<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 June 30, 1999
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.
X YES NO
------ ------
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
August 11, 1999: 7,537,311 shares
================================================================================
Exhibit Index appears on Page 22
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
INDEX
-----
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998
and June 30, 1999 (unaudited) ................................. 3
Consolidated Statements of Earnings for the Three Months and
Six Months Ended June 30, 1998 and 1999 (unaudited) ........... 4
Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 1999 (unaudited) .................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1999 (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 .......................................................... 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 19
Item 2. Changes in Securities and Use of Proceeds ..................... 19
Item 3. Defaults Upon Senior Securities ............................... 19
Item 4. Submission of Matters to a Vote of Security Holders ........... 19
Item 5. Other Information ............................................. 19
Item 6. Exhibits and Reports on Form 8-K .............................. 20
Signature ................................................................ 21
Exhibit Index ......................................................... 22
2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 2,091 $ 1,500
Accounts receivable .............................................................. 186 243
Receivables due from affiliated practices ........................................ 4,579 7,053
Inventories ...................................................................... 585 1,406
Prepaid expenses and other receivables ........................................... 1,466 1,891
Deferred income taxes ............................................................ 65 65
-------- --------
Total current assets .......................................................... 8,972 12,158
-------- --------
Property and equipment, net ........................................................ 12,943 18,669
-------- --------
Non-current assets:
Intangible assets, net ........................................................... 47,152 57,719
Deferred income taxes ............................................................ 1,120 1,551
Other assets ..................................................................... 348 340
-------- --------
Total non-current assets ...................................................... 48,620 59,610
-------- --------
Total assets .................................................................. $ 70,535 $ 90,437
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 3,010 $ 4,766
Accrued compensation, benefits and taxes ......................................... 3,426 4,524
Accrued expenses ................................................................. 3,377 4,871
Income taxes payable ............................................................. 805 116
Current maturities of debt ....................................................... 1,079 1,195
-------- --------
Total current liabilities ..................................................... 11,697 15,472
-------- --------
Non-current liabilities:
Long-term debt ................................................................... 9,980 22,638
Other liabilities ................................................................ 553 537
-------- --------
Total non-current liabilities ................................................. 10,533 23,175
-------- --------
Total liabilities ............................................................. 22,230 38,647
-------- --------
Stockholders' equity:
Preferred stock, par value $0.01 per share, 1,000,000 shares authorized, no shares
issued or outstanding .................................................. -- --
Common stock, par value $0.01 per share, 25,000,000 shares authorized, 7,436,066
and 7,517,448 shares issued and outstanding ............................ 74 75
Additional paid-in capital ....................................................... 45,742 46,396
Unearned compensation ............................................................ (24) (12)
Retained earnings ................................................................ 2,513 5,331
-------- --------
Total stockholders' equity .................................................... 48,305 51,790
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity .................................... $ 70,535 $ 90,437
======== ========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1998 1999 1998 1999
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue .................................................................... $20,217 $28,139 $38,388 $54,373
------- ------- ------- -------
Operating expenses:
Salaries and benefits ..................................................... 10,452 13,827 20,101 26,740
Lab fees and dental supplies .............................................. 2,641 3,710 4,837 7,217
Office occupancy .......................................................... 1,850 2,721 3,459 5,166
Other operating expenses .................................................. 1,619 2,170 3,264 4,324
General corporate expenses ................................................ 1,056 1,218 2,031 2,414
Depreciation .............................................................. 606 892 1,162 1,660
Amortization of intangibles ............................................... 413 599 746 1,153
------- ------- ------- -------
Total operating expenses ............................................. 18,637 25,137 35,600 48,674
------- ------- ------- -------
Earnings from operations ....................................................... 1,580 3,002 2,788 5,699
Interest expense, net .......................................................... 206 395 645 679
------- ------- ------- -------
Earnings before income taxes ................................................... 1,374 2,607 2,143 5,020
Income taxes ................................................................... 536 1,143 836 2,202
------- ------- ------- -------
Net earnings ................................................................... $ 838 $ 1,464 $ 2,818 $ 1,307
======= ======= ======= =======
Net earnings per common share:
Basic ..................................................................... $ 0.12 $ 0.19 $ 0.21 $ 0.38
Diluted ................................................................... $ 0.11 $ 0.19 $ 0.18 $ 0.37
Weighted average common shares outstanding:
Basic..................................................................... 6,265 7,517 4,357 7,495
Diluted................................................................... 7,103 7,752 6,056 7,713
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN UNEARNED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
------ ------ ------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ....... 7,436 $ 74 $45,742 $ (24) $ 2,513 $48,305
Common stock issued for
acquisitions and affiliations .. 50 1 351 -- -- 352
Common stock issued for the
employee stock purchase plan . 31 -- 303 -- -- 303
Amortization of unearned
