<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ___________ to ___________
COMMISSION FILE NUMBER: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3297858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
AMERICAN DENTAL PARTNERS, INC.
301 EDGEWATER PLACE, SUITE 320
WAKEFIELD, MASSACHUSETTS 01880
(Address of principal executive offices, including zip code)
(781) 224-0880
(781) 224-4216 (FAX)
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES NO
--------- --------
Indicate the number of shares outstanding of each of the issurer's classes of
common stock as of the latest practicable date.
Common Stock, $0.01 par value, outstanding as of May 11, 2000: 7,099,084
shares
================================================================================
Exhibit Index appears on Page 19
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999
and March 31, 2000 (unaudited)..................................................... 3
Consolidated Statements of Earnings for the Three Months
Ended March 31, 1999 and 2000 (unaudited).......................................... 4
Consolidated Statement of Stockholders' Equity for the
Three Months Ended March 31, 2000 (unaudited) .................................... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 2000 (unaudited)......................................... 6
Notes to Interim Consolidated Financial Statements ............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................. 16
Item 2. Changes in Securities and Use of Proceeds.......................................... 16
Item 3. Defaults Upon Senior Securities ................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders .............................. 16
Item 5. Other Information ................................................................. 16
Item 6. Exhibits and Reports on Form 8-K .................................................. 17
Signatures ................................................................................... 18
Exhibit Index................................................................................. 19
</TABLE>
2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 2,325 $ 1,503
Accounts receivable................................................................ 261 181
Receivables due from affiliated dental groups...................................... 9,637 11,585
Income taxes receivable............................................................ 416 -
Inventories........................................................................ 1,491 1,429
Prepaid expenses and other receivables............................................. 2,436 2,801
Deferred income taxes.............................................................. 397 397
-------- --------
Total current assets............................................................ 16,963 17,896
-------- --------
Property and equipment, net.......................................................... 23,006 24,672
-------- --------
Non-current assets:
Intangible assets, net............................................................. 69,175 71,938
Deferred income taxes.............................................................. 563 563
Other assets....................................................................... 293 304
-------- --------
Total non-current assets........................................................ 70,031 72,805
-------- --------
Total assets.................................................................... $110,000 $115,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 7,154 $ 6,642
Accrued compensation, benefits and taxes........................................... 4,452 4,246
Accrued expenses................................................................... 3,833 4,648
Income taxes payable............................................................... - 643
Current maturities of debt......................................................... 1,502 1,522
-------- --------
Total current liabilities....................................................... 16,941 17,701
-------- --------
Non-current liabilities:
Long-term debt..................................................................... 40,249 43,371
Other liabilities.................................................................. 581 703
-------- --------
Total non-current liabilities................................................... 40,830 44,074
-------- --------
Total liabilities............................................................... 57,771 61,775
-------- --------
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, 7,537,311
and 7,569,084 shares issued and 7,107,311 and 7,099,084 shares
outstanding..................................................................... 75 76
Additional paid-in capital......................................................... 46,584 46,772
Retained earnings . 8,526 9,994
Treasury stock, at cost, 430,000 and 470,000 shares................................ (2,956) (3,244)
-------- --------
Total stockholders' equity...................................................... 52,229 53,598
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity...................................... $110,000 $115,373
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
MARCH 31,
---------------------------
<S> <C> <C>
1999 2000
------- -------
Net revenue..................................................................... $26,234 $34,130
------- -------
Operating expenses:
Salaries and benefits........................................................ 12,913 16,460
Lab fees and dental supplies................................................. 3,507 4,900
Office occupancy............................................................. 2,445 3,374
Other operating expenses..................................................... 2,154 2,697
General corporate expenses................................................... 1,196 1,414
Depreciation................................................................. 768 1,082
Amortization of intangible assets............................................ 554 773
------- -------
Total operating expenses.............................................. 23,537 30,700
------- -------
Earnings from operations........................................................ 2,697 3,430
