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Filed pursuant to Rule 424(b)(3)
Registration No. 333-56941
AMERICAN DENTAL PARTNERS, INC.
750,000 SHARES OF COMMON STOCK
AND
$25,000,000 AGGREGATE PRINCIPAL AMOUNT OF
SUBORDINATED PROMISSORY NOTES
We may use this prospectus to offer and sell up to 750,000 shares of our
Common Stock and up to $25,000,000 of Subordinated Promissory Notes at various
times in connection with future business combinations and affiliation
transactions involving our company or its subsidiaries. The Common Stock and
the Subordinated Promissory Notes covered by this prospectus may be issued in
connection with:
. mergers, consolidations, recapitalizations or similar plans of
acquisitions;
. purchases of some or all of the assets of businesses;
. exchanges for the outstanding securities, obligations or other interests of
businesses; or
. affiliation transactions.
We expect that the specific terms of each business combination or
affiliation transaction in which Common Stock or Subordinated Promissory Notes
will be issued will be negotiated with the owners or other controlling persons
of the businesses involved. Generally, the securities covered by this
prospectus that are issued in a business combination or affiliation transaction
will be valued:
. at a price based on their market value at the time the business
combination or affiliation transaction is agreed upon or at the time they
are delivered;
. at a price based on average market prices for periods ending at or near
these times; or
. on such other basis as the parties may agree.
We do not expect that underwriting discounts or commissions will be paid in
connection with the issuances of securities under this prospectus. However,
brokers' commissions or finders' fees may be paid at various times in connection
with specific business combinations or affiliation transactions. Any person
receiving these fees may be deemed an underwriter within the meaning of the
Securities Act of 1933, and any profit on the resale of Common Stock or
Subordinated Promissory Notes purchased by them may be deemed to be underwriting
discounts or commissions under the Securities Act.
Our Common Stock trades on the Nasdaq National Market under the symbol
"ADPI." On April 11, 2000, the last reported sale price of our Common Stock was
$7.25 per share.
INVESTING IN THE COMMON STOCK AND THE SUBORDINATED PROMISSORY NOTES ISSUED UNDER
THIS PROSPECTUS INVOLVES RISK. BEFORE MAKING ANY INVESTMENT IN OUR COMPANY, YOU
SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED ANY OF THE SECURITIES OFFERED BY THIS PROSPECTUS OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this prospectus is April 21, 2000.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). You may read
and copy (upon the payment of fees prescribed by the SEC) any document that we
file with the SEC at its public reference rooms in Washington, D.C., (450 Fifth
Street, N.W. 20549), New York, New York (7 World Trade Center, Suite 1300
10048), and Chicago, Illinois (500 West Madison Street, Suite 1400 60661). You
may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our filings are also available to the public on the Internet
through the SEC's EDGAR database. You may access the EDGAR database at the
SEC's web site at http://www.sec.gov. We also maintain a web site at
http://www.amdpi.com.
This prospectus is part of a registration statement (on Form S-4) that we
have filed with the SEC relating to the Common Stock and the Subordinated
Promissory Notes offered by this prospectus. As permitted by SEC rules, this
prospectus does not contain all the information contained in the registration
statement and its accompanying exhibits and schedules which we have also filed
with the SEC. You may refer to the registration statement, the exhibits and
schedules for more information about us and our Common Stock and our
Subordinated Promissory Notes. The registration statement, exhibits and
schedules are available at the SEC's public reference rooms or through its EDGAR
database on the Internet.
Our Common Stock is traded on the Nasdaq National Market. Periodic reports,
proxy materials and other information concerning us, when filed, may be
inspected at the offices of the Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
You may obtain a copy of these filings, at no cost, by writing or telephoning
us at the following address:
American Dental Partners, Inc.
301 Edgewater Place, Suite 320
Wakefield, Massachusetts 01880
(781) 224-0880
Attention: Investor Relations
TO ENSURE TIMELY DELIVERY OF THESE MATERIALS, YOU SHOULD MAKE ANY REQUEST NO
LATER THAN FIVE BUSINESS DAYS PRIOR TO THE DATE ON WHICH YOU MUST MAKE YOUR
INVESTMENT DECISION.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus 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, our 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 this prospectus.
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PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision. The terms "we," "us"
and "our" as used in this prospectus refer to "American Dental Partners, Inc.",
its management service organization ("MSO") subsidiaries and its wholly owned
subsidiaries, Orthocare, Ltd. and American Dental Professional Services, Inc.,
as a consolidated entity, except where it is made clear that such term means
only the parent company . The term ''PC'' means the dental professional
corporation or other professional entity formed by the dentists of the
affiliating dental group. We do not own or control the PCs and, accordingly, do
not consolidate the financial statements of the PCs with ours.
OUR COMPANY
American Dental Partners, Inc. is a leading provider of business services to
multi-disciplinary dental groups in selected markets throughout the United
States. We seek to affiliate with leading dental groups that provide a
comprehensive range of dental care services, have outstanding reputations for
quality and have proven records of financial performance.
OUR ADDRESS
Our principal executive offices are located at 301 Edgewater Place, Suite
320, Wakefield, Massachusetts 01880. Our telephone number at that location is
(781) 224-0880.
OUR INDUSTRY
The market for dental care is large, growing and highly fragmented. Based on
United States Health Care Financing Administration statistics, estimated
expenditures for dental care were approximately $53.8 billion in 1998 and will
reach approximately $93.1 billion by 2008, representing a compound annual growth
rate of approximately 6%. We believe that the growth in expenditures for dental
care will continue to be driven by both increases in costs and increases in
demand for services due to:
(i) Increased prevalence of dental benefits offered by employers;
(ii) increased availability and use of dental insurance, including preferred
provider organization ("PPO") plans and, to a lesser extent, capitated
managed care plans;
(iii) increased demand for dental care from an aging population; and
(iv) increased demand for cosmetic and preventative procedures.
We believe that this growth will benefit not only dentists, but companies
that provide services to the dental care industry. However, the failure of any
of the foregoing factors to materialize could offset increases in demand for
dental care, and any such increases may not correlate with growth in our
business.
Unlike many other sectors of the health care services industry, the dental
care profession remains highly fragmented. Although dental care is typically
offered by solo practitioners, the trend towards group practice is growing.
According to the American Dental Association ("ADA"), in 1996, 12% of the
approximately 152,000 dentists in the United States were practicing in groups of
three or more, up from 4% in 1991. We believe this trend towards the delivery of
dental care in a group practice setting will continue.
Most dental care performed in the United States is categorized as general
dentistry. According to the ADA, in 1996, general dentistry was estimated to
represent approximately 79% of all dental services performed in the United
States. General dentistry includes preventative care, diagnosis and treatment
planning, as well as procedures such as fillings, crowns, bridges, dentures and
extractions. Specialty dentistry, which includes orthodontics, periodontics,
endodontics, prosthodontics and pediatric dentistry, represented the remaining
21% of dental care services.
Historically, dental care was not covered by insurers and consequently was
paid for by patients on a fee-for-service basis. An increasing number of
employers have responded to the desire of employees for enhanced benefits by
providing coverage from third party payors for dental care. These third party
payors offer indemnity insurance, PPO plans and capitated managed care plans.
Under an indemnity insurance plan, the dental provider charges a fee for each
service provided to the insured patient, which is typically the same as that
charged to a patient not covered by any type of dental insurance. We categorize
indemnity insurance plans as fee-for-service plans. Under a PPO plan, the
dentist charges a discounted fee for each service provided based on a schedule
negotiated with the PPO. Under a capitated managed care plan, the dentist
receives a fixed monthly fee from the
3
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managed care organization for each member covered under the plan who selects
that dentist as his or her provider. Capitated managed care plans also typically
require a co-payment by the patient.
The National Association of Dental Plans ("NADP") estimated that
approximately 147 million people, or approximately 55% of the population of the
United States, were covered by some form of dental care plan in 1997. This
compares with approximately 117 million people, or approximately 46% of the
population of the United States, in 1995 and approximately 96 million people, or
approximately 41% of the population of the United States, in 1990. Of the 147
million people with coverage, approximately 65% were covered by indemnity
insurance, approximately 18% were covered by capitated managed care plans and
approximately 17% were covered by PPO plans. The remaining approximately 120
million people, or approximately 45% of the population of the United States in
1997, did not have dental benefit coverage. We believe that the number of people
with dental benefits will continue to increase and that the majority of this
growth will be in PPO plans. For instance, according to the NADP, the number of
people covered by PPO plans increased from 11.7 million in 1994 to 24.5 million
in 1997, representing a 28% compound annual growth rate.
We believe that the increased complexity of managing and operating dental
practices, as a result of the growth of both the group practice delivery model
and the prevalence of dental insurance plans, has led dental groups to begin to
affiliate with entities such as us that:
(i) allow dentists to focus on the clinical aspects of dentistry by providing
management resources to conduct the business and administrative aspects
of dentistry;
(ii) provide information and operating systems that are required to
effectively manage in an increasingly complex reimbursement environment;
(iii) assist with dental benefit provider contracting;
(iv) realize economies of scale in purchasing and provide access to
capital; and
(v) provide dentists the opportunity to realize value for their practices.
OUR AFFILIATION MODEL
We believe that dental care is an important part of an individual's overall
health care. Because the practitioner is best qualified to manage the clinical
aspects of dentistry, the provision of dental care must be centered around the
dentist. However, current market trends in health care are increasing the
complexity of operating a dental practice. Consequently, dentists are
affiliating with business partners who can manage the non-clinical aspects of
dentistry and provide the business skills that can improve practice operating
performance.
We believe that, similar to other sectors of the health care delivery system,
the delivery of dental care is fundamentally a local business. Therefore, we
operate our business in a decentralized manner, and each affiliated dental group
maintains its local identity and operating philosophy. In each affiliation, we
strive to maintain the local culture of the affiliated group, and we encourage
it to retain the name of the practice, continue its presence in community
events, maintain its relationship with patients and local dental benefit
providers and, to the extent possible, maintain the existing management
organization.
Our affiliation model is designed to create a partnership in management
between the affiliated dental group and us that allows each party to maximize
its strengths and retain its autonomy. Under our affiliation model, the
affiliated dental group continues to own its practice and has sole purview over
the clinical aspects of the practice while we manage the business aspects of the
practice. This affiliation model is consistent across groups and, even where
permitted by law, we do not employ practicing dentists.
We believe that the core values of a business partnership are shared
governance and shared financial objectives and have structured our affiliation
model to achieve these goals. Shared governance is achieved by the formation of
a joint policy board for each affiliated dental group which is comprised of an
equal number of representatives from the affiliated dental group and us.
