<PAGE>
Prospectus Supplement No. 2
Filed pursuant to Rule 424(b)(3)
File No. 333-56941
_______________________________
AMERICAN DENTAL PARTNERS, INC.
750,000 SHARES OF COMMON STOCK
AND
$25,000,000 AGGREGATE PRINCIPAL AMOUNT OF
SUBORDINATED PROMISSORY NOTES
August 9, 2000
_______________________________
This prospectus supplement relates to the prospectus dated April 21,
2000 (the "Prospectus"), covering our offer and sale of up to 750,000 shares of
our Common Stock and up to $25,000,000 aggregate principal amount of our
Subordinated Promissory Notes which we may issue from time to time in connection
with future direct and indirect acquisition and affiliation transactions.
As of August 8, 2000, 679,878 shares of our Common Stock and
$21,206,500 of our Subordinated Promissory Notes remain available for issuance.
Recent Developments
-------------------
Attached hereto and incorporated by reference herein is the Quarterly
Report on Form 10-Q of American Dental Partners, Inc. for the quarterly period
ended June 30, 2000.
This prospectus supplement should be read in conjunction with the
Prospectus and is qualified by reference to the Prospectus except to the extent
that the information in this prospectus supplement supersedes the information
contained in the Prospectus.
_______________________________
Our Common Stock trades on the Nasdaq National Market under the symbol
"ADPI." On August 8, 2000, the last reported sale price of our Common Stock was
$8.625 per share.
INVESTING IN THE COMMON STOCK AND THE SUBORDINATED PROMISSORY NOTES
ISSUED UNDER THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT INVOLVES RISK.
BEFORE MAKING ANY INVESTMENT IN OUR COMPANY, YOU SHOULD CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING ON PAGE 8 OF THE PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED ANY OF THE SECURITIES OFFERED BY THE
PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT OR DETERMINED THAT THE PROSPECTUS OR
THIS PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 9, 2000: 7,130,532
shares
================================================================================
Exhibit Index appears on Page 21
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
INDEX
-----
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999
and June 30, 2000 (unaudited)........................................................ 3
Consolidated Statements of Earnings for the Three Months and Six Months
Ended June 30, 1999 and 2000 (unaudited)............................................. 4
Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 2000 (unaudited) .......................................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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........................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 18
Item 2. Changes in Securities and Use of Proceeds............................................ 18
Item 3. Defaults Upon Senior Securities ..................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ................................. 18
Item 5. Other Information ................................................................... 19
Item 6. Exhibits and Reports on Form 8-K .................................................... 19
Signatures .............................................................................. 20
Exhibit Index .............................................................................. 21
</TABLE>
2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER JUNE
31, 30,
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 2,325 $ 1,053
Accounts receivable................................................................ 261 214
Receivables due from affiliated dental groups...................................... 9,637 12,680
Income taxes receivable............................................................ 416 -
Inventories........................................................................ 1,491 1,717
Prepaid expenses and other receivables............................................. 2,436 3,124
Deferred income taxes.............................................................. 397 397
-------- --------
Total current assets............................................................ 16,963 19,185
-------- --------
Property and equipment, net.......................................................... 23,006 27,062
-------- --------
Non-current assets:
Intangible assets, net............................................................. 69,175 78,485
Deferred income taxes.............................................................. 563 673
Other assets....................................................................... 293 276
-------- --------
Total non-current assets........................................................ 70,031 79,434
-------- --------
Total assets.................................................................... $110,000 $125,681
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 7,154 $ 6,240
Accrued compensation, benefits and taxes........................................... 4,452 4,477
Accrued expenses................................................................... 3,833 5,007
Income taxes payable............................................................... - 106
Current maturities of debt......................................................... 1,502 1,571
-------- --------
Total current liabilities....................................................... 16,941 17,401
-------- --------
Non-current liabilities:
Long-term debt..................................................................... 40,249 52,635
Other liabilities.................................................................. 581 388
-------- --------
Total non-current liabilities................................................... 40,830 53,023
-------- --------
Total liabilities............................................................... 57,771 70,424
-------- --------
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 11,653
Treasury stock, at cost, 430,000 and 470,000 shares................................ (2,956) (3,244)
-------- --------
Total stockholders' equity...................................................... 52,229 55,257
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity...................................... $110,000 $125,681
======== ========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue.......................................................... $28,139 $35,227 $54,373 $69,357