compensation ................... -- -- -- 12 -- 12
Net earnings ..................... -- -- -- -- 2,818 2,818
------- ------- ------- ------- ------- -------
Balance at June 30, 1999 ........... 7,517 $ 75 $46,396 $ (12) $ 5,331 $51,790
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1999
--------------- ------------
Cash flows from operating activities: (UNAUDITED)
<S> <C> <C>
Net earnings ................................................................ $ 1,307 $ 2,818
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation ........................................................... 1,162 1,660
Amortization of intangibles ............................................ 746 1,153
Other amortization ..................................................... 53 53
Changes in assets and liabilities, net of acquisitions and affiliations:
Accounts receivable ............................................... 110 508
Receivables due from affiliated practices ......................... 278 (2,803)
Other current assets .............................................. (208) (940)
Accounts payable and accrued expenses ............................. (3) 1,549
Accrued compensation, benefits and taxes .......................... 160 532
Income taxes payable .............................................. 626 (689)
-------- --------
Net cash provided by operating activities ......................... 4,231 3,841
-------- --------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired ...................... (15,088) (9,023)
Capital expenditures, net ................................................ (1,982) (6,115)
Other .................................................................... (1,010) (1,027)
-------- --------
Net cash used for investing activities ............................ (18,080) (16,165)
-------- --------
Cash flows from financing activities:
Borrowings under (repayments of) revolving line of credit, net ........... (14,665) 12,297
Repayment of borrowings .................................................. (1,479) (853)
Proceeds from issuance of common stock in initial public offering,
net of underwriting discounts and commissions .......................... 36,096 --
Common stock issued for the employee stock purchase plan ................. -- 303
Redemption of Series B redeemable preferred stock ........................ (7,851) --
Payment of initial public offering costs ................................. (648) --
Payment of debt issuance costs ........................................... -- (14)
-------- --------
Net cash provided by financing activities ......................... 11,453 11,733
-------- --------
Decrease in cash and cash equivalents ....................................... (2,396) (591)
Cash and cash equivalents at beginning of period ............................ 4,675 2,091
-------- --------
Cash and cash equivalents at end of period .................................. $ 2,279 $ 1,500
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net ............................ $ 460 $ 471
======== ========
Cash paid during the period for income taxes, net ........................ $ 204 $ 2,891
======== ========
Supplemental disclosure of non-cash information:
Conversion of Series A convertible preferred stock to common stock ....... $ 8,841 $ -
======== ========
Acquisitions and affiliations:
Assets acquired .......................................................... $ 21,459 $ 13,672
Liabilities assumed and issued ........................................... (6,067) (4,168)
Common stock issued ...................................................... (247) (352)
-------- --------
Cash paid ................................................................ 15,145 9,152
Less cash acquired ....................................................... (57) (129)
-------- --------
Net cash paid for acquisitions and affiliations ........................ $ 15,088 $ 9,023
======== ========
</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
Company's consolidated financial statements as of and for the year ended
December 31, 1998.
Certain reclassifications have been made to the interim consolidated financial
statements for the six months ended June 30, 1998 in order to conform with the
June 30, 1999 presentation.
(2) ACQUISITIONS AND AFFILIATIONS
During calendar 1998, the Company acquired substantially all the assets of ten
dental practices and simultaneously entered into 40-year service agreements with
four of the affiliated dental groups (six practices joined existing affiliates).
The aggregate purchase price paid in connection with these transactions
consisted of approximately $18.4 million in cash, $2.2 million in subordinated
promissory notes, $1.0 million in deferred payments, 54,354 shares of Common
Stock and future contingent payments for one affiliation based on a multiple of
service fees received in excess of a predetermined threshold for each of the
three years ending May 31, 1999, 2000 and 2001. All transactions completed in
1998 are referred to as the "1998 Transactions."
From January 1, 1999 to June 30, 1999, the Company acquired substantially all
the assets of nine dental practices and simultaneously entered into 40-year
service agreements with four of the affiliated dental groups (five practices
joined existing affiliates). The aggregate purchase price paid in connection
with these transactions consisted of approximately $9.1 million in cash, $0.8
million in subordinated promissory notes, $0.4 million in deferred payments and
50,568 shares of Common Stock. All transactions completed in the first six
months of 1999 are referred to as the "1999 Transactions."
7
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1998 and 1999 Transactions completed through June 30, 1999 are as follows:
<TABLE>
<CAPTION>
DATE AFFILIATED DENTAL PRACTICE LOCATION(S)
---- -------------------------- -----------
<S> <C> <C>
January 1998........... Associated Dental Care Providers Phoenix and Tucson, AZ
April 1998............. Family Care Dental Centers Janesville, Kenosha and Racine, WI
April 1998............. John E. Carey, D.D.S. and Madison, WI
James J. Peterman, D.D.S.
April 1998............. Leroy S. Crapanzano, D.D.S. Hammond, LA
June 1998.............. Reston Dental Group Reston, VA
June 1998.............. TSC Dental Centers Houston, TX
July 1998.............. Indiana Dental Group Indiana, PA
September 1998......... Mintz & Pincus Dental Group Oxon Hill and Waldorf, MD
September 1998......... Westmore Dental Group Mt. Pleasant, PA
November 1998.......... St. Croix Valley Orthodontics Hudson, WI
February 1999.......... Dental Care of Alabama Birmingham and Tuscaloosa, AL
February 1999.......... CIGNA HealthCare of Arizona Phoenix, AZ
March 1999............. OK Dental Oklahoma City and Tulsa, OK
March 1999............. Jack G. Stacker, D.D.S. Wausau, WI
March 1999............. Kenneth W. Van Sickle, Jr., D.M.D. Mt. Pleasant, PA
June 1999.............. Kevin M. Strezo, D.D.S. Homer City, PA
June 1999.............. Hill Dental Group Columbia, MD
June 1999.............. University Dental Associates Winston-Salem, NC
June 1999.............. Karen L. Wedde, D.D.S. Appleton and Green Bay, WI
</TABLE>
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 1998 and 1999 Transactions over the
estimated fair value of the net assets acquired has been recorded as intangible
assets.
