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Filed pursuant to Rule 424(b)(2)
Registration No. 333-56941
AMERICAN DENTAL PARTNERS, INC.
750,000 Shares of Common Stock
and
$25,000,000 Aggregate Principal Amount of
Subordinated Promissory Notes
We may use this prospectus to offer and sell up to 750,000 shares of our
Common Stock and up to $25,000,000 of Subordinated Promissory Notes at various
times in connection with future business combinations and affiliation
transactions involving our company or its subsidiaries. The Common Stock and
the Subordinated Promissory Notes covered by this prospectus may be issued in
connection with:
. mergers, consolidations, recapitalizations or similar plans of
acquisitions;
. purchases of some or all of the assets of businesses;
. exchanges for the outstanding securities, obligations or other
interests of businesses; or
. affiliation transactions.
We expect that the specific terms of each business combination or
affiliation transaction in which Common Stock or Subordinated Promissory Notes
will be issued will be negotiated with the owners or other controlling persons
of the businesses involved. Generally, the securities covered by this
prospectus that are issued in a business combination or affiliation transaction
will be valued:
. at a price based on their market value at the time the business
combination or affiliation transaction is agreed upon or at the
time they are delivered;
. at a price based on average market prices for periods ending at
or near these times; or
. on such other basis as the parties may agree.
We do not expect that underwriting discounts or commissions will be paid
in connection with the issuances of securities under this prospectus. However,
brokers' commissions or finders' fees may be paid at various times in
connection with specific business combinations or affiliation transactions. Any
person receiving these fees may be deemed an underwriter within the meaning of
the Securities Act of 1933, and any profit on the resale of Common Stock or
Subordinated Promissory Notes purchased by them may be deemed to be
underwriting discounts or commissions under the Securities Act.
Our Common Stock trades on the Nasdaq National Market under the symbol
"ADPI." On May 14, 1999, the last reported sales price of our Common Stock was
$10.500 per share.
Investing in the Common Stock and the Subordinated Promissory Notes issued
under this prospectus involves risk. Before making any investment in our
company, you should consider carefully the risk factors beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved any of the securities offered by this prospectus or
determined that this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
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The date of this prospectus is May 28, 1999.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). You may read
and copy (upon the payment of fees prescribed by the SEC) any document that we
file with the SEC at its public reference rooms in Washington, D.C., (450
Fifth Street, N.W. 20549), New York, New York (7 World Trade Center, Suite
1300 10048), and Chicago, Illinois (500 West Madison Street, Suite 1400
60661). You may call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our filings are also available to the public on the
Internet through the SEC's EDGAR database. You may access the EDGAR database
at the SEC's web site at http://www.sec.gov. We also maintain a web site at
http://www.amdpi.com.
This prospectus is part of a registration statement (on Form S-4) that we
have filed with the SEC relating to the Common Stock and the Subordinated
Promissory Notes offered by this prospectus. As permitted by SEC rules, this
prospectus does not contain all the information contained in the registration
statement and its accompanying exhibits and schedules which we have also filed
with the SEC. You may refer to the registration statement, the exhibits and
schedules for more information about us and our Common Stock and our
Subordinated Promissory Notes. The registration statement, exhibits and
schedules are available at the SEC's public reference rooms or through its
EDGAR database on the Internet.
Our Common Stock is traded on the Nasdaq National Market. Periodic reports,
proxy materials and other information concerning us, when filed, may be
inspected at the offices of the Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
You may obtain a copy of these filings, at no cost, by writing or
telephoning us at the following address:
American Dental Partners, Inc.
301 Edgewater Place, Suite 320
Wakefield, Massachusetts 01880
(781) 224-0880
Attention: Investor Relations
To ensure timely delivery of these materials, you should make any request
no later than five business days prior to the date on which you must make your
investment decision.
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus may constitute "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements are based on management's current beliefs, assumptions and
expectations of our future economic performance, taking into account
information available at the time the statements are made. Forward-looking
statements are subject to uncertainties and other factors that may cause our
actual performance or financial condition in the future to be materially
different from the expectations stated in the forward-looking statements. Some
of the important factors that could cause our actual results, performance or
financial condition to differ materially from expectations are set forth in
the "Risk Factors" section of this prospectus.
Statements which include the words "believe," "expect," "anticipate,"
"project," "estimate," "forecast" and similar expressions should be considered
forward-looking statements. These statements speak only as of the date they
were made, and we are not obligated to publicly update or revise them, whether
as a result of new information, future events or otherwise.
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PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision. The terms "we," "us"
and "our" as used in this prospectus refer to "American Dental Partners, Inc.",
its management service organization ("MSO") subsidiaries and its wholly owned
subsidiaries, Orthocare, Ltd. and American Dental Professional Services, Inc.,
as a consolidated entity, except where it is made clear that such term means
only the parent company . The term "PC" means the dental professional
corporation or other professional entity formed by the dentists of the
affiliating dental group practice. We do not own or control the PCs and,
accordingly, do not consolidate the financial statements of the PCs with ours.
Our Company
American Dental Partners, Inc. is a leading provider of dental practice
management services to dental group practices in selected markets throughout
the United States. We seek to affiliate with leading dental groups that provide
a comprehensive range of dental care services, have outstanding reputations for
quality and have proven records of financial performance.
Our Address
Our principal executive offices are located at 301 Edgewater Place, Suite
320, Wakefield, Massachusetts 01880. Our telephone number at that location is
(781) 224-0880.
Our Industry
The United States Health Care Financing Administration estimates that
expenditures for dental care were approximately $50.6 billion in 1997 and will
reach approximately $95.2 billion by 2007, representing a compound annual
growth rate of approximately 6.5%. We believe that the growth in expenditures
for dental care will continue to be driven by both increases in costs and
increases in demand for services due to:
(i) improved dental benefits offered by employers;
(ii) increased availability and use of dental insurance, including
preferred provider organization plans and capitated managed care
plans;
(iii) increased demand for dental care from an aging population; and
(iv) increased demand for cosmetic and preventative procedures.
We believe that this growth will benefit not only dentists, but companies
that provide services to the dental care industry, such as dental practice
management companies. However, the failure of any of the foregoing factors to
materialize could offset increases in demand for dental care, and any such
increases may not correlate with growth in our business.
The delivery of dental care in the United States is highly fragmented.
Unlike many other sectors of the health care services industry, the dental care
industry is in the early stages of consolidation. Although dental care is
typically offered by solo practitioners, the trend toward group practice is
growing. According to the American Dental Association, in 1995, 11.8% of the
approximately 153,300 dentists in the United States were practicing in groups
of three or more, up from 4.1% in 1991. We believe that this consolidation
trend will continue and that dental group practices will seek to affiliate with
entities, such as us, that:
(i) allow dentists to focus on the clinical aspects of dentistry by
providing management resources to conduct the business and
administrative aspects of dentistry;
(ii) provide information and operating systems that are required to
effectively operate in an increasingly complex reimbursement
environment;
(iii) assist with third-party contracting;
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(iv) realize economies of scale in purchasing and provide access to capital;
and
(v) provide dentists the opportunity to realize value for their practices.
Our Affiliation Model
When affiliating with a dental group practice, we acquire substantially all
of the assets of the dental group practice and enter into a long-term service
agreement to manage all of the non-clinical aspects of the dental operations.
We share the best practices of our network of affiliated practices with each
affiliate and provide assistance with information systems, budgeting, financial
reporting, facilities management, third-party payor contracting, supplies and
equipment procurement, quality assurance initiatives, billing and collecting
accounts receivable, marketing and recruiting, hiring and training support
staff.
Under our service agreements with dental practices, we are responsible for
providing all services necessary for the administration of the non-clinical
aspects of the dental operations and the dental professional corporation is
responsible for the provision of dental care. The dental professional
corporation reimburses us for expenses we incur on its behalf in connection
with the operation and administration of the dental facilities and pays us fees
for our management services. Each of our service agreements is for an initial
term of 40 years.
Our Strategy
Our objective is to be the leading dental practice management company in the
United States. Our strategy for achieving this objective is to:
(i) expand into carefully selected and diverse geographic markets which
have favorable demographics and projected economic growth;
(ii) affiliate with leading dental group practices which have reputations
for quality care and proven records of financial performance;
(iii) increase market penetration in each of our markets through additional
affiliations, recruitment of dentists and new facility development;
(iv) add value to each affiliated dental group practice by assisting the
practice in improving operating performance; and
(v) pursue various initiatives to help our affiliates provide the highest
quality of care and service.
The Offering
Common Stock offered.......... We are offering 750,000 shares of Common Stock
to be issued in connection with the acquisition
of businesses, properties or securities in
acquisition and affiliation transactions.
Through May 14, 1999, we have issued 70,122
shares of Common Stock under this prospectus
and 679,878 shares remain available for future
issuance.
Subordinated Promissory Notes
offered....................... We are offering $25,000,000 aggregate principal
amount of Subordinated Promissory Notes to be
issued in connection with our acquisition of
businesses, properties or securities in
acquisition and affiliation transactions.
Through May 14, 1999, we have issued $1,195,000
aggregate principal amount of notes and
$23,805,000 of notes remain available for
future issuance.
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Terms of acquisitions and
affiliations.................. We expect that the terms upon which we may
issue Common Stock and Subordinated Promissory
Notes under this prospectus in acquisition and
affiliation transactions, including the rates
of interest for the Subordinated Promissory
Notes, will be determined through negotiations
with the security holders or principal owners
of the businesses whose securities or assets we
are acquiring. We expect that the Common Stock
issued will be valued at prices reasonably
related to market prices for the Common Stock
prevailing either at the time an acquisition
agreement is executed or at the time an
acquisition is consummated. The Subordinated
Promissory Notes will be unsecured debt
obligations, subordinated to all senior
indebtedness, which is generally our bank debt,
payable over seven years and on parity with all
currently outstanding Subordinated Promissory
Notes and any that may be issued in the future.
In addition, if you are an affiliate of a
business we acquire or affiliate with, there
will be limitations on how many shares you can
sell under SEC rules.
Transfer of Common Stock...... If you acquire shares of Common Stock in
transactions pursuant to this prospectus, we
may require you to hold all or some portion of
the Common Stock for some period of time.
Transfer of Subordinated
Promissory Notes.............. If you acquire Subordinated Promissory Notes in
acquisition and affiliation transactions
pursuant to this prospectus, you should be
aware that presently there is no market for the
Subordinated Promissory Notes, and it is not
anticipated that a market for the Subordinated
Promissory Notes will develop. In addition, the
acquisition agreements for the applicable
acquisition and affiliation transactions will
contain certain restrictions with respect to
your transfer of the Subordinated Notes.
Common Stock outstanding...... As of May 14, 1999, there are 7,517,448 shares
of Common Stock outstanding (1)
Nasdaq National Market
symbol........................ Our Common Stock is traded in the Nasdaq
National Market under the symbol "ADPI."
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(1) Does not include shares of Common Stock issuable upon the exercise of
outstanding options issued pursuant to our stock option plans.
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Summary Historical Consolidated Financial Data
(in thousands, except ratios, per share and statistical data)
We are providing the following summary financial information to aid you in
your analysis of our financial results and condition. This information is only
a summary and you should read it in conjunction with our historical and
consolidated financial statements and the related notes, beginning on page F-1,
and the information under "Our Company," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December Three Months
31, Ended March 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue.......................... $3,933 $53,270 $84,090 $18,171 $26,234
Operating expenses................... 6,414 51,513 76,639 16,963 23,537
Earnings (loss) from operations...... (2,481) 1,757 7,451 1,208 2,697
Interest expense (income), net....... (38) 563 1,085 439 284
Earnings (loss) before income taxes.. (2,443) 1,194 6,366 769 2,413
Income taxes......................... -- 124 2,480 300 1,059
Net earnings (loss).................. (2,443) 1,070 3,886 469 1,354
Net earnings (loss) per common share
(1):
Basic.............................. $(3.45) $ (0.05) $ 0.59 $ 0.06 $ 0.18
Diluted............................ $(3.45) $ (0.05) $ 0.54 $ 0.06 $ 0.18
Weighted average common shares
outstanding (1):
Basic.............................. 768 2,273 5,907 2,429 7,471
Diluted............................ 768 2,273 6,867 2,632 7,669
Ratio of earnings to fixed charges
(2)................................. N/A 2.4 5.5 2.5 7.7
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $4,675 $2,091 $2,995
Working capital........................................ 759 (2,725) (2,597)
Total assets........................................... 47,959 70,535 84,953
Long-term debt, excluding current maturities........... 21,253 9,980 20,076
Redeemable and convertible preferred stock............. 16,297 -- --
Total stockholders' equity............................. 909 48,305 50,320
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1996 1997 1998 1999
---- ---- ---- ---------
<S> <C> <C> <C> <C>
Statistical Data (end of period):
Number of states....................................... 3 5 8 10
Number of dental facilities............................ 42 77 103 123
Number of operatories (3).............................. 331 566 830 1,013
Number of affiliated dentists (4)...................... 128 171 231 274
</TABLE>
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(1) Net earnings (loss) per common share are computed on the basis described in
Notes 2 and 11 to our Consolidated Financial Statements and in Note 3 to
our Unaudited Interim Consolidated Financial Statements.
(2) The ratio of earnings to fixed charges is computed by dividing our fixed
charges into earnings before income taxes plus fixed charges. Fixed charges
include interest expense, amortization of debt expenses and the portion of
non-reimbursed rental expense estimated to be representative of the
interest factor (approximately 1/3 of non-reimbursed rental expense). Fixed
charges ordinarily do not include any provision for principal repayment.
For the year ended December 31, 1996, our earnings before income taxes plus
fixed charges were insufficient to cover fixed charges by approximately
$2.4 million.
(3) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
(4) Includes full-time general dentists employed by the PCs with which we are
affiliated and full-time specialists, some of whom are independent
contractors to the PCs.
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RISK FACTORS
Limited Operating History
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 practice. We had an operating loss in 1996. Although we were profitable
in 1997 and in 1998, there can be no assurance that we will be able to sustain
profitable operations.
Affiliation Strategy Risks
Our strategy includes expansion through affiliations with dental practices
in new and existing markets and the expansion of such affiliated practices.
Affiliations involve numerous risks, including failure to retain key personnel
and contracts of the affiliated practices and the inability to integrate
businesses without material disruption. In addition, we compete with other
dental practice management companies which have a similar strategy, some of
which may have greater financial resources and a longer operating history than
us. Competition for affiliations may intensify due to ongoing consolidation in
the dental care services industry, which may substantially increase the costs
associated with completing affiliation transactions. There can be no assurance
that any future affiliations will be successfully integrated into our
operations, that competition for affiliations will not intensify or that we
will be able to complete such affiliations on acceptable terms and conditions.
In addition, the costs of unsuccessful affiliation efforts may adversely affect
our business, financial condition or results of operations.
We devote substantial time and resources to affiliation-related activities.
Identifying appropriate affiliation candidates and negotiating and consummating
affiliations with dental practices can be a lengthy, complex and costly
process. The success of our affiliation strategy will depend on a number of
factors, including our ability to identify and affiliate with quality dental
practices in suitable markets and regulatory constraints. There can be no
assurance that our affiliation strategy will be successful or that
modifications to our strategy will not be required.
Risks Related to Rapid Growth
We are experiencing rapid growth as a result of our dental practice
affiliations. This growth has placed, and will continue to place, significant
demands upon our management, operations and systems. Our ability to manage our
growth effectively will depend upon our ability to hire, train and assimilate
additional management and other employees and our ability to expand, improve
and effectively use our accounting and finance, management and operating
systems in order to accommodate our expanded operations. A failure by
management to anticipate, implement and manage effectively the changes required
to sustain our growth could have a material adverse effect on our business,
financial condition and results of operations.
Dependence Upon Affiliated Dental Group Practices
Our revenue depends on revenue generated by dental group practices with
which we affiliate. We do not employ dentists or control the clinical practices
of the dental groups with which we affiliate. There can be no assurance that
dental group practices with which we affiliate will maintain successful dental
practices or that any of the key members of a particular dental group practice
will continue practicing with that group. A shortage of available dentists
could have a material adverse effect on our expansion opportunities. To the
extent permitted by state law, each PC has entered into non-competition
agreements and other restrictive covenants with the dentists employed by the
PC. There can be no assurance that these restrictive covenants are or will be
sufficient to protect our interests or the PC or that a court would enforce
such agreements. Any material loss of revenue by the affiliated dental group
practices, whether through the loss of existing dentists, the inability to
attract new dentists or otherwise, could have a material adverse effect on our
business, financial condition and results of operations.
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Dependence Upon Service Agreements
We are dependent upon the service agreements we have entered into with each
of our affiliated PCs for substantially all of our operating revenue. Under the
service agreements, we are responsible for providing all services necessary for
the administration of the non-clinical aspects of the dental operations. We pay
all expenses incurred for these services. We are reimbursed for these expenses
and also receive fees for providing 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 between 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 our dental facilities.
In those situations, no additional variable fee is applicable.
Revenue generated from service agreements with two of our affiliated dental
group practices, Park Dental and Smileage Dental Care, represented
approximately 56% and 16%, respectively, of our consolidated net revenue for
the year ended December 31, 1997 and approximately 41% and 12%, respectively,
of our consolidated net revenue for the year ended December 31, 1998. The
termination of either of these service agreements could have a material adverse
effect on our business, financial condition and results of operations.
Any material loss in revenue by one or more PCs would have a material
adverse effect on their ability to reimburse us for expenses and to pay service
fees. The failure to receive such amounts could have a material adverse effect
on our business, financial condition and results of operations. Furthermore, in
the event of a breach of a service agreement by a PC, there can be no assurance
that the remedies available to us under the service agreements will be
enforceable or will be adequate to compensate us for our damages resulting from
such breach.
Government Regulation
The dental industry and dental practices are highly regulated at the state
and federal levels. The laws of many states, including states where we operate
and anticipate operating, prohibit entities not wholly owned or controlled by
dentists from practicing dentistry (which in some states includes owning,
managing or controlling the assets, equipment or offices used in a dental
practice), employing dentists and, in some circumstances, dental assistants and
dental hygienists, or exercising control over the provision of dental services.
These laws also often regulate the content of advertisements of dental
services. We and our affiliated dental practices are also subject to state
and/or federal licensure, fraud and abuse, anti-kickback, false claims, fee
splitting, self-referral, antitrust and safety and health laws and regulations.
At the state level, many of these laws and regulations vary widely. In
addition, these laws and regulations are enforced by federal and state
regulatory authorities with broad discretion. We do not, and do not intend to,
control the practice of dentistry by the affiliated dental group practices or
their compliance with the regulatory requirements directly applicable to
dentists or the practice of dentistry. However, there can be no assurance that
any review of our business relationships, including our relationship with
affiliated dental group practices, by courts or other regulatory authorities,
will not result in determinations that could have a material adverse effect on
our operations, or that the laws and regulatory environment will not change to
restrict or limit the enforceability of our service agreements. The laws and
regulations of some states in which we may seek to expand may require us to
change our contractual relationships with dental practices in a manner that may
restrict our operations in those states or may prevent us from affiliating with
dental practices or providing comprehensive services to dental practices in
those states. To the extent that we or any affiliated dental group practice
contracts with third party payors, including self-insured plans, on a capitated
or other basis which causes us or such affiliated dental group practice to
assume a portion of the financial risk of providing dental care, we or such
affiliated dental group
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practice may become subject to state insurance laws, in which case we may be
required to change the method of payment from third party payors or seek
appropriate licensure. Any regulation of us or our affiliated dental group
practices under insurance laws could have a material adverse effect on our
business, financial condition and results of operations. See "Business--
Government Regulation."
Need for Additional Financing
Our ability to execute our business strategy depends to a significant degree
on our ability to obtain substantial capital to finance future affiliations. To
date, we have obtained financing through the public sale of our Common Stock in
our initial public offering, the private sales of Preferred and Common Stock
and through our $50 million revolving credit facility. We have historically
used a combination of cash, Common Stock and Subordinated Notes as
consideration in affiliations with dental practices and intend to continue this
practice. However, our ability to use our Common Stock and Subordinated Notes
as consideration for future affiliations may be adversely affected if our
Common Stock fails to maintain a sufficient market value or if the affiliation
candidates are unwilling to accept the Subordinated Notes. Furthermore, while
funds are currently available under our revolving credit facility, our ability
to draw such funds is subject to certain terms and conditions, and there can be
no assurance that we will be able to satisfy such terms and conditions. There
can be no assurance that any other financing will be available to us, or if
available, that such financing would be available on favorable terms.
Subordination of Subordinated Notes
The Subordinated Notes will be unsecured debt obligations of us and will at
all times remain subordinated to all Senior Indebtedness. The Subordinated
Notes will not restrict us from incurring any other indebtedness, some of which
may be senior to the Subordinated Notes and secured. Because of such
subordination, in the event of our liquidation and dissolution, the holders of
the Subordinated Notes may receive less, ratably, than our other creditors. See
"Description of Subordinated Notes."
Setoff Against Subordinated Notes
Under the terms of the acquisition agreements to be entered into in
connection with the acquisition and affiliation transactions, the Subordinated
Notes may be subject to setoff rights in favor of us to secure the
indemnification obligations of the securityholders or principal owners of the
businesses whose securities or assets are to be acquired. Consequently, the
consideration to be received by such securityholders or owners may be reduced.
See "Description of Subordinated Notes."
Lack of Market for Subordinated Notes; Restrictions on Transfer
At present, there is no market for the Subordinated Notes, and it is not
anticipated that a market for the Subordinated Notes will develop in the
foreseeable future. In addition, the acquisition agreements for the business
combination transactions will contain restrictions with respect to the transfer
of the Subordinated Notes. The securityholders or principal owners of the
businesses whose securities or assets are to be acquired should be willing and
have the financial ability to bear the risk of his or her investment in the
Subordinated Notes for an indefinite period of time.
Risks Related to Capitated Fees and Other Third Party Arrangements
A significant portion of the payments for dental care is paid or reimbursed
under insurance programs ("third party payors"). While payor mix varies from
market to market, the aggregate payor mix percentage of our affiliated
practices for the year ended December 31, 1998 was approximately 39% fee-for-
service (which includes indemnity plans), 12% preferred provider organization
plans and 49% capitated managed care plans. Third party payors are continually
negotiating the prices charged for dental care, with a goal of lowering
reimbursement and utilization rates. Third party payors can also deny
reimbursement for dental care if they
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determine that a treatment was not performed in accordance with treatment
protocols established by such third party payors or for other reasons. Loss of
revenue by our affiliated dental group practices caused by cost containment
efforts could have a material adverse effect on our business, financial
condition and results of operations.