------- ------- ------- -------
Operating expenses:
Salaries and benefits............................................. 13,827 16,716 26,740 33,176
Lab fees and dental supplies...................................... 3,710 5,110 7,217 10,010
Office occupancy.................................................. 2,721 3,561 5,166 6,935
Other operating expenses.......................................... 2,170 2,749 4,324 5,446
General corporate expenses........................................ 1,218 1,271 2,414 2,685
Depreciation...................................................... 892 1,110 1,660 2,192
Amortization of intangible assets................................. 599 824 1,153 1,597
------- ------- ------- -------
Total operating expenses....................................... 25,137 31,341 48,674 62,041
------- ------- ------- -------
Earnings from operations............................................. 3,002 3,886 5,699 7,316
Interest expense, net............................................. 395 950 679 1,796
------- ------- ------- -------
Earnings before income taxes......................................... 2,607 2,936 5,020 5,520
Income taxes...................................................... 1,143 1,277 2,202 2,393
------- ------- ------- -------
Net earnings...................................................... $ 1,464 $ 1,659 $ 2,818 $ 3,127
======= ======= ======= =======
Net earnings per common share:
Basic............................................................. $0.19 $0.23 $0.38 $0.44
Diluted........................................................... $0.19 $0.23 $0.37 $0.43
Weighted average common shares outstanding:
Basic............................................................. 7,517 7,099 7,495 7,112
Diluted........................................................... 7,752 7,307 7,713 7,316
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
COMMON COMMON ADDITIONAL TREASURY TOTAL
STOCK STOCK IN COMMON PAID-IN RETAINED STOCK AT STOCKHDER'S
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............................ - - - - 3,127 - 3,127
-------- -------- -------- --------- ------- -------- -----------
Balance at June 30, 2000.................. 7,569 (470) $76 $46,772 $11,653 $(3,244) $55,257
======== ======== ======== ========= ======= ======== ===========
</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>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings...................................................................... $ 2,818 $ 3,127
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation.................................................................. 1,660 2,192
Amortization of intangible assets............................................. 1,153 1,597
Other amortization............................................................ 53 41
Changes in assets and liabilities, net of acquisitions and affiliations:
Accounts receivable........................................................ 508 597
Receivables due from affiliated dental groups.............................. (2,803) (3,090)
Other current assets....................................................... (940) (492)
Accounts payable and accrued expenses...................................... 2,512 601
Accrued compensation, benefits and taxes................................... 532 19
Income taxes payable and receivable, net................................... (698) 522
-------- --------
Net cash provided by operating activities............................... 4,804 5,114
-------- --------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired............................... (9,023) (11,060)
Capital expenditures, net......................................................... (6,115) (5,963)
Contingent and deferred payments.................................................. (210) (370)
Other............................................................................. (817) (461)
-------- --------
Net cash used for investing activities.................................. (16,165) (17,854)
-------- --------
Cash flows from financing activities:
Borrowings under revolving line of credit, net.................................... 12,297 12,210
Repayment of borrowings........................................................... (853) (542)
Common stock issued for the employee stock purchase plan.......................... 303 189
Repurchase of common stock........................................................ - (288)
Payment of debt issuance costs.................................................... (14) (101)
-------- --------
Net cash provided by financing activities............................... 11,733 11,468
-------- --------
Increase (decrease) in cash and cash equivalents..................................... 372 (1,272)
Cash and cash equivalents at beginning of period..................................... 2,420 2,325
-------- --------
Cash and cash equivalents at end of period........................................... $ 2,792 $ 1,053
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net..................................... $ 471 $ 1,502
======== ========
Cash paid during the period for income taxes, net................................. $ 2,891 $ 1,831
======== ========
Acquisitions and affiliations:
Assets acquired................................................................... $ 13,672 $ 12,881
Liabilities assumed and issued.................................................... (4,168) (1,821)
Common stock issued............................................................... (352) -
-------- --------
Cash paid......................................................................... 9,152 11,060
Less cash acquired................................................................ (129) -
-------- --------
Net cash paid for acquisitions and affiliations.......................... $ 9,023 $ 11,060
======== ========
</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 and six months ended June 30, 1999 in order to
conform with the June 30, 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 June 30, 2000, the Company acquired substantially all
the assets of six dental practices and simultaneously entered into a 40-year
service agreement with one of the affiliated dental groups (five practices
joined existing affiliates). The aggregate purchase price paid in connection
with these transactions consisted of approximately $11.1 million in cash, $0.8
million in subordinated promissory notes and $0.3 million in deferred payments.