Subsequent to June 30, 1999, the Company acquired substantially all the assets
of Kenneth P. Dick, D.M.D. which joined the Company's existing affiliate in
Pennsylvania.
(3) 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.
8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
three months and six months ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------
1998 1999 1998 1999
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings ........................................................... $ 838 $ 1,464 $ 1,307 $ 2,818
Less: Dividends on Series A Convertible Preferred Stock ............ (35) -- (200) --
Dividends on Series B Redeemable Preferred Stock ............. (36) -- (195) --
------- ------- ------- -------
Net earnings available to common stockholders .......................... $ 767 $ 1,464 $ 912 $ 2,818
======= ======= ======= =======
Weighted average common shares outstanding ............................. 6,265 7,517 4,357 7,495
======= ======= ======= =======
Net earnings per share ................................................. $ 0.12 $ 0.19 $ 0.21 $ 0.38
======= ======= ======= =======
DILUTED EARNINGS PER SHARE
Net earnings ........................................................... $ 838 $ 1,464 $ 1,307 $ 2,818
Less: Dividends on Series A Convertible Preferred Stock (1) ........ -- -- -- --
Dividends on Series B Redeemable Preferred Stock ............. (36) -- (195) --
------- ------- ------- -------
Net earnings available to common stockholders .......................... $ 802 $ 1,464 $ 1,112 $ 2,818
======= ======= ======= =======
Weighted average common shares outstanding ............................. 6,265 7,517 4,357 7,495
Add: Dilutive effect of options ................................... 311 235 240 218
Assumed conversion of Series A Convertible Preferred Stock (1) 527 -- 1,459 --
------- ------- ------- -------
Weighted average common shares as adjusted ............................. 7,103 7,752 6,056 7,713
======= ======= ======= =======
Net earnings per share ................................................. $ 0.11 $ 0.19 $ 0.18 $ 0.37
======= ======= ======= =======
</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 on April 21, 1998. The Diluted EPS calculation for the
three months and six months ended June 30, 1998 assumes conversion of the
Series A Convertible Preferred Stock to Common Stock as of January 1, 1998.
9
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Report on Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "project," "estimate,"
"forecast," and similar expressions, among others, identify forward-looking
statements. Forward-looking statements speak only as of the date the statements
were made. Such forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from those
projected, anticipated or implied. Certain factors that might cause such a
difference include, among others, the risks associated with our acquisition and
affiliation strategy, management of rapid growth, dependence upon affiliated
dental groups, dependence upon service agreements, government regulation of the
dental industry and year 2000 compliance issues. Additional risks,
uncertainties and other factors are set forth in the "Risk Factors" section of
our Registration Statement on Form S-4 (File No. 333-56941).
OVERVIEW
American Dental Partners, Inc. is a leading provider of dental practice
management services to multi-disciplinary dental group practices in selected
markets throughout the United States. We were formed in December 1995. We began
our dental practice management operations in November 1996 when we completed the
affiliation with our first dental group practice. Our rapid growth has resulted
primarily from our affiliations with dental practices. From November 1996 to
June 30, 1999, we completed affiliations with 28 dental practices and, at June
30, 1999, we operated 123 dental facilities with 1,051 operatories in 11 states.
AFFILIATION SUMMARY
When affiliating with a dental practice, we acquire 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 enter into a long-term service agreement with the affiliated dental practice
or professional corporation (the "PC"). Under our service agreements, we are
responsible for providing all services necessary for the administration of the
non-clinical aspects of the dental operations. The PC is responsible for the
provision of dental care. Each of our service agreements is for an initial term
of 40 years. We do not own or control the affiliated dental practices and,
accordingly, do not consolidate the financial statements of the PCs with ours.
1998 Transactions
During calendar 1998, we acquired substantially all the assets of ten dental
practices and simultaneously entered into 40-year service agreements with four
of them (six practices joined existing affiliates).
1999 Transactions (completed through June 30, 1999)
During the first six months of 1999, we acquired substantially all the assets
of nine dental practices and simultaneously entered into 40-year service
agreements with four of them (five practices joined existing affiliates).
COMPONENTS OF REVENUE AND EXPENSES
Affiliate Adjusted Gross Revenue and Payor Mix. Our affiliated dental group
practices generate revenue from patients and third party payors under fee-for-
service, preferred provider organization plans and capitated managed care plans.
The affiliated dental group practices record revenue at established rates
reduced by contractual adjustments and allowances for doubtful accounts to
arrive at adjusted gross revenue. Contractual adjustments represent the
difference between gross billable charges at established rates and the portion
of those charges reimbursed pursuant to certain third party payor contracts.
While payor mix varies from market to market, the aggregate payor mix percentage
of our affiliated practices was approximately 35% fee-for-service, 10% preferred
provider organization plans and 55% capitated managed care plans for the six
months ended June 30, 1998. This compares with approximately 43% fee-for-
service, 13% preferred provider organization plans and 44% capitated managed
care plans for the six months ended June 30, 1999.