Additionally, some third-party payor contracts are capitated arrangements.
Under such contracts, which are typically terminable by either party on 30 to
90 days notice, the affiliated dental group practice receives a capitated
payment, calculated on a per member per month basis, to provide care to the
covered enrollees and generally receives a co-payment at the time care is
provided. Such payment methods shift a portion of the risk of high costs of
over-utilization from the third party payors to the affiliated dental group
practices. To the extent that patients covered by such contracts require more
frequent or extensive care than is anticipated, there may be a shortfall
between the capitated payments received by the affiliated dental group
practices and the costs to provide the contracted services. These shortfalls
may impact us by the possible reduction in expense reimbursement and service
fees from the affiliated dental group practices. There can be no assurance that
we will be able to negotiate satisfactory third-party payor arrangements on
behalf of the affiliated dental practices. Insufficient revenue under capitated
contracts or other agreements with third party payors could have a material
adverse effect on our business, financial condition and results of operations.
Possible Exposure to Professional Liability
Our affiliated dental practices could be exposed to the risk of professional
liability and other claims. Such claims, if successful, could result in
substantial damages that could exceed the limits of any applicable insurance
coverage. It is possible that such claims could be asserted against us as well
as the affiliated dental practices, that a claim brought against an affiliated
dental group practice or dentist could materially increase professional
liability insurance premiums of the affiliated dental group practice, or that
fees to us from a dental group practice could be adversely affected, if damages
payable by that practice exceed insurance coverage limits. Our service
agreements require that we be named as an additional insured party under the
liability insurance policy that each affiliated dental group is required to
maintain. In addition, we require each affiliated dental group practice to
indemnify us for actions or omissions related to the delivery of dental care by
such affiliated dental group practice. However, a successful professional
liability claim against us or an affiliated dental group practice could have a
material adverse effect on our business, financial condition and results of
operations.
Fluctuations in Operating Results
Our results of operations may fluctuate significantly from quarter to
quarter or year to year. Results may fluctuate due to a number of factors,
including the timing of future affiliations, seasonal fluctuations in the
demand for dental care and competitive factors. Accordingly, quarterly
comparisons of our revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of results to be expected for a full year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Highly Competitive Market
The business of providing dental practice management services is highly
competitive. There are a number of competitors specializing in the business of
providing comprehensive management services to dental practices and there are
other companies with substantial resources that may decide to enter the dental
practice management business. In addition, our revenue depends on the success
of our affiliated dental groups and those groups face competition from several
sources, including solo practitioners and single and multi-disciplinary groups,
many of which may have more established practices. See "Business--Competition."
10
<PAGE>
Risks Related to Intangible Assets
A significant portion of our total assets are represented by intangible
assets, the amount and concentration of which are expected to increase in
connection with future acquisitions. In addition, amortization expense
associated with these intangible assets will increase in the future as a result
of intangibles recorded in connection with affiliations. In the event of any
sale or liquidation of us or a portion of our assets, there can be no assurance
that the value of our intangible assets will be realized. In addition, we
periodically evaluate whether events or circumstances have occurred indicating
that any portion of our intangible assets may not be recoverable. If factors
indicate that our intangible assets have been impaired, we would be required to
reduce the carrying value of such assets. Any future determination requiring
the write off of a significant portion of unamortized intangible assets could
have a material adverse effect on our business, financial condition and results
of operation.
Control by Existing Stockholders
As of April 30, 1999, Summit Partners and our directors and executive
officers beneficially owned approximately 45.5% of our outstanding shares of
Common Stock. If this group were to act together, it would have significant
voting power with respect to, and may be able to control, the election of our
directors and, in general, the determination of the outcome of all corporate
actions requiring approval of stockholders, and thus control our business
affairs and policies. Such control could also have the effect of delaying or
preventing a change in control in us and consequently may adversely affect the
market price of our Common Stock. See "Principal Stockholders."
Shares Eligible for Future Sale
The 750,000 shares of Common Stock issuable pursuant to this Offering
generally will be eligible for resale after their issuance as follows: (i) for
non-affiliates of the businesses with which we affiliate or acquire, without
restriction; and (ii) for affiliates of the businesses with which we affiliate
or acquire, subject to compliance with the volume and manner-of-sale
restrictions of Rule 145, unless in each case we contractually restrict their
resale. We anticipate that the persons acquiring shares of Common Stock in
acquisition and affiliation transactions pursuant to this Offering will be
contractually required to hold all or some portion of the Common Stock for some
period of time.
We are unable to predict the effect, if any, that future sales of Common
Stock or the availability of Common Stock for sale may have on the market price
of our Common Stock. Some existing stockholders have the right to require us to
register their Common Stock from time to time. See "Description of Capital
Stock" and "Shares Eligible for Future Sale."
Possible Volatility of Stock Price
Our Common Stock is traded on the Nasdaq National Market; however, there can
be no assurance that an active trading market will be sustained. The trading
prices of our Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in our operating results, material announcements
by us, governmental regulatory action, general conditions in the health care
industry, or other events or factors, many of which are beyond our control. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many health
care services companies and which have often been unrelated to the operating
performance of such companies. Our operating results in the future may be below
the expectations of securities analysts and investors. In such event, the price
of our Common Stock would likely decline, perhaps substantially.
11
<PAGE>
Anti-takeover Provisions
Provisions of our Second Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Amended and Restated By-laws (the "By-
laws") and of Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent our change in control or limit the
price that certain investors might be willing to pay in the future for shares
of our Common Stock. Among other matters, the Certificate of Incorporation
provides for "blank check" preferred stock, which may be issued without
stockholder approval, and requires all actions by stockholders to be taken at
meetings of stockholders. The By-laws provide for a classified Board of
Directors. We are also subject to Section 203 of the Delaware General
Corporation Law ("DGCL"), which, subject to some exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
acquisitions with an "interested stockholder" for a period of three years
following the date such stockholder became an interested stockholder. See
"Description of Capital Stock."
12
<PAGE>
OUR COMPANY
We were formed in December 1995, commenced operations in January 1996 and
began engaging in dental practice management operations in November 1996 when
we completed our first dental group practice affiliation. Our rapid growth has
resulted primarily from the affiliations we have completed. We completed three
dental group practice affiliations in 1996, six dental group practice
affiliations in 1997, ten dental group practice affiliations in 1998 and five
dental group practice affiliations through March 31, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Affiliation Summary."
The following table lists the affiliations completed by us and the current
number of dental facilities and operatories at March 31, 1999:
<TABLE>
<CAPTION>
Dental
State/Affiliation Facilities Operatories Market(s) Affiliation Date
----------------- ---------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
Alabama
Dental Care of Alabama.... 2 20 Birmingham and February 1999
Tuscaloosa
Arizona
Associated Dental Care
Providers................. 7 55 Phoenix and Tucson January 1998
CIGNA HealthCare.......... 7 85 Phoenix February 1999
Louisiana
Lakeside Dental Care...... 1 28 Metairie March 1997
Leroy S. Crapanzano,
D.D.S..................... 1 5 Hammond April 1998
Maryland
Mintz & Pincus Dental
Group..................... 2 35 Oxon Hill and Waldorf September 1998
Minnesota
Park Dental............... 31 221 Minneapolis/St. Paul November 1996
Orthocare Group........... 17 85 Minneapolis/St. Paul October 1997
Oklahoma
OK Dental................. 8 68 Oklahoma City and Tulsa March 1999
Pennsylvania
Chestnut Hills Dental..... 4 29 Pittsburgh May 1997
Indiana Dental Group...... 2 9 Indiana July 1998
Westmore Dental Group..... 1 13 Mt. Pleasant September 1998
Kenneth W. Van Sickle,
Jr., D.M.D................ -- -- Mt. Pleasant March 1999
Texas
Longhorn Dental........... 8 48 Austin and Killeen December 1996
Malcolm R. Scott, D.D.S... 1 6 San Marcos March 1997
TSC Dental Centers........ 3 28 Houston June 1998
Virginia
Reston Dental Group....... 1 39 Reston June 1998
Wisconsin
Smileage Dental Care...... 13 126 Appleton, Green Bay,
Kenosha, Madison and
Milwaukee December 1996
Northpoint Dental Group... 2 28 Milwaukee July 1997
Wilkens Dental Group...... 4 30 Milwaukee October 1997
Family Care Dental
Centers................... 5 40 Janesville, Kenosha and April 1998
John E. Carey, D.D.S. and Racine
James J. Peterman,
D.D.S.................... 1 7 Madison April 1998
St. Croix Valley
Orthodontics............. 1 4 Hudson November 1998
Jack G. Stacker, D.D.S.... 1 4 Wausau March 1999
----- -------
Total.................. 123 1,013
===== =======
</TABLE>
13
<PAGE>
DIVIDEND POLICY
We have not paid any cash dividends on our Common Stock in the past and we
do not plan to pay any cash dividends on our Common Stock in the foreseeable
future. In addition, the terms of our revolving credit facility prohibit us
from paying dividends or making other payments with respect to our Common Stock
without the lenders' consent. Our Board of Directors intends, for the
foreseeable future, to retain earnings to finance the continued operation and
expansion of our business.
PRICE RANGE OF COMMON STOCK
Our Common Stock has been traded on the Nasdaq National Market(R) under the
symbol "ADPI" since April 16, 1998. The following table sets forth the range of
the reported high and low sales prices of our Common Stock for the periods
indicated:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Year Ending December 31, 1998:
2nd Quarter (beginning April 16, 1998).................... $19.375 $13.750
3rd Quarter .............................................. $15.000 $ 8.250
4th Quarter .............................................. $13.875 $ 7.125
Year Ending December 31, 1999:
1st Quarter............................................... $11.688 $ 7.000
</TABLE>
As of May 14, 1999, there were approximately 62 holders of record of Common
Stock, as shown on the records of the transfer agent and registrar of our
Common Stock. The number of record holders does not bear any relationship to
the number of beneficial owners of our Common Stock. The last reported sale
price of our Common Stock on the Nasdaq National Market as of May 14, 1999 was
$10.500 per share.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999 our cash and cash
equivalents, our current maturities of debt and our capitalization (in
thousands, except share and per share amounts):
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
Cash and cash equivalents....................................... $ 2,995
=======
Current maturities of debt...................................... $ 1,184
=======
Long-term debt, less current maturities......................... $20,076
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, 7,517,448 shares issued and outstanding (1)...... 75
Additional paid-in capital.................................... 46,396
Unearned compensation......................................... (18)
Retained earnings............................................. 3,867
-------
Total stockholders' equity.................................. 50,320
-------
Total capitalization...................................... $70,396
=======
</TABLE>
- --------
(1) Excludes 1,357,993 shares of Common Stock issuable upon the exercise of
outstanding options issued pursuant to our stock option plans as of March
31, 1999.
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios, per share and statistical data)
We are providing the following selected consolidated statement of operations
data for the years ended December 31, 1996, 1997 and 1998 and the selected
consolidated balance sheet data at December 31, 1996, 1997 and 1998. This
information has been derived from our Consolidated Financial Statements which
have been audited by KPMG LLP, Independent Certified Public Accountants, and
which are included elsewhere in this prospectus. In addition, we are providing
the following selected consolidated statement of earnings data for the three
months ended March 31, 1998 and 1999 and the selected consolidated balance
sheet data at March 31, 1999. This information has been derived from our
Unaudited Interim Consolidated Financial Statements which are also included
elsewhere in this prospectus. You should read this information in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," our Consolidated Financial Statements and the related notes
thereto and other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December Three Months
31, Ended March 31,
------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net revenue......................... $ 3,933 $53,270 $84,090 $18,171 $26,234
------- ------- ------- ------- -------
Operating expenses:
Salaries and benefits............. 2,098 28,438 43,190 9,649 12,913
Lab fees and dental supplies...... 534 6,435 10,796 2,196 3,507
Office occupancy.................. 389 4,814 7,635 1,609 2,445
Other operating expenses.......... 773 6,264 6,840 1,645 2,154
General corporate expenses........ 2,395 3,337 3,951 975 1,196
Depreciation...................... 177 1,580 2,495 556 768
Amortization of intangibles....... 48 645 1,732 333 554
------- ------- ------- ------- -------
Total operating expenses........ 6,414 51,513 76,639 16,963 23,537
------- ------- ------- ------- -------
Earnings (loss) from operations..... (2,481) 1,757 7,451 1,208 2,697
Interest expense (income), net.... (38) 563 1,085 439 284
------- ------- ------- ------- -------
Earnings (loss) before income
taxes.............................. (2,443) 1,194 6,366 769 2,413
Income taxes...................... -- 124 2,480 300 1,059
------- ------- ------- ------- -------
Net earnings (loss)............... $(2,443) $ 1,070 $ 3,886 $ 469 $ 1,354
======= ======= ======= ======= =======
Net Earnings (loss) per common share
(1):
Basic............................. $ (3.45) $ (0.05) $ 0.59 $ 0.06 $ 0.18
Diluted........................... $ (3.45) $ (0.05) $ 0.54 $ 0.06 $ 0.18
Weighted average common shares
outstanding (1):
Basic............................. 768 2,273 5,907 2,429 7,471
Diluted........................... 768 2,273 6,867 2,632 7,669
Ratio of earnings to fixed charges
(2)................................ N/A 2.4 5.5 2.5 7.7
</TABLE>
See accompanying footnotes on following page.
16
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA--CONTINUED
(in thousands, except ratios, per share and statistical data)
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1996 1997 1998 1999
------ ------ ------ ---------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents...................... $5,836 $4,675 $2,091 $2,995
Working Capital................................ 3,189 759 (2,725) (2,597)
Total assets................................... 25,294 47,959 70,535 84,953
Long-term debt, excluding current maturities... 3,063 21,253 9,980 20,076
Redeemable and convertible preferred stock..... 15,105 16,297 -- --
Total stockholders' equity..................... 164 909 48,305 50,320
<CAPTION>
December 31,
-------------------- March 31,
1996 1997 1998 1999
------ ------ ------ ---------
<S> <C> <C> <C> <C>
Statistical Data (end of period):
Number of states............................... 3 5 8 10
Number of dental facilities.................... 42 77 103 123
Number of operatories (3)...................... 331 566 830 1,013
Number of affiliated dentists (4).............. 128 171 231 274
</TABLE>
- --------
(1) Net earnings (loss) per common share are computed on the basis described in
Notes 2 and 11 to our Consolidated Financial Statements and in Note 3 to
our Unaudited Interim Consolidated Financial Statements.
(2) The ratio of earnings to fixed charges is computed by dividing our fixed
charges into earnings before income taxes plus fixed charges. Fixed charges
include interest expense, amortization of debt expenses and the portion of
non-reimbursed rental expense estimated to be representative of the
interest factor (approximately 1/3 of non-reimbursed rental expense). Fixed
charges ordinarily do not include any provision for principal repayment.
For the year ended December 31, 1996, our earnings before income taxes plus
fixed charges were insufficient to cover fixed charges by approximately
$2.4 million.
(3) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
(4) Includes full-time general dentists employed by the PCs and full-time
specialists, some of whom are independent contractors.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 out first dental group practice. Our rapid growth has
resulted primarily from our affiliations with dental group practices. From
November 1996 to March 31, 1999, we completed affiliations with 24 dental group
practices and, at March 31, 1999, operated 123 dental facilities with 1,013
operatories in ten states.
An integral part of our strategy is to affiliate with dental group
practices. Because of the financial impact of our affiliations during 1996 and
1997, it is difficult to make meaningful comparisons between our financial
statements during these periods. In addition, due to the relatively small
number of affiliated dental group practices, each affiliation can impact our
overall operating results. After affiliating with a dental group practice, we
typically take a number of steps designed to enhance the dental group's
practice revenue, improve practice operating efficiencies and expand practice
operating margins. The benefits of these actions generally do not occur
immediately. Consequently, the financial performance of a newly-affiliated
dental group practice could negatively affect overall operating margins in the
near term. As we grow, we expect that the effect of adding a new dental group
practice affiliation will be mitigated by the expanded financial base of the
existing affiliations. See "Business--Business Strategy."
Affiliation Summary
When affiliating with a dental group 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. 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.
1996 Transactions
During 1996, we acquired substantially all the assets of three dental group
practices and simultaneously entered into a 40-year service agreement with each
of them. These affiliated dental groups are: Park Dental in Minneapolis;
Longhorn Dental in Austin and Killeen, Texas; and Smileage Dental Care in
Milwaukee. These transactions resulted in the addition of 42 dental facilities
with 331 operatories.
1997 Transactions
During 1997, we 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 them (two
practices joined existing affiliates). These six dental group practices are:
Lakeside Dental Care in New Orleans; Malcolm R. Scott, D.D.S. in San Marcos,
Texas; Chestnut Hills Dental in Pittsburgh; Northpoint Dental Group and Wilkens
Dental Group in Milwaukee; and the Orthocare Group in Minneapolis. The Lakeside
Dental Care and Chestnut Hills Dental affiliations represented our entry into
two new markets. The affiliation with Malcolm R. Scott, D.D.S. expanded our
market presence in Austin by adding one dental facility with six operatories.
The affiliation with Northpoint Dental and Wilkens Dental groups expanded our
market presence in Milwaukee by adding six dental facilities with 53
operatories. In total, these transactions resulted in the addition of 29 dental
facilities with 199 operatories.
18
<PAGE>
1998 Transactions
During 1998, we acquired substantially all the assets of ten dental group
practices and simultaneously entered into 40-year service agreements with four
of them (six practices joined existing affiliates). These ten dental group
practices are: Associated Dental Care Providers in Phoenix and Tucson; Family
Care Dental Centers in Janesville, Kenosha and Racine, Wisconsin; John E.
Carey, D.D.S. and James J. Peterman, D.D.S. in Madison, Wisconsin; Leroy S.
Crapanzano, D.D.S. in New Orleans; Reston Dental Group in Reston, Virginia; TSC
Dental Centers in Houston; Indiana Dental Group in Indiana, Pennsylvania; Mintz
& Pincus Dental Group in Oxon Hill and Waldorf, Maryland; Westmore Dental Group
in Mt. Pleasant, Pennsylvania; and St. Croix Valley Orthodontics in Hudson,
Wisconsin. The Associated Dental Care Providers, Reston Dental Group, TSC
Dental Centers, Indiana Dental Group and Mintz & Pincus Dental Group
affiliations represented our entry into six new markets. The affiliation with
Family Care Dental Centers expanded our market presence in the Kenosha,
Wisconsin market and represented our entry into two new markets in Wisconsin,
Janesville and Racine. The affiliations with John E. Carey, D.D.S. and James J.
Peterman, D.D.S., Leroy S. Crapanzano, D.D.S., Westmore Dental Group and St.
Croix Valley Orthodontics expanded our market presence in the Madison, New
Orleans, Pittsburgh and Minneapolis markets, respectively. In total, these
affiliations resulted in the addition of 23 dental facilities with 231
operatories.
1999 Completed and Pending Transactions
Since the beginning of 1999, we have acquired substantially all the assets
of five dental group practices and simultaneously entered into 40-year service
agreements with two of them (three practices joined existing affiliates). These
five dental group practices are: Dental Care of Alabama in Birmingham and
Tuscaloosa; the dental facilities formerly part of CIGNA HealthCare of Arizona,
Inc. in Phoenix; Paul E. Plowman, D.D.S., M.S.D. in Oklahoma City and Tulsa;
Kenneth W. Van Sickle, Jr., D.M.D. in Mt. Pleasant, Pennsylvania; and Jack G.
Stacker, D.D.S. in Wausau, Wisconsin. The aggregate purchase price paid in
connection with these transactions consisted of approximately $7.2 million in
cash, $0.7 million in subordinated promissory notes, $0.3 million in deferred
payments and 50,568 shares of Common Stock.
In addition, we are currently in discussions with a number of dentists and
owners of dental group practices about possible affiliations with us. There can
be no assurance that we will consummate any of these possible affiliations.
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 for the year ended December 31, 1998 was
approximately 39% fee-for-service, 12% preferred provider organization plans
and 49% capitated managed care plans. For the three months ended March 31,
1999, the aggregate payor mix percentage of our affiliated practices was
approximately 43% fee-for-service, 12% preferred provider organization plans
and 45% capitated managed care plans.
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.
19
<PAGE>
Net Revenue. Our net revenue represents the aggregate 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 our dental facilities. In those situations, no additional
variable fee is applicable. 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 the 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 incurred in connection with completed transactions.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1997
Overview
We conducted no significant operations from January 1996 until November
1996, when we completed our first affiliation. Accordingly, we generated net
revenue of only $3,933,000 for 1996. General corporate expenses incurred during
1996 were $2,395,000 and contributed to a net loss of $2,443,000. During 1997,
net revenue generated from completed affiliations exceeded operating expenses
and general corporate expenses resulting in net income of $1,070,000. As a
result of our rapid expansion, we do not believe that a period-to-period
comparison and the percentage relationships of the year ended December 31, 1996
as compared with the year ended December 31, 1997 are meaningful.
20
<PAGE>
Results of Operations
Net Revenue. Net revenue amounted to $3,933,000 for 1996 as compared with
$53,270,000 for 1997. The 1997 period included revenue derived from service
agreements entered into in connection with the 1996 Transactions for the entire
year of 1997, plus revenue derived from service agreements entered into in
connection with the 1997 Transactions. Net revenue included expense
reimbursements ($3,175,000 for 1996 as compared with $36,386,000 for 1997),
management service fees ($720,000 for 1996 as compared with $12,056,000 for
1997) and revenue related to the arrangement of the provision of care to
patients ($38,000 for 1996 as compared with $4,828,000 for 1997). Expense
reimbursements included rent expense ($267,000 for 1996 as compared with
$3,476,000 for 1997) and other operating expenses ($2,908,000 for 1996 as
compared with $32,910,000 for 1997). Management service fees included the
monthly fee ($720,000 for 1996 as compared with $10,724,000 for 1997) and the
additional variable fee ($0 for 1996 as compared with $1,332,000 for 1997). Net
revenue derived from our service agreement with Park Dental represented
approximately 56% of our consolidated net revenue for the year ended December
31, 1997. The termination of this service agreement could have a material
adverse effect on us. See "Risk Factors--Dependence Upon Service Agreements."
Operating Expenses. Operating expenses for 1996 were $3,794,000 or 96.5% of
net revenue as compared with $45,951,000 or 86.3% of net revenue for 1997. The
increase in the dollar amount resulted from the full year impact of the 1996
Transactions plus the impact of the 1997 Transactions.