All transactions completed in the first six 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 June 30, 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
April 2000...................... The Dental Center Gadsden, AL
June 2000....................... Nathan Bell, D.D.S. Charlotte and Raleigh-Durham, NC
June 2000....................... Ronald G. White, D.D.S. Riverside, CA
</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 June 30, 2000, the Company acquired substantially all the assets
of Ronald L. Moore, DDS, which joined one of the Company's existing affiliates
in California.
(3) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of common shares outstanding during the period plus the dilutive
effect of outstanding stock options using the "treasury stock" method. The
computation of diluted earnings per share does not include the effect of
outstanding stock options that would be antidilutive.
8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of basic and diluted earnings per share computations for the
three months and six months ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------
1999 2000 1999 2000
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common stockholders................ $1,464 $1,659 $2,818 $3,127
====== ====== ====== ======
Weighted average common shares outstanding................... 7,517 7,099 7,495 7,112
====== ====== ====== ======
Net earnings per share....................................... $ 0.19 $ 0.23 $ 0.38 $ 0.44
====== ====== ====== ======
DILUTED EARNINGS PER SHARE
Net earnings available to common stockholders................ $1,464 $1,659 $2,818 $3,127
====== ====== ====== ======
Weighted average common shares outstanding................... 7,517 7,099 7,495 7,112
Add: Dilutive effect of stock options...................... 235 208 218 204
------ ------ ------ ------
Weighted average common shares as adjusted................... 7,752 7,307 7,713 7,316
====== ====== ====== ======
Net earnings per share....................................... $ 0.19 $ 0.23 $ 0.37 $ 0.43
====== ====== ====== ======
</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 June 30, 2000, we completed 37 affiliation transactions, comprising 19 dental
groups, and at June 30, 2000, we operated 149 dental facilities with 1,338
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 six months of 2000, we acquired substantially all the assets
of six dental practices and simultaneously entered into a 40-year service
agreement with one of the affiliated dental groups (five practices joined
existing affiliates). In total, these affiliations resulted in the addition of
15 dental facilities with 123 operatories.
In July 2000, we acquired substantially all the assets of another dental
practice, which joined an existing affiliate in California. 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 six
months ended June 30, 1999 was approximately 43% fee-for-service, 13% PPO plans
and 44% capitated managed care plans. For the six months ended June 30, 2000,
the aggregate payor mix percentage of our affiliated groups was approximately
47% fee-for-service, 20% PPO plans and 33% 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 JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
Overview
Our net earnings amounted to $1,464,000 or diluted earnings per share of $0.19
for the three months ended June 30, 1999, as compared with net earnings of
$1,659,000 or diluted earnings per share of $0.23 for the three months ended
June 30, 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 $28,139,000 for 1999 to $35,227,000
for 2000, an increase of approximately 25%. 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, successful renegotiation of certain
third party payor contracts which increased the amount of reimbursement for
services provided by our affiliated dental groups, the addition of dentists to
our affiliated dental group network and increases in certain affiliates' fees.