Interest expense, net........................................................ 284 846
------- -------
Earnings before income taxes.................................................... 2,413 2,584
Income taxes................................................................. 1,059 1,116
------- -------
Net earnings................................................................. $ 1,354 $ 1,468
======= =======
Net earnings per common share:
Basic........................................................................ $0.18 $0.21
Diluted...................................................................... $0.18 $0.20
Weighted average common shares outstanding:
Basic........................................................................ 7,471 7,125
Diluted...................................................................... 7,669 7,325
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------
COMMON COMMON ADDITIONAL TREASURY TOTAL
STOCK STOCK IN COMMON PAID-IN RETAINED STOCK AT STOCKHOLDERS'
ISSUED TREASURY STOCK CAPITAL EARNINGS COST EQUITY
------- ---------- --------- ---------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999............. 7,537 (430) $75 $46,584 $8,526 $(2,956) $52,229
Issuance of common stock for
employee stock purchase plan......... 32 - 1 188 - - 189
Repurchase of common stock............. - (40) - - - (288) (288)
Net earnings........................... - - - - 1,468 - 1,468
----- ---- --- ------- ------ ------- -------
Balance at March 31, 2000................ 7,569 (470) $76 $46,772 $9,994 $(3,244) $53,598
===== ==== === ======= ====== ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
<S> <C> <C>
1999 2000
-------- --------
Cash flows from operating activities:
Net earnings......................................................................... $ 1,354 $ 1,468
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation...................................................................... 768 1,082
Amortization of intangible assets................................................. 554 773
Other amortization................................................................ 26 21
Changes in assets and liabilities, net of acquisitions and affiliations:
Accounts receivable............................................................ 511 80
Receivables due from affiliated dental groups.................................. (1,640) (1,948)
Other current assets........................................................... (149) (290)
Accounts payable and accrued expenses.......................................... 922 660
Accrued compensation, benefits and taxes....................................... (354) (206)
Income taxes payable and receivable, net....................................... (144) 1,059
-------- -------
Net cash provided by operating activities................................. 1,848 2,699
-------- -------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired.................................. (7,038) (2,767)
Capital expenditures, net............................................................ (2,592) (3,045)
Contingent and deferred payments..................................................... - (39)
Other................................................................................ (490) (246)
-------- -------
Net cash used for investing activities.................................... (10,120) (6,097)
-------- -------
Cash flows from financing activities:
Borrowings under revolving line of credit, net....................................... 9,597 2,960
Repayment of borrowings.............................................................. (586) (285)
Common stock issued for the employee stock purchase plan............................. 303 189
Repurchase of common stock........................................................... - (288)
Payment of debt issuance costs....................................................... (14) -
-------- -------
Net cash provided by financing activities................................. 9,300 2,576
-------- -------
Increase (decrease) in cash and cash equivalents.......................................... 1,028 (822)
Cash and cash equivalents at beginning of period.......................................... 2,420 2,325
-------- -------
Cash and cash equivalents at end of period................................................ $ 3,448 $ 1,503
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net........................................ $ 156 $ 692
======== =======
Cash paid during the period for income taxes, net.................................... $ 1,203 $ 57
======== =======
Acquisitions and affiliations:
Assets acquired...................................................................... $ 11,101 $ 3,726
Liabilities assumed and issued....................................................... (3,582) (959)
Common stock issued.................................................................. (352) -
-------- -------
Cash paid............................................................................ 7,167 2,767
Less cash acquired................................................................... (129) -
-------- -------
Net cash paid for acquisitions and affiliations........................... $ 7,038 $ 2,767
======== =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of American
Dental Partners, Inc. and its wholly-owned subsidiaries (the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
The Company does not own any interests in or control the activities of the
affiliated dental practices. Accordingly, the financial statements of the
affiliated dental practices are not consolidated with those of the Company.
The interim consolidated financial statements are unaudited, but in the
opinion of management include all adjustments, which consist only of normal and
recurring adjustments, necessary for a fair presentation of its financial
position and results of operations. Results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with the
Company's consolidated financial statements as of and for the year ended
December 31, 1999.
Certain reclassifications have been made to the interim consolidated financial
statements for the three months ended March 31, 1999 in order to conform with
the March 31, 2000 presentation.