10
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The PC reimburses us for expenses incurred on its behalf in connection with
the operation and administration of the dental facilities and pays fees to us
for management services. Expenses incurred for the operation and administration
of the dental facilities include salaries and benefits for non-dentist personnel
working at the dental facilities (the administrative staff and, where permitted
by law, the dental hygienists and dental assistants), lab fees, dental supplies,
office occupancy costs of the dental facilities (rent, utilities, etc.) and
depreciation related to the fixed assets at the dental facilities. The PC is
also responsible for provider expenses, which generally consist of the salaries,
benefits and certain other expenses of the dentists.
Net Revenue. Our net revenue represents reimbursement of expenses and fees
charged to the affiliated dental practices pursuant to the terms of the long-
term service agreements under which we agree to manage the non-clinical aspects
of the dental practice. Under such agreements, the affiliated dental group
practices reimburse us for actual expenses incurred in connection with the
operation and administration of the dental facilities and pay fees to us for our
management services. Our service fees typically consist of a fixed monthly fee
and an additional variable fee. The fixed monthly fee is determined prior to
each affiliation and annually thereafter by agreement of us and the affiliated
dental group in a formal budgeting process. To the extent that there is
operating income after payment of the fixed monthly fee, reimbursement of
expenses incurred in connection with the operation and administration of the
dental facilities and payment of provider expenses, an additional variable fee
is paid to us in the amount of such excess up to budgeted operating income and
50% of such excess over budgeted operating income. Under certain service
agreements, our service fees consist of a variable monthly fee which is based
upon a specified percentage of the amount by which the PC's adjusted gross
revenue exceeds expenses incurred in connection with the operation and
administration of the dental facilities. In those situations, no additional
variable fee is applicable. Under one of our service agreements, our service
fee consists entirely of a fixed monthly fee. Additionally, our net revenue
includes amounts from third party payors related to the arrangement of the
provision of care to patients.
Operating Expenses. Operating expenses (excluding general corporate expenses,
depreciation and amortization of intangibles) consist of the expenses incurred
by us in fulfilling our obligations under the service agreements. These
expenses are operating costs and expenses that would have been incurred by the
affiliated dental groups had they not affiliated with us and include non-dentist
salaries and benefits, lab fees and dental supplies, office occupancy costs and
other expenses related to operations. Salaries and benefits expense are for
personnel working for us at the dental facilities, as well as the local
operating management. At the facility level, we generally employ the
administrative staff and, where permitted by law, the dental hygienists and
dental assistants. The local operating management team supervises and supports
the staff at the dental facilities. 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. Other expenses consist of professional fees,
marketing costs and other general and administrative expenses.
General Corporate Expenses. General corporate expenses consist of
compensation expenses for our corporate personnel and administrative staff, as
well as facility and other administrative costs of our corporate office. We
provide management, administrative, third party contracting and other services
to the affiliated groups.
Depreciation. Depreciation expense includes depreciation charges related to
leasehold improvements and furniture, fixtures and equipment used to operate the
dental facilities, local management offices and our corporate office.
Amortization of Intangibles. Amortization of intangibles relates to
intangible assets acquired in connection with completed acquisition and
affiliation transactions.
11
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Overview
Our net earnings amounted to $838,000 or diluted earnings per share of $0.11
for the three months ended June 30, 1998, as compared with net earnings of
$1,464,000 or diluted earnings per share of $0.19 for the three months ended
June 30, 1999. The increase in net earnings resulted from incremental earnings
provided from completed acquisitions and affiliations and from internal growth.
Net Revenue. Net revenue increased from $20,217,000 for 1998 to $28,139,000
for 1999, an increase of approximately 39.2%. The increase in net revenue in
1999 is due primarily to the inclusion of revenue derived from service
agreements entered into in connection with the 1998 Transactions for the entire
period and from the 1999 Transactions. In addition, same market growth from our
affiliates in Austin, Milwaukee, Minneapolis, New Orleans, Phoenix, Pittsburgh
and Tucson resulted from the addition of new facilities and expansion of
existing facilities, the addition of dentists to our affiliated dental group
network and increases in certain affiliates' fees. Net revenue included expense
reimbursements ($13,441,000 for 1998 as compared with $18,892,000 for 1999),
management service fees ($4,730,000 for 1998 as compared with $6,778,000 for
1999) and revenue related to the arrangement of the provision of care to
patients ($2,046,000 for 1998 as compared with $2,469,000 for 1999). Expense
reimbursements included rent expense ($1,372,000 for 1998 as compared with
$1,990,000 for 1999) and other operating expenses ($12,069,000 for 1998 as
compared with $16,902,000 for 1999). Management service fees included monthly
fees ($4,241,000 for 1998 as compared with $6,305,000 for 1999) and additional
variable fees ($489,000 for 1998 as compared with $473,000 for 1999). Net
revenue derived from our service agreement with Park Dental represented
approximately 42% and 35% of our consolidated net revenue for 1998 and 1999,
respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $10,452,000
or 51.7% of net revenue for 1998, as compared with $13,827,000 or 49.1% of net
revenue for 1999. The decrease in salaries and benefits as a percentage of net
revenue resulted from more efficient utilization of staff in existing
facilities, the regionalization of finance, operations and administrative staff
in certain markets, 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 and the outsourcing of certain lab work which was
previously handled in-house. These savings were partially offset by an increase
in the amount of expense related to the arrangement of the provision of care to
patients, which is at a higher percentage of net revenue.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $2,641,000 or 13.1% of net revenue for 1998 to $3,710,000 or
13.2% of net revenue for 1999. Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures
performed. The increase in lab fees and dental supplies as a percentage of net
revenue is attributable to a combination of the acquisition of facilities with a
generally higher ratio of lab fees and dental supplies expense to net revenue in
their respective markets compared to the existing base of facilities, rate
increases from certain lab providers and the outsourcing of certain lab work
which was previously handled in-house.
