respectively.
Cash used for financing activities during 1997 resulted from the repayment of
certain indebtedness. Cash provided from financing activities for the three
months ended March 31, 1998 resulted primarily from borrowings under the
Company's revolving credit facility.
In April 1997, the Company entered into a $30 million revolving line of credit
agreement with Fleet National Bank. The credit facility is being used for
general corporate purposes, including acquisitions. Borrowings under this line
of credit bear interest at either prime- or LIBOR-based rates, at the Company's
option, plus a margin based upon the Company's debt coverage ratio, which ranges
up to 0.50% for prime-based loans and up to 2.125% for LIBOR-based loans. In
addition, the Company pays a commitment fee of 0.25% of the average daily
balance of the unused line. Borrowings are limited to an availability formula
based on adjusted EBITDA. The credit facility is secured by a first lien on
substantially all of the Company's assets, including a pledge of the stock of
the Company's subsidiaries. The Company is also required to comply with certain
financial and other covenants. The line of credit matures in April 2000. There
was no balance outstanding under this line as of May 8, 1998.
Effective April 16, 1998, the Company sold 2,250,000 shares of Common Stock in
an initial public offering at $15.00 per share. Effective May 4, 1998, the
Company sold an additional 337,500 shares of Common Stock at $15.00 per share
pursuant to the over-allotment option granted to the underwriters. Net proceeds
to the Company after deducting underwriting discounts and commissions and
offering costs, including the over-allotment option, were approximately
$34,596,000. Such proceeds have been used to (i) redeem all the Series B
Redeemable Preferred Stock, including unpaid dividends, in the amount of
$7,851,000 and (ii) repay outstanding indebtedness under the Company's revolving
credit facility, including accrued interest, in the amount of $20,651,000. The
remaining balance will be used for general corporate purposes, including
affiliations with additional dental group practices.
The Company believes that the remaining net proceeds from the offering, cash
generated from operations and amounts available under its revolving credit
facility will be sufficient to fund its anticipated cash needs for working
capital, capital expenditures and acquisitions and affiliations for at least
the next 12 months.
13
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
PART I. FINANCIAL INFORMATION--(CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following reports the use of proceeds information in accordance
with Rule 463 under the Securities Act of 1933, as amended (the "Act"),
and Item 701(f) of Regulation S-K:
(1) The effective date of the Company's Registration Statement on Form
S-1, as amended, was April 15, 1998, and the SEC file number
assigned to this Registration Statement was File No. 333-39981. In
addition, and in connection with the foregoing Registration
Statement, the Company filed a Registration Statement on Form S-1
under Rule 462(b) of the Act, which Registration Statement was
automatically effective upon its filing on April 15, 1998. The SEC
file number assigned to this Registration Statement was File No.
333-50241. These Registration Statements are hereinafter
collectively referred to as the Registration Statement.
(2) The offering commenced on April 16, 1998.
(3) Not applicable.
(4) Securities sold:
(i) The offering terminated on May 6, 1998, which was the date
all sales were completed for the securities registered
pursuant to the Registration Statement.
(ii) Managing Underwriters: BT Alex. Brown, BancAmerica
Robertson Stephens and Piper Jaffray Inc.
(iii) Title of Class of Securities Registered: Common Stock,
$0.01 par value
(iv) All shares of Common Stock were sold for the account of the
Company.
Amount Registered: 2,587,500 shares
Aggregate offering price of amount registered: $38,812,500
Amount sold: 2,587,500 shares
Aggregate offering price of amount sold: $38,812,500
(v) From the effective date of the Registration Statement
through May 8, 1998, no direct or indirect payments of
expenses incurred for the Company's account in connection
with the issuance and distribution of the securities
registered were made to directors, officers, or their
associates or to persons owning 10% or more of any class of
equity securities of the Company or to affiliates of the
Company.
14
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION--(CONTINUED)
From the effective date of the Registration Statement through May
8, 1998, direct or indirect payments of expenses incurred for the
Company's account in connection with the issuance and
distribution of the securities registered were made to others as
follows:
Underwriting discounts and commissions: $2,716,875
Finder's Fees: $-0-
Expenses paid to or for underwriters: $-0-
Other expenses: $1,500,000 (estimated)
Total Expenses: $4,216,875 (estimated)
(vi) The net proceeds to the Company after deducting the total
expenses described in Item (4)(v) were $34,595,625 (estimated).
(vii) From the effective date of the Registration Statement through May
8, 1998, $7,029,086 of net offering proceeds were paid to
directors, officers or their associates or to persons owning 10%
or more of any class of equity securities of the Company or to
affiliates of the Company, which payments were made for the
purpose of redeeming the Company's Series B Redeemable Preferred
Stock.
From the effective date of the Registration Statement through May
8, 1998, the net offering proceeds paid to others, along with the
purpose of such payments, were as follows:
Redemption of Series B Redeemable Preferred Stock: $821,544
Repayment of indebtedness under the Company's
revolving credit facility, including accrued interest:
$20,651,051
Temporary investment in short-term money
market funds: $6,093,994 (estimated)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 27, 1998, Gregory T. Swenson, D.D.S., was elected as a
Class I director of the Company for a three-year term expiring at the
Company's 2001 annual meeting of stockholders. Dr. Swenson was elected
pursuant to a written consent executed by stockholders owning 61.5% of
the capital stock entitled to vote on such matter. The term of office
for all other directors of the Company continued following the date of
such consent.
ITEM 5. OTHER INFORMATION
Not applicable.
15
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
(27) Financial Data Schedule for the quarter ended March 31, 1998.
(B) REPORTS ON FORM 8-K
There have been no reports on Form 8-K filed by the Company during
the three months ended March 31, 1998.
16
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
SIGNATURE
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.
MAY 11, 1998 AMERICAN DENTAL PARTNERS, INC.
/s/ Ronald M. Levenson
---------------------------------------
Ronald M. Levenson
Senior Vice President,
Chief Financial Officer and Treasurer
(duly authorized signatory and principal
financial officer)
17
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
-------------
PAGE
----
(27) Financial Data Schedule for the quarter ended March 31, 1998 19
18
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INTERIM FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,696
<SECURITIES> 0
<RECEIVABLES> 3,115
<ALLOWANCES> 0
<INVENTORY> 377
<CURRENT-ASSETS> 10,286
<PP&E> 9,330
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<TOTAL-ASSETS> 52,198
<CURRENT-LIABILITIES> 8,546
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7,815
8,806
<COMMON> 24
<OTHER-SE> 1,283
<TOTAL-LIABILITY-AND-EQUITY> 52,198
<SALES> 18,171
<TOTAL-REVENUES> 18,171
<CGS> 0
<TOTAL-COSTS> 16,963
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 439
<INCOME-PRETAX> 769
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