Together, members of the joint policy board develop strategies and decide on
major business initiatives for the practice. Shared financial objectives are
achieved through the joint implementation of a budgeting process that
establishes the financial performance standards for the dental practice.
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OUR STRATEGY
Our objective is to be the leading business partner to dental groups in the
United States. In order to achieve this objective, our business strategy is to:
Expand into carefully selected markets. We focus on markets that:
(i) offer the opportunity to gain market share leadership;
(ii) have a prevalence of dental group practices;
(iii) have favorable demographics and projected economic growth; and
(iv) have access to dental schools.
To date, we have identified approximately 125 markets that currently meet
our market selection criteria.
Affiliate with leading dental groups. In entering a new market, we seek
to affiliate with a leading dental group in that market as a platform for
expansion. A "platform" dental group is one which has a reputation for
quality care, provides a comprehensive range of dental services, has a
significant market presence and has a proven record of financial performance.
Increase market penetration. We assist our affiliated dental groups to
achieve market share leadership. After affiliating with a leading dental
group, we seek to increase market share by assisting the affiliate in
recruiting new general and specialty dentists, expanding its patient base and
opening new facilities. Additionally, we may affiliate with other dental
practices or with specialty practices that complement the platform dental
group.
Add value to each affiliated dental group. We support our affiliated
dental groups with a broad range of services designed to enhance their
practice revenue, improve operating efficiencies and expand operating margins.
We share the best practices of each of our affiliated dental groups and assist
each affiliate with an analysis of its revenue and payor mix, capacity,
utilization, staffing, scheduling and productivity. We also provide our
affiliates assistance with information systems, budgeting, financial
reporting, facilities management, dental benefit provider contracting,
supplies and equipment procurement, quality assurance initiatives,
organization development and structure, billing and collecting accounts
receivable, marketing and recruiting, hiring and training support staff.
Focus on quality care. We pursue various initiatives to help our
affiliates provide the highest quality of care and service. Our goal is to
have each affiliated dental group become accredited by the Accreditation
Association of Ambulatory Health Care, Inc. ("AAAHC"). Through our National
Professional Advisory Forum, we provide our affiliated dental groups with the
opportunity to share clinical knowledge and best clinical practices. We also
implement comprehensive patient satisfaction surveys administered by
independent third parties. We believe that our focus on quality care enhances:
(i) our affiliates' relationships with patients;
(ii) our affiliates' ability to recruit dentists;
(iii) our ability to attract new dental groups as affiliates; and
(iv) our affiliates' attractiveness to dental benefit providers.
THE OFFERING
Common Stock offered....... We are offering 750,000 shares of Common Stock to be
issued in connection with the acquisition of
businesses, properties or securities in acquisition
and affiliation transactions. Through March 31,
2000, we have issued 70,122 shares of Common Stock
under this prospectus and 679,878 shares remain
available for future issuance.
Subordinated Promissory
Notes offered............ We are offering $25,000,000 aggregate
principal amount of Subordinated Promissory Notes
to be issued in connection with our acquisition of
businesses, properties or securities in acquisition
and affiliation transactions. Through March 31,
2000, we have issued $3,473,500 aggregate principal
amount of notes and $21,526,500 of notes remain
available for future issuance.
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Terms of acquisitions
and affiliations...... We expect that the terms upon which we may issue
Common Stock and Subordinated Promissory Notes under
this prospectus in acquisition and affiliation
transactions, including the rates of interest for
the Subordinated Promissory Notes, will be
determined through negotiations with the security
holders or principal owners of the businesses whose
securities or assets we are acquiring. We expect
that the Common Stock issued will be valued at
prices reasonably related to market prices for the
Common Stock prevailing either at the time an
acquisition agreement is executed or at the time an
acquisition is consummated. The Subordinated
Promissory Notes will be unsecured debt obligations,
subordinated to all senior indebtedness, which is
generally our bank debt, payable over seven years
and on parity with all currently outstanding
Subordinated Promissory Notes and any that may be
issued in the future. In addition, if you are an
affiliate of a business we acquire or affiliate
with, there will be limitations on how many shares
you can sell under SEC rules.
Transfer of Common Stock... If you acquire shares of Common Stock in
transactions pursuant to this prospectus, we may
require you to hold all or some portion of the
Common Stock for some period of time.
Transfer of Subordinated
Promissory Notes........ If you acquire Subordinated Promissory Notes in
acquisition and affiliation transactions pursuant to
this prospectus, you should be aware that presently
there is no market for the Subordinated Promissory
Notes, and it is not anticipated that a market for
the Subordinated Promissory Notes will develop. In
addition, the acquisition agreements for the
applicable acquisition and affiliation transactions
will contain certain restrictions with respect to
your transfer of the Subordinated Notes.
Common Stock outstanding... As of March 31, 2000, there are 7,099,084 shares of
Common Stock outstanding (1)
Nasdaq National
Market symbol........... Our Common Stock is traded on the Nasdaq
National Market under the symbol "ADPI."
- ----------------------
(1) Does not include shares of Common Stock issuable upon the exercise of
outstanding options issued pursuant to our stock option plans.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND STATISTICAL DATA)
We are providing the following summary financial information to aid you in
your analysis of our financial results and condition. This information is only
a summary and you should read it in conjunction with our historical and
consolidated financial statements and the related notes, beginning on page F-1,
and the information under "Our Company," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1997 1998 1999
------- ------- ------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net revenue................................................................. $ 3,933 $53,270 $84,090 $117,352
------- ------- ------- --------
Operating expenses:
Salaries and benefits..................................................... 2,098 28,438 43,190 57,417
Lab fees and dental supplies.............................................. 534 6,435 10,796 15,866
Office occupancy.......................................................... 389 4,814 7,635 11,321
Other operating expenses.................................................. 773 6,264 6,840 9,235
General corporate expenses................................................ 2,395 3,337 3,951 4,814
Depreciation.............................................................. 177 1,580 2,495 3,642
Amortization of intangible assets......................................... 48 645 1,732 2,579
------- ------- ------- --------
Total operating expenses................................................ 6,414 51,513 76,639 104,874
------- ------- ------- --------
Earnings (loss) from operations............................................. (2,481) 1,757 7,451 12,478
Interest expense (income), net............................................ (38) 563 1,085 1,877
------- ------- ------- --------
Earnings (loss) before income taxes........................................ (2,443) 1,194 6,366 10,601
Income taxes............................................................. - 124 2,480 4,588
------- ------- ------- --------
Net earnings (loss)...................................................... $(2,443) $ 1,070 $ 3,886 $ 6,013
======= ======= ======= ========
Net earnings (loss) per common share (1):
Basic.................................................................... $ (3.45) $ (0.05) $ 0.59 $ 0.80
Diluted.................................................................. $ (3.45) $ (0.05) $ 0.54 $ 0.78
Weighted average common shares outstanding (1):
Basic.................................................................... 768 2,273 5,907 7,513
Diluted.................................................................. 768 2,273 6,867 7,745
Ratio of earnings to fixed charges (2): ................................... N/A 2.4 5.5 5.8
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1997 1998 1999
------- ------ -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 5,836 4,675 $ 2,091 $ 226
Working capital.............................................................. 3,189 759 (2,725) 22
Total assets................................................................. 25,294 47,959 70,535 107,901
Long-term debt, excluding current maturities................................. 3,063 21,253 9,980 40,249
Redeemable and convertible preferred stock................................... 15,105 16,297 - -
Total stockholders' equity................................................... 164 909 48,305 52,229
STATISTICAL DATA (END OF PERIOD):
Number of states............................................................. 3 5 8 12
Number of dental facilities.................................................. 42 77 103 134
Number of operatories (3).................................................... 331 566 830 1,193
Number of affiliated dentists (4)............................................ 128 171 231 324
</TABLE>
- -----------------------------
(1) Net earnings (loss) per common share are computed on the basis described in
Notes 2 and 12 to our Consolidated Financial Statements.
(2) The ratio of earnings to fixed charges are computed by dividing our fixed
charges into earnings before income taxes plus fixed charges. Fixed
charges include interest expense, amortization of debt expenses and the
portion of non-reimbursed rental expense estimated to be represenative of
the interest factor (approximately 1/3 of non-reimbursed rental expense).
Fixed charges ordinarily do not include any provision for principal
repayment. For the year ended December 31, 1996, our earnings before
income taxes plus fixed charges were insufficient to cover fixed charges by
approximately $2.4 million.
(3) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
(4) Includes full-time general dentists employed by the PCs and full-time
specialists, some of whom are independent contractors to the PCs.
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RISK FACTORS
LIMITED OPERATING HISTORY
We were formed in December 1995. We began providing business services to
multi-disciplinary dental groups in November 1996 when we completed the
affiliation with our first dental group. We had an operating loss in 1996.
Although we were profitable in 1997, 1998 and 1999, there can be no assurance
that we will be able to sustain profitable operations.
AFFILIATION STRATEGY RISKS
Our strategy includes expansion through affiliations with leading dental
groups in new and existing markets and the expansion of such affiliated
practices. Affiliations involve numerous risks, including failure to retain key
personnel and contracts of the affiliated practices and the inability to
integrate businesses without material disruption. In addition, we compete with
other companies that provide business services to dentists, some of which may
have greater financial resources and a longer operating history than us. There
can be no assurance that any future affiliations will be successfully integrated
into our operations, that competition for affiliations will not intensify or
that we will be able to complete such affiliations on acceptable terms and
conditions. In addition, the costs of unsuccessful affiliation efforts may
adversely affect our business, financial condition or results of operations.
We devote substantial time and resources to affiliation-related activities.
Identifying appropriate affiliation candidates and negotiating and consummating
affiliations with dental groups can be a lengthy, complex and costly process.
The success of our affiliation strategy will depend on a number of factors,
including our ability to identify and affiliate with quality dental groups in
suitable markets and regulatory constraints. There can be no assurance that our
affiliation strategy will be successful or that modifications to our strategy
will not be required.
RISKS RELATED TO RAPID GROWTH
We are experiencing rapid growth as a result of our dental group
affiliations. This growth has placed, and will continue to place, significant
demands upon our management, operations and systems. Our ability to manage our
growth effectively will depend upon our ability to hire, train and assimilate
additional management and other employees and our ability to expand, improve and
effectively use our accounting and finance, management and operating systems in
order to accommodate our expanded operations. A failure by management to
anticipate, implement and manage effectively the changes required to sustain our
growth could have a material adverse effect on our business, financial condition
and results of operations.