General Corporate Expenses. General corporate expenses were $2,395,000 or
60.9% of net revenue for 1996, as compared with $3,337,000 or 6.3% of net
revenue for 1997. The increase resulted primarily from the impact of additional
corporate personnel hired in finance, information systems and operations in
late 1996 and early 1997 to build infrastructure in anticipation of our growth.
Depreciation. Depreciation expense was $177,000 or 4.5% of net revenue for
1996, as compared with $1,580,000 or 3.0% of net revenue for 1997. Depreciation
expense for 1996 resulted primarily from costs incurred in connection with the
purchase of furniture, fixtures and equipment for our corporate office.
Depreciation expense for 1997 included depreciation related primarily to the
assets acquired and capital expenditures incurred in connection with our
completed affiliations.
Amortization of Intangible Assets. Amortization of intangibles was $48,000
or 1.2% of net revenue for 1996, as compared with $645,000 or 1.2% of net
revenue for 1997. Amortization resulted from intangible assets recorded in
connection with our nine affiliations and one acquisition completed in 1996 and
1997.
Interest Expense (Income), Net. Net interest income was $38,000 for 1996, as
compared with net interest expense of $563,000 for 1997. Interest income for
1996 resulted from earnings on proceeds received from our private sales of
equity securities. Interest expense for 1997 resulted from borrowings under our
credit facility, the issuance of subordinated notes and the assumption of
certain other debt in connection with completed affiliations.
Income Taxes. We incurred no income tax expense for 1996, as compared with
$124,000 for 1997. The net loss incurred for 1996 resulted in our creating a
net operating loss carryforward for financial statement purposes. For 1997, we
utilized a portion of our net operating loss carryforward which resulted in
only $124,000 of income tax expense.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1998
Overview
Our net earnings amounted to $1,070,000 or a diluted loss per share
available to common stockholders of $(0.05) for 1997, as compared with net
earnings of $3,886,000 or diluted earnings per share of $0.54 for 1998.
21
<PAGE>
The increase in net earnings resulted from incremental earnings provided from
completed acquisitions and affiliations and from internal growth.
Results of Operations
Net Revenue. Net revenue increased from $53,270,000 for 1997 to $84,090,000
for 1998, an increase of approximately 58%. 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 Transactions for the entire period and
from the 1998 Transactions. In addition, same market growth from our affiliates
in Austin, Milwaukee and Minneapolis resulted from the addition and expansion
of our facilities, the addition of dentists to our affiliated dental group
network and increases in certain affiliates' fees. Net revenue included expense
reimbursements ($36,386,000 for 1997 as compared with $56,278,000 for 1998),
management service fees ($12,056,000 for 1997 as compared with $19,138,000 for
1998) and revenue related to the arrangement of the provision of care to
patients and other revenue ($4,828,000 for 1997 as compared with $8,674,000 for
1998). Expense reimbursements included rent expense ($3,476,000 for 1997 as
compared with $5,590,000 for 1998) and other operating expenses ($32,910,000
for 1997 as compared with $50,688,000 for 1998). Management service fees
included a monthly fee ($10,724,000 for 1997 as compared with $17,306,000 for
1998) and an additional variable fee ($1,332,000 for 1997 as compared with
$1,832,000 for 1998). Net revenue derived from our service agreement with Park
Dental represented approximately 56% and 41% of our consolidated net revenue
for 1997 and 1998, respectively. The termination of this service agreement
could have a material adverse effect on us. See "Risk Factors--Dependence Upon
Service Agreements."
Salaries and Benefits Expense. Salaries and benefits amounted to $28,438,000
or 53.4% of net revenue for 1997, as compared with $43,190,000 or 51.4% of net
revenue for 1998. 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 $6,435,000 or 12.1% of net revenue for 1997 to $10,796,000 or
12.8% of net revenue for 1998. 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 $4,814,000
for 1997, as compared with $7,635,000 for 1998. As a percentage of net revenue,
these costs remained relatively consistent at 9.0% for 1997 and 9.1% for 1998.
Other Operating Expenses. Other expenses amounted to $6,264,000 or 11.8% of
net revenue for 1997, as compared with $6,840,000 or 8.1% of net revenue for
1998. Other costs decreased as a percentage of net revenue due primarily 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, a reduction of the Minnesota Care Tax rate from 2.0% to 1.5%
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.
General Corporate Expenses. General corporate expenses were $3,337,000 or
6.3% of net revenue for 1997, as compared with $3,951,000 or 4.7% of net
revenue for 1998. We have built our management
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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, we began to leverage these costs, resulting in a
reduction of general corporate expenses as a percentage of net revenue. This
reduction was partially offset by an increase in costs associated with being a
public company. The level of general corporate expenses is expected to 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 $1,580,000 or 3.0% of net revenue for
1997, as compared with $2,495,000 or 3.0% of net revenue for 1998. Depreciation
expense included depreciation related primarily to assets acquired and capital
expenditures associated with the addition of three new dental facilities in
Minneapolis and one new dental facility in Phoenix in 1998 and the addition of
new operatories in Austin, Milwaukee and Minneapolis throughout 1998.
Depreciation expense is expected to increase as a result of depreciable assets
acquired in connection with future acquisitions and affiliations and future
capital expenditures.
Amortization of Intangibles. Amortization of intangibles was $645,000 or
1.2% of net revenue for 1997, as compared with $1,732,000 or 2.1% of net
revenue for 1998. The increase in amortization resulted from intangible assets
recorded in connection with our six affiliations and one acquisition completed
during 1997 and ten affiliations completed during 1998. 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 $563,000 or 1.1% of net
revenue for 1997, as compared with $1,085,000 or 1.3% of net revenue for 1998.
The increase in interest expense resulted primarily from increased average
borrowings under our credit facility in 1998 as compared with 1997. In
addition, the issuance of subordinated notes in connection with the 1997 and
1998 Transactions contributed to higher interest expense in 1998.
Income Taxes. We incurred income tax expense of $124,000 for 1997, as
compared with $2,480,000 for 1998. In 1997, we utilized a portion of our net
operating loss carryforward which resulted in minimal income tax expense. For
1998, our effective tax rate was approximately 39%, resulting in income tax
expense of $2,480,000.
Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31,
1999
Overview
Our net earnings amounted to $469,000 or diluted earnings per share of $0.06
for the three months ended March 31, 1998, as compared with net earnings of
$1,354,000 or diluted earnings per share of $0.18 for the three months ended
March 31, 1999. The increase in net earnings resulted from incremental earnings
provided from completed acquisitions and affiliations and from internal growth.
Results of Operations
Net Revenue. Net revenue increased from $18,171,000 for 1998 to $26,234,000
for 1999, an increase of approximately 44%. 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 and expansion of our facilities, the addition of
dentists to our affiliated dental group network and increases in certain
affiliates' fees. Net revenue included expense reimbursements ($12,204,000 for
1998 as compared with $17,476,000 for 1999), management service fees
($3,925,000 for 1998 as compared with $6,367,000 for 1999) and revenue related
to the arrangement of the provision of care to patients ($2,042,000 for 1998 as
compared with $2,391,000 for 1999). Expense reimbursements included rent
expense ($1,164,000 for 1998 as compared with $1,761,000 for 1999)
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and other operating expenses ($11,040,000 for 1998 as compared with $15,715,000
for 1999). Management service fees included a monthly fee ($3,740,000 for 1998
as compared with $6,096,000 for 1999) and an additional variable fee ($185,000
for 1998 as compared with $271,000 for 1999). Net revenue derived from our
service agreement with Park Dental represented approximately 44% and 36% of our
consolidated net revenue for 1998 and 1999, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $9,649,000
or 53.1% of net revenue for 1998, as compared with $12,913,000 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 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 $2,196,000 or 12.1% of net revenue for 1998 to $3,507,000 or
13.4% 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 $1,609,000 or
8.9% of net revenue for 1998, as compared with $2,445,000 or 9.3% of net
revenue for 1999. Office occupancy expense increased as a percentage of net
revenue due to investment in the expansion of dental facilities and local
management offices in Arizona, Texas and Virginia. These increased costs were
partially offset by better utilization of capacity in existing facilities.
Other Operating Expenses. Other expenses amounted to $1,645,000 or 9.1% of
net revenue for 1998, as compared with $2,154,000 or 8.2% of net revenue for
1999. Other costs decreased as a percentage of net revenue due primarily 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 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.
General Corporate Expenses. General corporate expenses were $975,000 or 5.4%
of net revenue for 1998, as compared with $1,196,000 or 4.6% of net revenue for
1999. We have built our 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, we began to
leverage these costs, resulting in a reduction of general corporate expenses as
a percentage of net revenue. This leverage continues to a lesser extent during
1999. This reduction was partially offset by an increase in costs associated
with being a public company. 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 $556,000 or 3.1% of net revenue for
1998, as compared with $768,000 or 2.9% of net revenue for 1999. Depreciation
expense included depreciation related primarily to the assets acquired and
capital expenditures associated with the development of new dental facilities
in Minneapolis and Phoenix and the expansion of facilities in Austin and
Minneapolis in 1999, the opening of three new facilities in Minneapolis and one
new facility in Phoenix in 1998 and the addition of new operatories in Austin,
Milwaukee and Minneapolis in 1998. Depreciation expense decreased as a
percentage of net revenue due to leveraging of our existing property and
equipment, despite the capital expenditures described above. Depending on the
amount and timing of future capital expenditures, depreciation expense will
likely increase.
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Amortization of Intangibles. Amortization of intangibles was $333,000 or
1.8% of net revenue for 1998, as compared with $554,000 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 five
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 $439,000 or 2.4% of net
revenue for 1998, as compared with $284,000 or 1.1% of net revenue for 1999.
The decrease in interest expense resulted from a lower average balance of
borrowings under our revolving credit facility in 1999 as compared with 1998.
Borrowings under our revolving line of credit that were outstanding during 1998
were repaid with proceeds from our initial public offering completed in April
1998. This interest expense savings was partially offset by higher interest
expense related to the issuance of subordinated notes in connection with the
completed transactions in 1998 and 1999.
Income Taxes. We incurred income tax expense of $300,000 for 1998, as
compared with $1,059,000 for 1999. Our effective tax rate was approximately 39%
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 and affiliations, capital expenditures and working capital, from
our sale of equity securities, borrowings under our revolving line of credit
and cash generated from operations.
From November 1996 (the date of our first dental group practice affiliation)
through March 31, 1999, we completed 24 dental group practice affiliations for
aggregate consideration of $49.7 million in cash, $7.5 million in subordinated
promissory notes, $1.3 million in deferred payments, 1,899,156 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. Our growth strategy depends in
large measure on our ability to affiliate with additional dental group
practices. Although we have affiliated with many dental group practices since
our initial affiliation in November 1996, there can be no assurance that
additional affiliation candidates can be identified, consummated or
successfully integrated into our operations. We have used a combination of
cash, common stock, and subordinated debt as consideration for past
acquisitions and affiliations and plan to continue to use these sources in the
future. In the event that our common stock does not maintain sufficient
valuation or if potential affiliation candidates are unwilling to accept our
securities as consideration, we will be required to use more cash resources to
continue our affiliation program. In addition, if sufficient financing is not
available as needed on terms acceptable to us, our affiliation program could be
adversely affected.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1998
For the years ended December 31, 1997 and 1998, cash provided by operating
activities amounted to $3,991,000 and $9,771,000, respectively. The increase in
cash from operations resulted primarily from earnings generated from
acquisitions and affiliations, same market growth and expanded profit margins.
For the years ended December 31, 1997 and 1998, cash used in investing
activities amounted to $19,510,000 and $24,886,000, 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
$14,878,000 for 1997 and $18,290,000 for 1998. Cash used for capital
expenditures was $3,212,000 and $5,074,000 for 1997 and 1998, respectively.
Capital expenditures for 1997 included costs associated with the addition of
dental facilities in Austin, Milwaukee and Minneapolis and the addition of new
operatories in
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Austin, Minneapolis and Pittsburgh. Capital expenditures for 1998 included
costs associated with the addition of three new dental facilities in
Minneapolis, a new dental facility in Phoenix and 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.
For the years ended December 31, 1997 and 1998, cash provided by financing
activities amounted to $14,358,000 and $12,531,000, respectively. Cash provided
by financing activities during 1997 resulted from borrowings under our
revolving line of credit of $16,700,000, reduced by the repayment of certain
indebtedness and the payment of debt issuance costs and initial public offering
costs. 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 an initial public offering at $15.00 per share. Net proceeds to us after
deducting underwriting discounts and commissions and offering expenses totaled
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, (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. In connection with the initial
public offering, all 400,000 shares of Series A Convertible Preferred Stock
were converted to 2,399,995 shares of our Common Stock.
Three Months Ended March 31, 1998 Compared to the Three Months Ended March
31, 1999
For the three months ended March 31, 1998 and 1999, cash provided by
operating activities amounted to $562,000 and $1,724,000, respectively. The
increase in cash from operations resulted primarily from earnings generated
from acquisitions and affiliations, same market growth and expanded profit
margins.
For the three months ended March 31, 1998 and 1999, cash used in investing
activities amounted to $3,682,000 and $10,120,000, 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
$2,590,000 for 1998 and $7,038,000 for 1999. Cash used for capital expenditures
was $669,000 and $2,592,000 for 1998 and 1999, respectively. Capital
expenditures for 1998 included costs associated with the addition of three new
dental facilities in Minneapolis, a new dental facility in Phoenix and the
addition of new operatories in Austin, Milwaukee and Minneapolis. Capital
expenditures for 1999 included costs associated with the addition of new
facilities in Minneapolis and Phoenix and the expansion of existing facilities
in Austin and Minneapolis. The establishment of new dental facilities and the
expansion of existing dental facilities in the future will require ongoing
capital expenditures.
For the three months ended March 31, 1998 and 1999, cash provided by
financing activities amounted to $3,141,000 and $9,300,000, respectively. Cash
provided by financing activities during 1998 resulted from borrowings under our
revolving line of credit of $3,850,000, net of the repayment of certain
indebtedness and the payment of initial public offering costs. Cash provided by
financing activities in 1999 resulted from borrowings under our revolving line
of credit of $9,597,000 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 March 31, 1999 was $13,897,000.
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As of March 31, 1999, 679,878 shares and $23,805,000 of notes remain
available for issuance pursuant to this Offering.
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 by the end of the second
quarter of 1999.
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. 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. Preliminary compliance
testing has been done by us on Comdent and other significant practice
management systems and we intend to complete all such testing by the end of the
second quarter of 1999. 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. 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. 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 are still in the process of identifying potential compliance issues with
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 by the end of the
third quarter of 1999. The costs of such upgrades are not 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 PPO 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. 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
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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.
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BUSINESS
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 seek to affiliate with leading dental
groups that provide a comprehensive range of dental care services, have
outstanding reputations for quality and have proven records of financial
performance.
Our affiliation model is designed to create a partnership in management
between us and the affiliated dental group practice that allows each party to
maximize its strengths and retain its autonomy. When affiliating with a dental
group practice, we acquire substantially all of its non-clinical assets and
enter into a long-term service agreement to manage the non-clinical aspects of
the dental operations. We support our affiliated dental group practices with a
broad range of services designed to enhance practice revenue, improve operating
efficiencies and expand operating margins. We share the best practices of our
network with each affiliate and provide assistance with information systems,
budgeting, financial reporting, facilities management, third-party payor
contracting, supplies and equipment procurement, quality assurance initiatives,
billing and collecting accounts receivable, marketing and recruiting, hiring
and training support staff.
Our objective is to be the leading dental practice management company in the
United States. Our strategy for achieving this objective is to:
(i) expand into carefully selected and diverse geographic markets which
have favorable demographics and projected economic growth;
(ii) affiliate with leading dental group practices which have reputations
for quality care and proven records of financial performance;
(iii) increase market penetration in each of its markets through
additional affiliations, recruitment of dentists and new facility
development;
(iv) add value to each affiliated dental group practice by assisting the
practice in improving operating performance; and
(v) pursue various initiatives to ensure the highest quality of care and
service.
Dental Care Industry
The market for dental care is large, growing and highly fragmented. The
United States Health Care Financing Administration estimates that expenditures
for dental care were approximately $50.6 billion in 1997 and will reach
approximately $95.2 billion by 2007, representing a compound annual growth rate
of approximately 6.5 %. We believe that the growth in expenditures for dental
care will continue to be driven by both increases in costs and increases in
demand for services due to:
(i) improved dental benefits offered by employers;
(ii) increased availability and use of dental insurance, including
preferred provider organization ("PPO") plans and capitated managed
care plans;
(iii) increased demand for dental care from an aging population; and
(iv) increased demand for cosmetic and preventative procedures.
We believe that this growth will benefit not only dentists, but companies
that provide services to the dental care industry, such as dental practice
management companies. However, the failure of any of the foregoing factors to
materialize could offset increases in demand for dental care, and any such
increases may not correlate with growth in our business.
Unlike many other sectors of the health care services industry, the dental
care industry is in the early stages of consolidation. Although dental care is
typically offered by solo practitioners, the trend towards group practice is
growing. According to the American Dental Association ("ADA"), in 1995, 11.8%
of the
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approximately 153,300 dentists in the United States were practicing in groups
of three or more, up from 4.1% in 1991. We believe this consolidation trend
will continue.
Most dental care performed in the United States is categorized as general
dentistry. Based upon a 1990 survey by the ADA, general dentistry was estimated
to represent approximately 83% of all dental services performed in the United
States. General dentistry includes preventative care, diagnosis and treatment
planning, as well as procedures such as fillings, crowns, bridges, dentures and
extractions. Specialty dentistry, which includes orthodontics, periodontics,
endodontics, prosthodontics and pediatric dentistry, represented the remaining
17% of dental care services.
Historically, dental care was not covered by insurers and consequently was
paid for by patients on a fee-for-service basis. An increasing number of
employers have responded to the desire of employees for enhanced benefits by
providing coverage from third party payors for dental care. These third party
payors offer indemnity insurance, PPO plans and capitated managed care plans.
Under an indemnity insurance plan, the dental provider charges a fee for each
service provided to the insured patient, which is typically the same as that
charged to a patient not covered by any type of dental insurance. We categorize
indemnity insurance plans as fee-for-service plans. Under a PPO plan, the
dentist charges a discounted fee for each service provided based on a schedule
negotiated with the PPO. Under a capitated managed care plan, the dentist
receives a fixed monthly fee from the managed care organization for each member
covered under the plan who selects that dentist as his or her provider.
Capitated managed care plans also typically require a co-payment by the
patient.
The National Association of Dental Plans ("NADP") estimated that
approximately 147 million people, or approximately 55% of the population of the
United States, were covered by some form of dental care plan in 1997. This
compares with approximately 117 million people, or approximately 46% of the
population of the United States, in 1995 and approximately 96 million people,
or approximately 41% of the population of the United States, in 1990. Of the
147 million people with coverage, approximately 65% were covered by indemnity
insurance, approximately 18% were covered by capitated managed care plans and
approximately 17% were covered by PPO plans. The remaining approximately 120
million people, or approximately 45% of the population of the United States in
1997, did not have dental benefit coverage. We believe that the number of
people with dental benefits will continue to increase and that the majority of
this growth will be in PPO and capitated managed care plans. For instance,
according to the NADP, the number of people covered by capitated managed care
plans increased from 7.8 million in 1990 to 26.5 million in 1997, representing
a 19.1% compound annual growth rate. Also, according to the NADP, the number of
people covered by PPO plans increased from 11.7 million in 1994 to 24.5 million
in 1997, representing a 27.9% compound annual growth rate.
We believe that the increased prevalence of dental benefits and the shift of
those benefits from traditional fee-for-service to non-fee-for-service plans
has increased the complexity of operating a dental practice and has led dental
practices to begin to affiliate or consolidate with entities, such as us, that:
(i) allow dentists to focus on the clinical aspects of dentistry by
providing management resources to conduct the business and
administrative aspects of dentistry;
(ii) provide information and operating systems that are required to
effectively manage in an increasingly complex reimbursement
environment;
(iii) assist with third-party payor contracting;
(iv) realize economies of scale in purchasing and provide access to
capital; and
(v) provide dentists the opportunity to realize value for their practices.
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Business Strategy
Our objective is to be the leading dental practice management company in the
United States. In order to achieve this objective, our business strategy is to:
Expand into carefully selected markets. We plan to expand our network of
affiliated dental group practices into carefully selected and diverse
geographic markets. We focus on markets that:
(i) offer the opportunity to gain market share leadership;
(ii) have a prevalence of dental group practices;
(iii) have favorable demographics and projected economic growth; and
(iv) have access to dental schools.
To date, we have identified approximately 125 markets that currently
meet our market selection criteria. We believe that operating in multiple
markets increases the attractiveness of us and our affiliated dental group
practices to third party payors who seek to contract with dental providers
that are strategically located in attractive markets and that offer a
comprehensive range of multi-disciplinary dental care services.
Affiliate with leading dental group practices. In entering a new market,
we seek to affiliate with a leading dental group practice in that market as
a platform for expansion. A "platform" dental group practice is one which
has a reputation for quality care, provides a comprehensive range of dental
services, has a significant market presence and has a proven record of
financial performance. We believe that by affiliating with leading dental
group practices it will become more attractive to other practices, dentists
and payors.
Increase market penetration. We seek to be the market share leader in
each market in which we operate. After affiliating with a leading dental
group practice, we seek to increase our market share by assisting the
affiliate in recruiting new general and specialty dentists, expanding its
patient base and opening new facilities. Additionally, we may affiliate
with other dental practices or with specialty group practices that
complement the platform dental group practice.
Add value to each affiliated dental group practice. We support our
affiliated dental group practices with a broad range of services designed
to enhance their practice revenue, improve operating efficiencies and
expand operating margins. We share the best practices of our network with
each affiliate and assist each affiliate with an analysis of its revenue
and payor mix, capacity, utilization, staffing, scheduling and
productivity. We also provide our affiliates assistance with information
systems, budgeting, financial reporting, facilities management, third-party
payor contracting, supplies and equipment procurement, quality assurance
initiatives, billing and collecting accounts receivable, marketing and
recruiting, hiring and training support staff.
Focus on quality care. We pursue various initiatives to help our
affiliates provide the highest quality of care and service. Our goal is to
have each affiliated dental group practice become accredited by the
Accreditation Association of Ambulatory Health Care, Inc. ("AAAHC").