Office Occupancy Expense. Office occupancy expense amounted to $1,850,000 or
9.2% of net revenue for 1998, as compared with $2,721,000 or 9.7% of net revenue
for 1999. Office occupancy expense increased as a percentage of net revenue due
to investment in the relocation, expansion and addition of new dental facilities
and local management offices in Arizona, Minnesota, Texas, Virginia and
Wisconsin. This investment in facilities increased our capacity in these
markets to allow for future growth. Initially, however, the increase in office
occupancy expense was not fully offset by incremental net revenue.
Additionally, the acquisition of facilities with a generally higher ratio of
office occupancy costs to net revenue in their respective markets compared to
the existing base of facilities contributed to a higher expense as a percentage
of net revenue. These increased costs were partially offset by better
utilization of capacity in existing facilities.
12
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other Operating Expenses. Other expenses amounted to $1,619,000 or 8.0% of net
revenue for 1998, as compared with $2,170,000 or 7.7% of net revenue for 1999.
Other costs decreased as a percentage of net revenue due to the regionalization
of administrative functions in certain markets and the reduction of certain
discretionary spending.
General Corporate Expenses. General corporate expenses were $1,056,000 or 5.2%
of net revenue for 1998, as compared with $1,218,000 or 4.3% of net revenue for
1999. In 1999, we continued to expand our management infrastructure in the
areas of finance, employee benefit administration and professional recruiting.
Despite these additions, we continue 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 we continue to expand our management infrastructure. However, it is
anticipated that these expenses will continue to decline as a percentage of net
revenue.
Depreciation. Depreciation expense was $606,000 or 3.0% of net revenue for
1998, as compared with $892,000 or 3.2% of net revenue for 1999. The increase in
depreciation expense related primarily to the depreciation of assets acquired
and capital expenditures associated with the addition of five new facilities in
Arizona and Minnesota and the relocation and/or expansion of 20 facilities in
Arizona, Minnesota, Texas and Wisconsin since July 1, 1998. These capital
expenditures increased our capacity in these markets to allow for future growth.
Depreciation expense increased as a percentage of net revenue as this initial
investment was not fully offset by incremental net revenue. Depending on the
amount and timing of future capital expenditures, depreciation expense will
likely increase.
Amortization of Intangibles. Amortization of intangibles was $413,000 or 2.0%
of net revenue for 1998, as compared with $599,000 or 2.1% of net revenue for
1999. The increase in amortization resulted from intangible assets recorded in
connection with our ten affiliations completed during 1998 and nine affiliations
completed during 1999. We expect that amortization of intangibles will increase
in the future as a result of intangibles recorded in connection with future
acquisitions and affiliations.
Interest Expense, net. Net interest expense was $206,000 or 1.0% of net
revenue for 1998, as compared with $395,000 or 1.4% of net revenue for 1999.
The increase in interest expense resulted primarily from increased average
borrowings under our revolving credit facility in 1999 as compared with 1998.
In addition, the issuance of subordinated notes in connection with the 1998 and
1999 Transactions contributed to higher interest expense in 1999.
Income Taxes. We incurred income tax expense of $536,000 for 1998, as
compared with $1,143,000 for 1999. Our effective tax rate was approximately
39.0% for 1998 as compared with 43.8% for 1999. The increase in the effective
tax rate is primarily attributable to the fact that the remaining net operating
loss carryforwards from 1996 were fully utilized to offset a portion of our
taxable income in 1998. In addition, an increase in the amount of amortization
of intangible assets which are not deductible for tax purposes also led to an
increase in the effective tax rate in 1999.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Overview
Our net earnings amounted to $1,307,000 or diluted earnings per share of $0.18
for the six months ended June 30, 1998, as compared with net earnings of
$2,818,000 or diluted earnings per share of $0.37 for the six months ended June
30, 1999. The increase in net earnings resulted from incremental earnings
provided from completed acquisitions and affiliations and from internal growth.
13
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Revenue. Net revenue increased from $38,388,000 for 1998 to $54,373,000
for 1999, an increase of approximately 41.6%. The increase in net revenue in
1999 is due primarily to the inclusion of revenue derived from service
agreements entered into in connection with the 1998 Transactions for the entire
period and from the 1999 Transactions. In addition, same market growth from our
affiliates in Austin, Milwaukee, Minneapolis, New Orleans and Tucson resulted
from the addition of new facilities and expansion of existing facilities, the
addition of dentists to our affiliated dental group network and increases in
certain affiliates' fees. Net revenue included expense reimbursements
($25,645,000 for 1998 as compared with $36,368,000 for 1999), management service
fees ($8,655,000 for 1998 as compared with $13,145,000 for 1999) and revenue
related to the arrangement of the provision of care to patients ($4,088,000 for
1998 as compared with $4,860,000 for 1999). Expense reimbursements included rent
expense ($2,536,000 for 1998 as compared with $3,751,000 for 1999) and other
operating expenses ($23,109,000 for 1998 as compared with $32,617,000 for 1999).