DEPENDENCE UPON AFFILIATED DENTAL GROUPS
Our revenue depends on revenue generated by dental groups with which we
affiliate. We do not employ dentists or control the clinical practices of the
dental groups with which we affiliate. There can be no assurance that dental
groups with which we affiliate will maintain successful dental groups or that
any of the key members of a particular dental group will continue practicing
with that group. A shortage of available dentists could have a material adverse
effect on our expansion opportunities. To the extent permitted by state law,
each PC has entered into non-competition agreements and other restrictive
covenants with the dentists employed by the PC. There can be no assurance that
these restrictive covenants are or will be sufficient to protect our interests
or the PC or that a court would enforce such agreements. Any material loss of
revenue by the affiliated dental groups, whether through the loss of existing
dentists, the inability to attract new dentists or otherwise, could have a
material adverse effect on our business, financial condition and results of
operations.
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DEPENDENCE UPON SERVICE AGREEMENTS
We are dependent upon the service agreements we have entered into with each
of our affiliated PCs for substantially all of our operating revenue. Under the
service agreements, we are responsible for providing all services necessary for
the administration of the non-clinical aspects of the dental operations. We pay
all expenses incurred for these services. We are reimbursed for these expenses
and also receive fees for providing 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.
Revenue generated from service agreements with two of our affiliated dental
groups, Park Dental and Northpark Dental Group (formerly Smileage Dental Care,
Inc.), represented approximately 41% and 12%, respectively, of our consolidated
net revenue for the year ended December 31, 1998 and approximately 34% and 10%,
respectively, of our consolidated net revenue for the year ended December 31,
1999. The termination of either of these service agreements could have a
material adverse effect on our business, financial condition and results of
operations.
Any material loss in revenue by one or more PCs would have a material adverse
effect on their ability to reimburse us for expenses and to pay service fees.
The failure to receive such amounts could have a material adverse effect on our
business, financial condition and results of operations. Furthermore, in the
event of a breach of a service agreement by a PC, there can be no assurance that
the remedies available to us under the service agreements will be enforceable or
will be adequate to compensate us for our damages resulting from such breach.
GOVERNMENT REGULATION
The dental industry and dental practices are highly regulated at the state
and federal levels. The laws of many states, including states where we operate
and anticipate operating, prohibit entities not wholly owned or controlled by
dentists from practicing dentistry (which in some states includes owning,
managing or controlling the assets, equipment or offices used in a dental
practice), employing dentists and, in some circumstances, dental assistants and
dental hygienists, or exercising control over the provision of dental services.
These laws also often regulate the content of advertisements of dental services.
We and our affiliated dental groups are also subject to state and/or federal
licensure, fraud and abuse, anti-kickback, false claims, fee splitting, self-
referral, antitrust and safety and health laws and regulations. At the state
level, many of these laws and regulations vary widely. In addition, these laws
and regulations are enforced by federal and state regulatory authorities with
broad discretion. We do not, and do not intend to, control the practice of
dentistry by the affiliated dental groups or their compliance with the
regulatory requirements directly applicable to dentists or the practice of
dentistry. However, there can be no assurance that any review of our business
relationships, including our relationship with affiliated dental groups, by
courts or other regulatory authorities, will not result in determinations that
could have a material adverse effect on our operations, or that the laws and
regulatory environment will not change to restrict or limit the enforceability
of our service agreements. The laws and regulations of some states in which we
may seek to expand may require us to change our contractual relationships with
dental groups in a manner that may restrict our operations in those states or
may prevent us from affiliating with dental groups or providing comprehensive
business services to dental groups in those states. To the extent that we or any
affiliated dental group contracts with third party payors, including self-
insured plans, on a capitated or other basis which causes us or such affiliated
dental groups to assume a portion of the financial risk of providing dental
care, we or such affiliated dental groups may become subject to state insurance
laws, in which case we may be required to change the method of payment from
third party payors or seek appropriate licensure. Any regulation of us or our
affiliated dental groups under insurance laws could have a material adverse
effect on our business, financial condition and results of operations. See
"Business--Government Regulation."
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NEED FOR ADDITIONAL FINANCING
Our ability to execute our business strategy depends to a significant degree
on our ability to obtain substantial capital to finance future affiliations. To
date, we have obtained financing through sales of equity securities and through
our $50 million revolving credit facility. We have historically used a
combination of cash, Common Stock and Subordinated Notes as consideration in
affiliations with dental practices and intend to continue this practice.
However, our ability to use our Common Stock and Subordinated Notes as
consideration for future affiliations may be adversely affected if our Common
Stock fails to maintain a sufficient market value or if the affiliation
candidates are unwilling to accept the Subordinated Notes. Furthermore, while
funds are currently available under our revolving credit facility, our ability
to draw such funds is subject to certain terms and conditions, and there can be
no assurance that we will be able to satisfy such terms and conditions. There
can be no assurance that any other financing will be available to us, or if
available, that such financing would be available on favorable terms.
SUBORDINATION OF SUBORDINATED NOTES
The Subordinated Notes will be unsecured debt obligations of us and will at
all times remain subordinated to all Senior Indebtedness. The Subordinated Notes
will not restrict us from incurring any other indebtedness, some of which may be
senior to the Subordinated Notes and secured. Because of such subordination, in
the event of our liquidation and dissolution, the holders of the Subordinated
Notes may receive less, ratably, than our other creditors. See "Description of
Subordinated Notes."
SETOFF AGAINST SUBORDINATED NOTES
Under the terms of the acquisition agreements to be entered into in
connection with the acquisition and affiliation transactions, the Subordinated
Notes may be subject to setoff rights in favor of us to secure the
indemnification obligations of the securityholders or principal owners of the
businesses whose securities or assets are to be acquired. Consequently, the
consideration to be received by such securityholders or owners may be reduced.
See "Description of Subordinated Notes."
LACK OF MARKET FOR SUBORDINATED NOTES; RESTRICTIONS ON TRANSFER
At present, there is no market for the Subordinated Notes, and it is not
anticipated that a market for the Subordinated Notes will develop in the
foreseeable future. In addition, the acquisition agreements for the business
combination transactions will contain restrictions with respect to the transfer
of the Subordinated Notes. The securityholders or principal owners of the
businesses whose securities or assets are to be acquired should be willing and
have the financial ability to bear the risk of his or her investment in the
Subordinated Notes for an indefinite period of time.
RISKS RELATED TO CAPITATED FEES AND OTHER THIRD PARTY ARRANGEMENTS
A significant portion of the payments for dental care is paid or reimbursed
under insurance programs ("third party payors"). While payor mix varies from
market to market, the aggregate payor mix percentage of our affiliated groups
for the year ended December 31, 1999 was approximately 44% fee-for-service
(which includes indemnity plans), 14% preferred provider organization plans and
42% capitated managed care plans. Third party payors are continually negotiating
the prices charged for dental care, with a goal of lowering reimbursement and
utilization rates. Third party payors can also deny reimbursement for dental
care if they determine that a treatment was not performed in accordance with
treatment protocols established by such third party payors or for other reasons.
Loss of revenue by our affiliated dental group practices caused by cost
containment efforts could have a material adverse effect on our business,
financial condition and results of operations.
Additionally, some third-party payor contracts are capitated arrangements.
Under such contracts, which are typically terminable by either party on 30 to 90
days notice, the affiliated dental group receives a capitated payment,
calculated on a per member per month basis, to provide care to the covered
enrollees and generally receives a co-payment at the time care is provided. Such
payment methods shift a portion of the risk of high costs of over-utilization
from the third party payors to the affiliated dental groups. To the extent that
patients covered by such contracts require more frequent or extensive care than
is anticipated, there may be a shortfall between the capitated payments received
by the affiliated dental groups and the costs to provide the contracted
services. These shortfalls may impact us by the possible reduction in expense
reimbursement and service fees from the affiliated dental groups. There can be
no assurance that we will be able to negotiate satisfactory third-party payor
arrangements on behalf of the affiliated dental groups. Insufficient revenue
under capitated contracts or other agreements with third party payors could have
a material adverse effect on our business, financial condition and results of
operations.
10
<PAGE>
POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY
Our affiliated dental groups could be exposed to the risk of professional
liability and other claims. Such claims, if successful, could result in
substantial damages that could exceed the limits of any applicable insurance
coverage. It is possible that such claims could be asserted against us as well
as the affiliated dental groups, that a claim brought against an affiliated
dental group or dentist could materially increase professional liability
insurance premiums of the affiliated dental group, or that fees to us from a
dental group could be adversely affected, if damages payable by that practice
exceed insurance coverage limits. Our service agreements require that we be
named as an additional insured party under the liability insurance policy that
each affiliated dental group is required to maintain. In addition, we require
each affiliated dental group to indemnify us for actions or omissions related to
the delivery of dental care by such affiliated dental group. However, a
successful professional liability claim against us or an affiliated dental group
could have a material adverse effect on our business, financial condition and
results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Our results of operations may fluctuate significantly from quarter to quarter
or year to year. Results may fluctuate due to a number of factors, including the
timing of future affiliations, seasonal fluctuations in the demand for dental
care and competitive factors. Accordingly, quarterly comparisons of our revenues
and operating results should not be relied on as an indication of future
performance, and the results of any quarterly period may not be indicative of
results to be expected for a full year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
HIGHLY COMPETITIVE MARKET
The dental services industry is highly competitive. There are a number of
competitors specializing in the business of providing comprehensive business
services to dental groups and there are other companies with substantial
resources that may decide to enter the business of providing business services
to dentists and dental groups. In addition, our revenue depends on the success
of our affiliated dental groups and those groups face competition from several
sources, including solo practitioners and single and multi-disciplinary groups,
many of which may have more established practices. See "Business--Competition."
RISKS RELATED TO INTANGIBLE ASSETS
A significant portion of our total assets are represented by intangible
assets, the amount and concentration of which are expected to increase in
connection with future acquisitions. In addition, amortization expense
associated with these intangible assets will increase in the future as a result
of intangibles recorded in connection with affiliations. In the event of any
sale or liquidation of us or a portion of our assets, there can be no assurance
that the value of our intangible assets will be realized. In addition, we
periodically evaluate whether events or circumstances have occurred indicating
that any portion of our intangible assets may not be recoverable. If factors
indicate that our intangible assets have been impaired, we would be required to
reduce the carrying value of such assets. Any future determination requiring the
write off of a significant portion of unamortized intangible assets could have a
material adverse effect on our business, financial condition and results of
operation.
CONTROL BY EXISTING STOCKHOLDERS
As of March 31, 2000, Summit Partners and our directors and executive
officers beneficially owned approximately 49.2% of our outstanding shares of
Common Stock. If this group were to act together, it would have significant
voting power with respect to, and may be able to control, the election of our
directors and, in general, the determination of the outcome of all corporate
actions requiring approval of stockholders, and thus control our business
affairs and policies. Such control could also have the effect of delaying or
preventing a change in control in us and consequently may adversely affect the
market price of our Common Stock. See "Principal Stockholders."