Through our National Professional Advisory Forum, we provide our affiliated
dental group practices with the opportunity to share clinical knowledge and
best clinical practices. We also implement comprehensive patient
satisfaction surveys administered by independent third parties. We believe
that our focus on quality care enhances: (i) our affiliates' relationships
with patients; (ii) our affiliates' ability to recruit dentists; (iii) our
ability to attract new dental groups as affiliates; and (iv) our
attractiveness to third party payors.
Affiliation Philosophy
We believe that dental care is an important part of an individual's overall
health care. Because the practitioner is best qualified to manage the clinical
aspects of dentistry, the provision of dental care must be centered around the
dentist. However, current market trends in health care are increasing the
complexity of
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operating a dental practice. Consequently, dentists are affiliating with
professional practice managers who can manage the non-clinical aspects of
dentistry and provide the business skills that can improve practice operating
performance.
We believe that, similar to other sectors of the health care delivery
system, the delivery of dental care is fundamentally a local business.
Therefore, we operate our business in a decentralized manner and maintain the
identity of the local affiliated practice. In each affiliation, we strive to
maintain the local culture of the affiliated group and encourage it to retain
the name of the practice, continue its presence in community events, maintain
its relationship with patients and local third party payors and, to the extent
possible, maintain the existing management organization.
Our affiliation model is designed to create a partnership in management
between us and the affiliated dental group practice that allows each party to
maximize its strengths and retain its autonomy. Under our affiliation model,
the affiliated dental group continues to own its practice and has sole purview
over the clinical aspects of the practice while we manage the business aspects
of the practice. This affiliation model is consistent across practices and,
even where permitted by law, we do not employ practicing dentists.
We believe that the core values of a business partnership are shared
governance and shared financial objectives and have structured our affiliation
model to achieve these goals. Shared governance is achieved by the formation of
a joint policy board for each affiliated dental group practice which is
comprised of an equal number of representatives from us and the affiliated
dental group practice. Together, members of the policy board develop strategies
and decide on major business initiatives for the practice. Shared financial
objectives are achieved through the joint implementation of a budgeting process
that establishes the financial performance standards for the dental practice.
The organizational structure of a dental group practice before and after its
affiliation with us is generally as follows:
[CHART APPEARS HERE]
Market and Group Selection
Market Selection
We have well-defined market selection criteria. We define potential markets
with reference to one or more Metropolitan Statistical Areas ("MSAs"). An MSA
is generally a geographic area consisting of a city of at least 50,000 people,
together with adjacent communities that have a high degree of economic and
social integration with the population center. In 1996, there were 316 MSAs in
the United States. We typically focus on markets with a population of at least
250,000 people that:
(i)offer the opportunity to gain market share leadership;
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(ii) have a prevalence of dental group practices;
(iii) have favorable demographics and projected economic growth; and
(iv) have access to dental schools.
We have identified approximately 125 MSAs that currently meet our market
selection criteria.
Group Selection
We seek to affiliate with leading dental group practices in each selected
market. We focus on group practices because they have greater potential to be
market share leaders. Group practices are also more likely to have implemented
quality assurance and peer review policies and procedures and are better
positioned to operate in an increasingly complex reimbursement environment.
When entering a new market, we seek to affiliate with a platform dental group
with a:
(i) reputation for quality care;
(ii) comprehensive range of dental care services;
(iii) significant market presence; and
(iv) proven record of financial performance.
We believe that, although a limited number of platform dental group
practices exist within any given market, there are a significant number of such
groups nationwide.
Affiliation Process
Once we have identified a potential affiliate within a market, our
management seeks to determine whether the group practice and we share a common
philosophy about the dental industry and common strategic goals and objectives.
To this end, we conduct a series of meetings, site visits and presentations
with the potential affiliate about the industry, us and our affiliation model.
We believe that the existence of shared philosophical values is a critical
element of the affiliation's ultimate success.
If we and a potential affiliate determine that we share common values, goals
and objectives, we then undertake a preliminary due diligence review of
clinical, operating and financial information. Based upon this review, we
formulate an offer outlining the basic terms and conditions of the affiliation
which, if accepted by the dental group practice, is generally embodied in a
letter of intent between the parties.
Upon signing a letter of intent, we and our representatives begin a thorough
review of the potential affiliate's clinical systems, processes, facilities and
compliance with licensing and credentialing requirements, as well as perform
legal and accounting due diligence. Acquisition, service and other agreements
are then prepared and the transaction is closed. Generally, the process of
identifying an acceptable affiliation candidate to closing the transaction
takes approximately twelve months.
Potential Affiliations
We are constantly discussing potential affiliations with dental group
practices that meet our group selection criteria, which may be at various
stages at any point in time. There can be no assurance that we will consummate
any of these potential affiliations.
Market Penetration
After affiliating with a platform dental group practice, our strategy is to
increase our market penetration by increasing the market share of our existing
affiliated dental group and by affiliating with other leading dental groups
that complement or add to the dental care provided by our existing affiliate.
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Increase Existing Groups' Market Share
Upon completing an affiliation, we prepare a thorough operating evaluation
of the affiliate which builds upon our operational due diligence. Based on this
evaluation, we prepare a plan for increasing the affiliate's market
penetration. This plan may include one or more of the following methods:
(i) opening new facilities that are conveniently located in highly
populated areas within the MSA or in contiguous MSAs;
(ii) recruiting additional general and specialty dentists that will
complement or enhance the dental care provided by each affiliated
dental group;
(iii) expanding physical capacity by adding new operatories at existing
facilities;
(iv) increasing the utilization of existing physical capacity by expanding
hours of operation; and
(v) growing our affiliate's patient base through increased marketing
efforts and expanded relationships with third party payors.
Affiliations in Existing Markets
We also increased our market penetration by affiliating with other leading
general dentistry group practices and specialty dental group practices that
complement the platform dental group practice in a given market. These
practices are selected in much the same manner as the platform dental group
practice. We identify those practices which have an outstanding reputation for
quality and provide the type of dental care which will complement or add to the
dental care offered by the platform dental group in that market.
Operations
Operating Structure
We operate under a decentralized organizational structure. At the facility
level, where permitted by applicable state law, we generally employ the dental
hygienists, dental assistants and administrative staff. At each facility, a
practice manager typically oversees the day-to-day business operations. The
practice manager and administrative staff are responsible for, among other
things, facility staffing, patient scheduling, on-site patient invoicing and
ordering office and dental supplies. We believe local office scheduling is
crucial because it allows each practice to accommodate the needs of its
patients and increase the productivity of its dentists.
In each market, we have a local management team that supervises the
operations of one or more affiliates. This team provides support in areas such
as recruiting, hiring and training facility staff, developing and implementing
quality assurance programs, developing and implementing operating policies and
procedures, billing and collecting accounts receivable, processing payroll,
information systems, accounting, marketing and facilities development and
management.
Each local management team reports to one of our operating vice presidents.
An operating vice president is responsible for monitoring the operating
performance of multiple affiliated dental groups in multiple markets. Each
operating vice president participates as a member of the policy board of the
affiliated dental groups for which he or she has management oversight
responsibilities. The operating vice presidents are responsible for overseeing
the development of operating plans and annual budgets and monitoring actual
results. Additionally, we support each of our dental group practices with
analysis of the capacity, utilization and productivity of each dental facility.
This analysis assists each practice in improving its operating performance from
both a clinical and financial perspective.
On a national level, we support our affiliated network in several ways. We
assist our affiliates with:
(i) sharing best clinical practices through our National Professional
Advisory Forum ("NPAF"), described below;
(ii) evaluating and negotiating third party payor contracts;
(iii) designing, locating and leasing new facilities;
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(iv) developing budgets and implementing accounting and financial systems;
and
(v) developing and implementing practice management and other information
systems.
We also take advantage of value purchasing by contracting for various goods
and services on behalf of all of the affiliates. For example, we have arranged
for national contracts for the purchase of dental supplies and equipment,
professional, casualty, and general liability insurance and payroll processing.
National Professional Advisory Forum
We have organized the NPAF to provide guidance to our affiliated dental
group practices with respect to the clinical aspects of dentistry. Leading
dentists from our affiliated dental groups are selected to participate in the
NPAF. The NPAF meets three times per year and provides a forum for dentists to
share the best clinical practices of their respective dental groups and an
opportunity for them to build professional relationships with other dentists
affiliated with us. These dentists, as a result of their affiliation with us,
share common long-term goals. This enables the discussion at the NPAF to be
more open than it may be in other professional settings. While the primary
emphasis of the NPAF is on the clinical aspects of dentistry, it also provides
our management an opportunity to communicate with affiliated dentists. This
enables us to continue to build strong, mutually beneficial partner
relationships with our affiliated dental groups.
Payor Relationships and Reimbursement Mix
We and our affiliates believe that clinical and economic decisions should be
made separately. However, we recognize that the source of payment for services
affects operating and financial performance. We assist our affiliates in
analyzing their revenue and payor mix on an ongoing basis and recommend methods
by which the affiliated dental group practices can improve operating efficiency
by improving their revenue and payor mix. As a general rule, we believe that
growth in a market is best facilitated where the payor mix of our affiliates
mirrors the payor mix for that market. We assist each of our affiliated dental
groups in evaluating and negotiating third-party payor contracts on a local,
regional and national level. The aggregate payor mix percentage of our
affiliated practices for the year ended December 31,1998 was approximately 39%
fee-for-service, 12% preferred provider plans and 49% capitated managed care
plans. For the three months ended March 31, 1999, the aggregate payor mix
percentage of our affiliated practices was approximately 43% fee-for-service,
12% preferred provider organization plans and 45% capitated managed care plans.
We believe it is advantageous to be affiliated with dental groups that have
successfully provided care to patients under all reimbursement methodologies.
Since a shift is taking place in the dental benefits market from traditional
fee-for-service to preferred provider organization and capitated managed care
dental plans, we believe that our affiliates' experience in operating under all
of these plans provides them with a competitive advantage. Most of our
affiliated dental groups have provided care under traditional fee-for-service
plans and non-fee-for-service plans. Several of our affiliated dental groups
have been providing care to patients with capitated managed care dental
benefits for more than 20 years.
Facilities Development and Management
We believe an inviting professional environment is a critical aspect of
overall patient satisfaction. Each of our facilities is constructed to be warm,
attractive and inviting to the patients in addition to being highly functional.
Our dental facilities have from three to 39 operatories and typically
accommodate general and specialty dentists, dental hygienists and dental
assistants, a business manager and a receptionist. Generally, our facilities
are either stand alone or located within a professional office building or
medical facility and range in size from approximately 1,500 to 10,000 square
feet.
We work with each of our affiliated dental groups in analyzing utilization
of existing capacity and identifying facility upgrade and expansion priorities.
We also provide our affiliates guidance in the site selection process. We
initially construct each facility as appropriate for the market and add and
equip additional operatories as necessary through a capacity and utilization
analysis.
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We use architectural design services to improve the facility design process
and to further ensure that all facilities are properly constructed and meet the
standards set forth by the Accreditation Association of Ambulatory Health Care,
Inc. To this end, we work with each affiliated dental group to establish a
defined set of standards for each facility, such as operatory design and dental
equipment, which are consistent with the desires of the dental group. We
believe such facility standards are necessary to speed the site development
process and create consistency across newly developed facilities, leading to
enhanced staff and provider productivity.
Budgeting and Planning; Financial Information Systems
We assist each affiliate with budgeting and planning. We and each affiliate
develop a strategic plan for increased market penetration on an annual basis.
We and each affiliated dental group then jointly develop a budget which sets
specific goals for revenue growth, operating expenses and capital expenditures.
Once a budget has been approved, we measure the financial performance of each
affiliated dental group on a monthly basis and compare actual performance to
budget.
Our financial information system enables us to measure, monitor and compare
the financial performance of affiliated dental groups on a standardized basis
across our entire network. The system also allows us to track and control costs
and facilitates the accounting and financial reporting process. This financial
system is installed in all affiliated dental group practices. Historically, we
have converted all affiliates to our system within 90 days of affiliation and
intend to continue this practice with new affiliates.
Practice Management Systems
We use various dental practice management software systems to facilitate
patient scheduling, to invoice patients and insurance companies, to assist with
facility staffing and for other practice related activities. In connection with
our affiliation with Park Dental, we acquired the rights to Comdent, a
proprietary practice management software system which has been used and
continuously enhanced at Park Dental since 1987. We believe that Comdent's
scheduling, electronic data interchange and data management features are
superior to others that are commercially available. In addition, Comdent is
scalable and capable of accommodating large multi-site dental group practices.
We intend, when appropriate, to convert our affiliated dental group practices
to the Comdent practice management software system. We are also developing a
data warehouse and decision support system to analyze information across our
entire network.
Affiliation Structure
Service Agreement
We have entered into a service agreement with each of our affiliated PCs
pursuant to which we perform all administrative, non-clinical aspects of such
PC's dental practice. We expect that each new affiliated PC will enter into a
similar service agreement or become a party to an existing service agreement at
the time of its affiliation. We are dependent on our service agreements for the
vast majority of our operating revenue. The termination of one or more of these
service agreements could have a material adverse effect on our business,
financial condition and results of operations. See "Risk Factors--Dependence
Upon Service Agreements."
We are responsible for providing all services necessary for the
administration of the non-clinical aspects of the dental operations. These
services include assisting our affiliates with information systems, budgeting
and financial reporting, facilities management, third-party contracting,
supplies and equipment procurement, quality assurance initiatives, billing and
collecting accounts receivable, marketing and recruiting, hiring and training
support staff.
The PC is responsible for recruiting and hiring all of the dentists
necessary to provide dental care. We do not assume any authority,
responsibility, supervision or control over the provision of dental care to
patients. The service agreement requires the PC to enter into an employment or
independent contractor agreement with each dentist retained by the PC. The
service agreement also requires the PC to implement and maintain quality
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assurance and peer review programs, maintain professional and comprehensive
general liability insurance covering the PC and each of its dentists and abide
by non-competition and confidentiality provisions.
We and each PC establish a joint policy board which is responsible for
developing and implementing management and administrative policies for the
dental operation. The policy board consists of an equal number of
representatives designated by us and the PC. The policy board members
designated by the PC must be licensed dentists employed by the PC. The policy
board's responsibilities include the review and approval of all renovation and
expansion plans and capital equipment expenditures with respect to the dental
facilities affiliated with the PC, all annual capital and operating budgets,
all advertising and marketing services, the long-term strategic and short-term
operational goals, objectives, and plans for the dental facilities and staffing
plans regarding provider and support personnel for the dental facilities. The
policy board also reviews and monitors the financial performance of the PC with
respect to the attainment of the PC's budgeted goals. The policy board also has
the authority to approve or disapprove any merger or combination with, or
acquisition of, any dental practice by the PC. Finally, the policy board
reviews and makes recommendations with respect to contractual relationships
between the PC and third-party payors. However, the PCs have final approval
over matters relating to dental care including all third-party payor contracts
and fee practices and schedules.
The PC reimburses us for actual expenses incurred on its behalf in
connection with the operation and administration of the dental facilities and
pays fees to us for 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 our dental facilities. In
those situations, no additional variable fee is applicable. The PC is also
responsible for provider expenses, which generally consist of the salaries,
benefits, and certain other expenses of the dentists. Pursuant to the terms of
the service agreements, we bill patients and third party payors on behalf of
the affiliated PCs. Such funds are applied in the following order of priority:
1. reimbursement of expenses incurred in connection with the operation and
administration of the dental facilities;
2. repayment of advances, if any, made by us to the PC;
3. payment of the monthly fee;
4. payment of provider expenses; and
5. payment of the additional variable fee.
Each of our current service agreements is for an initial term of 40 years
and automatically renews for successive five-year terms, unless terminated by
notice given at least 120 days prior to the end of the initial term or any
renewal term. In addition, the service agreement may be terminated earlier by
either party upon the occurrence of certain events involving the other party,
such as its dissolution, bankruptcy, liquidation, or its failure to perform its
material duties and obligations under the service agreement. In the event a
service agreement is terminated, the related affiliated dental practice is
generally required to purchase, at our option, the unamortized balance of
intangible assets at the current book value, as well as all related other
assets associated with the affiliated dental practice.
Employment Agreements with Dentists
The service agreements require that all dentists practicing full-time at the
dental facilities enter into employment agreements with their respective PCs.
The employment agreements with dentists who are owners of the PCs generally are
for a specified initial term of up to five years and may not be terminated by
the
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dentists without cause during such initial term. The employment agreements with
other dentists may be for terms up to 18 months. Such employment agreements are
usually terminable by either party upon advance written notice, which may be 90
days in some cases, and are terminable by the PC for cause immediately upon
written notice to the dentist. The agreements typically contain non-competition
provisions which prohibit the dentist from engaging in the practice of
dentistry or otherwise performing professional dental services within a
specified geographic area, usually a specified number of miles from the
relevant dental facility, following termination. The non-competition
restrictions are generally for one to two years following termination.
Competition
The dental practice management industry, currently in its formative stage,
is highly competitive and is expected to become more competitive. We compete
with other dental practice management companies with respect to providing
management services to dentists. We believe that the principal factors of
competition between dental practice management companies are their affiliation
methods and models, the reputation of their existing affiliates, the scope of
their dental care networks, their management expertise and experience, the
sophistication of their management information, accounting, finance and other
systems and their operating methods. We believe that we compete effectively
with other dental practice management companies with respect to these factors.
See "Risk Factors--Highly Competitive Market."
Government Regulation
General
The practice of dentistry is highly regulated, and the operations of us and
our affiliated dental practices are subject to numerous state and federal laws
and regulations. Furthermore, we may become subject to additional laws and
regulations as we expand into new markets. There can be no assurance that the
regulatory environment in which we and our affiliated dental group practices
operate will not change significantly in the future. The ability to operate
profitably will depend, in part, upon us and our affiliated dental group
practices obtaining and maintaining all necessary licenses, certifications and
other approvals and operating in compliance with applicable laws. See "Risk
Factors--Government Regulation."
State Regulation
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. Except for Wisconsin, the laws of the
states in which we currently operate prohibit, either by specific statutes,
case law or as a matter of general public policy, entities not wholly owned or
controlled by dentists, such as us, from practicing dentistry, from employing
dentists and, in some circumstances, dental assistants and dental hygienists,
or from exercising control over the provision of dental services. Many states
prohibit or restrict the ability of a person other than a licensed dentist to
own, manage or control the assets, equipment or offices used in a dental
practice. The laws of some states prohibit the advertising of dental services
under a trade or corporate name and require all advertisements to be in the
name of the dentist. A number of states also regulate the content of
advertisements of dental services and the use of promotional gift items. These
laws and their interpretation vary from state to state and are enforced by
regulatory authorities with broad discretion.
To the extent that we or any affiliated dental group practice contract with
third party payors, including self-insured plans, under a capitated or other
arrangement which causes us or such affiliated dental group practice to assume
a portion of the financial risk of providing dental care, we or such affiliated
dental group practice may become subject to state insurance laws. If we or any
affiliated dental group practice are determined to be engaged in the business
of insurance, we may be required to change the method of payment from third
party payors or to seek appropriate licensure. Any regulation of us or our
affiliated dental group practices under insurance laws could have a material
adverse effect on our business, financial condition and results of operations.
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Many states have fraud and abuse laws, including anti-kickback laws, which
are similar to the federal laws, discussed below, and in many cases these laws
apply to all referrals for items or services reimbursable by any payor. A
number of states also impose significant criminal and civil penalties for false
claims, false or improper billings, or inappropriate coding for dental
services. Many states either prohibit or require disclosure of self-referral
arrangements and impose criminal and civil penalties for violations of these
laws.
Many states also prohibit a dentist from paying a portion of fees received
for dental services to another person or entity. In some states, this "fee-
splitting" prohibition applies only to payments in exchange for referrals.
Other states flatly prohibit any rebates or split fees regardless of whether
referrals are involved. There can be no assurance that management fees paid to
us, to the extent based on a percentage of dental service revenues or profits,
will not be deemed to violate such laws.
Many states have antitrust laws which prohibit agreements in restraint of
trade, the exercise of monopoly power and other practices that are considered
to be anti-competitive, including cooperation by separate economic entities to
fix the prices of services. Dental practices are also subject to compliance
with state and local regulatory standards in the areas of safety and health.
Federal Regulation
The dental industry is also regulated at the federal level to the extent
that dental services are reimbursed under federal programs. Participation by
the affiliated dental group practices and their dentists in such programs
subject them, and potentially us, to significant regulation regarding the
provision of services to beneficiaries, submission of claims and related
matters, including the types of regulations discussed below. Violation of these
laws or regulations can result in civil and criminal penalties, including
possible exclusion of individuals and entities from participation in federal
payment programs.
The federal anti-kickback statutes prohibit, in part, and subject to certain
safe harbors, the payment or receipt of remuneration in return for, or in order
to induce, referrals, or arranging for referrals, for items or services which
are reimbursable under federal payment programs. Other federal laws impose
significant penalties for false or improper billings or inappropriate coding
for dental services regardless of the payor source. The federal self-referral
law, or "Stark law," prohibits dentists from making referrals for certain
designated health services reimbursable under federal payment programs to
entities with which they have financial relationships unless a specific
exception applies. The Stark law also prohibits the entity receiving such
referrals from submitting a claim for services provided pursuant to such
referral. We may be subject to federal payor rules prohibiting the assignment
of the right to receive payment for services rendered unless certain conditions
are met. These rules prohibit a billing agent from receiving a fee based on a
percentage of collections and may require payments for the services of the
dentists to be made directly to the dentist providing the services or to a
lock-box account held in the name of the dentist or his or her dental group. In
addition, these rules provide that accounts receivables from federal payors are
not saleable or assignable.
Federal antitrust laws prohibit agreements in restraint of trade, the
exercise of monopoly power and other practices that are considered to be anti-
competitive, including cooperation by separate economic entities to fix the
prices of services. Finally, dental practices are also subject to compliance
with federal regulatory standards in the areas of safety and health.
Insurance
We maintain property-casualty insurance covering our corporate office, local
management offices and dental facilities on a replacement cost basis. Each
affiliated PC maintains, or causes to be maintained, professional liability
insurance covering itself and its employees and contractors, including the
dentists, hygienists and dental assistants employed by, or contracted by such
affiliated PC in the amount of $1 million per occurrence and $3 million annual
aggregate. We generally are a named insured under such policies. We also
maintain umbrella liability coverage for our property-casualty policies in the
amount of $10 million. Some risks and liabilities may not be covered by
insurance, however, and there can be no assurance that coverage will continue
to be available upon terms satisfactory to us or that the coverage will be
adequate to cover losses.