Management service fees included monthly fees ($7,981,000 for 1998 as compared
with $12,401,000 for 1999) and additional variable fees ($674,000 for 1998 as
compared with $744,000 for 1999). Net revenue derived from our service agreement
with Park Dental represented approximately 43% and 35% of our consolidated net
revenue for 1998 and 1999, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $20,101,000
or 52.4% of net revenue for 1998, as compared with $26,740,000 or 49.2% of net
revenue for 1999. The decrease in salaries and benefits as a percentage of net
revenue resulted primarily from more efficient utilization of staff in existing
facilities, the regionalization of finance, operations and administrative staff
in certain markets 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. These cost savings were partially offset by an
increase in the amount of expense related to the arrangement of the provision of
care to patients, which is at a higher percentage of net revenue.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $4,837,000 or 12.6% of net revenue for 1998 to $7,217,000 or
13.3% of net revenue for 1999. Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures
performed. The increase in lab fees and dental supplies as a percentage of net
revenue is attributable to a combination of an increase in the mix of procedures
requiring more extensive lab work, the acquisition of facilities with a
generally higher ratio of lab fees and dental supplies expense to net revenue in
their respective markets compared to the existing base of facilities, rate
increases from certain lab providers and the outsourcing of certain lab work
which was previously handled in-house.
Office Occupancy Expense. Office occupancy expense amounted to $3,459,000 or
9.0% for 1998, as compared with $5,166,000 or 9.5% of net revenue for 1999.
Office occupancy expense increased as a percentage of net revenue due to
investment in the relocation, expansion and addition of new dental facilities
and local management offices in Arizona, Minnesota, Texas, Virginia and
Wisconsin. This investment in facilities increased our capacity in these
markets to allow for future growth. Initially, however, the increase in office
occupancy expense was not fully offset by incremental net revenue.
Additionally, the acquisition of facilities with a generally higher ratio of
office occupancy costs to net revenue in their respective markets compared to
the existing base of facilities contributed to a higher expense as a percentage
of net revenue. These increased costs were partially offset by better
utilization of capacity in existing facilities.
Other Operating Expenses. Other expenses amounted to $3,264,000 or 8.5% of net
revenue for 1998, as compared with $4,324,000 or 8.0% of net revenue for 1999.
Other costs decreased as a percentage of net revenue due to the reduction of
certain expenses associated with the administration of a benefit plan that was
renegotiated, the regionalization of administrative functions in certain markets
and the reduction of certain discretionary spending.
General Corporate Expenses. General corporate expenses were $2,031,000 or 5.3%
of net revenue for 1998, as compared with $2,414,000 or 4.4% of net revenue for
1999. In 1999, we continued to expand our management infrastructure in the areas
of finance, employee benefit administration and professional recruiting.
Despite these additions, we continue 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 we continue to expand our management infrastructure. However, it is
anticipated that these expenses will continue to decline as a percentage of net
revenue.
14
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Depreciation. Depreciation expense was $1,162,000 or 3.0% of net revenue for
1998, as compared with $1,660,000 or 3.1% of net revenue for 1999. The increase
in depreciation expense related primarily to the depreciation of assets acquired
and capital expenditures associated with the addition of five new facilities in
Arizona and Minnesota and the relocation and/or expansion of 20 facilities in
Arizona, Minnesota, Texas and Wisconsin since July 1, 1998. These capital
expenditures increased our capacity in these markets to allow for future growth.
Depreciation expense increased as a percentage of net revenue as this initial
investment was not fully offset by incremental net revenue. Depending on the
amount and timing of future capital expenditures, depreciation expense will
likely increase.
Amortization of Intangibles. Amortization of intangibles was $746,000 or 1.9%
of net revenue for 1998, as compared with $1,153,000 or 2.1% of net revenue for
1999. The increase in amortization resulted from intangible assets recorded in
connection with our ten affiliations completed during 1998 and nine affiliations
completed during 1999. We expect amortization of intangibles to increase in the
future as a result of intangibles recorded in connection with future
acquisitions and affiliations.
Interest Expense, net. Net interest expense was $645,000 or 1.7% of net
revenue for 1998, as compared with $679,000 or 1.2% of net revenue for 1999. The
slight increase in interest expense resulted primarily from the issuance of
subordinated notes in connection with the 1998 and 1999 Transactions.
Income Taxes. We incurred income tax expense of $836,000 for 1998, as
compared with $2,202,000 for 1999. Our effective tax rate was approximately
39.0% for 1998 as compared with 43.9% for 1999. The increase in the effective
tax rate is primarily attributable to the fact that the remaining net operating
loss carryforwards from 1996 were fully utilized to offset a portion of our
taxable income in 1998. In addition, an increase in the amount of amortization
of intangible assets which are not deductible for tax purposes also led to an
increase in the effective tax rate in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operating and capital needs, including cash used for
acquisitions, capital expenditures and working capital, from our sales of equity
securities, borrowings under our revolving line of credit and cash generated
from operations.
From January 1, 1998 through June 30, 1999, we completed 19 dental group
practice affiliations for aggregate consideration of $27.5 million in cash, $3.0
million in subordinated promissory notes, $1.4 million in deferred payments,
104,922 shares of Common Stock and future contingent payments for one
affiliation based on a multiple of service fees received in excess of a
predetermined threshold for each of the three years ending May 31, 1999, 2000
and 2001.