Net revenue included expense reimbursements ($18,892,000 for 1999 as compared
with $24,031,000 for 2000), business service fees ($6,778,000 for 1999 as
compared with $8,429,000 for 2000) and revenue related to the arrangement of the
provision of care to patients and other revenue ($2,469,000 for 1999 as compared
with $2,767,000 for 2000). Expense reimbursements included rent expense
($1,990,000 for 1999 as compared with $2,549,000 for 2000) and other operating
expenses ($16,902,000 for 1999 as compared with $21,482,000 for 2000). Business
service fees included a monthly fee ($6,305,000 for 1999 as compared with
$7,297,000 for 2000) and an additional variable fee ($473,000 for 1999 as
compared with $1,132,000 for 2000). Net revenue derived from our service
agreement with Park Dental represented approximately 35% and 33% of our
consolidated net revenue for 1999 and 2000, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $13,827,000
or 49.1% of net revenue for 1999, as compared with $16,716,000 or 47.5% 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 $3,710,000 or 13.2% of net revenue for 1999 to $5,110,000 or
14.5% 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 price increases from certain dental
supply manufacturers and lab providers due to increases in costs of certain
precious metals and their internal wage inflation and 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. 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 $2,721,000 or
9.7% of net revenue for 1999, as compared with $3,561,000 or 10.1% 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, Maryland, Minnesota, North Carolina,
Pennsylvania, Texas, Virginia and Wisconsin. 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 dental 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 $2,170,000 or 7.7% of net
revenue for 1999, as compared with $2,749,000 or 7.8% of net revenue for 2000.
Other expenses increased slightly as a percentage of net revenue due to
increases in recruiting and professional development activities, investments in
administrative infrastructure and the acquisition of facilities with a generally
higher ratio of operating expenses to net revenue in their respective markets
compared to the existing base of facilities.
General Corporate Expenses. General corporate expenses were $1,218,000 or 4.3%
of net revenue for 1999, as compared with $1,271,000 or 3.6% of net revenue for
2000. Throughout 1999 and 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. Additionally, the
reduction in general corporate expenses as a percentage of net revenue resulted
from a lower level of discretionary spending and costs associated with
acquisitions and affiliations, which fluctuate from period to period. 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 $892,000 or 3.2% of net revenue for
1999, as compared with $1,110,000 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 six new facilities in
California, Minnesota, North Carolina and Virginia and the relocation and/or
expansion of 32 facilities in Arizona, California, Minnesota, Texas and
Wisconsin throughout 1999 and 2000. These capital expenditures increased our
capacity in these markets to allow for future growth. The increase in
depreciation expense as a percentage of net revenue from capital expenditures
was fully offset by the acquisition of facilities with generally lower ratio of
depreciation expense to net revenue in their respective markets compared to the
existing base of facilities. 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 $599,000 or 2.1%
of net revenue for 1999, as compared with $824,000 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 six
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 $395,000 or 1.4% of net
revenue for 1999, as compared with $950,000 or 2.7% 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 and 2000. In addition, an overall higher average interest rate
under our revolving credit facility in 2000 than 1999 and the issuance of
subordinated notes in connection with the 1999 and 2000 Transactions contributed
to higher expense in 2000. Interest expense as a percentage of net revenue will
likely increase in the future as we continue to fund acquisition and affiliation
transactions through our revolving credit facility and subordinated notes, and
our average interest rates are expected to continue to increase.
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 $1,143,000 for 1999, as
compared with $1,277,000 for 2000. Our effective tax rate was approximately
43.8% for 1999 as compared with 43.5% 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
higher estimated pre-tax income in 2000 and increased income in states with
higher tax rates which increased the average state tax rate.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
Overview
Our net earnings amounted to $2,818,000 or diluted earnings per share of $0.37
for the six months ended June 30, 1999, as compared with net earnings of
$3,127,000 or diluted earnings per share of $0.43 for the six months ended June
30, 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 $54,373,000 for 1999 to $69,357,000
for 2000, an increase of approximately 28%. 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, successful renegotiation of certain
third party payor contracts which increased the amount of reimbursement for
services provided by our affiliated dental groups, the addition of dentists to
our affiliated dental group network and increases in certain affiliates' fees.
Net revenue included expense reimbursements ($36,368,000 for 1999 as compared
with $47,354,000 for 2000), business service fees ($13,145,000 for 1999 as
compared with $16,575,000 for 2000) and revenue related to the arrangement of
the provision of care to patients ($4,860,000 for 1999 as compared with
$5,428,000 for 2000). Expense reimbursements included rent expense ($3,751,000
for 1999 as compared with $4,983,000 for 2000) and other operating expenses
($32,617,000 for 1999 as compared with $42,371,000 for 2000). Business service
fees included monthly fees ($12,401,000 for 1999 as compared with $14,257,000
for 2000) and additional variable fees ($744,000 for 1999 as compared with
$2,318,000 for 2000). Net revenue derived from our service agreement with Park
Dental represented approximately 35% and 33% of our consolidated net revenue for
1999 and 2000, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $26,740,000
or 49.2% of net revenue for 1999, as compared with $33,176,000 or 47.8% 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 $7,217,000 or 13.3% of net revenue for 1999 to $10,010,000 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 price increases from certain lab
providers due to increases in costs of certain precious metals and their
internal wage inflation, price increases from certain dental supply
manufacturers and 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. We believe such price inflation
will continue for the foreseeable future.