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Malpractice insurance, moreover, can be expensive and varies from state to
state. Successful malpractice claims asserted against the dentists, the PCs or
us may have a material adverse effect on our business, financial condition and
results of operations. While we believe our insurance policies are adequate in
amount and coverage for our current operations, there can be no assurance that
the coverage maintained by us will be sufficient to cover all future claims or
will continue to be available in adequate amounts or at a reasonable cost.
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 PCs 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.
Facilities and Employees
We lease most of our dental facilities. Typically, each acquired dental
facility is located at the site used by the dental group practice prior to
affiliating with us. As of March 31, 1999, we owned or leased 123 dental
facilities, seven local management offices and our corporate office. Our
corporate office is located at 301 Edgewater Place, Suite 320, Wakefield,
Massachusetts, in approximately 6,900 square feet occupied under a lease which
expires in March 2002.
As of March 31, 1999, we employed, either directly or through independent
contract arrangements, 1,202 people. This amount included 629 hygienists and
dental assistants and 573 administrative and management personnel located at
our dental facilities, local management offices and our corporate office. In
addition, we were affiliated with 274 dentists, as well as 126 hygienists and
dental assistants located in states which prohibit our employment of hygienists
and/or dental assistants, all of whom were employees or independent contractors
of their respective affiliated PCs. We consider our relations with our
employees to be good.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information concerning our directors and
executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gregory A. Serrao....... 36 Chairman, President and Chief Executive Officer
Ronald M. Levenson...... 43 Senior Vice President, Chief Financial Officer and Treasurer
William H. Bottlinger... 54 Vice President-Regional Operations and Chief Information Officer
Joseph V. Errante,
D.D.S.................. 43 Vice President-Regional Operations
Lee S. Feldman.......... 31 Vice President-General Counsel
Forrest M. Flint........ 47 Vice President-Business Development
Michael F. Frisch....... 41 Vice President-Regional Operations
Jesley C. Ruff, D.D.S... 44 Vice President-Chief Professional Officer
Gregory T. Swenson,
D.D.S.................. 64 President of PDHC, Ltd. and Director
James T. Kelly (1)...... 52 Director
Martin J. Mannion
(1)(2)................. 39 Director
Derril W. Reeves
(1)(2)................. 55 Director
</TABLE>
- --------
(1)Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Serrao, our founder, has been our President, Chief Executive Officer and
a Director since December 1995 and our Chairman since October 1997. From 1992
through December 1995, Mr. Serrao served as the
40
<PAGE>
President of National Specialty Services, Inc., a subsidiary of Cardinal
Health, Inc. ("Cardinal Health"). From 1991 to 1992, Mr. Serrao served as Vice
President--Corporate Development of Cardinal Health. Before joining Cardinal
Health, Mr. Serrao was an investment banker at Dean Witter Reynolds Inc. where
he co-founded its health care investment banking group and specialized in
mergers, acquisitions and public equity offerings.
Mr. Levenson has been our Senior Vice President, Chief Financial Officer and
Treasurer since April 1996. Prior to joining us, Mr. Levenson was employed by
American Medical Response, Inc. ("AMR"), a national provider of ambulance
services, where he served as Senior Vice President and Chief Accounting Officer
from October 1992 through April 1996 and also served as Treasurer from August
1995 through April 1996. Prior to joining AMR, Mr. Levenson was a Senior
Manager at KPMG LLP, a public accounting firm, where he was employed from 1979
through 1992.
Mr. Bottlinger has been our Vice President and Chief Information Officer
since January 1997 and our Vice President--Regional Operations since November
1997. From 1985 through 1996, Mr. Bottlinger served as Senior Vice President
and Chief Information Officer for Cardinal Health and Senior Vice President and
General Manager of CORD Logistics, Inc., a Cardinal Health subsidiary which
provided pharmaceutical distribution and information technology services for
emerging biotechnical manufacturing companies. During his career, Mr.
Bottlinger has initiated the use of state of the art information system
technology in a variety of businesses engaged in retailing, food wholesaling,
pharmaceutical manufacturing and distribution, pharmacy operations and
financial services.
Dr. Errante has been our Vice President--Regional Operations since November
1998 and has served as Chief Executive Officer of Innovative Practice Concepts,
Inc. (which was acquired by us in January 1998) since January 1996. From
January 1996 to January 1998, Dr. Errante also served as Chairman of Associated
Dental Care Providers, P.C. (a dental group practice affiliated with us since
January 1998), which he co-founded in 1985. From 1992 to 1996, Dr. Errante
served as Chief Executive Officer and Chairman of Associated Companies, Inc.,
the management company that operated Associated Health Plans, Inc. ("AHP"), a
managed care dental plan in Arizona. From 1985 to 1992, Dr. Errante served as
the Dental Director for AHP. Dr. Errante currently serves as President of the
American Academy of Dental Group Practice ("AADGP") and sits on the Managed
Care Dental Advisory Board to Proctor and Gamble.
Mr. Feldman has been our Vice President--General Counsel since November
1998. Prior to joining us, Mr. Feldman was employed by Professional Dental
Associates, Inc., a dental practice management company, where he served as Vice
President--General Counsel and Secretary from June 1997 to November 1998. From
1993 to 1997, Mr. Feldman was an associate with Ropes & Gray, a law firm
located in Boston, Massachusetts.
Mr. Flint has been our Vice President--Business Development since November
1996. From 1985 through November 1996, Mr. Flint served as the Executive
Director of PDHC, Ltd. ("Park"), prior to its affiliation with us. At Park, Mr.
Flint was responsible for managing all external relationships and contracting
with third party payors. From 1984 to 1985, Mr. Flint was an investment banker
in the health care finance group of Dain Bosworth, Inc. From 1977 to 1984, Mr.
Flint was the Director of the South Dakota Division of Health Services. Mr.
Flint is a past Board Member of the Accreditation Association for Ambulatory
Health Care, Inc.
Mr. Frisch has been our as Vice President--Regional Operations since June
1997. From January 1997 to June 1997, Mr. Frisch served as our Director--
National Support Initiatives. From July 1996 to January 1997, Mr. Frisch was an
independent consultant to us. From June 1993 to July 1996, Mr. Frisch served as
Vice President and General Manager of National Specialty Services, Inc., a
subsidiary of Cardinal Health. From July 1986 to June 1993, Mr. Frisch was
employed by VHA, Inc., a national health care alliance, in a variety of
marketing, business development and management positions.
Dr. Ruff has been our Vice President-Chief Professional Officer since
January 1999 and has chaired our National Professional Advisory Forum since
January 1997. From 1992 to 1998, Dr. Ruff served as President of Wisconsin
Dental Group, S.C., one of our affiliated dental group practices, where he was
employed as a
41
<PAGE>
practicing dentist and held a variety of positions since 1985. In 1994, Dr.
Ruff served on the Board of Directors of the National Association of Prepaid
Dental Plans. From 1983 to 1991, Dr. Ruff was an Assistant Professor at the
Marquette University School of Dentistry and an adjunct faculty member from
1991 to 1996, where he held a variety of clinical faculty and grant-related
positions.
Dr. Swenson has served as President of PDHC, Ltd., President of Park Dental
and one of our Directors since November 1996. From 1983, when he co-founded
Park, to November 1996, Dr. Swenson served as Chairman and Chief Executive
Officer of Park. Dr. Swenson was a member of the AADGP from 1980 until 1995,
serving on many occasions as a practice auditor in the AADGP's accreditation
program. In 1978, Park's predecessor was the second group practice to receive
AADGP's accreditation certificate. In 1973, a national referee committee
selected Dr. Swenson to the American Association of Endodontics, a society with
which he maintained a membership until 1989. In 1972, after practicing solo
dentistry for ten years, he formed a partnership with colleagues and helped
build Park's predecessor group practice. Dr. Swenson is a member of the
Minnesota State Dental Association, the American Dental Association, and
Federation Dentaire Internationale. From 1980 to 1996, Dr. Swenson served on
the Board of Directors of Marquette Bank Brookdale.
Mr. Kelly has been one of our Directors since February 1997. Mr. Kelly has
served as Chairman of the Board of Lincare Holdings Inc., a provider of home
respiratory therapy services, since April 1994. Mr. Kelly served as the Chief
Executive Officer of Lincare from June 1986 through December 1996. Prior to
1986, Mr. Kelly served in a number of capacities within the Mining and Metals
Division of Union Carbide Corporation over a 19-year period.
Mr. Mannion has been one of our Directors since January 1996 and served as
our Chairman from January 1996 to October 1997. Mr. Mannion is a general
partner with Summit Partners, a private equity capital firm, where he has been
employed since 1985.
Mr. Reeves has been one of our Directors since February 1997. Mr. Reeves is
a founder, Vice Chairman of the Board of Directors and Chief Development
Officer of PhyCor, Inc., a physician practice management company, where he has
been employed since 1988. From 1974 to 1976, Mr. Reeves was with Hospital
Affiliates International ("HAI") where he served as Vice President of Hospital
Management Corporation, the hospital management subsidiary of HAI. In 1977, he
joined Hospital Corporation of America ("HCA") to head the growth function for
HCA's management company. Mr. Reeves was a Vice President of HCA and also Vice
President of Development for HCA Management Company until 1985. In 1985, he
moved to HCA Health Plans as Vice President of Sales and Marketing and was
instrumental in the creation of Equicor where he was Senior Vice President,
National Sales.
Board of Directors
Our Board of Directors is divided into three classes, with each class
elected to serve a staggered three-year term. The Class I director, whose term
will expire at the 2001 annual meeting of stockholders, is Dr. Swenson. The
Class II directors, whose terms will expire at the 2002 annual meeting of
stockholders, are Messrs. Mannion and Kelly. The Class III directors, whose
terms will expire at the 2000 annual meeting of stockholders, are Messrs.
Serrao and Reeves. The classified Board of Directors may increase the
difficulty of consummating or discourage a business combination or an attempt
to gain control of us that is not approved by our Board of Directors. Our
executive officers are elected annually by and serve at the discretion of our
Board of Directors. See "--Employment Agreements."
Compensation of Directors
Directors who are also our employees or employees of one of our subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of ours or one of our subsidiaries receives a fee of
$1,000 for attending each Board of Directors' meeting and $500 for attending
each committee
42
<PAGE>
meeting. In addition, such directors are eligible to receive options under our
1996 Amended and Restated Directors Stock Option Plan. These options are issued
at such times and in such amounts as may be determined by the Directors Stock
Option Plan Committee. Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof.
Compensation of Executive Officers
The following table sets forth information with respect to compensation paid
to or accrued on behalf of our Chief Executive Officer and our four most highly
compensated executive officers whose annual compensation exceeded $100,000
during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Awards
---------------------------------------------- ------------------------
Other Securities
Annual Restricted Underlying All Other
Year Salary ($) Bonus ($) Compensation(/1/) Stock Options (#) Compensation (/2/)
---- ---------- --------- ----------------- ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory A. Serrao....... 1998 $ 170,000 $102,000 $ -- $ -- 12,000 $2,259
Chairman, President 1997 $ 153,000 $123,600 $ -- $ -- 189,600 $1,946
and Chief Executive 1996 $ 144,000(3) $ 90,000 $136,543(4) $99,500(5) 270,270 $ 519
Officer
Ronald M. Levenson...... 1998 $ 165,000 $ 66,000 $ -- $ -- 12,000 $2,200
Senior Vice President, 1997 $ 153,000 $ 82,400 $ -- $ -- 126,000 $1,946
Chief Financial Officer 1996 $ 101,000(3) $ 41,600 $ 23,000(6) $ -- 81,000 $ --
and Treasurer
William H. Bottlinger... 1998 $ 152,880 $ 65,800 $ -- $ -- 4,523 $ --
Vice President-Regional 1997 $ 143,000(3) $ 58,800 $ 57,900(6) $ -- 15,000 $ --
Operations and Chief 1996 $ -- $ -- $ -- $ -- -- $ --
Information Officer
Forrest M. Flint........ 1998 $ 130,000 $ 26,250 $ -- $ -- 1,692 $2,430
Vice President-Business 1997 $ 125,000 $ 30,000 $ -- $ -- 7,200 $2,340
Development 1996 $ 143,000(3) $ 15,000 $ -- $ -- 36,000 $ 288
Joseph V. Errante, DDS.. 1998 $ 120,000 $ 717 $ -- $ -- 11,000 $4,943
Vice President-Regional 1997 $ -- $ -- $ -- $ -- -- $ --
Operations 1996 $ -- $ -- $ -- $ -- -- $ --
</TABLE>
- --------
(1) Except as specifically noted, no Other Annual Compensation for any
executive officer named in the Summary Compensation Table exceeded $50,000
or 10% of the total salary and bonus for such officer.
(2) Represents matching contributions under our 401(k) plan.
(3) Represents less than one full year's compensation.
(4) Consists of a tax offset bonus in the amount of $84,461 paid with respect
to the restricted Common Stock issued to Mr. Serrao in January 1996 and
moving and relocation expenses in the amount of $52,082.
(5) Represents the dollar value (net of consideration paid) of 300,000 shares
of restricted Common Stock issued to Mr. Serrao in January 1996, based upon
the fair market value of such shares on the date of issuance. Such shares
are subject to repurchase rights in favor of us upon the occurrence of
certain events, including the termination of Mr. Serrao's employment. Such
repurchase rights lapse ratably during the first four years of Mr. Serrao's
employment and upon the occurrence of certain other events. As of
December 31, 1998, 81,180 shares of restricted Common Stock with a fair
market value on such date of $938,644 were held by Mr. Serrao. Dividends,
if declared and paid upon our Common Stock, will be paid on such restricted
stock.
(6) Consists of moving and relocation expenses.
43
<PAGE>
Option Grants In Last Fiscal Year
The following table sets forth all grants of stock options to the executive
officers named in the Summary Compensation Table during 1998:
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
------------------------------------------- ----------------
Number of
Securities
Underlying % of Total
Options Options Exercise
Granted Granted in Price Expiration
(#)(1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
---------- ----------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Gregory A. Serrao....... 12,000 12% $13.00 2/27/08 $98,108 $248,624
Ronald M. Levenson...... 12,000 12% $13.00 2/27/08 $98,108 $248,624
William H. Bottlinger... 4,523 4% $13.00 2/27/08 $36,978 $ 93,710
Forrest M. Flint........ 1,692 2% $13.00 2/27/08 $13,833 $ 35,056
Joseph V. Errante,
D.D.S.................. 1,000 1% $14.17 1/01/08 $ 8,911 $ 22,583
10,000 10% $11.50 11/06/08 $72,323 $183,280
</TABLE>
- --------
(1) All option grants were issued under our Amended and Restated 1996 Stock
Option Plan, as amended. The exercise price of such options is no less than
the fair market value of our Common Stock on the date of grant. Options
become exercisable in equal annual installments over a four-year period.
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The following table sets forth the number of securities underlying
unexercised options and the value of in-the-money stock options held by the
executive officers named in the Summary Compensation Table as of December 31,
1998 (/1/):
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at December In-the-Money Options
31, 1998(#) at December 31, 1998 ($)
----------------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory A. Serrao....... 325,477 146,393 $3,035,808 $ --
Ronald M. Levenson...... 90,307 128,693 $ 572,858 $336,975
William H. Bottlinger... 5,213 14,310 $ -- $ --
Forrest M. Flint........ 27,240 17,652 $ 82,235 $ 34,135
Joseph V. Errante,
D.D.S.................. -- 11,000 $ -- $ 625
</TABLE>
- --------
(1) There were no stock options exercised by executive officers named in the
Summary Compensation Table during 1998.
Employment Agreements
We have a five-year employment agreement with Mr. Serrao which terminates in
January 2001. Under his employment agreement, Mr. Serrao receives an annual
base salary, which was $170,000 in 1998 (subject to potential annual salary
increases), and a bonus in an amount up to 60% of his then current base salary.
Mr. Serrao is also subject to non-competition and confidentiality provisions in
the employment agreement. If Mr. Serrao's employment is terminated prior to the
end of the five-year term by us without cause or by Mr. Serrao for "good
reason" (as defined in the employment agreement), he is entitled to receive
severance benefits which include severance payments in an amount equal to his
then current annual base salary and health care benefits for one year after
termination.
We have a three-year employment agreement with Mr. Flint which terminates in
November 1999. Under his employment agreement, Mr. Flint receives an annual
base salary, which was $130,000 in 1998 (subject to
44
<PAGE>
potential annual salary increases), and a bonus in an amount up to 25% of his
then current base salary. Mr. Flint is also subject to non-competition and
confidentiality provisions in the employment agreement. If Mr. Flint's
employment is terminated prior to the end of the three-year term by us for any
reason other than for cause, he is entitled to receive severance benefits which
include severance payments in an amount equal to his then current base salary
for the remainder of such term.
We have a four-year employment agreement with Dr. Errante which terminates
in January 2003. Under his employment agreement, Dr. Errante receives an annual
base salary of $140,000 (subject to potential annual salary increases) and a
bonus in an amount up to 35% of his then current base salary. Dr. Errante is
also subject to non-competition and confidentiality provisions in the
employment agreement. If Dr. Errante's employment is terminated prior to the
end of the four-year term by us for any reason other than for cause, he is
entitled to receive severance benefits which include severance payments in an
amount equal to the lesser of the remainder of the term or one year of his then
current base salary.
Compensation Committee Interlocks
Prior to October 27, 1997, we did not have a separate Compensation Committee
or other committee performing equivalent functions. As a result, compensation
decisions prior to that time were made by our Board of Directors consisting of
Messrs. Serrao, Kelly, Mannion, Reeves and Dr. Swenson. Messrs. Mannion and
Reeves serve as the current members of our Compensation Committee. There are no
interlocking relationships between any of our executive officers and any entity
whose directors or executive officers serve on our Board of Directors or
Compensation Committee.
45
<PAGE>
CERTAIN TRANSACTIONS
We and a group of investors (collectively, the "Purchasers") were parties to
various agreements and transactions which were entered into in connection with
our initial capitalization. The Purchasers included, among others, Mr. Serrao
and certain limited partnerships which are affiliated with Summit Partners.
Mr. Mannion, one of our Directors, is a general partner of Summit Partners.
Summit Partners and its affiliated limited partnerships are collectively
referred to as "Summit Partners."
We and the Purchasers were parties to a Series A and Series B Preferred
Stock Purchase Agreement dated January 8, 1996, as amended (the "Preferred
Stock Purchase Agreement"), pursuant to which the Purchasers purchased, in the
aggregate, 400,000 shares of our Series A Convertible Preferred Stock at a
price of $19.75 per share and 70,000 shares of our Series B Redeemable
Preferred Stock at a price of $100 per share. In addition, in connection with
entering into the Preferred Stock Purchase Agreement, the Purchasers purchased
an aggregate of 300,000 shares of our Common Stock at $0.33 per share. The
aggregate purchase price for all Preferred and Common Stock purchased by the
Purchasers was $15,000,000. The proceeds from the sale of such shares were used
by us in connection with affiliations with dental practices and for general
working capital purposes. The following table describes the number of shares of
our Series A and Series B Preferred Stock and our Common Stock purchased by Mr.
Serrao and Summit Partners:
<TABLE>
<CAPTION>
Number of Shares
------------------------------------------------
Series A Convertible Series B Redeemable Common
Preferred Stock Preferred Stock Stock
-------------------- ------------------- -------
<S> <C> <C> <C>
Gregory A. Serrao.............. 2,933 513 2,200
Summit Partners................ 349,600 61,180 278,563
</TABLE>
The Series A Convertible Preferred Stock was converted into 17,600 and
2,097,599 shares of our Common Stock for Mr. Serrao and Summit Partners,
respectively, upon completion of the initial public offering ("IPO") in April
1998. Approximately $7.9 million of the proceeds of the IPO were used to redeem
all of the Series B Preferred Stock, including unpaid dividends. In connection
with such redemption, Mr. Serrao and Summit Partners received $57,572 and
$6,861,887, respectively.
We and the Purchasers are parties to a Registration Rights Agreement dated
January 8, 1996, as amended (the "Purchasers Registration Rights Agreement"),
pursuant to which the Purchasers have the right, subject to certain
restrictions, to cause us to effect a registration of their shares of Common
Stock under the Securities Act of 1933, as amended (the "Securities Act"). The
Purchasers also have certain "piggy back" registration rights in the event we
register any of our securities for our account or for security holders
exercising their registration rights.
In addition, Mr. Levenson, our Senior Vice President, Chief Financial
Officer and Treasurer, was a party to such agreements and transactions.
Pursuant to the Preferred Stock Purchase Agreement, Mr. Levenson purchased
5,600 shares of our Series A Convertible Preferred Stock at a price of $19.75
per share and 980 shares of our Series B Redeemable Preferred Stock at a price
of $100 per share. In addition, in connection with entering into the Preferred
Stock Purchase Agreement, Mr. Levenson purchased 4,199 shares of our Common
Stock at $0.33 per share. The Series A Convertible Stock was converted into
33,600 shares of our Common Stock at the completion of the IPO. As part of the
redemption of the Series B Redeemable Preferred Stock with a portion of the
proceeds of the IPO, Mr. Levenson received $109,714. Mr. Levenson is also a
party to the Purchasers Registration Rights Agreement.
We acquired PDHC, Ltd. ("Park") pursuant to an Acquisition and Exchange
Agreement effective November 12, 1996 (the "Acquisition Agreement"), among us,
Park and all of the shareholders of Park, including Dr. Swenson. Under the
Acquisition Agreement, the shareholders of Park received an aggregate of $3.3
million in cash, $1.5 million principal amount of our Subordinated Notes and
1,260,000 shares of our Common Stock in consideration for the exchange of all
of their Park shares. Dr. Swenson received $74,848 in principal and interest
payments under the Subordinated Notes in 1998. The terms and conditions of the
acquisition of Park, including the consideration received for the exchange of
the Park shares, were based upon arms-length negotiations between our
representatives and Park, including Dr. Swenson.
46
<PAGE>
We acquired Smileage Dental Care, Inc. pursuant to an Agreement and Plan of
Merger and Reorganization effective December 23, 1996 (the "Merger Agreement"),
among us, American Dental Partners of Wisconsin, Inc. ("American"), Smileage
Dental Care, Inc. ("Smileage") and the shareholders of Smileage, including
Jesley C. Ruff, D.D.S., who became our Vice President--Chief Professional
Officer on January 1, 1999. Under the Merger Agreement, the shareholders of
Smileage received an aggregate of $546,250 in cash, $247,500 principal amount
of our Subordinated Notes and 304,200 shares of our Common Stock in
consideration of the merger of Smileage with American. Dr. Ruff received $3,955
in principal and interest payments under the Subordinated Notes in 1998. The
terms and conditions of the acquisition of Smileage, including the
consideration received for the exchange of the Smileage shares, were based upon
arms-length negotiations between our representatives and Smileage, including
Dr. Ruff.