11
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 750,000 shares of Common Stock issuable pursuant to this Offering
generally will be eligible for resale after their issuance as follows: (i) for
non-affiliates of the businesses with which we affiliate or acquire, without
restriction; and (ii) for affiliates of the businesses with which we affiliate
or acquire, subject to compliance with the volume and manner-of-sale
restrictions of Rule 145, unless in each case we contractually restrict their
resale. We anticipate that the persons acquiring shares of Common Stock in
acquisition and affiliation transactions pursuant to this Offering will be
contractually required to hold all or some portion of the Common Stock for some
period of time.
We are unable to predict the effect, if any, that future sales of Common
Stock or the availability of Common Stock for sale may have on the market price
of our Common Stock. Some existing stockholders have the right to require us to
register their Common Stock from time to time. See "Description of Capital
Stock" and "Shares Eligible for Future Sale."
POSSIBLE VOLATILITY OF STOCK PRICE
Our Common Stock is traded on the Nasdaq National Market; however, there can
be no assurance that an active trading market will be sustained. The trading
prices of our Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in our operating results, material announcements
by us, governmental regulatory action, general conditions in the health care
industry, or other events or factors, many of which are beyond our control. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many health
care services companies and which have often been unrelated to the operating
performance of such companies. Our operating results in the future may be below
the expectations of securities analysts and investors. In such event, the price
of our Common Stock would likely decline, perhaps substantially.
ANTI-TAKEOVER PROVISIONS
Provisions of our Second Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Amended and Restated By-laws (the "By-
laws") and of Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent our change in control or limit the price
that certain investors might be willing to pay in the future for shares of our
Common Stock. Among other matters, the Certificate of Incorporation provides for
"blank check" preferred stock, which may be issued without stockholder approval,
and requires all actions by stockholders to be taken at meetings of
stockholders. The By-laws provide for a classified Board of Directors. We are
also subject to Section 203 of the Delaware General Corporation Law ("DGCL"),
which, subject to some exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business acquisitions with an "interested
stockholder" for a period of three years following the date such stockholder
became an interested stockholder. See "Description of Capital Stock."
12
<PAGE>
OUR COMPANY
We were formed in December 1995 and began providing business services to
dental groups in November 1996, concurrent with the completion of our first
dental group affiliation. From November 1996 through March 31, 2000, we
completed 34 affiliation transactions, comprising 19 dental groups in 13 states.
The following table lists our affiliates and the current number of dental
facilities and operatories at March 31, 2000:
<TABLE>
<CAPTION>
Dental Affiliation
State/Affiliate Facilities Operatories (1) Market(s) Date
- --------------------------------------------------- ---------- --------------- --------------------------------- ----------------
<S> <C> <C> <C> <C>
ALABAMA
Dental Care of Alabama........................... 2 20 Birmingham and Tuscaloosa February 1999
ARIZONA
Associated Dental Care Providers................. 13 136 Phoenix and Tucson January 1998
CALIFORNIA
Dental Associates of Corona, Dental Associates of
Moreno Valley, Dental Associates of Riverside,
Dental Associates of Temecula and Riverside
Dental Group................................... 5 80 Corona, Moreno Valley, Riverside September 1999
and Temecula
LOUISIANA
Lakeside Dental Care............................. 2 33 Hammond and Metairie March 1997
MARYLAND
Mintz & Pincus Dental Group...................... 2 35 Oxon Hill and Waldorf September 1998
Hill Dental Group................................ 2 27 Columbia June 1999
MINNESOTA
Park Dental...................................... 31 256 Minneapolis/St. Paul November 1996
Orthodontic Care Specialists....................... 20 98 Minneapolis/St. Paul October 1997
NEW YORK
Western New York Dental Group.................... 4 28 Buffalo January 2000
NORTH CAROLINA
University Dental Associates..................... 1 18 Winston-Salem June 1999
OKLAHOMA
OK Dental........................................ 8 68 Oklahoma City and Tulsa March 1999
PENNSYLVANIA
Chestnut Hills Dental............................ 8 61 Indiana, Johnstown and May 1997
Pittsburgh
TEXAS
Longhorn Dental Associates....................... 8 53 Austin, Killeen and San Marcos December 1996
TSC Dental Centers............................... 5 43 Houston June 1998
VIRGINIA
Dental Arts Center............................... 2 48 Ashburn and Reston June 1998
WISCONSIN
Northpark Dental Group........................... 14 136 Appleton, Green Bay, Kenosha December 1996
Madison, Milwaukee and Wausau
Northpoint Dental Group.......................... 2 28 Milwaukee July 1997
Wilkens Dental Group............................. 4 30 Milwaukee October 1997
Family Care Dental Centers....................... 5 40 Janesville, Kenosha and Racine April 1998
--- -----
Total.............................................. 138 1,238
=== =====
</TABLE>
- ----------------------
(1) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
13
<PAGE>
DIVIDEND POLICY
We have not paid any cash dividends on our Common Stock in the past and do
not plan to pay any cash dividends on our Common Stock in the foreseeable
future. In addition, the terms of our revolving credit facility prohibit us from
paying dividends or making other payments with respect to our Common Stock
without the lenders' consent. Our Board of Directors intends, for the
foreseeable future, to retain earnings to finance the continued operation and
expansion of our business.
PRICE RANGE OF COMMON STOCK
Our Common Stock has been traded on the Nasdaq National Market under the
symbol "ADPI" since April 16, 1998. The following table sets forth the range of
the reported high and low sales prices of our Common Stock for 1998, 1999 and
2000:
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
1998
2nd Quarter (beginning April 16, 1998)... $19.375 $13.750
3rd Quarter.............................. $15.000 $ 8.250
4th Quarter.............................. $13.875 $ 7.125
1999
1st Quarter.............................. $11.688 $ 7.000
2nd Quarter.............................. $12.375 $ 6.875
3rd Quarter.............................. $13.375 $ 8.750
4th Quarter.............................. $12.188 $ 6.625
2000
1st Quarter.............................. $ 9.375 $ 5.750
</TABLE>
As of April 11, 2000, there were approximately 65 holders of record of Common
Stock, as shown on the records of the transfer agent and registrar of Common
Stock. The number of record holders does not bear any relationship to the number
of beneficial owners of the Common Stock. The last reported sale price of the
Common Stock on the Nasdaq National Market System as of April 11, 2000 was $7.25
per share.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1999 our cash and cash
equivalents, our current maturities of debt and our capitalization (in
thousands, except share and per share amounts):
<TABLE>
<CAPTION>
<S> <C>
Cash and cash
equivalents.............................................................................................................. $ 226
=======
Current maturities of
debt..................................................................................................................... $ 1,502
=======
Long-term debt, less current maturities................................................................................... $40,249
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
shares issued and 7,107,311 shares outstanding (1).................................................................... 75
Additional paid-in capital............................................................................................. 46,584
Retained earnings...................................................................................................... 8,526
Treasury stock, at cost, 430,000 shares................................................................................ (2,956)
-------
Total stockholders' equity........................................................................................... 52,229
-------
Total capitalization............................................................................................... $92,478
=======
</TABLE>
- ----------------------------
(1) Excludes 1,557,128 shares of Common Stock issuable upon the exercise of
outstanding options issued pursuant to our stock option plans as of March
31, 2000.
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND STATISTICAL DATA)
We are providing the following selected consolidated statement of operations
data for the years ended December 31, 1996, 1997, 1998 and 1999 and the selected
consolidated balance sheet data at December 31, 1996, 1997, 1998 and 1999. This
information has been derived from our Consolidated Financial Statements which
have been audited by KPMG LLP, Independent Certified Public Accountants. You
should read this information in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our Consolidated
Financial Statements and the related notes thereto and other financial
information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1997 1998 1999
-------- -------- ------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net revenue......................................................... $ 3,933 $53,270 $84,090 $117,352
------- ------- ------- --------
Operating expenses:
Salaries and benefits............................................. 2,098 28,438 43,190 57,417
Lab fees and dental supplies...................................... 534 6,435 10,796 15,866
Office occupancy.................................................. 389 4,814 7,635 11,321
Other operating expenses.......................................... 773 6,264 6,840 9,235
General corporate expenses........................................ 2,395 3,337 3,951 4,814
Depreciation...................................................... 177 1,580 2,495 3,642
Amortization of intangible assets................................. 48 645 1,732 2,579
------- ------- ------- --------
Total operating expenses........................................ 6,414 51,513 76,639 104,874
------- ------- ------- --------
Earnings (loss) from operations..................................... (2,481) 1,757 7,451 12,478
Interest expense (income), net.................................... (38) 563 1,085 1,877
------- ------- ------- --------
Earnings (loss) before income taxes................................. (2,443) 1,194 6,366 10,601
Income taxes...................................................... - 124 2,480 4,588
------- ------- ------- --------
Net earnings (loss)............................................... $(2,443) $ 1,070 $ 3,886 $ 6,013
======= ======= ======= ========
Net earnings (loss) per common share (1):
Basic............................................................. $ (3.45) $ (0.05) $ 0.59 $ 0.80
Diluted........................................................... $ (3.45) $ (0.05) $ 0.54 $ 0.78
Weighted average common shares outstanding (1):
Basic............................................................. 768 2,273 5,907 7,513
Diluted........................................................... 768 2,273 6,867 7,745
Ratio of earnings to fixed charges (2).............................. N/A 2.4 5.5 5.8
</TABLE>
See accompanying footnotes on following page.
16
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA--CONTINUED
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1997 1998 1999
------- ------ -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equvalents............................................ $ 5,836 4,675 $ 2,091 $ 226
Working capital..................................................... 3,189 759 (2,725) 22
Total assets........................................................ 25,294 47,959 70,535 107,901
Long-term debt, excluding current maturities........................ 3,063 21,253 9,980 40,249
Redeemable and convertible preferred stock.......................... 15,105 16,297 - -
Total stockholders' equity.......................................... 164 909 48,305 52,229
</TABLE>
<TABLE>
<CAPTION>
STATISTICAL DATA (END OF PERIOD):
<S> <C> <C> <C> <C>
Number of states.................................................... 3 5 8 12
Number of dental facilities......................................... 42 77 103 134
Number of operatories (3)........................................... 331 566 830 1,193
Number of affiliated dentists (4)................................... 128 171 231 324
</TABLE>
- -----------------------
(1) Net earnings (loss) per common share are computed on the basis described in
Notes 2 and 12 to our Consolidated Financial Statements.
(2) The ratio of earnings to fixed charges are computed by dividing our fixed
charges into earnings before income taxes plus fixed charges. Fixed charges
include interest expense, amortization of debt expenses and the portion of
non-reimbursed rental expense estimated to be representative of the interest
factor (approximately 1/3 of non-reimbursed rental expense). Fixed charges
ordinarily do not include any provision for principal repayment. For the
year ended December 31, 1996, our earnings before income taxes plus fixed
charges were insufficient to cover fixed charges by approximately $2.4
million.