14
<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 $5,166,000 or
9.5% for 1999, as compared with $6,935,000 or 10.0% 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, Maryland, Minnesota, North Carolina, Pennsylvania, Texas,
Virginia and Wisconsin. This investment in facilities increased our capacity in
these markets to allow for future growth. Initially, however, the increase in
office occupancy expense was not fully offset by incremental net revenue. 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 $4,324,000 or 8.0% of net
revenue for 1999, as compared with $5,446,000 or 7.9% of net revenue for 2000.
Other costs decreased slightly as a percentage of net revenue due primarily to
savings from the regionalization of administrative and data processing functions
in certain markets.
General Corporate Expenses. General corporate expenses were $2,414,000 or 4.4%
of net revenue for 1999, as compared with $2,685,000 or 3.9% of net revenue for
2000. Throughout 1999 and 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 continue to leverage these costs, resulting in a reduction of
general corporate expenses as a percentage of net revenue. Additionally, the
reduction in general corporate expenses as a percentage of net revenue resulted
from a lower level of discretionary spending and costs associated with
acquisitions and affiliations, which fluctuate from period to period. 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 $1,660,000 or 3.1% of net revenue for
1999, as compared with $2,192,000 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 eight new facilities in
Arizona, California, Minnesota, North Carolina and Virginia and the relocation
and/or expansion of 35 facilities in Arizona, California, Maryland, Minnesota,
Pennsylvania, Texas and Wisconsin throughout 1999 and 2000. These capital
expenditures increased our capacity in these markets to allow for future growth.
The increase in depreciation expense as a percentage of net revenue from capital
expenditures was partially offset by the acquisition of facilities with a
generally lower ratio of depreciation expense to net revenue in their respective
markets compared to the existing base of facilities. Depending on the amount
and timing of future capital expenditures, depreciation expense will likely
increase.
Amortization of Intangibles. Amortization of intangibles was $1,153,000 or
2.1% of net revenue for 1999, as compared with $1,597,000 or 2.3% of net revenue
for 2000. The increase in amortization resulted from intangible assets recorded
in connection with our 15 affiliations (12 transactions) completed during 1999
and six 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 $679,000 or 1.2% of net
revenue for 1999, as compared with $1,796,000 or 2.6% 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
through 1999 and 2000. In addition, an overall higher average interest rate
under our revolving credit facility in 2000 than 1999 and the issuance of
subordinated notes in connection with the 1999 and 2000 Transactions contributed
to higher expense in 2000. Interest expense as a percentage of net revenue will
likely increase in the future as we continue to fund acquisition and affiliation
transactions through our revolving credit facility and subordinated notes, and
our average interest rates are expected to continue to increase.
15
<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 $2,202,000 for 1999, as
compared with $2,393,000 for 2000. Our effective tax rate was approximately
43.9% for 1999 as compared with 43.4% 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
higher estimated pre-tax income in 2000 and 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 June 30, 2000, we completed 21 dental practice
affiliations (18 transactions) for aggregate consideration of $31.1 million in
cash, $3.3 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 six months ended June 30, 1999 and 2000, cash provided by operating
activities amounted to $4,804,000 and $5,114,000, respectively. The increase in
cash from operations resulted primarily from incremental earnings generated from
acquisitions and affiliations and same market growth.
For the six months ended June 30, 1999 and 2000, cash used in investing
activities amounted to $16,165,000 and $17,854,000, 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
$9,023,000 for 1999 and $11,060,000 for 2000. Cash used for capital
expenditures was $6,115,000 and $5,963,000 for 1999 and 2000, respectively.