(2) ACQUISITIONS AND AFFILIATIONS
During calendar 1999, the Company acquired substantially all the assets of 15
dental practices (12 transactions) and simultaneously entered into 40-year
service agreements with eight of the affiliated dental groups (seven practices
joined existing affiliates). The aggregate purchase price paid in connection
with these transactions consisted of approximately $20.0 million in cash, $2.5
million in subordinated promissory notes, $0.9 million in deferred payments and
50,568 shares of Common Stock valued at approximately $0.4 million. All
transactions completed in 1999 are referred to as the "1999 Transactions."
From January 1, 2000 to March 31, 2000, the Company acquired substantially all
the assets of three dental practices and simultaneously entered into a 40-year
service agreement with one of the affiliated dental groups (two practices joined
existing affiliates). The aggregate purchase price paid in connection with
these transactions consisted of approximately $2.8 million in cash, $0.5 million
in subordinated promissory notes and $0.3 million in deferred payments. All
transactions completed in the first three months of 2000 are referred to as the
"2000 Transactions."
7
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The 1999 and 2000 Transactions completed through March 31, 2000 are as follows:
<TABLE>
<CAPTION>
DATE AFFILIATED DENTAL PRACTICE LOCATION(S)
---- -------------------------- -----------
<S> <C> <C>
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.................. Kenneth W. Van Sickle, Jr., D.M.D. Mt. Pleasant, PA
March 1999.................. Jack G. Stacker, D.D.S. Wausau, WI
June 1999................... Kevin M. Strezo, D.D.S. Homer City, PA
June 1999................... Hill Dental Group Columbia, MD
June 1999................... University Dental Associates Winston-Salem, NC
June 1999................... Karen L. Wedde, D.D.S. Appleton and Green Bay, WI
July 1999................... Kenneth P. Dick, D.M.D. Johnstown, PA
July 1999................... Gary R. Christman, D.D.S. Humble and Kingwood, TX
September 1999.............. Dental Associates of Corona, Dental Corona, Moreno Valley and
Associates of Moreno Valley, Riverside, CA
Dental Associates of Riverside
and Riverside Dental Group
January 2000................ Western New York Dental Group Buffalo, NY
February 2000............... Columbia Dental Associates Columbia, MD
February 2000............... Robert E. Ford, D.M.D. Birmingham, AL
</TABLE>
The accompanying interim consolidated financial statements include the results
of operations under the service agreements from the dates of acquisition. The
excess of the purchase price of all the 1999 and 2000 Transactions over the
estimated fair value of the net assets acquired has been recorded as intangible
assets.
Subsequent to March 31, 2000, the Company acquired substantially all the
assets of The Dental Center which joined the Company's existing affiliate in
Alabama.
(3) EARNINGS PER SHARE
Earnings per share are computed based on Statement of Financial Accounting
Standard No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or contingent
stock arrangements). Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings.
8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
three months ended March 31:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1999 2000
--------------- ---------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Basic Earnings Per Share
Net earnings available to common stockholders................................ $1,354 $1,468
====== ======
Weighted average common shares outstanding................................... 7,471 7,125
====== ======
Net earnings per share....................................................... $ 0.18 $ 0.21
====== ======
DILUTED EARNINGS PER SHARE
Net earnings available to common stockholders................................. $1,354 $1,468
====== ======
Weighted average common shares outstanding.................................... 7,471 7,125
Add: Dilutive effect of options............................................. 198 200
------ ------
Weighted average common shares as adjusted.................................... 7,669 7,325
====== ======
Net earnings per share........................................................ $ 0.18 $ 0.20
====== ======
</TABLE>
9
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Report on Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "project," "estimate,"
"forecast" and similar expressions, among others, identify forward-looking
statements. Forward-looking statements speak only as of the date the statements
were made. Such forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from those
projected, anticipated or implied. Certain factors that might cause such a
difference include, among others, risks associated with our acquisition and
affiliation strategy, management of rapid growth, dependence upon affiliated
dental groups, dependence upon service agreements and government regulation of
the dental industry. Additional risks, uncertainties and other factors are set
forth in the "Risk Factors" section of our Registration Statement on Form S-4
(File No. 333-56941).
OVERVIEW
American Dental Partners, Inc. is a leading provider of business services to
multi-disciplinary dental groups in selected markets in the United States. We
were formed in December 1995, commenced operations in January 1996 and began
providing business services to dental groups in November 1996, concurrent with
the completion of our first dental group affiliation. Our rapid growth has
resulted primarily from our affiliations with dental groups. From November 1996
to March 31, 2000, we completed 34 affiliation transactions, comprising 19
dental groups, and at March 31, 2000, we operated 138 dental facilities with
1,235 operatories in 13 states.