(3) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
(4) Includes full-time general dentists employed by the PCs and full-time
specialists, some of whom are independent contractors to the PCs.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 December 31, 1999, we completed 31 affiliation transactions, comprising 18
dental groups, and at December 31, 1999, we operated 134 dental facilities with
1,193 operatories in 12 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.
1997 Transactions
During 1997, we acquired substantially all the assets of six dental practices
and Orthocare, Ltd., a related entity of one of these practices, and
simultaneously entered into 40-year service agreements with four of these
affiliated dental groups (two practices joined existing affiliates). In total,
these affiliations resulted in the addition of 29 dental facilities with 199
operatories.
1998 Transactions
During 1998, we acquired substantially all the assets of ten dental practices
and simultaneously entered into 40-year service agreements with four of the
affiliated dental groups (six practices joined existing affiliates). In total,
these affiliations resulted in the addition of 23 dental facilities with 231
operatories.
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
Subsequent to December 31, 1999, 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 39 operatories.
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.
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.
18
<PAGE>
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 year
ended December 31, 1998 was approximately 39% fee-for-service, 12% PPO plans and
49% capitated managed care plans. For the year ended December 31, 1999, the
aggregate payor mix percentage of our affiliated groups was approximately 44%
fee-for-service, 14% PPO plans and 42% 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. See "Business--
Operations--Operating Structure."
General Corporate Expenses. General corporate expenses consist of
compensation expenses for our corporate personnel and administrative staff, as
well as facility and other administrative costs of our corporate office. We
provide management, administrative, third party contracting and other services
to the affiliated groups.
Depreciation. Depreciation expense includes depreciation charges related to
leasehold improvements and furniture, fixtures and equipment used to operate the
dental facilities, local management offices and our corporate office.
Amortization of Intangible Assets. Amortization of intangible assets relates
to intangible assets acquired in connection with completed acquisition and
affiliation transactions.
19
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Overview
Our net earnings amounted to $1,070,000 or a diluted loss per share available
to common stockholders of $(0.05) for 1997, as compared with net earnings of
$3,886,000 or diluted earnings per share of $0.54 for 1998. 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 $53,270,000 for 1997 to $84,090,000
for 1998, an increase of approximately 58%. The increase in net revenue in 1998
is due primarily to the inclusion of revenue derived from service agreements
entered into in connection with the 1997 Transactions for the entire period and
from the 1998 Transactions. In addition, same market growth from our affiliates
in Austin, Milwaukee and Minneapolis resulted from the addition and expansion of
our facilities, the addition of dentists to our affiliated dental group network
and increases in certain affiliates' fees. Net revenue included expense
reimbursements ($36,386,000 for 1997 as compared with $56,278,000 for 1998),
business service fees ($12,056,000 for 1997 as compared with $19,138,000 for
1998) and revenue related to the arrangement of the provision of care to
patients and other revenue ($4,828,000 for 1997 as compared with $8,674,000 for
1998). Expense reimbursements included rent expense ($3,476,000 for 1997 as
compared with $5,590,000 for 1998) and other operating expenses ($32,910,000 for
1997 as compared with $50,688,000 for 1998). Business service fees included a
monthly fee ($10,724,000 for 1997 as compared with $17,306,000 for 1998) and an
additional variable fee ($1,332,000 for 1997 as compared with $1,832,000 for
1998). Net revenue derived from our service agreement with Park Dental
represented approximately 56% and 41% of our consolidated net revenue for 1997
and 1998, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $28,438,000
or 53.4% of net revenue for 1997, as compared with $43,190,000 or 51.4% of net
revenue for 1998. The decrease in salaries and benefits as a percentage of net
revenue resulted primarily from more efficient utilization of staff in existing
facilities, the regionalization of finance, operations and administrative staff
in certain markets and the acquisition of facilities with a generally lower
ratio of staffing costs to net revenue in their respective markets compared to
the existing base of facilities. These cost savings were partially offset by an
increase in the amount of expense related to the arrangement of the provision of
care to patients, which is at a higher percentage of net revenue.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $6,435,000 or 12.1% of net revenue for 1997 to $10,796,000 or
12.8% of net revenue for 1998. Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures
performed. The increase in lab fees and dental supplies as a percentage of net
revenue is attributable to a combination of the acquisition of facilities with a
generally higher ratio of lab fees and dental supplies expense to net revenue in
their respective markets compared to the existing base of facilities, rate
increases from certain lab providers and the outsourcing of certain lab work
which was previously handled in-house.
Office Occupancy Expense. Office occupancy expense amounted to $4,814,000
for 1997, as compared with $7,635,000 for 1998. As a percentage of net revenue,
these costs remained relatively consistent at 9.0% for 1997 and 9.1% for 1998.
Other Operating Expenses. Other expenses amounted to $6,264,000 or 11.8% of
net revenue for 1997, as compared with $6,840,000 or 8.1% of net revenue for
1998. Other costs decreased as a percentage of net revenue due primarily to the
reduction of certain expenses associated with the administration of a benefit
plan that was renegotiated, the regionalization of administrative functions in
certain markets, a reduction of the Minnesota Care Tax rate from 2.0% to 1.5%
and efficiencies from managing certain expenses, such as professional fees and
other costs associated with operating a stand alone dental group practice, on a
national level, as opposed to on a local level.
General Corporate Expenses. General corporate expenses were $3,337,000 or
6.3% of net revenue for 1997, as compared with $3,951,000 or 4.7% of net revenue
for 1998. We built our management infrastructure in anticipation of rapid
growth. This included the hiring of key management and support staff in the
areas of finance, operations and information systems. In 1998, we began to
leverage these costs, resulting in a reduction of general corporate expenses as
a percentage of net revenue. This reduction was partially offset by an increase
in costs associated with being a public company.
Depreciation. Depreciation expense was $1,580,000 or 3.0% of net revenue for
1997, as compared with $2,495,000 or 3.0% of net revenue for 1998. Depreciation
expense included depreciation related primarily to assets acquired and capital
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expenditures associated with the addition of three new dental facilities in
Minneapolis and one new dental facility in Phoenix in 1998 and the addition of
new operatories in Austin, Milwaukee and Minneapolis throughout 1998.
Amortization of Intangible Assets. Amortization of intangible assets was
$645,000 or 1.2% of net revenue for 1997, as compared with $1,732,000 or 2.1% of
net revenue for 1998. The increase in amortization resulted from intangible
assets recorded in connection with our six affiliations and one acquisition
completed during 1997 and ten affiliations completed during 1998.
Interest Expense, Net. Net interest expense was $563,000 or 1.1% of net
revenue for 1997, as compared with $1,085,000 or 1.3% of net revenue for 1998.
The increase in interest expense resulted primarily from increased average
borrowings under our credit facility in 1998 as compared with 1997. In addition,
the issuance of subordinated notes in connection with the 1997 and 1998
Transactions contributed to higher interest expense in 1998.
Income Taxes. We incurred income tax expense of $124,000 for 1997, as
compared with $2,480,000 for 1998. In 1997, we utilized a portion of our net
operating loss carryforward which resulted in minimal income tax expense. For
1998, our effective tax rate was approximately 39%, resulting in income tax
expense of $2,480,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Overview
Our net earnings amounted to $3,886,000 or diluted earnings per share of
$0.54 for 1998, as compared with net earnings of $6,013,000 or diluted earnings
per share of $0.78 for 1999. The increase in net earnings resulted from
incremental earnings provided from completed acquisitions and affiliations and
from internal growth.
Net Revenue. Net revenue increased from $84,090,000 for 1998 to $117,352,000
for 1999, an increase of approximately 39.6%. The increase in net revenue in
1999 is due primarily to the inclusion of revenue derived from service
agreements entered into in connection with the 1998 Transactions for the entire
period and from the 1999 Transactions. In addition, same market growth from our
affiliates in Austin, Milwaukee, Minneapolis, New Orleans, Phoenix, Pittsburgh
and Tucson resulted from the addition of new facilities and expansion of
existing facilities, the addition of dentists to our affiliated dental group
network and increases in certain affiliates' fees. Net revenue included expense
reimbursements ($56,278,000 for 1998 as compared with $79,474,000 for 1999),
business service fees ($19,138,000 for 1998 as compared with $27,926,000 for
1999) and revenue related to the arrangement of the provision of care to
patients and other revenue ($8,674,000 for 1998 as compared with $9,952,000 for
1999). Expense reimbursements included rent expense ($5,590,000 for 1998 as
compared with $8,201,000 for 1999) and other operating expenses ($50,688,000 for
1998 as compared with $71,273,000 for 1999). Business service fees included
monthly fees ($17,306,000 for 1998 as compared with $26,335,000 for 1999) and
additional variable fees ($1,832,000 for 1998 as compared with $1,591,000 for
1999). Net revenue derived from our service agreement with Park Dental
represented approximately 41% and 34% of our consolidated net revenue for 1998
and 1999, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $43,190,000
or 51.4% of net revenue for 1998, as compared with $57,417,000 or 48.9% of net
revenue for 1999. The decrease in salaries and benefits as a percentage of net
revenue resulted primarily from more efficient utilization of staff in existing
facilities, the acquisition of facilities with a generally lower ratio of
staffing costs to net revenue in their respective markets compared to the
existing base of facilities, and the regionalization of finance, operations and
administrative staff in certain markets. These cost savings were partially
offset by an increase in the amount of expense related to the arrangement of the
provision of care to patients, which is at a higher percentage of net revenue.
In addition, due to tight labor markets, these savings were partially offset by
wage inflation. 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 $10,796,000 or 12.8% of net revenue for 1998 to $15,866,000 or
13.5% of net revenue for 1999. Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures
performed. The increase in lab fees and dental supplies as a percentage of net
revenue is attributable to a combination of the acquisition of facilities with a
generally higher ratio of lab fees and dental supplies expense to net revenue in
their respective markets compared to the existing base of facilities and rate
increases from certain lab providers and dental supply manufacturers. We
believe such price inflation will continue for the foreseeable future.
Office Occupancy Expense. Office occupancy expense amounted to $7,635,000 or
9.1% for 1998, as compared with $11,321,000 or 9.6% of net revenue for 1999.
Office occupancy expense increased as a percentage of net revenue due to
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investment in the relocation, expansion and addition of new dental facilities
and local management offices 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.