For the six months ended June 30, 1998 and 1999, cash provided by operating
activities amounted to $4,231,000 and $3,841,000, respectively. The decrease in
cash from operations resulted primarily from an increase in the amount of cash
paid for income taxes in 1999 compared to 1998. This was partially offset by an
increase in cash from operations due to incremental earnings generated from
acquisitions and affiliations, same market growth and expanded profit margins.
For the six months ended June 30, 1998 and 1999, cash used in investing
activities amounted to $18,080,000 and $16,165,000, 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
$15,088,000 for 1998 and $9,023,000 for 1999. Cash used for capital
expenditures was $1,982,000 and $6,115,000 for 1998 and 1999, respectively.
Capital expenditures for 1998 included costs associated with the addition of two
new dental facilities in Minnesota and the relocation and/or expansion of six
dental facilities in Minnesota, Texas and Wisconsin. Capital expenditures for
1999 included costs associated with the addition of three new dental facilities
in Arizona and Minnesota and the relocation and/or expansion of 15 dental
facilities in Arizona, Minnesota, Texas and Wisconsin. The establishment of new
dental facilities and the expansion of existing dental facilities in the future
will require ongoing capital expenditures.
15
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
For the six months ended June 30, 1998 and 1999, cash provided by financing
activities amounted to $11,453,000 and $11,733,000, respectively. Cash provided
by financing activities in 1998 resulted primarily from net proceeds received
from our initial public offering. During the second quarter of 1998 we sold
2,587,500 shares of Common Stock in our initial public offering at $15.00 per
share. Net proceeds to us after deducting underwriting discounts and
commissions and offering costs were approximately $34,596,000. Such proceeds
were 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 our revolving credit facility, including accrued interest, in
the amount of $20,651,000 and (iii) complete additional affiliation
transactions. Cash provided by financing activities in 1999 resulted from
borrowings under our revolving line of credit of $12,297,000 and proceeds from
the issuance of common stock for the employee stock purchase plan of $303,000,
net of the repayment of certain indebtedness.
In April 1997, we entered into a $30 million revolving line of credit
agreement with a bank. In December 1998, we amended our line of credit to (i)
increase the amount available under the line to $50 million, (ii) add two
additional banks, (iii) extend the maturity date and (iv) modify certain other
terms, including pricing. The credit facility is being used for general
corporate purposes including acquisitions and affiliations. Borrowings under
this line of credit bear interest at either prime or LIBOR plus a margin, at our
option. The margin for LIBOR loans is based upon our debt coverage ratio and
ranges up to 1.625%. In addition, we pay 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 our assets, including a pledge of the stock
of our subsidiaries. We are also required to comply with certain financial and
other covenants. The line of credit matures in December 2001. The outstanding
balance under this line as of June 30, 1999 was $16,597,000.
We have a Shelf Registration Statement on file with the Securities and
Exchange Commission (Registration No. 333-56941) covering a total of 750,000
shares of Common Stock and $25,000,000 aggregate principal amount of
subordinated promissory notes to be issued in connection with future dental
group practice affiliations. As of June 30, 1999, 679,878 shares and
$23,740,000 of notes remain available for issuance under this Shelf Registration
Statement.
We believe that cash generated from operations and amounts available under our
revolving credit facility will be sufficient to fund our anticipated cash needs
for working capital, capital expenditures and acquisitions and affiliations for
at least the next 12 months.
YEAR 2000 ISSUE
The Year 2000 issue is the result of certain computer programs being written
using two digits rather than four digits to define the year. Accordingly,
computer programs that have date-sensitive software may recognize a date using
''00'' as the year 1900 rather than 2000. This could result in system failures
or miscalculations causing disruptions in operations, including the temporary
inability to process transactions, send invoices or statements, or engage in
similar normal business activities. We utilize software and related computer
technologies essential to our operations.
All significant operating systems, the general ledger system and network
communication software system utilized by us are either already Year 2000
compliant or are expected to be Year 2000 compliant upon installation of
available patches or upgrades at minimal to no cost. The general ledger system
has already been satisfactorily tested for compliance by the software vendor.
We expect that all necessary upgrades for significant operating systems and
network communication software will be completed as soon as practicable but no
later than the end of 1999.
16
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We also use various dental practice management software systems in our
affiliated dental group practices. In particular, our proprietary practice
management system, Comdent, which is currently used at 38 of our dental
facilities, is Year 2000 compliant. We intend, when appropriate, to convert our
current and future affiliated dental group practices to Comdent or other
preferred systems. In general, the other practice management systems utilized by
us are commercially available systems that are either already Year 2000
compliant or scheduled for Year 2000 compliance by the end of the third quarter
of 1999. We have satisfactorily tested Comdent for Year 2000 compliance and
preliminary compliance testing has been done by us or the software vendor on
other significant practice management systems. All such testing should be
completed by the end of the third quarter of 1999. As part of our due diligence
in connection with future affiliations, we will perform a review of the dental
practice management software systems being used by those dental practices for
Year 2000 compliance. Any systems deemed to be non-compliant at such time are
expected to be converted to Year 2000 compliant systems by the end of 1999.
Continual system upgrades and conversion of dental practice management systems
to our preferred systems is an integral part of our overall information systems
strategy. We believe that costs specifically associated with Year 2000
compliance issues, if any, will not be material to our financial position or
results of operations.