AFFILIATION SUMMARY
When affiliating with a dental group, 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 group or
professional corporation ("PC"). Under our service agreements, we are
responsible for providing all services necessary for the administration of the
non-clinical aspects of the dental operations. The PC is responsible for the
provision of dental care. Each of our service agreements is for an initial term
of 40 years. We do not own or control the affiliated dental groups and,
accordingly, do not consolidate the financial statements of the PCs with ours.
1999 Transactions
During 1999, we acquired substantially all the assets of 15 dental practices
(12 transactions) and simultaneously entered into 40-year service agreements
with eight of the affiliated dental groups (seven practices joined existing
affiliates). In total, these affiliations resulted in the addition of 27 dental
facilities with 297 operatories.
2000 Completed and Pending Transactions
During the first three months of 2000, we acquired substantially all the
assets of three dental practices and simultaneously entered into a 40-year
service agreement with one of the affiliated dental groups (two practices joined
existing affiliates). In total, these affiliations resulted in the addition of
five dental facilities with 41 operatories.
In April 2000, we acquired substantially all the assets of another dental
practice which joined an existing affiliate. In addition, we currently are in
discussions with a number of dentists and owners of dental groups about possible
affiliations with us. There can be no assurance, however, that we will
consummate any of these possible affiliations.
10
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
COMPONENTS OF REVENUE AND EXPENSES
Affiliate Adjusted Gross Revenue and Payor Mix. Our affiliated dental groups
generate revenue from patients and dental benefit providers under fee-for-
service, PPO plans and capitated managed care plans. The affiliated dental
groups 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 dental benefit provider contracts. While payor mix varies from market to
market, the aggregate payor mix percentage of our affiliated groups for the
three months ended March 31, 1999 was approximately 43% fee-for-service, 12% PPO
plans and 45% capitated managed care plans. For the three months ended March
31, 2000, the aggregate payor mix percentage of our affiliated groups was
approximately 47% fee-for-service, 19% PPO plans and 34% 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.
Net Revenue. Our net revenue represents reimbursement of expenses and fees
charged to the affiliated dental groups pursuant to the terms of the long-term
service agreements under which we agree to provide business services of the
dental practice. Under such agreements, the affiliated dental groups reimburse
us for actual expenses incurred in connection with the operation and
administration of the dental facilities and pay fees to us for our business
services. Under certain service agreements, our service fee consists 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. Under certain
service agreements, our service fees consist of a fixed monthly fee and an
additional variable fee. 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
fee consists entirely of a fixed monthly fee. The fixed monthly fees are
determined by agreement of us and the affiliated dental group in a formal
budgeting process. Additionally, our net revenue includes amounts from dental
benefit providers related to the arrangement of the provision of care to
patients.
Operating Expenses. Operating expenses (excluding general corporate
expenses, depreciation and amortization of intangible assets) 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 cost and other expenses related to operations. Salaries and benefits
expense are for personnel working for us at the dental facilities, as well as
the local operating management. At the facility level, we generally employ the
administrative staff and, where permitted by law, the dental hygienists and
dental assistants. The local operating management team supervises and supports
the staff at the dental facilities. Office occupancy includes rent expense and
certain other operating costs such as utilities associated with dental
facilities and the local administrative offices. Such costs vary based on the
size of each facility and the market rental rate for dental office space in the
particular geographic market. Other expenses consist of professional fees,
marketing costs and other general and administrative expenses.
General Corporate Expenses. General corporate expenses consist of
compensation expenses for our corporate personnel and administrative staff, as
well as facility and other administrative costs of our corporate office. We
provide management, administrative, third party contracting and other services
to the affiliated groups.
11
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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 Intangible Assets. Amortization of intangible assets relates
to intangible assets acquired in connection with completed acquisition and
affiliation transactions.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2000
Overview
Our net earnings amounted to $1,354,000 or diluted earnings per share of $0.18
for the three months ended March 31, 1999, as compared with net earnings of
$1,468,000 or diluted earnings per share of $0.20 for the three months ended
March 31, 2000. The increase in net earnings resulted from incremental earnings
provided from completed acquisitions and affiliations and from internal growth.