Other Operating Expenses. Other expenses amounted to $6,840,000 or 8.1% of
net revenue for 1998, as compared with $9,235,000 or 7.9% of net revenue for
1999. Other costs decreased as a percentage of net revenue due to the
regionalization of administrative functions in certain markets and the reduction
of certain discretionary spending. These cost savings were partially offset by
certain costs such as printing, professional fees and marketing associated with
the opening of new facilities in 1999 and the acquisition of facilities with a
generally higher 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 $3,951,000 or
4.7% of net revenue for 1998, as compared with $4,814,000 or 4.1% of net revenue
for 1999. In 1999, we continued to expand our management infrastructure in the
areas of finance, 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 $2,495,000 or 3.0% of net revenue for
1998, as compared with $3,642,000 or 3.1% of net revenue for 1999. The increase
in depreciation expense related primarily to the depreciation of assets acquired
and capital expenditures associated with the addition of eleven new facilities
in Arizona, California, Minnesota and Virginia and the relocation and/or
expansion of 35 facilities in Arizona, Minnesota, Texas and Wisconsin throughout
1998 and 1999. 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 Intangible Assets. Amortization of intangible assets was
$1,732,000 or 2.1% of net revenue for 1998, as compared with $2,579,000 or 2.2%
of net revenue for 1999. The increase in amortization resulted from intangible
assets recorded in connection with our ten affiliations completed during 1998
and 15 affiliations (12 transactions) completed during 1999. 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 $1,085,000 or 1.3% of net
revenue for 1998, as compared with $1,877,000 or 1.6% of net revenue for 1999.
The increase in interest expense resulted primarily from increased average
borrowings under our revolving credit facility in 1999 as compared to 1998.
Average borrowings in 1998 were significantly lower than in 1999 due in large
part to using a portion of the proceeds from the initial public offering to
repay the outstanding balance on the revolving credit facility. In addition, the
issuance of subordinated notes in connection with the 1998 and 1999 Transactions
contributed to higher expense in 1999. This increase in interest expense was
partially reduced due to an overall lower average interest rate under our
revolving credit facility in 1999 than 1998.
Income Taxes. We incurred income tax expense of $2,480,000 for 1998, as
compared with $4,588,000 for 1999. Our effective tax rate was approximately
39.0% for 1998 as compared with 43.3% for 1999. The increase in the effective
tax rate is primarily attributable to the fact that the remaining net operating
loss carryforwards from 1996 were fully utilized to offset a portion of our
taxable income in 1998. In addition, higher pre-tax income in 1999 resulted in a
higher Federal statutory rate and increased income in states with higher tax
rates increased the average state tax rate. These increases were partially
offset by a reduction in the proportionate amount of amortization of intangible
assets which are not deductible for tax purposes.
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, 1997 through December 31, 1999, we completed 31 dental
practice affiliations (28 transactions) for aggregate consideration of
$55,205,000 in cash, $7,120,000 in subordinated promissory notes, $1,881,000 in
deferred payments,
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285,756 shares of Common Stock and future contingent payments for one
affiliation based on a multiple of service fees received in excess of a
predetermined threshold for each of the three years ending May 31, 1999, 2000
and 2001. For the year ended May 31, 1999, this contingent payment amounted to
$286,000.
For the years ended December 31, 1998 and 1999, cash provided by operating
activities amounted to $9,771,000 and $8,745,000, respectively. The decrease in
cash from operations resulted primarily from an increase in the amount of cash
paid for income taxes and interest in 1999 compared to 1998. This was partially
offset by an increase in cash from operations due to incremental earnings
generated from acquisitions and affiliations, same market growth and expanded
profit margins.
For the years ended December 31, 1998 and 1999, cash used in investing
activities amounted to $24,886,000 and $35,655,000, 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
$18,290,000 for 1998 and $19,855,000 for 1999. Cash used for capital
expenditures was $5,074,000 and $12,484,000 for 1998 and 1999, respectively.
Capital expenditures for 1998 included costs associated with the addition of
three new dental facilities in Minnesota, a new dental facility in Arizona and
the relocation and/or expansion of eleven dental facilities in Minnesota, Texas
and Wisconsin. Capital expenditures for 1999 included costs associated with the
addition of seven new dental facilities in Arizona, California, Minnesota and
Virginia and the relocation and/or expansion of 24 dental facilities in Arizona,
Minnesota, Texas and Wisconsin. The establishment of new dental facilities and
the expansion of existing dental facilities in the future will require ongoing
capital expenditures. Although we expect to continue making meaningful capital
expenditures, we do not expect capital expenditures to continue at the same
level as 1999.
For the years ended December 31, 1998 and 1999, cash provided by financing
activities amounted to $12,531,000 and $25,045,000, respectively. Cash provided
by financing activities during 1998 resulted primarily from net proceeds
received from our initial public offering. During the second quarter of 1998, we
sold 2,587,500 shares of Common Stock in our initial public offering at $15.00
per share. Net proceeds to us after deducting underwriting discounts and
commissions and offering costs were approximately $34,596,000. Such proceeds
were used to (i) redeem all the Series B Redeemable Preferred Stock, including
unpaid dividends, in the amount of $7,851,000, (ii) repay outstanding
indebtedness under our revolving credit facility, including accrued interest, in
the amount of $20,651,000 and (iii) complete additional affiliation
transactions. Cash provided by financing activities in 1999 resulted from
borrowings under our revolving line of credit of $29,197,000 and proceeds from
the issuance of common stock for the employee stock purchase plan of $491,000,
offset by the repayment of certain indebtedness of $1,673,000 and the repurchase
of 430,000 shares of our Common Stock for $2,956,000.
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.
As of March 31, 2000, 679,878 shares and $21,526,500 of notes remain
available for issuance pursuant to this Offering.
Our growth strategy depends in large measure on our ability to affiliate with
additional dental practices. Subsequent to December 31, 1999, 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). 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. The cash portion of this purchase price was funded through
cash generated from operations and borrowings under our revolving credit
facility. 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.
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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.
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. We do not own any derivative financial instruments.
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.
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BUSINESS
OVERVIEW
American Dental Partners, Inc. is a leading provider of business services to
multi-disciplinary dental groups in selected markets throughout the United
States. We seek to affiliate with leading dental groups that provide a
comprehensive range of dental care services, have outstanding reputations for
quality and have proven records of financial performance.
Our affiliation model is designed to create a partnership in management
between us and the affiliated dental group that allows each party to maximize
its strengths and retain its autonomy. When affiliating with a dental group, we
acquire substantially all of its non-clinical assets and enter into a long-term
service agreement to manage the non-clinical aspects of the dental operations.
We support our affiliated dental groups with a broad range of services designed
to enhance practice revenue, improve operating efficiencies and expand operating
margins. We share the best practices of our network with each affiliate and
provide assistance with information systems, planning and budgeting, facilities
development and management, capacity and utilization management, scheduling,
staffing, professional recruiting, benefits administration, economic analysis,
financial reporting, purchasing, quality assurance, organization structure and
development, analyzing and negotiating agreements with dental benefit providers
and marketing.
Our objective is to be the leading business partner to dental groups in the
United States. Our strategy for achieving this objective is to:
(i) expand into carefully selected and diverse geographic markets which
have favorable demographics and projected economic growth;
(ii) affiliate with leading dental groups which have reputations for
quality care and proven records of financial performance;
(iii) increase market penetration in each of our markets through additional
affiliations, recruitment of dentists and facility development;
(iv) add value to each affiliated dental group by assisting the practice in
improving operating performance; and
(v) pursue various initiatives to ensure the highest quality of care and
service.
DENTAL CARE INDUSTRY
The market for dental care is large, growing and highly fragmented. Based on
United States Health Care Financing Administration statistics, estimated
expenditures for dental care were approximately $53.8 billion in 1998 and will
reach approximately $93.1 billion by 2008, representing a compound annual growth
rate of approximately 6%. We believe that the growth in expenditures for dental
care will continue to be driven by both increases in costs and increases in
demand for services due to:
(i) increased prevalence of dental benefits offered by employers;
(ii) increased availability and use of dental insurance, including
preferred provider organization ("PPO") plans and, to a lesser
extent, capitated managed care plans;
(iii) increased demand for dental care from an aging population; and
(iv) increased demand for cosmetic and preventative procedures.
We believe that this growth will benefit not only dentists, but companies
that provide services to the dental care industry, such as us. However, the
failure of any of these factors to materialize could offset increases in demand
for dental care, and any such increases may not correlate with growth in our
business.
Unlike many other sectors of the health care services industry, the dental
care profession remains highly fragmented. Although dental care is typically
offered by solo practitioners, the trend towards group practice is growing.
According to the American Dental Association ("ADA"), in 1996, 12% of the
approximately 152,000 dentists in the United States were practicing in groups of
three or more, up from 4% in 1991. We believe this trend towards the delivery of
dental care in a group practice setting will continue.
Most dental care performed in the United States is categorized as general
dentistry. According to the ADA, in 1996, general dentistry was estimated to
represent approximately 79% of all dental services performed in the United
States. General dentistry includes preventative care, diagnosis and treatment
planning, as well as procedures such as fillings, crowns, bridges, dentures and
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extractions. Specialty dentistry, which includes orthodontics, periodontics,
endodontics, prosthodontics and pediatric dentistry, represented the remaining
21% of dental care services.
Historically, dental care was not covered by insurers and consequently was
paid for by patients on a fee-for-service basis. An increasing number of
employers have responded to the desire of employees for enhanced benefits by
providing coverage from third party payors for dental care. These third party
payors offer indemnity insurance, PPO plans and capitated managed care plans.
Under an indemnity insurance plan, the dental provider charges a fee for each
service provided to the insured patient, which is typically the same as that
charged to a patient not covered by any type of dental insurance. We categorize
indemnity insurance plans as fee-for-service plans. Under a PPO plan, the
dentist charges a discounted fee for each service provided based on a schedule
negotiated with the PPO. Under a capitated managed care plan, the dentist
receives a fixed monthly fee from the managed care organization for each member
covered under the plan who selects that dentist as his or her provider.
Capitated managed care plans also typically require a co-payment by the patient.
The National Association of Dental Plans ("NADP") estimated that
approximately 147 million people, or approximately 55% of the population of the
United States, were covered by some form of dental care plan in 1997. This
compares with approximately 117 million people, or approximately 46% of the
population of the United States, in 1995 and approximately 96 million people, or
approximately 41% of the population of the United States, in 1990. Of the 147
million people with coverage, approximately 65% were covered by indemnity
insurance, approximately 18% were covered by capitated managed care plans and
approximately 17% were covered by PPO plans. The remaining approximately 120
million people, or approximately 45% of the population of the United States in
1997, did not have dental benefit coverage. We believe that the number of people
with dental benefits will continue to increase and that the majority of this
growth will be in PPO plans. For instance, according to the NADP, the number of
people covered by PPO plans increased from 11.7 million in 1994 to 24.5 million
in 1997, representing a 28% compound annual growth rate.