Capital expenditures for 1999 included costs associated with the addition of new
facilities in Arizona, California, Minnesota and Virginia and the expansion of
existing facilities in Arizona, Minnesota, Texas and Wisconsin. Capital
expenditures for 2000 included costs associated with the addition of a new
facility in North Carolina and the relocation and/or expansion of existing
facilities in California, Maryland, 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 six months ended June 30, 1999 and 2000, cash provided by financing
activities amounted to $11,733,000 and $11,468,000, respectively. Cash provided
by financing activities in 1999 resulted from borrowings under our revolving
line of credit of $12,297,000 and proceeds from the issuance of common stock for
the employee stock purchase plan of $303,000, net of the repayment of certain
indebtedness. Cash provided by financing activities during 2000 resulted from
borrowings under our revolving line of credit of $12,210,000 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 $542,000, the repurchase of
40,000 shares of our Common Stock for $288,000 and the payment of debt issuance
costs associated with the amendment of our revolving credit facility in the
amount of $101,000.
In July 2000, we amended our line of credit to increase the amount available
under the line from $50 million to $75 million. 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 2.75%. As a result of amending our revolving
credit facility in July 2000, the banks' margin will initially increase by 1.00%
from current levels. In addition, we pay a commitment fee, which ranges up to
0.375% 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 July 2004. The
outstanding balance under this line as of June 30, 2000 was $45,707,000.
16
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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 June 30, 2000, 679,878 shares and $21,207,000 of
notes remain available for issuance under this Shelf Registration Statement.
Our growth strategy depends in large measure on our ability to affiliate with
additional dental practices. Subsequent to June 30, 2000, we acquired
substantially all the assets of a dental practice which joined an existing
affiliate and signed letters of intent to acquire substantially all the assets
of three more dental practices. 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 past 18 months, the consideration paid has consisted of a higher percentage
of cash and subordinated debt and a lower percentage common stock.
We believe that cash generated from operations and amounts available under our
current revolving credit facility, as amended, 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. If sufficient
financing is not available on terms acceptable to us in the future, our
affiliation strategy may be modified.
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.
17
<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 1.00% to 2.75% based
upon our debt coverage ratio. As a result of amending our revolving credit
facility in July 2000, the banks' margin will initially increase by 1.00% from
current levels. 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 June 30, 2000 under our variable rate
revolving credit facility for each one percentage point change in interest rates
would be approximately $457,000 per annum. 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
We held our annual meeting of shareholders of May 12, 2000 at the offices of
Summit Partners at 600 Atlantic Avenue in Boston, Massachusetts. At the
meeting, individuals listed below were elected to our Board of Directors for a
term expiring in 2003. The table below indicates the votes for and votes
withheld for each nominee:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
----------------- --------- --------------
<S> <C> <C> <C>
1. Derril W. Reeves 5,915,096 349,227
2. Gregory A. Serrao 5,834,606 429,717
</TABLE>
James T. Kelly, Martin J. Mannion and Dr. Gregory T. Swenson also serve on our
Board of Directors for terms which continue after the annual meeting.
18
<PAGE>
PART II. OTHER INFORMATION - (CONTINUED)
At our annual meeting of shareholders, the shareholders also approved an
amendment to our 1997 Employee Stock Purchase Plan in the tables below:
<TABLE>
<CAPTION>
<S> <C>
Voted for 5,795,996
Voted against 467,627
Abstain 700
Shares not voted 0
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(q) Second Amended and Restated Revolving Credit Agreement Dated as of
July 31, 2000, Among American Dental Partners, Inc., the Lenders
Party Hereto, Fleet National Bank as Agent, and Sovereign Bank as
Documentation Agent.
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 June 30, 2000.
19
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN DENTAL PARTNERS, INC.
August 9, 2000 /s/ Gregory A. Serrao
-----------------------------------------------
Gregory A. Serrao
Chairman, President and Chief Executive Officer
August 9, 2000 /s/ Ronald M. Levenson
-----------------------------------------------
Ronald M. Levenson
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
20
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10(q) Second Amended and Restated Revolving Credit Agreement Dated as of
July 31, 2000, Among American Dental Partners, Inc., the Lenders
Party Hereto, Fleet National Bank as Agent, and Sovereign Bank as
Documentation Agent.
27 Financial Data Schedule
21