Net Revenue. Net revenue increased from $26,234,000 for 1999 to $34,130,000
for 2000, an increase of approximately 30%. The increase in net revenue in 2000
is due primarily to the inclusion of revenue derived from service agreements
entered into in connection with the 1999 Transactions for the entire period and
from the 2000 Transactions. In addition, same market growth from dental groups
which were our affiliates during the entirety of both periods 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 ($17,476,000 for 1999 as compared with
$23,323,000 for 2000), business service fees ($6,367,000 for 1999 as compared
with $8,146,000 for 2000) and revenue related to the arrangement of the
provision of care to patients and other revenue ($2,391,000 for 1999 as compared
with $2,661,000 for 2000). Expense reimbursements included rent expense
($1,761,000 for 1999 as compared with $2,434,000 for 2000) and other operating
expenses ($15,715,000 for 1999 as compared with $20,889,000 for 2000). Business
service fees included a monthly fee ($6,096,000 for 1999 as compared with
$6,960,000 for 2000) and an additional variable fee ($271,000 for 1999 as
compared with $1,186,000 for 2000). Net revenue derived from our service
agreement with Park Dental represented approximately 36% and 33% of our
consolidated net revenue for 1999 and 2000, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $12,913,000
or 49.2% of net revenue for 1999, as compared with $16,460,000 or 48.2% of net
revenue for 2000. The decrease in salaries and benefits as a percentage of net
revenue resulted primarily from affiliations completed during 1999 and 2000 with
a generally lower ratio of staffing costs to net revenue. Continued leveraging
of regional management and administrative resources in certain markets also
improved this ratio. These cost savings were partially offset by wage inflation
due to tight labor markets. We anticipate such wage inflation pressures will
continue for the foreseeable future.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $3,507,000 or 13.4% of net revenue for 1999 to $4,900,000 or
14.4% of net revenue for 2000. 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 and rate
increases from certain lab providers due to increases in costs of certain
precious metals and their internal wage inflation. We believe such price
inflation will continue for the foreseeable future.
12
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Office Occupancy Expense. Office occupancy expense amounted to $2,445,000 or
9.3% of net revenue for 1999, as compared with $3,374,000 or 9.9% of net revenue
for 2000. Office occupancy expense increased as a percentage of net revenue due
to investment in the relocation, expansion and addition of new dental facilities
in Arizona, California, Minnesota, Texas and Virginia. This investment in
facilities increased our capacity in these markets to allow for future growth.
However, the increase in office occupancy expense has not yet been fully offset
by incremental net revenue. These increased costs were partially offset by
better utilization of capacity in existing facilities and the leveraging of
local management offices in certain markets. We expect office occupancy to
continue to increase as we invest in the relocation and expansion of facilities
in desirable markets where costs such as rent are generally at a premium. These
increases should be partially or fully offset by better utilization of capacity
in existing dental facilities.
Other Operating Expenses. Other expenses amounted to $2,154,000 or 8.2% of net
revenue for 1999, as compared with $2,697,000 or 7.9% of net revenue for 2000.
Other expenses decreased as a percentage of net revenue due to the
regionalization of data processing and administrative functions in certain
markets and the acquisition of facilities with a generally lower ratio of other
operating expenses to net revenue in their respective markets compared to the
existing base of facilities.
General Corporate Expenses. General corporate expenses were $1,196,000 or 4.6%
of net revenue for 1999, as compared with $1,414,000 or 4.1% of net revenue for
2000. Throughout 1999 and early 2000, we continued to expand our management
infrastructure in the areas of finance, operations, employee benefit
administration, professional recruiting and purchasing. Despite these
additions, we continued to leverage these costs, resulting in a reduction of
general corporate expenses as a percentage of net revenue. The level of
general corporate expenses will likely continue to increase in the future as we
continue to expand our management infrastructure. However, it is anticipated
that these expenses will continue to decline as a percentage of net revenue.