We believe that the increased complexity of managing and operating dental
practices, as a result of the growth of both the group practice delivery model
and the prevalence of dental insurance plans, has led dental groups to begin to
affiliate with entities such as us that:
(i) allow dentists to focus on the clinical aspects of dentistry by
providing management resources to conduct the business and
administrative aspects of dentistry;
(ii) provide information and operating systems that are required to
effectively manage in an increasingly complex reimbursement
environment;
(iii) assist with dental benefit provider contracting;
(iv) realize economies of scale in purchasing and provide access to
capital; and
(v) provide dentists the opportunity to realize value for their practices.
BUSINESS STRATEGY
Our objective is to be the leading business partner to dental groups in the
United States. In order to achieve this objective, our business strategy is to:
Expand into carefully selected markets. We focus on markets that:
(i) offer the opportunity to gain market share leadership;
(ii) have a prevalence of dental group practices;
(iii) have favorable demographics and projected economic growth; and
(iv) have access to dental schools.
To date, we have identified approximately 125 markets that currently meet
our market selection criteria.
Affiliate with leading dental groups. In entering a new market, we seek
to affiliate with a leading dental group in that market as a platform for
expansion. A "platform" dental group is one which has a reputation for
quality care, provides a comprehensive range of dental services, has a
significant market presence and has a proven record of financial performance.
Increase market penetration. We assist our affiliated dental groups to
achieve market share leadership. After affiliating with a leading dental
group, we seek to increase market share by assisting the affiliate in
recruiting new general
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and specialty dentists, expanding its patient base and opening new facilities.
Additionally, we may affiliate with other dental practices or with specialty
practices that complement the platform dental group.
Add value to each affiliated dental group. We support our affiliated
dental groups with a broad range of services designed to enhance their
practice revenue, improve operating efficiencies and expand operating margins.
We share the best practices of each of our affiliated dental groups and assist
each affiliate with an analysis of its revenue and payor mix, capacity,
utilization, staffing, scheduling and productivity. We also provide our
affiliates assistance with information systems, budgeting, financial
reporting, facilities management, dental benefit provider contracting,
supplies and equipment procurement, quality assurance initiatives,
organization development and structure, billing and collecting accounts
receivable, marketing and recruiting, hiring and training support staff.
Focus on quality care. We pursue various initiatives to help our
affiliates provide the highest quality of care and service. Our goal is to
have each affiliated dental group become accredited by the Accreditation
Association of Ambulatory Health Care, Inc. ("AAAHC"). Through our National
Professional Advisory Forum, we provide our affiliated dental groups with the
opportunity to share clinical knowledge and best clinical practices. We also
implement comprehensive patient satisfaction surveys administered by
independent third parties. We believe that our focus on quality care enhances:
(i) our affiliates' relationships with patients;
(ii) our affiliates' ability to recruit dentists;
(iii) our ability to attract new dental groups as affiliates; and
(iv) our affiliates' attractiveness to dental benefit providers.
AFFILIATION PHILOSOPHY
We believe that dental care is an important part of an individual's overall
health care. Because the practitioner is best qualified to manage the clinical
aspects of dentistry, the provision of dental care must be centered around the
dentist. However, current market trends in health care are increasing the
complexity of operating a dental practice. Consequently, dentists are
affiliating with professional practice managers who can manage the non-clinical
aspects of dentistry and provide the business skills that can improve practice
operating performance.
We believe that, similar to other sectors of the health care delivery system,
the delivery of dental care is fundamentally a local business. Therefore, we
operate our business in a decentralized manner, and each affiliated dental group
maintains its local identity and operating philosophy. In each affiliation, we
strive to maintain the local culture of the affiliated group, and we encourage
it to retain the name of the practice, continue its presence in community
events, maintain its relationship with patients and local dental benefit
providers and, to the extent possible, maintain the existing management
organization.
Our affiliation model is designed to create a partnership in management
between the affiliated dental group and us that allows each party to maximize
its strengths and retain its autonomy. Under our affiliation model, the
affiliated dental group continues to own its practice and has sole purview over
the clinical aspects of the practice while we manage the business aspects of the
practice. This affiliation model is consistent across groups and, even where
permitted by law, we do not employ practicing dentists.
We believe that the core values of a business partnership are shared
governance and shared financial objectives and have structured our affiliation
model to achieve these goals. Shared governance is achieved by the formation of
a joint policy board for each affiliated dental group which is comprised of an
equal number of representatives from the affiliated dental group and us.
Together, members of the joint policy board develop strategies and decide on
major business initiatives for the practice. Shared financial objectives are
achieved through the joint implementation of a budgeting process that
establishes the financial performance standards for the dental practice.
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The organizational structure of a dental group before and after our
affiliation with us is generally as follows:
<TABLE>
<CAPTION>
BEFORE AFFILIATION AFTER AFFILIATION
- ---------------------------------------------- ------------------------------------------------------------------------------
<S> <C>
|----------------------------|
_______________| Joint Policy Board |_____________|
| |____________________________| |
| | |
------------------------------ ------------------------ ------------------------ ------------------------
| Dental | | Dentist-owned | | Service | | ADP-owned |
| Group | | Professional |____| Agreement |____| Management Service |
| | | Corporation (PC) | | (40 year) | | Organization (MSO) |
|----------------------------| |----------------------| |----------------------| |----------------------|
</TABLE>
MARKET AND GROUP SELECTION
Market Selection
We have a well-defined market selection criteria. We define potential markets
with reference to one or more Metropolitan Statistical Areas ("MSAs"). An MSA
is generally a geographic area consisting of a city of at least 50,000 people,
together with adjacent communities that have a high degree of economic and
social integration with the population center. In 1996, there were 316 MSAs in
the United States. We typically focus on markets with a population of at least
250,000 people that:
(i) offer the opportunity to gain market share leadership;
(ii) have a prevalence of dental group practices;
(iii) have favorable demographics and projected economic growth; and
(iv) have access to dental schools.
We have identified approximately 125 MSAs that currently meet our market
selection criteria.
Group Selection
We seek to affiliate with a leading dental group in each selected market. We
focus on group practices because they have greater potential to be market share
leaders, are more likely to have implemented quality assurance and peer review
policies and procedures and are better positioned to operate in an increasingly
complex reimbursement environment. When entering a new market, we seek to
affiliate with a platform dental group with a:
(i) reputation for quality care;
(ii) comprehensive range of dental care services;
(iii) significant market presence; and
(iv) proven record of financial performance.
We believe that, although a limited number of platform dental groups exist
within any given market, there are a significant number of such groups
nationwide.
Affiliation Process
Once we have identified a potential affiliate within a market, our management
seeks to determine whether the group shares a common philosophy about the dental
profession and holds common strategic goals and objectives. To this end, we
conduct a series of meetings, site visits and presentations with the potential
affiliate, during which we discuss trends in the dental
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profession, our mission and strategy and our affiliation model. We believe that
the existence of shared philosophical values is a critical element of each
affiliation's ultimate success.
If it is determined that we mutually share common values, goals and
objectives, we then undertake a preliminary due diligence review of clinical,
operating and financial information. Based upon this review, we formulate an
offer outlining the basic terms and conditions of the affiliation which, if
accepted by the dental group, is generally embodied in a letter of intent
between the parties.
Upon signing a letter of intent, we begin a thorough review of the potential
affiliate's clinical systems, processes, facilities and compliance with
licensing and credentialing requirements, as well as performing legal and
accounting due diligence. Acquisition, service and other agreements are then
prepared and the transaction is closed. Generally, the process of identifying an
acceptable affiliation candidate to closing the transaction takes approximately
twelve months.
Potential Affiliations
We are constantly discussing potential affiliations with dental groups that
meet our selection criteria, which may be at various stages at any point in
time. There can be no assurance that we will consummate any of these potential
affiliations.
MARKET PENETRATION
After affiliating with a platform dental group, our strategy is to increase
market penetration by developing new dental facilities and by affiliating with
other leading dental groups that complement or add to the dental care provided
by the platform affiliate.
Increase the Platform Groups' Market Share
Upon completing an affiliation, we prepare a thorough operating evaluation of
the affiliate which builds upon our operational due diligence. Based on this
evaluation, we prepare a plan for increasing the affiliate's market penetration.
This plan may include one or more of the following methods:
(i) opening new facilities that are conveniently located in highly
populated areas within the MSA or in contiguous MSAs;
(ii) recruiting additional general and specialty dentists that will
complement or enhance the dental care provided by each affiliated
dental group;
(iii) expanding physical capacity by adding new operatories at existing
facilities;
(iv) increasing the utilization of existing physical capacity by expanding
hours of operation; and
(v) growing our affiliate's patient base through increased marketing
efforts and expanded relationships with dental benefit providers.
Affiliations in Existing Markets
We also increase our market penetration by affiliating with other leading
general dentistry practices and specialty dental practices that complement the
platform dental group. These practices are selected in much the same manner as
the platform dental group. We identify those practices which have an outstanding
reputation for quality dental care and provide the type of dental care which
will complement or add to the dental care offered by the platform dental group.
OPERATIONS
Operating Structure
We operate under a decentralized organizational structure. At the facility
level, where permitted by applicable state law, we generally employ the dental
hygienists, dental assistants and administrative staff. At each facility, a
practice manager typically oversees the day-to-day business operations. The
practice manager and administrative staff are responsible for, among other
things, facility staffing, patient scheduling, on-site patient invoicing and
ordering office and dental supplies. We believe local office scheduling is
crucial because it allows each practice to accommodate the needs of its patients
and increase the productivity of its dentists.
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In each market, we have a local management team that supervises the
operations of one or more affiliates. This team provides support in areas such
as recruiting, hiring and training facility staff, developing and implementing
quality assurance programs, developing and implementing operating policies and
procedures, administering employee benefits, billing and collecting accounts
receivable, processing payroll, information systems, accounting, marketing and
facilities development and management.
Each local management team reports to one of our operating vice presidents.
An operating vice president is responsible for monitoring the operating
performance of multiple affiliated dental groups in multiple markets. Each
operating vice president participates as a member of the joint policy board of
each of the affiliated dental groups for which he or she has management
oversight responsibilities. The operating vice presidents are responsible for
overseeing the development of operating plans and annual budgets and monitoring
actual results. Additionally, we support each of our dental groups with analyses
of the capacity, utilization and productivity of each dental facility. This
analysis assists each practice in improving its operating performance from both
a clinical and financial perspective.
On a national level, we support our affiliates in several ways. We assist
with:
(i) sharing best clinical practices through our National Professional
Advisory Forum;
(ii) designing, locating and leasing new facilities;
(iii) evaluating and negotiating dental benefit provider contracts;
(iv) developing budgets and implementing accounting and financial systems;
(v) developing and implementing practice management and other information
systems;
(vi) professional recruitment; and
(vii) administering employee benefit plans.