We acquired Innovative Practice Concepts, Inc. pursuant to a Stock Purchase
Agreement dated December 22, 1997 (the "Purchase Agreement") among us,
Associated Dental Care Providers, P.C. ("Associated"), Innovative Practice
Concepts, Inc. ("IPC") and the shareholders of IPC. The transaction was
effective January 1, 1998. Under the Purchase Agreement, the shareholders of
IPC received an aggregate of $2,910,000 in cash less certain amounts applied to
pay off indebtedness of IPC to Joseph V. Errante, D.D.S. and his sister
Margaret E. Errante, D.D.S., $500,000 principal amount of our Subordinated
Notes and 34,800 shares of our Common Stock in consideration for the exchange
of all of their IPC shares. All of the stock of IPC was owned by Dr. Joseph
Errante, Dr. Margaret Errante and trusts for the benefit of certain members of
their families. The terms and conditions of the acquisition of IPC, including
the consideration received for the exchange of the IPC shares, were based upon
arms-length negotiations between our representatives and representatives of
IPC, including Dr. Joseph Errante. Dr. Joseph Errante was elected to the office
of Vice President--Regional Operations in November 1998.
We entered into registration rights agreements with the former shareholders
of each of Park and Smileage. In addition to Dr. Swenson, Delta Associates,
Ltd. ("DAL"), a greater than 5% stockholder of us, was a stockholder of Park
and received its pro rata share of the consideration paid by us for the
exchange of its Park stock. DAL is also a party to the registration rights
agreement with the former shareholders of Park. These registration rights
agreements contain provisions which grant the former shareholders of Park and
Smileage piggy back registration rights in the event we register any of our
securities for either ourself or for security holders exercising their
registration rights. In addition, the former Park shareholders may require
registration of their shares of our Common Stock (subject to the other general
applicable limitations on our registration obligations) on one occasion if and
to the extent that they have not otherwise had the opportunity to register
their shares during the three-year period following the completion of the IPO.
In connection with the Park, Smileage and IPC transactions, we entered into
service agreements with the professional corporations owned in part by Drs.
Swenson, Ruff and Errante, respectively. See "Business--Affiliation Structure--
Service Agreement." These professional corporations are PDG, P.A. ("PDG"),
Wisconsin Dental Group, S.C. ("WDG") and Associated Dental Care Providers, P.C.
("Associated"). These service agreements are on substantially the same terms
and conditions as all of our other service agreements. The amounts received by
our subsidiaries under the service agreements with PDG, WDG and Associated in
1998 were approximately $34,414,000, $10,270,000 and $4,467,000, respectively.
Dr. Swenson owns approximately 6% of the issued and outstanding capital stock
of PDG, Dr. Ruff owns approximately 13% of the issued and outstanding capital
stock of WDG and Dr. Errante owns approximately 23% of the issued and
outstanding capital stock of Associated.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of April 30, 1999, by: (i) each person who is
known to us to own beneficially more than 5% of the outstanding shares of
Common Stock; (ii) each director; (iii) our Chief Executive Officer and the
four other most highly compensated executive officers named in the Summary
Compensation Table; and (iv) our directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, a person is deemed
to be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security, has or shares the power to
dispose of or direct the disposition of such security, or has the right to
acquire the security within 60 days. Accordingly, more than one person may be
deemed to be the beneficial owner of the same security. All persons listed have
sole voting and investment power with respect to their shares unless otherwise
indicated.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
---------------------------------
Number Percentage
---------------- ----------------
<S> <C> <C>
Summit Ventures(2)........................... 2,376,162 31.6%
Martin J. Mannion(2)......................... 2,376,162 31.6%
Gregory A. Serrao(3)(9)...................... 662,877 8.4%
Pilgrim Baxter & Associates, Ltd.(4)......... 497,600 6.6%
Capital Research and Management Company(5)... 443,000 5.9%
Delta Associates, Ltd.(6).................... 378,001 5.0%
Gregory T. Swenson, D.D.S.(7)(9)............. 338,485 4.5%
Ronald M. Levenson(8)(9)..................... 154,747 2.0%
Forrest M. Flint(9).......................... 27,993 *
Joseph V. Errante, D.D.S.(9)(10)............. 20,280 *
William H. Bottlinger(9)..................... 10,853 *
Derril W. Reeves(9).......................... 7,825 *
James T. Kelly(9)............................ 4,825 *
All executive officers and directors as a
group (11 persons)(11)...................... 3,650,581 45.5%
</TABLE>
- --------
* less than 1%
(1) This table includes for each person or group of persons shares of Common
Stock that may be purchased by such person or group pursuant to options
which are currently exercisable or exercisable within 60 days of April 30,
1999. As of such date, a total of 7,517,448 shares of Common Stock were
issued and outstanding and options for 680,346 shares were exercisable.
(2) Represents 2,285,869 and 90,293 shares of Common Stock owned by Summit
Ventures IV, L.P. and Summit Investors II, L.P., respectively. Summit
Partners is affiliated with both limited partnerships. Mr. Mannion, one of
our Directors, is a general partner of Summit Partners. The address of
Summit Partners and Mr. Mannion is 600 Atlantic Avenue, Suite 2800, Boston,
Massachusetts 02110.
(3) Includes 26,170 shares owned by a family trust, of which Mr. Serrao is the
grantor and trustee, 5,000 shares held by Mr. Serrao's minor children and
5,000 shares held by Mr. Serrao's wife. The address for Mr. Serrao is
American Dental Partners, Inc., 301 Edgewater Place, Suite 320, Wakefield,
Massachusetts 01880.
(4) The address for Pilgrim Baxter & Associates, Ltd. is 825 Duportail Road,
Wayne, Pennsylvania 19087.
(5) The address for Capital Research and Management Company is 333 South Hope
Street, Los Angeles, California 90071.
(6) Represents shares received by Delta Associates, Ltd. in connection with our
affiliation with PDHC, Ltd. The address of Delta Associates, Ltd. is 3560
Delta Dental Drive, Eagan, Minnesota 55122.
(7) Includes 96,000 shares owned by a family trust, of which Dr. Swenson is the
grantor.
(8) Includes 950 shares held by Mr. Levenson's minor children.
(9) Includes options for 330,877 shares for Mr. Serrao, 8,650 shares for Dr.
Swenson, 109,807 shares for Mr. Levenson, 27,663 shares for Mr. Flint, 250
shares for Dr. Errante, 7,807 shares for Mr. Bottlinger, 4,825 shares for
Mr. Reeves and 4,825 shares for Mr. Kelly, respectively, which are
currently exercisable or exercisable within 60 days of April 30, 1999.
(10) Includes 932 shares owned by a family trust, of which Dr. Errante is the
grantor, and 1,390 shares owned by a family trust, of which Dr. Errante is
the trustee.
(11) Includes options for 499,346 shares for all executive officers and
directors as a group which are currently exercisable or exercisable within
60 days of April 30, 1999.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Preferred Stock
We are authorized to issue up to 1,000,000 shares of Preferred Stock, $0.01
par value. At the closing of the initial public offering, 400,000 shares of our
Series A Convertible Preferred Stock (which were converted into 2,399,995
shares of our Common Stock) and 70,000 shares of our Series B Redeemable
Preferred Stock (which were redeemed for cash) were restored to the status of
undesignated preferred stock available for issuance.
Preferred Stock may be issued in one or more series as determined by the
Board of Directors without further stockholder approval, and the Board or
Directors is authorized to fix and determine the terms, limitations, and
relative rights and preferences of such Preferred Stock, and to fix and
determine the variations among series of Preferred Stock. Any new Preferred
Stock issued would have priority over the Common Stock with respect to
dividends and other distributions, including the distribution of assets upon
liquidation and dissolution. Such Preferred Stock may be subject to repurchase
or redemption by us. The Board of Directors, without stockholder approval,
could issue Preferred Stock with voting and conversion rights that could
adversely affect the voting power of the holders of Common Stock and the
issuance of which, could be used by the Board of Directors in defense of a
hostile takeover of us. As of May 14, 1999, there were no shares of Preferred
Stock issued or outstanding.
Common Stock
We are authorized to issue up to 25,000,000 shares of Common Stock, $0.01
par value, of which 7,517,448 shares were issued and outstanding as of May 14,
1999. The holders of shares of Common Stock are entitled to one vote per share
for the election of directors and on all other matters submitted to a vote of
stockholders. Holders of shares of Common Stock are not entitled to preemptive
rights or to cumulative voting for the election of directors. Subject to any
senior rights of the Preferred Stock which may from time to time be
outstanding, holders of the Common Stock are entitled to receive such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Upon our dissolution and liquidation, holders
of our Common Stock are entitled to a ratable share of our net assets remaining
after payments to our creditors and to the holders of our Preferred Stock of
the full preferential amounts to which they may be entitled. All outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be, validly issued, fully paid and nonassessable.
Certain Provisions of Certificate of Incorporation and By-laws
The Certificate of Incorporation and By-laws provide that directors may not
be removed from office by the stockholders except by the affirmative vote of
stockholders exercising at least two-thirds of the voting power in the election
of directors; provided that if two-thirds of the entire Board of Directors
recommend to the stockholders that a director be removed, then such director
may be removed by the stockholders exercising at least a majority of the voting
power in the election of directors. The Certificate of Incorporation requires
all actions by stockholders to be taken at annual or special meetings. The By-
laws divide the Board of Directors into three classes, each with a term of
three years, with the term of one class expiring each year. No provision of the
Certificate of Incorporation nor certain provisions of the By-laws, including
those relating to indemnification and election and removal of directors, may be
altered, amended or repealed nor may any inconsistent provision be adopted
except by the affirmative vote of stockholders exercising at least two-thirds
of our voting power; provided that if any such action was previously approved
by at least two-thirds of the directors, then such action may be taken by the
stockholders exercising a majority of the voting power. The By-laws also
provide that any vacancy on the Board of Directors may be filled by a majority
of the directors then in office even though less than a quorum exits. The
foregoing provisions could have an anti-takeover effect by delaying, averting
or preventing a change in our control or management.
49
<PAGE>
Statutory Business Combination Provision
We are subject to Section 203 of the DGCL which, with certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and officers
and (b) by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or (iii) on or after such date, the
business combination is approved by the Board of Directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
Transfer Agent and Registrar
BankBoston, N.A. serves as our transfer agent and registrar for our Common
Stock.
DESCRIPTION OF SUBORDINATED NOTES
Except as otherwise described below, all of the Subordinated Notes to be
issued in this Offering will be on substantially the same terms and conditions
as the currently outstanding Subordinated Notes of American Dental Partners,
Inc. ("ADP"). As of May l4, 1999, ADP had approximately $6,525,000 aggregate
principal amount of Subordinated Notes issued and outstanding. All of the
outstanding Subordinated Notes bear interest at a rate of 7% per annum, are
payable in seven equal annual principal installments plus interest on the
declining unpaid principal balance due on the first seven anniversaries from
their date of issuance, are unsecured debt obligations of ADP and are subject
to subordination agreements which are substantially the same as the
subordination agreements described below.
The Subordinated Notes offered hereby will be issued on the following terms
and conditions:
Rates of Interest; Terms of Repayment
The rates of interest on the Subordinated Notes offered hereby will be
determined through negotiations with the securityholders or principal owners of
the businesses whose securities or assets are to be acquired in acquisition and
affiliation transactions. However, the rate of interest for any Subordinated
Note will not be less than a rate which is sufficient to avoid imputed interest
under any applicable section of the Internal Revenue Code as of the date of
issuance of such Subordinated Note. The Subordinated Notes will be payable in
seven equal annual principal installments plus interest on the declining unpaid
principal balance due on the first seven anniversaries from their date of
issuance. ADP will have the right to prepay all or part of the principal
balance of the Subordinated Notes at any time, without penalty. Payments under
the Subordinated Notes will be subject to indemnification setoff rights in
favor of ADP. ADP will have the right, to the extent it is entitled to
indemnification from the securityholders or principal owners of the businesses
whose securities or assets are to be acquired, to setoff the amount of damages
incurred by ADP as a result of an indemnifiable claim against amounts due from
ADP under the Subordinated Notes.
50
<PAGE>
Subordination Arrangements
Each of the Subordinated Notes will be unsecured debt obligations of ADP. In
addition, each of the Subordinated Notes will be subject to subordination
agreements which will be executed by each securityholder or principal owners of
the businesses whose securities or assets are to be acquired in an acquisition
or affiliation transaction. Under the subordination agreements, the payment of
the Subordinated Notes will be subordinate and junior in right of payment to
the payment in full of all obligations of ADP for borrowed money ("Senior
Indebtedness"), except as follows: (a) debt arising under instruments delivered
by ADP to an unaffiliated entity or owners of such entity in connection with
the acquisition of such entity; (b) any preferred stock or other equity
security of ADP; and (c) any indebtedness owed by ADP to an affiliate (as
defined in the subordination agreement). Pursuant to the subordination
agreements, the holders of the Subordinated Notes (the "Holders") will not be
permitted to accept or receive any payment on the Subordinated Notes; provided
that the Holders may accept mandatory scheduled payments under the Subordinated
Notes unless at the time of such payment there exists a default on any payment
for the Senior Indebtedness or there exists any other default with respect to
the Senior Indebtedness permitting the holders of Senior Indebtedness to
accelerate the maturity of such indebtedness. If a payment default exists under
the Subordinated Notes, the Holders may give written notice of such default to
the holders of the Senior Indebtedness (the "Senior Debt Holders"). Thereafter,
the Senior Debt Holders will have 180 days to either declare a default under
the Senior Indebtedness or consent to ADP making scheduled payments under the
Subordinated Notes (the "Consent") until the Consent is terminated by the
Senior Debt Holders. If the Senior Debt Holders (i) fail to do one of the
foregoing alternatives or (ii) terminate the Consent and a payment default
occurs under the Subordinated Notes on either of the next two succeeding
scheduled payments, then the Holders will have the right to enforce their
respective rights under the Subordinated Notes.
In the event of any dissolution, winding-up, liquidation, restructuring, or
other reorganization of ADP (a "Reorganization"), all Senior Indebtedness will
be paid in full before any payment is made on the Subordinated Notes. In
addition, the Holders will, pursuant to the Subordination Agreement,
irrevocably authorize ADP or the Senior Debt Holders to, upon the occurrence of
a Reorganization:
(a) prove and enforce any claims with respect to the Subordinated Notes in
the name of the Senior Debt Holders or the Holders;
(b) vote claims arising under the Subordinated Indebtedness; and
(c) accept and receive any payment or distribution made under the
Subordinated Notes and apply such payment or distribution to the Senior
Indebtedness.
If any payment or distribution is made to the Holders with respect to the
Subordinated Notes before all Senior Indebtedness had been paid in full and
before the obligations of the Senior Debt Holders to extend credit have been
irrevocably terminated, such payment or distribution will be held in trust by
the Holders and promptly paid over to the Senior Debt Holders for application
to the payment of all Senior Indebtedness. The Subordination Agreement also
contains material restrictions on the Holders' enforcement of remedies under
the Subordinated Notes.
As of May 14, 1999, the amount of outstanding Senior Indebtedness was
$14,197,000.
ADP conducts all of its operations through subsidiaries and expects that it
will continue to do so in the future. The Subordinated Notes represent
indebtedness of ADP only. Creditors and holders of indebtedness (including
preferred stock, if any) of each subsidiary, although not holders of Senior
Indebtedness, will have a claim on the assets of such subsidiary prior to the
claims of the Holders.
SHARES ELIGIBLE FOR FUTURE SALE
No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of our Common Stock. Nevertheless, sales of substantial amounts
51
<PAGE>
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of our Common
Stock and could impair our future ability to raise capital through an offering
of our equity securities. See "Risk Factors--Shares Eligible for Future Sale."
Sales of Restricted Shares
As of May 14, 1999, we had a total of 7,517,448 shares of Common Stock
outstanding. Of these shares, the 2,587,500 shares of Common Stock sold in the
initial public offering (which includes the underwriters' over-allotment
option) and the 30,814 shares of Common Stock issued pursuant to our 1997
Employee Stock Purchase Plan are freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of us,
as defined in the Securities Act, who are required to sell such shares under
Rule 144 under the Securities Act. Additionally 4,374,250 shares of Common
Stock outstanding are "restricted securities" as that term is defined by Rule
144 (the "Restricted Shares"). The Restricted Shares were issued and sold by us
in private transactions in reliance upon exemptions from registration under the
Securities Act. Finally, 70,122 shares of Common Stock were issued to former
owners of dental groups that affiliated with us and are subject to contractual
restrictions on transfer without our consent, which restrictions expire one
year from the date of issuance.
The 4,374,250 of Restricted Shares are eligible for sale in the public
market pursuant to Rule 144. In general, under Rule 144 as currently in effect,
a person (or persons whose shares are aggregated) who has beneficially owned
restricted securities for at least one year (including the holding period of
any prior owner except an affiliate), including persons who may be deemed
"affiliates" of us, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 75,174 shares
as of the date hereof) or (ii) the average weekly trading volume of our Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner-
of-sale provisions and notice requirements, and to the availability of current
public information about us. In addition, a person who is not deemed to have
been an affiliate of us at the time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate),
would be entitled to sell such shares under Rule 144 (k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
Stock Option and Purchase Plans
As of May 14, 1999, 1,828,606 shares of Common Stock were reserved for
issuance under our stock plans, of which 1,377,393 shares were issuable upon
the exercise of outstanding stock options, and 200,000 shares of Common Stock
were reserved for issuance under the employee stock purchase plan, of which
30,814 shares have been issued. We have filed registration statements on Form
S-8 under the Securities Act to register shares of Common Stock issuable
pursuant to certain of our stock option plans (our 1996 Stock Option Plan, 1996
Time Accelerated Restricted Stock Option Plan and 1996 Directors Stock Option
Plan) and our 1997 Employee Stock Purchase Plan. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates.
Registration Rights
The holders of 4,259,982 shares of Common Stock have the right under certain
circumstances to require us to register their shares under the Securities Act
for resale to the public, and holders of approximately 4,794,212 shares have
the right to include their shares in a registration statement filed by us. See
"Certain Transactions."
52
<PAGE>
Shelf Registration for Future Affiliations
The 750,000 shares of Common Stock issuable pursuant to this Offering
generally will be eligible for resale after their issuance as follows: (i) for
non-affiliates of the businesses we acquire, without restriction; and (ii) for
affiliates of the businesses we acquire, subject to compliance with the volume
and manner-of-sale restrictions of Rule 145, unless in each case we
contractually restrict their resale. We anticipate that the persons acquiring
shares of Common Stock in business combination transactions pursuant to this
Offering will be contractually required to hold all or some portion of the
Common Stock for some period of time. See "Shares Eligible for Future Sale."
PLAN OF DISTRIBUTION
The Company
This prospectus covers the offer and sale of up to 750,000 shares of Common
Stock and up to $25,000,000 aggregate principal amount of Subordinated Notes,
which we may issue from time to time in connection with the future direct and
indirect affiliations or acquisitions of other businesses, properties, or
securities in acquisition or affiliation transactions in accordance with Rule
415(a)(1)(viii) of Regulation C under the Securities Act or as otherwise
permitted under the Securities Act.
We expect that the terms upon which we may issue the Common Stock and/or the
Subordinated Notes in acquisition or affiliation transactions will be
determined through negotiations with the securityholders or principal owners of
the businesses whose securities or assets are to be acquired, including the
rates of interest for the Subordinated Notes. We expect that the Common Stock
issued will be valued at prices reasonably related to market prices for the
Common Stock prevailing either at the time an acquisition agreement is executed
or at the time an acquisition is consummated. The Subordinated Notes will be
unsecured debt obligations of us, subordinated to all Senior Indebtedness,
payable over seven years and on parity with all other Subordinated Notes
(whether currently outstanding or hereafter issued).
General
All expenses of this Offering will be paid by us. No underwriting discounts
or commissions will be paid in connection with our issuance of shares of Common
Stock and/or Subordinated Notes in acquisition or affiliation transactions,
although finder's fees may be paid with respect to specific transactions. Any
person receiving a finder's fee may be deemed to be an Underwriter within the
meaning of the Securities Act.
The shares of Common Stock offered hereunder will be tradeable on the Nasdaq
National Market, but such shares may be subject to certain contractual holding
period restrictions as described above. At present, there is no market for the
Subordinated Notes, and it is not anticipated that a market for the
Subordinated Notes will develop in the foreseeable future. In addition, the
acquisition agreements to be entered into in connection with the acquisition or
affiliation transactions will set forth restrictions with respect to the
transfer of the Subordinated Notes.
VALIDITY OF SECURITIES
The validity of the securities offered hereby will be passed upon for us by
Baker & Hostetler LLP, Columbus, Ohio. Gary A. Wadman, a partner of Baker &
Hostetler LLP, is our Secretary.