Depreciation. Depreciation expense was $768,000 or 2.9% of net revenue for
1999, as compared with $1,082,000 or 3.2% of net revenue for 2000. The increase
in depreciation expense related primarily to the depreciation of assets acquired
and capital expenditures associated with the addition of seven new facilities in
Arizona, California, Minnesota and Virginia and the relocation and/or expansion
of 28 facilities in Arizona, Minnesota, Pennsylvania, Texas and Wisconsin
throughout 1999 and 2000. These capital expenditures increased our capacity in
these markets to allow for future growth. Depreciation expense increased as a
percentage of net revenue as this initial investment was not fully offset by
incremental net revenue. We expect to continue to invest in the relocation and
expansion of our physical capacity, and depending on the amount and timing of
such future capital expenditures, depreciation expense will likely increase.
Amortization of Intangibles. Amortization of intangibles was $554,000 or 2.1%
of net revenue for 1999, as compared with $773,000 or 2.3% of net revenue for
2000. The increase in amortization resulted from intangible assets recorded in
connection with 15 affiliations (12 transactions) completed during 1999 and
three affiliations completed during 2000. We expect amortization of intangible
assets to increase in the future as a result of intangibles recorded in
connection with future acquisitions and affiliations.
Interest Expense, net. Net interest expense was $284,000 or 1.1% of net
revenue for 1999, as compared with $846,000 or 2.5% of net revenue for 2000.
The increase in interest expense resulted primarily from increased average
borrowings under our revolving credit facility in 2000 as compared to 1999 to
fund the 1999 and 2000 Transactions and a portion of our capital expenditures
throughout 1999. In addition, the issuance of subordinated notes in connection
with the 1999 and 2000 Transactions and an overall higher average interest rate
under our revolving credit facility in 2000 than 1999 contributed to higher
expense in 2000.
13
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Income Taxes. We incurred income tax expense of $1,059,000 for 1999, as
compared with $1,116,000 for 2000. Our effective tax rate was approximately
43.9% for 1999 as compared with 43.2% for 2000. The decrease in the effective
tax rate is primarily attributable to a reduction in the proportionate amount of
amortization of intangible assets which are not deductible for tax purposes.
This decrease was partially offset by a higher Federal statutory rate due to a
higher estimated pre-tax income in 2000 and an increased income in states with
higher tax rates which increased the average state tax rate.
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
sales of equity securities, borrowings under our revolving line of credit and
cash generated from operations.
From January 1, 1999 through March 31, 2000, we completed 18 dental practice
affiliations (15 transactions) for aggregate consideration of $22.8 million in
cash, $3.0 million in subordinated promissory notes, $1.2 million in deferred
payments and 50,568 shares of Common Stock valued at approximately $0.4 million.
For the three months ended March 31, 1999 and 2000, cash provided by operating
activities amounted to $1,848,000 and $2,699,000, respectively. The increase in
cash from operations resulted primarily from the reduction of net cash paid for
income taxes offset by an increase in amounts paid for interest.
For the three months ended March 31, 1999 and 2000, cash used in investing
activities amounted to $10,120,000 and $6,097,000, 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
$7,038,000 for 1999 and $2,767,000 for 2000. Cash used for capital expenditures
was $2,592,000 and $3,045,000 for 1999 and 2000, respectively. Capital
expenditures for 1999 included costs associated with the addition of new
facilities in Arizona and Minnesota and the expansion of existing facilities in
Arizona, Minnesota, Texas and Wisconsin. Capital expenditures for 2000 included
costs associated with the relocation and/or expansion of existing facilities in
Minnesota, Pennsylvania, Texas and Wisconsin. 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, 1999 and 2000, cash provided by financing
activities amounted to $9,300,000 and $2,576,000, respectively. 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. Cash provided by financing activities during 2000 resulted from
borrowings under our revolving line of credit of $2,960,000 and proceeds from
the issuance of common stock for the employee stock purchase plan of $189,000,
net of the repayment of certain indebtedness of $285,000 and the repurchase of
40,000 shares of our common stock for $288,000.
We have a $50 million revolving line of credit. 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, 2000 was $36,457,000.
We have a Shelf Registration Statement on file with the Securities and
Exchange Commission (Registration No. 333-56941) covering a total of 750,000
shares of Common Stock and $25,000,000 aggregate principal amount of
subordinated promissory notes to be issued in connection with future dental
practice affiliations. As of March 31, 2000, 679,878 shares and $21,526,500 of
notes remain available for issuance under this Shelf Registration Statement.