We have not identified any compliance issues with respect to non-information
technology ("non-IT") systems such as phone systems and certain other
equipment. We do not believe the failure of such systems would have a material
adverse effect on our operations. Non-IT systems that are not compliant, if any,
are expected to be upgraded or replaced as soon as practicable but no later
than the end of 1999. The costs of such upgrades are no later expected to be
material to our financial position or results of operations.
Year 2000 issues also relate to third parties with which we have significant
relationships. In particular, our affiliated dental groups have contracts with
third party payors to provide dental services in exchange for capitation, fee-
for-service and preferred provider organization plan claims payments. These
third party payors have systems that may be vulnerable to Year 2000 issues. We
have identified and initiated discussions with all significant third party
payors to determine their compliance status and develop appropriate contingency
plans. We have not been notified of any Year 2000 compliance issues by these
third party payors. There can be no assurance, however, that the systems of
these significant third party payors will be Year 2000 compliant on a timely
basis. We believe Year 2000 problems experienced by such third party payors is
the most reasonably likely worst case scenario and that such problems could
result in late payments received under the payor contracts and related cash flow
problems. Potential contingency plans may include temporary advancing of funds
to our affiliates by third party payors unable to process claims on a timely
basis and the direct billing of patients in lieu of reimbursements under the
payor contracts. In addition, we could, if necessary, use borrowings under our
revolving credit facility to support working capital obligations in the event of
payment problems from third party payors. Due to the dependence of our
affiliated dental groups on third party payor relationships, Year 2000 system
failures of such payors could have a material adverse effect on our cash flows
and financial condition. We also have relationships with benefit plan vendors
relating to the employee benefit plans we sponsor. We have identified and
initiated communications with the primary benefit plan vendors to determine
their Year 2000 compliance status. Year 2000 system failures of such vendors
could have a material adverse effect on our financial condition and employee
relations.
RECENTLY ISSUED AND PENDING FINANCIAL ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of the hedge
in the statement of operations.
17
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities, which amended the
effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. We do not believe that
SFAS No. 133 will have a material impact on our consolidated financial
statements.
A proposed interpretation of APB Opinion No. 25, "Accounting for Stock Issued
to Employees," would change the way we account for stock options issued to non-
employee directors. We currently use the intrinsic value method for such
options. The interpretation, if adopted, will require that we recognize
compensation cost, based on the fair value method, for stock options granted to
non-employee directors after December 15, 1998. The portion of costs recognized
would be on a prospective basis from the date of issuance of the interpretation
over the remaining vesting period of the option grant. We are evaluating the
potential effect of the interpretation but do not believe its adoption would
have a material effect on our consolidated financial position, results of
operations or cash flows.
18
<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
From time to time, we may be subject to litigation incidental to our
business. We are not presently a party to any material litigation. The dentists
employed by, or independent contractors of, our affiliated dental group
practices are from time to time subject to malpractice claims. Such claims, if
successful, could result in damage awards exceeding applicable insurance
coverage which could have a material adverse effect on our business, financial
condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of shareholders on May 7, 1999 at the offices of
Summit Partners at 600 Atlantic Avenue in Boston, Massachusetts. At the
meeting, individuals listed below were elected to our Board of Directors for a
term expiring in 2002. The table below indicates the votes for and votes
withheld for each nominee:
Name Votes For Votes Withheld
---- --------- --------------
1. James T. Kelly 6,529,636 43,426
2. Martin J. Mannion 6,529,736 43,326
Derril W. Reeves, Gregory A. Serrao and Dr. Gregory T. Swenson also serve on
our Board of Directors for terms which continue after the annual meeting.
At our annual meeting of shareholders, the shareholders also approved
amendments to our 1996 Stock Option Plan and the 1996 Directors Stock Option
Plan by the votes shown in the tables below:
1996 Stock 1996 Directors
Option Plan Stock Option Plan
----------- -----------------
Voted for 5,997,151 6,511,288
Voted against 566,943 53,285
Abstain 1,428 949
Shares not voted 7,540 7,540
ITEM 5. OTHER INFORMATION
Not applicable.
19
<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.
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K for the three months ended
June 30, 1999.
20
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN DENTAL PARTNERS, INC.
August 11, 1999 /s/ Gregory A. Serrao
-----------------------------------
Gregory A. Serrao
Chairman, President and Chief Executive Officer
August 11, 1999 /s/ Ronald M. Levenson
-----------------------------------
Ronald M. Levenson
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
21
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
27 Financial Data Schedule.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INTERIM FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 0 1,500
<SECURITIES> 0 0
<RECEIVABLES> 0 7,296
<ALLOWANCES> 0 0
<INVENTORY> 0 1,406
<CURRENT-ASSETS> 0 12,158
<PP&E> 0 18,669
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 90,437
<CURRENT-LIABILITIES> 0 15,472
<BONDS> 0 0
0 0
0 0
<COMMON> 0 75
<OTHER-SE> 0 51,715
<TOTAL-LIABILITY-AND-EQUITY> 0 90,437
<SALES> 28,139 54,373
<TOTAL-REVENUES> 28,139 54,373
<CGS> 0 0
<TOTAL-COSTS> 25,137 48,674
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 395 679
<INCOME-PRETAX> 2,607 5,020
<INCOME-TAX> 1,143 2,202
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,464 2,818
<EPS-BASIC> 0.19 0.38
<EPS-DILUTED> 0.19 0.37
</TABLE>