EXPERTS
The consolidated financial statements of American Dental Partners, Inc. as
of December 31, 1997 and 1998 and for each of the years in the three-year
period ended December 31, 1998 have been included herein
53
<PAGE>
and in the registration statement in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Interim Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 (audited) and March
31, 1999 (unaudited).................................................... F-23
Consolidated Statements of Earnings for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-24
Consolidated Statement of Stockholders' Equity for the Three Months Ended
March 31, 1999 (unaudited).............................................. F-25
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1998 and 1999 (unaudited)........................................... F-26
Notes to Interim Consolidated Financial Statements....................... F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Dental Partners, Inc.:
We have audited the accompanying consolidated balance sheets of American
Dental Partners, Inc. (the "Company") as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Dental Partners, Inc. as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Boston, Massachusetts
February 12, 1999
F-2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 4,675 $ 2,091
Accounts receivable......................................... 101 186
Receivables due from affiliated practices................... 3,207 4,579
Inventories................................................. 387 585
Prepaid expenses and other receivables...................... 1,631 1,466
Deferred income taxes....................................... -- 65
------- -------
Total current assets...................................... 10,001 8,972
------- -------
Property and equipment, net.................................. 8,752 12,943
------- -------
Non-current assets:
Intangible assets, net...................................... 28,975 47,152
Deferred income taxes....................................... -- 1,120
Other assets................................................ 231 348
------- -------
Total non-current assets.................................. 29,206 48,620
------- -------
Total assets.............................................. $47,959 $70,535
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 2,618 $ 3,010
Accrued compensation, benefits and taxes.................... 3,001 3,426
Accrued expenses............................................ 2,666 3,377
Income taxes payable........................................ 183 805
Current maturities of debt.................................. 774 1,079
------- -------
Total current liabilities................................. 9,242 11,697
------- -------
Non-current liabilities:
Long-term debt.............................................. 21,253 9,980
Deferred income taxes....................................... 231 --
Other liabilities........................................... 27 553
------- -------
Total non-current liabilities............................. 21,511 10,533
------- -------
Total liabilities......................................... 30,753 22,230
------- -------
Series A convertible preferred stock, par value $0.01 per
share, 400,000 shares authorized,
issued and outstanding as of December 31, 1997; no shares
authorized, issued or outstanding as of December 31, 1998... 8,641 --
Series B redeemable preferred stock, par value $0.01 per
share, 70,000 shares authorized, issued and outstanding as
of December 31, 1997; no shares authorized, issued or
outstanding as of December 31, 1998......................... 7,656 --
Stockholders' equity:
Preferred stock, par value $0.01 per share, 530,000 and
1,000,000 shares authorized, no shares issued or
outstanding................................................. -- --
Common stock, par value $0.01 per share, 25,000,000 shares
authorized, 2,394,212 and 7,436,066 shares issued and
outstanding................................................. 24 74
Additional paid-in capital.................................. 2,307 45,742
Unearned compensation....................................... (49) (24)
Retained earnings (accumulated deficit)..................... (1,373) 2,513
------- -------
Total stockholders' equity................................ 909 48,305
------- -------
Commitments and contingencies
Total liabilities and stockholders' equity.................. $47,959 $70,535
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net revenue.......................................... $ 3,933 $53,270 $84,090
------- ------- -------
Operating expenses:
Salaries and benefits.............................. 2,098 28,438 43,190
Lab fees and dental supplies....................... 534 6,435 10,796
Office occupancy................................... 389 4,814 7,635
Other operating expenses........................... 773 6,264 6,840
General corporate expenses......................... 2,395 3,337 3,951
Depreciation....................................... 177 1,580 2,495
Amortization of intangible assets.................. 48 645 1,732
------- ------- -------
Total operating expenses......................... 6,414 51,513 76,639
------- ------- -------
Earnings (loss) from operations...................... (2,481) 1,757 7,451
Interest expense (income), net..................... (38) 563 1,085
------- ------- -------
Earnings (loss) before income taxes.................. (2,443) 1,194 6,366
Income taxes....................................... -- 124 2,480
------- ------- -------
Net earnings (loss)................................ $(2,443) $ 1,070 $ 3,886
======= ======= =======
Net earnings (loss) per common share:
Basic.............................................. $ (3.45) $ (0.05) $ 0.59
Diluted............................................ $ (3.45) $ (0.05) $ 0.54
Weighted average common shares outstanding:
Basic.............................................. 768 2,273 5,907
Diluted............................................ 768 2,273 6,867
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1997 and 1998
(in thousands)
<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 January 1,
1996................... -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock for
acquisitions and
affiliations......... 1,613 16 2,673 -- -- 2,689
Sale of common stock.. 600 6 191 (97) -- 100
Amortization of
unearned
compensation......... -- -- -- 23 -- 23
Dividends on Series A
convertible preferred
stock................ -- -- (109) -- -- (109)
Dividends on Series B
redeemable preferred
stock................ -- -- (96) -- -- (96)
Net loss.............. -- -- -- -- (2,443) (2,443)
----- ---- ------- ---- ------- -------
Balance at December 31,
1996................... 2,213 22 2,659 (74) (2,443) 164
Issuance of common
stock for
acquisitions and
affiliations......... 181 2 840 -- -- 842
Amortization of
unearned
compensation......... -- -- -- 25 -- 25
Dividends on Series A
convertible preferred
stock................ -- -- (632) -- -- (632)
Dividends on Series B
redeemable preferred
stock................ -- -- (560) -- -- (560)
Net earnings.......... -- -- -- -- 1,070 1,070
----- ---- ------- ---- ------- -------
Balance at December 31,
1997................... 2,394 24 2,307 (49) (1,373) 909
Issuance of common
stock in initial
public offering,
net.................. 2,588 26 34,570 -- -- 34,596
Issuance of common
stock for
acquisitions and
affiliations......... 54 -- 443 -- -- 443
Amortization of
unearned
compensation......... -- -- -- 25 -- 25
Dividends on Series A
convertible preferred
stock................ -- -- (200) -- -- (200)
Dividends on Series B
redeemable preferred
stock................ -- -- (195) -- -- (195)
Conversion of Series A
convertible preferred
stock to common
stock................ 2,400 24 8,817 -- -- 8,841
Net earnings.......... -- -- -- -- 3,886 3,886
----- ---- ------- ---- ------- -------
Balance at December 31,
1998................... 7,436 $ 74 $45,742 $(24) $ 2,513 $48,305
===== ==== ======= ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................. $ (2,443) $ 1,070 $ 3,886
Adjustments to reconcile net earnings (loss) to
net cash provided by (used for) operating
activities:
Depreciation.................................... 177 1,580 2,495
Amortization of intangible assets............... 48 645 1,732
Other amortization.............................. 23 65 106
Deferred income taxes........................... -- (32) 1,466
Changes in assets and liabilities, net of
acquisitions and affiliations:
Accounts receivable............................ 1,417 1,871 864
Receivables due from affiliated practices...... (1,707) (1,801) (764)
Other current assets........................... 237 509 (384)
Accounts payable and accrued expenses.......... 941 (314) (418)
Accrued compensation, benefits and taxes....... (232) 427 118
Income taxes payable........................... -- (29) 670
-------- -------- --------
Net cash provided by (used for) operating
activities................................... (1,539) 3,991 9,771
-------- -------- --------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash
acquired....................................... (6,632) (14,878) (18,290)
Capital expenditures, net....................... (386) (3,212) (5,074)
Other........................................... 140 (1,420) (1,522)
-------- -------- --------
Net cash used for investing activities........ (6,878) (19,510) (24,886)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Series A convertible
preferred stock................................ 7,900 -- --
Proceeds from issuance of Series B redeemable
preferred stock................................ 7,000 -- --
Proceeds from issuance of common stock.......... 100 -- --
Borrowings under (repayments of) revolving line
of credit, net................................. -- 16,700 (12,400)
Repayment of borrowings......................... (747) (1,543) (2,254)
Proceeds from issuance of common stock in
initial public offering, net of underwriting
discounts and commissions...................... -- -- 36,096
Redemption of Series B redeemable preferred
stock.......................................... -- -- (7,851)
Payment of initial public offering costs........ -- (557) (943)
Payment of debt issuance costs.................. -- (242) (117)
-------- -------- --------
Net cash provided by financing activities..... 14,253 14,358 12,531
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... 5,836 (1,161) (2,584)
Cash and cash equivalents at beginning of year... -- 5,836 4,675
-------- -------- --------
Cash and cash equivalents at end of year......... $ 5,836 $ 4,675 $ 2,091
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net..... $ 3 $ 459 $ 898
======== ======== ========
Cash paid during the year for income taxes,
net............................................ $ -- $ 185 $ 348
======== ======== ========
Supplemental disclosure of non-cash information:
Dividends accrued on Series A convertible
preferred stock and Series B redeemable
preferred stock................................ $ 205 $ 1,192 $ 395
======== ======== ========
Conversion of Series A convertible preferred
stock to common stock.......................... $ -- $ -- $ 8,841
======== ======== ========
Acquisitions and affiliations:
Assets acquired................................. $ 20,099 $ 24,693 $ 26,938
Liabilities assumed and issued.................. (10,063) (7,054) (8,109)
Common stock issued............................. (2,689) (842) (443)
-------- -------- --------
Cash paid....................................... 7,347 16,797 18,386
Less cash acquired.............................. (715) (1,919) (96)
-------- -------- --------
Net cash paid for acquisitions and
affiliations................................. $ 6,632 $ 14,878 $ 18,290
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1997 and 1998
(1) Description of Business
American Dental Partners, Inc. (the "Company") was formed in December 1995
to provide management services to dental practices and commenced operations in
January 1996. The Company acquires substantially all the assets of the dental
practices with which it affiliates, 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 long-term service agreements
with these affiliated dental practices. The Company provides all services
necessary for the administration of the non-clinical aspects of the dental
operations. Services provided to the affiliated dental practices include
assistance with information systems, budgeting, financial reporting, facilities
management, third-party payor contracting, supplies and equipment procurement,
billing and collecting accounts receivable, marketing and recruiting, hiring
and training support staff.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. The Company does not own any interests in or
control the activities of the affiliated dental practices. Accordingly, the
consolidated financial statements of the affiliated dental practices are not
consolidated with those of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Prior Period Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the year ended December 31, 1997 in order to conform with the
December 31, 1998 presentation.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents.
F-7
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
Fair Value of Financial Instruments
The Company believes the carrying amount of cash and cash equivalents,
accounts receivable, receivables due from affiliated practices, accounts
payable and accrued expenses approximate fair value because of the short-term
nature of these items. The carrying amount of long-term debt approximates fair
value because the interest rates approximate rates at which similar types of
borrowing arrangements could be obtained by the Company.
Net Revenue
The Company's net revenue represents the aggregate amounts charged to
affiliated dental practices pursuant to the terms of the service agreements.
Under such agreements, the affiliated dental practices reimburse the Company
for expenses incurred on their behalf in connection with the operation and
administration of the dental facilities and pay fees to the Company for its
management services. The Company's service fees generally consist of a fixed
monthly fee and an additional variable fee. Under certain service agreements,
the Company's service fees consist of a variable monthly fee which is based
upon a specified percentage. Additionally, the Company's net revenue includes
amounts from third party payors related to the arrangement of the provision of
care to patients. The Company records all revenue monthly as earned.
Inventories
Inventories consist primarily of dental supplies and are stated at the lower
of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
related assets which are 30-40 years for buildings, 3-12 years for equipment
and 5-7 years for furniture and fixtures.
Property and equipment under capital leases are stated at the present value
of minimum lease payments at inception of the lease. Equipment held under
capital leases and leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset. Amortization of assets
subject to capital leases is included in depreciation expense.
Intangible Assets
Identifiable intangible assets result from service agreements with the
affiliated dental groups and goodwill associated with the Company's
acquisition. The estimated fair value of the service agreements is the excess
of the purchase price over the estimated fair value of the tangible assets
acquired and liabilities assumed of dental practices. Intangible assets
associated with service agreements and goodwill are amortized over 25 years. In
the event a service agreement is terminated, the related affiliated dental
practice is generally required to purchase, at the Company's option, the
unamortized balance of intangible assets at the current book value, as well as
all related other assets associated with the affiliated dental practice.
Accumulated amortization amounted to $28,000, $673,000 and $2,405,000 at
December 31, 1996, 1997 and 1998, respectively.
The Company reviews the carrying value of intangible assets on an entity by
entity basis to determine if facts and circumstances exist which would suggest
that the intangible assets may be impaired or that the amortization period
needs to be modified. Among the factors the Company considers in making the
evaluation
F-8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
are changes in the practices' market position, reputation, profitability and
geographical penetration. If conditions are present which indicate impairment
is probable, the Company will prepare a projection of the undiscounted cash
flows of the specific practice and determine if the intangible assets are
recoverable based on these undiscounted cash flows. If impairment is indicated,
then an adjustment will be made to reduce the carrying amount of the intangible
assets to their fair value.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of
changes in the tax rate is recognized in operations in the period that includes
the enactment date.
Stock Option Plans
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," allows companies to recognize
expense for the fair value of stock-based awards or to continue to apply the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and disclose the effects of SFAS 123 as if the fair-value-based method defined
in SFAS No. 123 had been applied. Under APB Opinion No. 25, compensation
expense is recognized only if on the measurement date the fair value of the
underlying stock exceeds the exercise price. The Company has elected to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
Earnings Per Share
Earnings per share are computed based on Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share." 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.
Recently Issued Financial Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
requires adoption by the Company by January 1, 1999. SOP 98-1 provides guidance
on accounting for costs of computer software developed or obtained for internal
use.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities," which requires adoption by the
Company by January 1, 1999. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of start-
up activities and organization costs to be expensed as incurred.
Adoption of these statements is not expected to have a material impact on
the Company's consolidated financial statements.
F-9
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
(3) Accounts Receivable and Net Revenue
Accounts Receivable
Accounts receivable represent amounts due from patients and third party
payors for dental services provided by affiliated dental practices that were
outstanding at the time the Company acquired the assets of the practice and
amounts due from third party payors related to the arrangement of the provision
of care to patients.
Receivables Due From Affiliated Dental Practices
Receivables due from affiliated practices represent amounts due pursuant to
the terms of the service agreements as described below.
Revenue--Affiliated Dental Practices
The affiliated dental 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 .
The Company does not consolidate the financial statements of its affiliated
dental practices with those of the Company. The adjusted gross revenue and
amounts retained by the affiliated dental practices are presented below for
illustrative purposes only (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1996 1997 1998
----------------- ------------------ ------------------
All All All
Park Affiliated Park Affiliated Park Affiliated
Dental Practices Dental Practices Dental Practices
------ ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Adjusted gross revenue-
affiliated dental
practices............. $4,459 $4,920 $38,515 $64,492 $45,142 $105,438
Amounts retained by
affiliated dental
practices............. 858 1,025 8,461 16,050 10,728 30,022
------ ------ ------- ------- ------- --------
Net revenue earned by
the Company under
service agreements.... $3,601 $3,895 $30,054 $48,442 $34,414 $ 75,416
====== ====== ======= ======= ======= ========
</TABLE>
Net Revenue
The Company's net revenue represents the aggregate amounts charged to
affiliated dental practices pursuant to the terms of the service agreements.
Under such agreements, the affiliated dental practices reimburse the Company
for actual expenses incurred on their behalf in connection with the operation
and administration of the dental facilities and pay fees to the Company for its
management services. The Company's service fees generally 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 the Company
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 the Company in the amount of such excess up
to budgeted operating income and 50% of such excess over budgeted operating
income. Under certain service agreements, the Company's 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.
Additionally, the Company's net revenue includes amounts from third party
payors related to the arrangement of the provision of care to patients. The
Company records its revenue monthly as earned.
F-10
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
For the years ended December 31, 1996, 1997 and 1998, net revenue consisted
of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Reimbursement of expenses:
Rent expense.......................................... $ 267 $ 3,476 $ 5,590
Other operating expenses.............................. 2,908 32,910 50,688
------ ------- -------
Total reimbursement of expenses...................... 3,175 36,386 56,278
------ ------- -------
Service fees:
Monthly fee........................................... 720 10,724 17,306
Additional variable fee............................... -- 1,332 1,832
------ ------- -------
Total service fees................................... 720 12,056 19,138
------ ------- -------
Net revenue earned by the company under service
agreements.......................................... 3,895 48,442 75,416
Revenue related to the arrangement of the provision of
care to patients...................................... 38 4,828 8,674
------ ------- -------
Total net revenue.................................... $3,933 $53,270 $84,090
====== ======= =======
</TABLE>
(4) Acquisitions and Affiliations
During the year ended December 31, 1997, the Company acquired substantially
all the assets of six dental practices and a related entity associated with one
of these practices, Orthocare, Ltd., (now a wholly-owned subsidiary), which
contracts with third party payors and orthodontic providers to arrange for the
provision of orthodontic care to patients insured by such third party payors.
The Company 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."
During the year ended December 31, 1998, the Company acquired substantially
all the assets of ten dental group 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."
F-11
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
The 1997 and 1998 Transactions are as follows:
<TABLE>
<CAPTION>
Date Affiliated Group Location(s)
---- ---------------- ----------
<S> <C> <C>
March 1997.............. Malcolm R. Scott, D.D.S. San Marcos, TX
March 1997.............. Lakeside Dental Care Metairie, LA
May 1997................ Chestnut Hills Dental 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 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 James J. Peterman, D.D.S. Madison, WI
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
</TABLE>
The accompanying consolidated financial statements include the results of
operations under the service agreements from the date of acquisition. The
excess of the purchase price associated with all of the 1997 and 1998
Transactions over the estimated fair value of net assets acquired has been
recorded as intangible assets which are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
Fair value of total consideration paid............................. $42,081
Fair value of net tangible assets acquired and liabilities
assumed........................................................... 148
-------
Excess of fair value of the consideration paid over the fair value
of net tangible assets acquired................................... $41,933
=======
The excess of the fair value of the consideration paid over the
fair value of the net tangible assets acquired has been allocated
as follows:
Service agreements associated with affiliations.................... $38,573
Goodwill associated with the acquisition........................... 3,360
-------
$41,933
=======
</TABLE>
If the acquisition of Orthocare, Ltd., which was accounted for as a
purchase, had occurred on January 1, 1996, the Company's unaudited net revenue,
earnings (loss) before income taxes, net earnings (loss) and net loss per share
would have been $7,661,000, $(2,465,000), $(2,465,000), and $(3.24) per share,
respectively, for the year ended December 31, 1996 and $56,346,000, $1,248,000,
$1,118,000 and $(0.03) per share, respectively, for the year ended December 31,
1997. Such pro forma financial information reflects certain adjustments,
including amortization of intangibles, income tax effects and an increase in
the weighted average shares outstanding. This unaudited pro forma information
does not necessarily reflect the results of operations that would have occurred
had the acquisition taken place at the beginning of 1996 and is not necessarily
indicative of results that may be obtained in the future.
Subsequent to December 31, 1998, the Company acquired substantially all the
assets of two dental practices and simultaneously entered into a 40-year
service agreement with one of the affiliated dental groups (the dentists of the
other dental group joined an existing affiliate). The aggregate purchase price
paid in connection with these transactions consisted of approximately $3.9
million in cash, $0.1 million in subordinated promissory notes and $0.1 million
in deferred payments. These transactions are referred to as the "1999
Transactions."
F-12
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
(5) Property and Equipment
Property and Equipment
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Land, buildings and leasehold improvements................ $ 6,376 $ 9,850
Equipment ................................................ 6,191 9,938
Furniture and fixtures.................................... 2,868 3,461
------- --------
Total property and equipment............................. 15,435 23,249
Less accumulated depreciation............................. (6,683) (10,306)
------- --------
Property and equipment, net.............................. $ 8,752 $ 12,943
======= ========
</TABLE>
Operating Leases
The Company is obligated under non-cancelable operating leases for premises
and equipment expiring in various years through the year 2009. Rent expense for
the years ended December 31, 1996, 1997 and 1998 amounted to $319,000,
$3,926,000 and $6,248,000, respectively, of which $267,000, $3,476,000 and
$5,590,000 were reimbursed under service agreements. The Company has several
leases with stockholders that were assumed in connection with its affiliation
transactions. Such amounts are generally reimbursed pursuant to the terms of
the service agreements.
Minimum future rental payments under non-cancelable operating leases and
amounts to be reimbursed under service agreements as of December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
Amount to be
Reimbursed
Under
Total Amount Service Net
Due Agreements Amount
------------ ------------ ------
<S> <C> <C> <C>
1999....................................... $ 5,817 $ 5,268 $ 549
2000....................................... 5,152 4,676 476
2001....................................... 4,486 4,056 430
2002....................................... 3,967 3,613 354
2003....................................... 3,333 3,184 149
Thereafter................................. 13,836 13,836 --
------- ------- ------
Total minimum lease payments.............. $36,591 $34,633 $1,958
======= ======= ======
</TABLE>
F-13
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
(6) Income Taxes
Income tax expense (benefit) for the years ended December 31 consists of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- ------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ 54 $ 704
State.................................................. -- 102 310
----- ----- ------
-- 156 1,014
----- ----- ------
Deferred:
Federal................................................ -- (32) 1,249
State.................................................. -- -- 217
----- ----- ------
-- (32) 1,466
----- ----- ------
Total income taxes.................................... $ -- $ 124 $2,480
===== ===== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- ------
<S> <C> <C>
Deferred tax assets:
Operating loss and other carryforwards.................... $ 989 $ 91
Property and equipment.................................... 566 632
Organization and start-up costs........................... 243 630
Accrued expenses and other liabilities.................... 730 524
------- ------
Total gross deferred tax assets........................... 2,528 1,877
Valuation allowance....................................... (2,454) --
------- ------
Total deferred tax assets................................ 74 1,877
------- ------
Deferred tax liabilities:
Intangibles............................................... (16) (389)
Other..................................................... (289) (303)
------- ------
Total deferred tax liabilities........................... (305) (692)
------- ------
Net deferred tax assets (liabilities).................... $ (231) $1,185
======= ======
</TABLE>
The valuation allowance for deferred tax assets was $2,454,000 and $0 as of
December 31, 1997 and 1998, respectively. The net change in the total
valuation allowance for the years ended December 31, 1996, 1997 and 1998 was
an increase of $3,062,000, a decrease of $608,000 and a decrease of
$2,454,000, respectively. The valuation allowance was reversed due to the
Company's taxable earnings in 1998 and management's assessment that it is more
likely than not that the remaining net deferred tax assets will be realized
through future taxable earnings. The reversal of the valuation allowance
attributable to acquired deferred tax assets reduced intangible assets by
$2,083,000. The remaining reversal of the valuation allowance provided a tax
benefit of $371,000 in the Company's consolidated statement of operations for
the year ended December 31, 1998.
F-14
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
The net deferred tax assets (liabilities) consisted of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
----------------------- ----------------------
Federal State Total Federal State Total
------- ----- ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Current.................. $ 354 $ 95 $ 449 $ 49 $ 16 $ 65
Non-current.............. 1,457 622 2,079 1,250 562 1,812
Valuation allowance...... (1,807) (647) (2,454) -- -- --
------- ----- ------- ------ ----- ------
Total deferred tax
assets................. 4 70 74 1,299 578 1,877
------- ----- ------- ------ ----- ------
Deferred tax liabilities:
Current.................. -- -- -- -- -- --
Non-current.............. (203) (102) (305) (497) (195) (692)
------- ----- ------- ------ ----- ------
Total deferred tax
liabilities............ (203) (102) (305) (497) (195) (692)
------- ----- ------- ------ ----- ------
Net deferred tax assets
(liabilities).......... $ (199) $ (32) $ (231) $ 802 $ 383 $1,185
======= ===== ======= ====== ===== ======
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $2,092,000 which were utilized in
full to offset Federal taxable income in 1998.