14
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Our growth strategy depends in large measure on our ability to affiliate with
additional dental practices. Subsequent to March 31, 2000, we acquired
substantially all the assets of a dental practice which joined an existing
affiliate. Although we have affiliated with many dental 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 strategy will be modified.
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
(although at a reduced rate compared to 1999) 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.
We have not experienced any material Year 2000 problems or disruptions in our
systems or operations, and the costs we have incurred in addressing Year 2000
compliance have not been material. There can be no assurance, however, that we
will not experience Year 2000 problems that may have a material adverse effect
on our business, financial condition and results of operations.
RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 (the "Interpretation"), "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"). This
Interpretation clarifies the application of APB No. 25 for only certain issues,
which include, among others, (i) definition of an employee for purposes of
applying APB No. 25, (ii) criteria for determining whether a plan qualifies as a
non-compensatory plan, (iii) the accounting consequences for various
modifications to the terms of a previously fixed stock option or award and (iv)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation covers specific events that occur after
December 15, 1998 or January 12, 2000. We do not believe the adoption of the
Interpretation will have a material effect on our consolidated financial
position, results of operations or cash flows.
15
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
PART I. FINANCIAL INFORMATION - (Continued)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We invest our cash in money market instruments. These instruments are
denominated in U.S. dollars. Due to the conservative nature of these
instruments, we do not believe that we have a material exposure to interest rate
or market risk.
In the ordinary course of business, we are exposed to interest rate risk. With
regard to our revolving credit facility, we are also exposed to variable rate
interest for the banks' applicable margins ranging from 1.000% to 1.625% based
upon our debt coverage ratio. For fixed rate debt, interest rate changes affect
the fair value but do not impact earnings or cash flow. Conversely, for
floating rate debt, interest rate changes generally do not affect the fair
market value but do impact future earnings and cash flow. We do not believe a
one percentage point change in interest rates would have a material impact on
the fair market value of our fixed rate debt. The pre-tax earnings and cash
flow impact for one year based upon the amounts outstanding at March 31, 2000
under our variable rate revolving credit facility for a one percentage point
change in interest rates would be approximately $365,000. We do not presently
undertake any specific actions to cover our exposure to interest rate risk and
we are not party to any interest rate risk management transactions.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to litigation incidental to our
business. We are not presently a party to any material litigation. The dentists
employed by, or independent contractors of, our affiliated dental group
practices are from time to time subject to malpractice claims. Such claims, if
successful, could result in damage awards exceeding applicable insurance
coverage which could have a material adverse effect on our business, financial
condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
16
<PAGE>
PART II. OTHER INFORMATION - (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the three-month
period ended March 31, 2000.
17
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN DENTAL PARTNERS, INC.
May 11, 2000 /s/ Gregory A. Serrao
--------------------------------------
Gregory A. Serrao
Chairman, President and Chief
Executive Officer
May 11, 2000 /s/ Ronald M. Levenson
--------------------------------------
Ronald M. Levenson
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
18
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
27 Financial Data Schedule
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INTERIM FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1999 MAR-31-2000
<CASH> 2,325 1,503
<SECURITIES> 0 0
<RECEIVABLES> 10,314 11,766
<ALLOWANCES> 0 0
<INVENTORY> 1,491 1,429
<CURRENT-ASSETS> 16,963 17,896
<PP&E> 23,006 24,672
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 110,000 115,373
<CURRENT-LIABILITIES> 16,941 17,701
<BONDS> 0 0
0 0
0 0
<COMMON> 75 76
<OTHER-SE> 52,154 53,522
<TOTAL-LIABILITY-AND-EQUITY> 110,000 115,373
<SALES> 117,352 34,130
<TOTAL-REVENUES> 117,352 34,130
<CGS> 0 0
<TOTAL-COSTS> 104,874 30,700
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,877 846
<INCOME-PRETAX> 10,601 2,584
<INCOME-TAX> 4,588 1,116
<INCOME-CONTINUING> 6,013 1,468
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,013 1,468
<EPS-BASIC> 0.80 0.21
<EPS-DILUTED> 0.78 0.20
</TABLE>