The following table reconciles the Federal statutory income tax rate to the
Company's effective income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- ----
<S> <C> <C> <C>
Income taxes at Federal statutory rate.................. (34.0)% 34.0% 34.0%
State taxes, net of Federal benefit..................... (6.0) 4.0 5.5
Valuation reserve and other changes..................... 33.0 (36.6) (5.0)
Intangibles and other permanent differences............. 7.0 9.0 4.5
----- ----- ----
Effective income tax rate............................... --% 10.4% 39.0%
===== ===== ====
</TABLE>
(7) Debt
Long-term debt and capital lease obligations consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Revolving line of credit advances, collateralized by
substantially all assets of the Company, all at a LIBOR-
based rate of approximately 6.6%........................... $16,700 $ 4,300
Mortgages payable, secured, interest rates ranging from 8.6%
to 8.8% payable in installments through 2015............... 727 660
Note payable, unsecured, interest rate of 8.5% payable in
installments, maturing in 2004............................. 45 40
Subordinated notes payable to stockholders and former
owners, bearing interest at 7%, maturing through 2005...... 4,308 5,894
Capital lease obligations................................... 247 165
------- -------
Total long-term debt and capital lease obligations.......... 22,027 11,059
Less current maturities..................................... 774 1,079
------- -------
Long-term debt and capital lease obligations, excluding
current maturities......................................... $21,253 $ 9,980
======= =======
</TABLE>
F-15
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
Annual maturities of long-term debt and future minimum lease payments under
capital leases as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Long-term Capital
Debt Leases
--------- -------
<S> <C> <C>
1999....................................................... $ 1,029 $ 63
2000....................................................... 1,052 50
2001....................................................... 5,377 50
2002....................................................... 1,104 31
2003....................................................... 1,071 --
Thereafter................................................. 1,261 --
------- ----
Total payments............................................ $10,894 194
=======
Less amounts representing interest......................... 29
----
Total obligations under capital leases..................... $165
====
</TABLE>
Revolving Line of Credit
In April 1997, the Company entered into a $30 million revolving line of
credit agreement with a bank. In December 1998, the Company amended its 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 the Company's option. The margin for LIBOR loans is based upon the Company's
debt coverage ratio and ranges up to 1.625%. 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 December 2001.
(8) Stockholders' Equity
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $0.01 par value. At the closing of the initial public offering, 400,000
shares of Series A Convertible Preferred Stock (which were converted into
2,399,995 shares of Common Stock) and 70,000 shares of Series B Redeemable
Preferred Stock (which were redeemed for cash) were restored to the status of
undesignated preferred stock available for issuance.
Preferred Stock may be issued in one or more series as determined by the
Board of Directors without further stockholder approval, and the Board or
Directors is authorized to fix and determine the terms, limitations, and
relative rights and preferences of such Preferred Stock, and to fix and
determine the variations among series of Preferred Stock. Any new Preferred
Stock issued would have priority over the Common Stock with respect to
dividends and other distributions, including the distribution of assets upon
liquidation and dissolution. Such Preferred Stock may be subject to repurchase
or redemption by the Company. The Board of Directors, without stockholder
approval, could issue Preferred Stock with voting and conversion rights that
could adversely affect the voting power of the holders of Common Stock and the
issuance of which, could be used by the Board of Directors in defense of a
hostile takeover of the Company. As of December 31, 1998, there were no shares
of Preferred Stock issued or outstanding.
F-16
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
Common Stock
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$0.01 par value, of which 2,394,212 and 7,436,066 shares were issued and
outstanding at December 31, 1997 and 1998, respectively. In January and
February of 1996, the Company sold 300,000 shares of its Common Stock for
$100,000. Additionally, in January 1996, the Company sold 300,000 shares of its
Common Stock, which were subject to certain restrictions, for $500. In
connection with this transaction, the Company is recording compensation expense
ratably as the restrictions lapse. Compensation expense amounted to $22,809,
$24,884 and $24,888 for the years ended December 31, 1996, 1997 and 1998,
respectively.
On November 7, 1997, the Company approved a 6-for-1 split of the Company's
Common Stock effected in the form of a stock dividend. All share and per share
amounts in the accompanying consolidated financial statements have been
retroactively restated to reflect this split.
Initial Public Offering
During the second quarter of 1998, the Company sold 2,587,500 shares of
Common Stock in an initial public offering ("IPO") at $15.00 per share. Net
proceeds to the Company after deducting underwriting discounts and commissions
and offering expenses totaled 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, (ii) repay outstanding
indebtedness under the Company's revolving credit facility, including accrued
interest, in the amount of $20,651,000 and (iii) complete additional
affiliation transactions.
Dividend Restriction
The Company has not paid any cash dividends on its Common Stock and does not
plan to pay any cash dividends on its Common Stock in the foreseeable future.
Additionally, the terms of the Company's revolving credit facility prohibit it
from paying dividends or making other payments with respect to its Common Stock
without the lenders' consent.
(9) Stock Option Plans
1996 Stock Option Plan
The Company's 1996 Stock Option Plan, as amended (the "1996 Plan"), provides
for the grant of stock options to key employees. The 1996 Plan permits the
granting of options that qualify as incentive stock options and non-qualified
options. The exercise price of such options is no less than the fair market
value of the Common Stock at the time of grant. Options granted pursuant to the
1996 Plan expire ten years after the date of grant. At December 31, 1998,
options for a total of 973,246 shares were reserved for issuance and options
for 731,232 shares were outstanding under this Plan.
1996 Time Accelerated Restricted Stock Option Plan
The Company's 1996 Time Accelerated Restricted Stock Option Plan, as amended
("TARSOP Plan"), provides for the grant of stock options to key employees. Only
non-qualified options may be granted pursuant to the TARSOP Plan. The exercise
price of such options is no less than the fair market value of the Common Stock
at the time of grant. These options vest at the end of the ninth year, but are
subject to accelerated vesting based on achievement of certain performance
measures. The total number of shares subject to the TARSOP is 360,360. Options
to purchase all such shares have been granted and became exercisable at the
completion of the IPO.
F-17
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
1996 Affiliate Stock Option Plan
The Company's 1996 Affiliate Stock Option Plan, as amended (the "Affiliate
Plan"), provides for the grant of stock options to certain persons associated
with the affiliated dental practices. Only non-qualified options may be granted
pursuant to the Affiliate Plan. The exercise price of such options is no less
than the fair market value of the Common Stock at the time of grant. Options
granted pursuant to the Affiliate Plan expire ten years after the date of
grant. At December 31, 1998, options for a total of 110,000 shares were
reserved for issuance and options for 89,586 shares were outstanding under this
Plan.
1996 Directors Stock Option Plan
The Company's 1996 Directors Stock Option Plan, as amended (the "Directors
Plan"), provides for the granting of options to outside directors. Only non-
qualified options may be granted pursuant to the Directors Plan. The exercise
price of such options is no less than the fair market value of the Common Stock
at the time of grant. Options granted pursuant to the Directors Plan expire ten
years after the date of grant. At December 31, 1998, options for a total of
60,000 shares were reserved for issuance and options for 24,800 shares were
outstanding under this Plan.
Stock Option Activity
A summary of stock option activity under all the Company's stock option
plans for the years ended December 31, 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ------------------- -------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 566,670 $ 3.50 1,118,166 $ 8.69
Granted................. 571,170 3.50 552,096 14.04 101,518 12.01
Cancelled............... (4,500) 0.33 (600) 14.17 (13,706) 13.42
------- ----- --------- ------ --------- ------
Outstanding at end of
year................... 566,670 $3.50 1,118,166 $ 8.69 1,205,978 $ 8.92
======= ===== ========= ====== ========= ======
Exercisable at end of
year................... 16,320 $7.59 72,098 $ 6.90 638,573 $ 5.77
======= ===== ========= ====== ========= ======
</TABLE>
The Company accounts for stock options in accordance with APB Opinion No.
25, under which no compensation cost has been recognized. Had compensation cost
for stock options issued been determined consistent with SFAS No. 123, the
Company's net earnings in 1998 would have been reduced by approximately $28,000
with no impact on diluted net earnings per share. There would have been no
impact to the Company's net earnings (loss) and diluted net loss per share in
1996 and 1997.
The weighted average fair value of options granted during 1998 was $3.02.
The fair values of the options granted were estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
grants in 1998: risk-free interest rate of 5.0%, expected life of four years,
expected volatility of 56% and no dividends. The following assumptions for
grants in 1996 and 1997 were used: risk-free interest rate of 6.7%, expected
life of four years, no volatility and no dividends.
F-18
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.33 352,770 6.3 $ 0.33 322,770 $ 0.33
$ 8.06--$11.50 223,700 7.6 $ 8.47 147,346 $ 8.33
$12.50--$13.00 125,242 8.6 $12.76 23,233 $12.51
$14.17 504,266 8.5 $14.17 145,224 $14.17
--------- --- ------ ------- ------
1,205,978 7.7 $ 8.92 638,573 $ 5.77
========= === ====== ======= ======
</TABLE>
(10) Employee Benefit Plans
1997 Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan, as amended (the "Employee Stock
Purchase Plan"), enables eligible employees to purchase shares of Common Stock
at a discount on a periodic basis through payroll deductions and is intended to
meet the requirements of Section 423 of the Internal Revenue Code. Purchases
occur at the end of option periods, each of six months' duration, except that
the first such option period began concurrent with the completion of the IPO
and ended on December 31, 1998. The purchase price of Common Stock under the
Employee Stock Purchase Plan is 85% of the lesser of the value of the Common
Stock at the beginning or the end of the option period. Prior to each option
period, participants may elect to have from 2% to 10% of their pay withheld and
applied to the purchase of shares at the end of the option period. The Employee
Stock Purchase Plan imposes a maximum of $10,000 on the amount that may be
withheld from any participant in any option period. A total of 200,000 shares
of Common Stock has been reserved for issuance under the Employee Stock
Purchase Plan, of which 30,814 shares were committed for issuance as of
December 31, 1998.
Under SFAS No. 123, compensation cost would have been recognized for the
fair value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1998: risk-free interest
rate of 5.6%, expected life of 0.71 years, expected volatility of 56% and no
dividends. The fair value of those purchase rights granted in 1998 was $4.82
per share.
Retirement Plans
The Company has a Savings and Retirement Plan (401(k) Plan), adopted October
1, 1996, which is the Company's principal defined contribution retirement plan,
which provides for a match of up to 3% of an employee's compensation.
Additionally, at December 31, 1998, the Company had seven other defined
contribution retirement plans which were acquired in connection with
affiliation transactions. Total plan expense for the years ended December 31,
1996, 1997 and 1998 was $20,000, $189,000 and $423,000, respectively.
F-19
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
(11) Earnings Per Share
Earnings per share are computed based on Statement of Financial Accounting
Standards 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.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted loss per share computations for the years
ended December 31 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
-------- ------- ------
<S> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Net earnings (loss).............................. $ (2,443) $ 1,070 $3,886
Less: Dividends on Series A Convertible Preferred
Stock........................................... (109) (632) (200)
Dividends on Series B Redeemable Preferred
Stock......................................... (96) (560) (195)
-------- ------- ------
Net earnings (loss) available to common
stockholders.................................... $ (2,648) $ (122) $3,491
======== ======= ======
Weighted average common shares outstanding....... 768 2,273 5,907
======== ======= ======
Net earnings (loss) per share.................... $ (3.45) $(0.05) $ 0.59
======== ======= ======
Diluted Earnings (Loss) Per Share:
Net earnings (loss).............................. $ (2,443) $ 1,070 $3,886
Less: Dividends on Series A Convertible Preferred
Stock........................................... (109) (632) --
Dividends on Series B Redeemable Preferred
Stock......................................... (96) (560) (195)
-------- ------- ------
Net earnings (loss) available to common
stockholders.................................... $ (2,648) $ (122) $3,691
======== ======= ======
Weighted average common shares outstanding....... 768 2,273 5,907
Add: Dilutive effect of options (1).............. -- -- 237
Assumed conversion of Series A Convertible Pre-
ferred Stock (1)(2)........................... -- -- 723
-------- ------- ------
Weighted average common shares as adjusted....... 768 2,273 6,867
======== ======= ======
Net earnings (loss) per share.................... $ (3.45) $ (0.05) $ 0.54
======== ======= ======
</TABLE>
- --------
(1) The assumed conversion of Series A Convertible Preferred Stock and the
dilutive effect of stock options were not included in the calculation of
Diluted EPS for the years ended December 31, 1996 and 1997, as the
inclusion of these items would have been antidilutive.
(2) In connection with the IPO, 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 year ended December 31,
1998 assumes conversion of the Series A Convertible Preferred Stock to
Common Stock as of January 1, 1998.
F-20
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Years Ended December 31, 1996, 1997 and 1998
(12) Selected Quarterly Operating Results (unaudited)
The following table sets forth summary quarterly results of operations for
the Company for the years ended December 31, 1997 and 1998 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- -------
1997
- ----
<S> <C> <C> <C> <C>
Net revenue............................. $ 11,226 $ 12,076 $ 13,318 $16,650
Operating expenses...................... 11,081 11,751 12,848 15,833
Earnings from operations................ 145 325 470 817
Earnings before income taxes............ 172 218 355 449
Income taxes............................ -- 7 74 43
Net earnings............................ $ 172 $ 211 $ 281 $ 406
Net earnings (loss) per share:
Basic.................................. $ (0.06) $ (0.04) $ (0.01) $ 0.04
Diluted................................ $ (0.06) $ (0.04) $ (0.01) $ 0.04
Weighted average common shares
outstanding:
Basic.................................. 2,213 2,228 2,255 2,394
Diluted................................ 2,213 2,228 2,255 2,593
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C>
Net revenue............................. $ 18,171 $ 20,217 $ 22,334 $23,368
Operating expenses...................... 16,963 18,637 20,248 20,791
Earnings from operations................ 1,208 1,580 2,086 2,577
Earnings before income taxes............ 769 1,374 1,893 2,330
Income taxes............................ 300 536 738 906
Net earnings............................ $ 469 $ 838 $ 1,155 $ 1,424
Net earnings per share:
Basic.................................. $ 0.06 $ 0.12 $ 0.16 $ 0.19
Diluted................................ $ 0.06 $ 0.11 $ 0.15 $ 0.19
Weighted average common shares
outstanding:
Basic.................................. 2,429 6,265 7,428 7,436
Diluted................................ 2,632 7,103 7,660 7,671
</TABLE>
F-21
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
F-22
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 2,091 $ 2,995
Accounts receivable................................. 186 218
Receivables due from affiliated practices........... 4,579 5,586
Inventories......................................... 585 779
Prepaid expenses and other receivables.............. 1,466 1,569
Deferred income taxes............................... 65 65
------- -------
Total current assets.............................. 8,972 11,212
------- -------
Property and equipment, net........................... 12,943 15,401
------- -------
Non-current assets:
Intangible assets, net.............................. 47,152 56,461
Deferred income taxes............................... 1,120 1,528
Other assets........................................ 348 351
------- -------
Total non-current assets.......................... 48,620 58,340
------- -------
Total assets...................................... $70,535 $84,953
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 3,010 $ 4,158
Accrued compensation, benefits and taxes............ 3,426 3,572
Accrued expenses.................................... 3,377 4,234
Income taxes payable................................ 805 661
Current maturities of debt.......................... 1,079 1,184
------- -------
Total current liabilities......................... 11,697 13,809
------- -------
Non-current liabilities:
Long-term debt...................................... 9,980 20,076
Other liabilities................................... 553 748
------- -------
Total non-current liabilities..................... 10,533 20,824
------- -------
Total liabilities................................. 22,230 34,633
------- -------
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) (18)
Retained earnings................................... 2,513 3,867
------- -------
Total stockholders' equity........................ 48,305 50,320
------- -------
Commitments and contingencies
Total liabilities and stockholders' equity........ $70,535 $84,953
======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
F-23
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------
1998 1999
------- -------
(unaudited)
<S> <C> <C>
Net revenue.................................................... $18,171 $26,234
------- -------
Operating expenses:
Salaries and benefits........................................ 9,649 12,913
Lab fees and dental supplies................................. 2,196 3,507
Office occupancy............................................. 1,609 2,445
Other operating expenses..................................... 1,645 2,154
General corporate expenses................................... 975 1,196
Depreciation................................................. 556 768
Amortization of intangibles.................................. 333 554
------- -------
Total operating expenses................................... 16,963 23,537
------- -------
Earnings from operations....................................... 1,208 2,697
Interest expense, net........................................ 439 284
------- -------
Earnings before income taxes................................... 769 2,413
Income taxes................................................. 300 1,059
------- -------
Net earnings ................................................ $ 469 $ 1,354
======= =======
Net earnings per common share:
Basic ....................................................... $ 0.06 $ 0.18
Diluted...................................................... $ 0.06 $ 0.18
Weighted average common shares outstanding:
Basic ....................................................... 2,429 7,471
Diluted...................................................... 2,632 7,669
</TABLE>
See accompanying notes to interim consolidated financial statements.
F-24
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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......... -- -- -- 6 -- 6
Net earnings.......... -- -- -- -- 1,354 1,354
----- ---- ------- ----- ------ -------
Balance at March 31,
1999................... 7,517 $ 75 $46,396 $ (18) $3,867 $50,320
===== ==== ======= ===== ====== =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
F-25
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1999
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings............................................ $ 469 $ 1,354
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation.......................................... 556 768
Amortization of intangibles........................... 333 554
Other amortization.................................... 25 26
Changes in assets and liabilities, net of acquisitions
and affiliations:
Accounts receivable................................. 45 511
Receivables due from affiliated practices........... 148 (1,640)
Other current assets................................ (111) (149)
Accounts payable and accrued expenses............... (281) 798
Accrued compensation, benefits and taxes............ (1,061) (354)
Income taxes payable................................ 439 (144)
-------- ---------
Net cash provided by operating activities......... 562 1,724
-------- ---------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired..... (2,590) (7,038)
Capital expenditures, net............................... (669) (2,592)
Other................................................... (423) (490)
-------- ---------
Net cash used for investing activities............ (3,682) (10,120)
-------- ---------
Cash flows from financing activities:
Borrowings under (repayments of) revolving line of
credit, net............................................ 3,850 9,597
Common stock issued for the employee stock purchase
plan................................................... -- 303
Repayment of borrowings................................. (387) (586)
Payment of initial public offering costs................ (322) --
Payment of debt issuance costs.......................... -- (14)
-------- ---------
Net cash provided by financing activities......... 3,141 9,300
-------- ---------
Increase in cash and cash equivalents..................... 21 904
Cash and cash equivalents at beginning of period.......... 4,675 2,091
-------- ---------
Cash and cash equivalents at end of period................ $ 4,696 $ 2,995
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net........... $ 361 $ 156
======== =========
Cash paid during the period for income taxes, net....... $ 13 $ 1,203
======== =========
Acquisitions and affiliations:
Assets acquired......................................... $ 4,228 $ 11,101
Liabilities assumed and issued.......................... (1,391) (3,575)
Common stock issued..................................... (247) (359)
-------- ---------
Cash paid............................................... 2,590 7,167
Less cash acquired...................................... -- (129)
-------- ---------
Net cash paid for acquisitions and affiliations... $ 2,590 $ 7,038
======== =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
F-26
<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, 1998.
(2) Acquisitions and Affiliations
During 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 March 31, 1999, the Company acquired substantially
all the assets of five dental group practices and simultaneously entered into
40-year service agreements with two of the affiliated dental groups (three
practices joined existing affiliates). The aggregate purchase price paid in
connection with these transactions consisted of approximately $7.2 million in
cash, $0.7 million in subordinated promissory notes, $0.3 million in deferred
payments and 50,568 shares of Common Stock. All transactions completed in 1999
are referred to as the "1999 Transactions."
The 1998 and 1999 Transactions completed through March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Date Affiliated Group 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
</TABLE>
F-27
<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 1998 and 1999
Transactions over the estimated fair value of the net assets acquired has been
recorded as intangible assets.
(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.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
three months ended March 31:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1999
--------- ---------
(in thousands,
except per share
data)
<S> <C> <C>
Basic Earnings Per Share
Net earnings............................................. $ 469 $ 1,354
Less: Dividends on Series A Convertible Preferred Stock.. (165) --
Dividends on Series B Redeemable Preferred Stock......... (159) --
--------- ---------
Net earnings available to common stockholders............ $ 145 $ 1,354
========= =========
Weighted average common shares outstanding............... 2,429 7,471
========= =========
Net earnings per share................................... $ 0.06 $ 0.18
========= =========
Diluted Earnings Per Share
Net earnings............................................. $ 469 $ 1,354
Less:Dividends on Series A Convertible Preferred Stock... (165) --
Dividends on Series B Redeemable Preferred Stock......... (159) --
--------- ---------
Net earnings available to common stockholders............ $ 145 $ 1,354
========= =========
Weighted average common shares outstanding............... 2,429 7,471
Add: Dilutive effect of options.......................... 203 198
Assumed conversion of Series A Convertible Preferred
Stock (1)............................................... -- --
--------- ---------
Weighted average common shares as adjusted............... 2,632 7,669
========= =========
Net earnings per share................................... $ 0.06 $ 0.18
========= =========
</TABLE>
(1) The assumed conversion of Series A Convertible Preferred Stock was not
included in the calculation of Diluted EPS for the three months ended March
31, 1998, as the inclusion of this item would have been antidilutive.
F-28
<PAGE>
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No person has been authorized in connection with the offering made hereby
to give any information or to make any representations not contained in this
prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by us. This prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any of the
securities offered hereby to any person or by anyone in any jurisdiction in
which it is unlawful to make such offer or solicitation. Neither the delivery
of this prospectus nor any sale made hereunder shall, under any circumstances,
create any implications that the information contained herein is correct as of
any date subsequent to the date hereof.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Our Company.............................................................. 13
Dividend Policy.......................................................... 14
Price Range of Common Stock.............................................. 14
Capitalization........................................................... 15
Selected Historical Consolidated Financial
Data..................................................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 18
Business................................................................. 29
Management............................................................... 40
Certain Transactions..................................................... 46
Principal Stockholders................................................... 48
Description of Capital Stock............................................. 49
Description of Subordinated Notes........................................ 50
Shares Eligible for Future Sale.......................................... 51
Plan of Distribution..................................................... 53
Validity of Securities................................................... 53
Experts.................................................................. 53
Index to Financial Statements............................................ F-1
</TABLE>
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AMERICAN DENTAL PARTNERS, INC.
750,000 Shares of Common Stock
And
$25,000,000 Aggregate Principal Amount of
Subordinated Promissory Notes
-----------
PROSPECTUS
-----------
May 28, 1999
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