We also take advantage of economies of scale by contracting for various goods
and services. For example, we have arranged for national contracts for the
purchase of dental supplies and equipment, long distance telephone services,
professional, casualty and general liability insurance, employee benefits such
as a 401(k) plan, flexible spending program, life insurance and disability
insurance and payroll processing.
National Professional Advisory Forum
We have organized the National Professional Advisory Forum ("NPAF") to
provide guidance to our affiliated dental groups with respect to the clinical
aspects of dentistry. Leading dentists from our affiliated dental groups are
selected to participate in the NPAF. The NPAF meets on a regional basis and a
national basis each year and provides a forum for dentists to share the best
clinical practices of their respective dental groups and an opportunity for them
to build professional relationships with other dentists affiliated with us.
These dentists, as a result of their affiliation with us, share common long-term
goals. This enables the discussion at the NPAF to be more open than it may be in
other professional settings. While the primary emphasis of the NPAF is on the
clinical aspects of dentistry, it also provides our management an opportunity to
communicate with affiliated dentists. This enables us to continue to build
strong, mutually beneficial partner relationships with our affiliated dental
groups.
Payor Relationships and Reimbursement Mix
We believe that our affiliated dental groups' clinical philosophy should not
be compromised by economic decisions. We recognize, however, that the source of
payment for services affects operating and financial performance. We assist our
affiliates in analyzing their revenue and payor mix on an ongoing basis and
recommend methods by which the affiliated dental group can improve operating
efficiency while not compromising this clinical practice philosophy. As a
general rule, we believe that growth in a market is best facilitated where the
payor mix of our affiliates mirrors the payor mix for their community. We assist
each of our affiliated dental groups in evaluating and negotiating dental
benefit provider contracts on a local, regional and national level. The
aggregate payor mix percentage of our affiliated groups for the year ended
December 31, 1999 was approximately 44% fee-for-service, 14% PPO plans and 42%
capitated managed care plans.
We believe it is advantageous to be affiliated with dental groups that have
successfully provided care to patients under all reimbursement methodologies.
Since a shift is taking place in the dental benefits market from traditional
fee-for-service to PPO and, to a lesser extent, capitated managed care dental
plans, we believe that our affiliates' experience in operating under all of
these plans provides them with a competitive advantage. Most of our affiliated
dental groups have provided care under traditional fee-for-service plans and
non-fee-for-service plans.
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Facilities Development and Management
We believe an inviting professional environment is a critical aspect of
overall patient satisfaction. Each of our facilities is constructed to be warm,
attractive and inviting to the patients in addition to being highly functional.
Our dental facilities typically have eight to ten operatories and accommodate
general and specialty dentists, dental hygienists and dental assistants, a
business manager and a receptionist. Generally, our facilities are either stand
alone or located within a professional office building or medical facility.
We work with each of our affiliated dental groups in analyzing utilization of
existing capacity and identifying facility upgrade and expansion priorities. We
also provide our affiliates guidance in the site selection process. We initially
construct each facility as appropriate for the market and add or equip
additional operatories as necessary through a capacity and utilization analysis.
We use architectural design services to improve the facility design process
and to ensure that all facilities are properly constructed and meet the
standards set forth by the AAAHC. To this end, we work with each affiliated
dental group to establish a defined set of standards which are consistent with
the desires of the dental group. We believe such facility standards are
necessary to speed the site development process and create consistency across
newly developed facilities, leading to enhanced staff and provider productivity.
Budgeting and Planning; Financial Information Systems
We assist each affiliate with budgeting and planning. Together with each
affiliate, we develop on an annual basis a strategic plan for increased market
penetration. Together, we then jointly develop a budget which sets specific
goals for revenue growth, operating expenses and capital expenditures. Once a
budget has been approved, we measure the financial performance of each
affiliated dental group on a monthly basis and compare actual performance to
budget.
Our financial information system enables us to measure, monitor and compare
the financial performance of each affiliated dental group on a standardized
basis across our entire network. The system also allows us to track and control
costs and facilitates the accounting and financial reporting process. This
financial system is installed in all affiliated dental groups. Historically, we
have converted all affiliates to our financial system within 60 days of
affiliation and intend to continue this practice with new affiliates.
Practice Management Systems
We use various dental practice management software systems to facilitate
patient scheduling, to invoice patients and insurance companies, to assist with
facility staffing and for other practice related activities. In connection with
our affiliation with Park Dental, we acquired the rights to Comdent, a
proprietary practice management software system which has been used and
continuously enhanced at Park Dental since 1987. We believe that Comdent's
scheduling, electronic data interchange and data management features are
superior to others that are commercially available. In addition, Comdent is
scalable and capable of accommodating large multi-site dental groups. Shortly
after affiliation, we typically convert each dental group to one of three
practice management systems - Comdent, Alphadent or QSI. While Comdent remains
our top choice for its advanced features and ease of use, it is not practical or
cost effective to convert all of our affiliates to this system. We are also
developing a data warehouse and decision support system to analyze information
across all of our affiliates.
AFFILIATION STRUCTURE
Service Agreement
We have entered into a service agreement with each affiliated professional
corporation ("PC") pursuant to which we perform all administrative, non-clinical
aspects of the dental group. We expect that each new affiliated PC will enter
into a similar service agreement or become a party to an existing service
agreement at the time of affiliation with us. We are dependent on our service
agreements for the vast majority of our operating revenue. The termination of
one or more of these service agreements could have a material adverse effect on
us. See "Risk Factors - Dependence Upon Service Agreements."
We are responsible for providing all services necessary for the
administration of the non-clinical aspects of the dental operations. These
services include assisting our affiliates with information systems, budgeting
and financial reporting, facilities management, third-party contracting,
supplies and equipment procurement, quality assurance initiatives, billing and
collecting accounts receivable, marketing and recruiting, hiring and training
support staff.
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The PC is responsible for recruiting and hiring all of the dentists necessary
to provide dental care. We do not assume any authority, responsibility,
supervision or control over the provision of dental care to patients. The
service agreement requires the PC to enter into an employment or independent
contractor agreement with each dentist retained by the PC. The service agreement
also requires the PC to implement and maintain quality assurance and peer review
programs, maintain professional and comprehensive general liability insurance
covering the PC and each of its dentists and abide by non-competition and
confidentiality provisions.
We and each PC establish a joint policy board which is responsible for
developing and implementing management and administrative policies for the
dental operation. The joint policy board consists of an equal number of
representatives designated by us and the PC. The joint policy board members
designated by the PC must be licensed dentists employed by the PC. The joint
policy board's responsibilities include the review and approval of the long-term
strategic and short-term operational goals, objectives, and plans for the dental
facilities, all annual capital and operating budgets, all renovation and
expansion plans and capital equipment expenditures with respect to the dental
facilities, all advertising and marketing services, and staffing plans regarding
provider and support personnel for the dental group. The joint policy board also
reviews and monitors the financial performance of the PC with respect to the
attainment of the PC's budgeted goals. The joint policy board also has the
authority to approve or disapprove any merger or combination with, or
acquisition of, any dental practice by the PC. Finally, the joint policy board
reviews and makes recommendations with respect to contractual relationships
between the PC and dental benefit providers. However, the PC has final approval
over matters relating to dental care including all dental benefit plan provider
contracts and patient fee schedules.
The PC reimburses us for actual expenses incurred on its behalf in connection
with the operation and administration of the dental facilities and pays fees to
us for 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 our 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. The PC is also responsible for provider expenses, which
generally consist of the salaries, benefits, and certain other expenses of the
dentists. Pursuant to the terms of the service agreements, we bill patients and
third party payors on behalf of the affiliated PCs. Such funds are applied in
the following order of priority:
(i) reimbursement of expenses incurred in connection with the operation
and administration of the dental facilities;
(ii) repayment of advances, if any, made by us to the PC;
(iii) payment of the monthly fee;
(iv) payment of provider expenses; and
(v) payment of the additional variable fee.
Each of our current service agreements is for an initial term of 40 years and
automatically renews for successive five-year terms, unless terminated by notice
given at least 120 days prior to the end of the initial term or any renewal
term. In addition, the service agreement may be terminated earlier by either
party upon the occurrence of certain events involving the other party, such as
our dissolution, bankruptcy, liquidation, or our failure to perform our material
duties and obligations under the service agreement. In the event a service
agreement is terminated, the related affiliated dental practice is generally
required to purchase, at our option, the unamortized balance of intangible
assets at the current book value, as well as all related other assets associated
with the affiliated dental group.
Employment Agreements with Dentists
The service agreements require that all dentists practicing full-time at the
dental facilities enter into employment agreements with their respective PCs.
The employment agreements with dentists who are owners of the PCs generally are
for a specified initial term of up to five years and may not be terminated by
the dentists without cause during such initial term. The employment agreements
with other dentists may be for terms up to 18 months. Such employment agreements
are usually terminable by either party upon advance written notice, which in
most cases is 90 days, and are terminable by the PC for cause immediately upon
written notice to the dentist. Such agreements typically contain non-competition
provisions which prohibit the dentist from engaging in the practice of dentistry
or otherwise performing professional dental services within a specified
geographic area,
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usually a specified number of miles from the relevant dental facility, following
termination. The non-competition restrictions are generally for one to two years
following termination.
COMPETITION
The dental services industry, currently in its formative stage, is highly
competitive and is expected to become more competitive. Our affiliates compete
with other dental practices in their market. We compete with other companies
that provide business services to dentists, as well as those seeking to
affiliate with existing dental practices through service agreement arrangements.
We believe that the principal factors of competition between companies that
provide business services to dentists are their affiliation methods and models,
the reputation of their existing affiliates, the scope of their dental care
networks, their management expertise and experience, the sophistication of their
management information, accounting, finance and other systems and their
operating methods. We believe that we compete effectively with other companies
that provide business services to dentists with respect to these factors. See
"Risk Factors - Highly Competitive Market."
GOVERNMENT REGULATION
General
The practice of dentistry is highly regulated, and the operations of us and
our affiliated dental practices are subject to numerous state and federal laws
and regulations. Furthermore, we may become subject to additional laws and
regulations as we expand into new markets. There can be no assurance that the
regulatory environment in which we and our affiliated dental groups operate will
not change significantly in the future. Our ability to operate profitably will
depend, in part, upon us and our affiliated dental groups obtaining and
maintaining all necessary licenses, certifications and other approvals and
operating in compliance with applicable laws. See "Risk Factors - Government
Regulation."
State Regulation
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. Except for Wisconsin, the laws of the states
in which we currently operate prohibit, either by specific statutes, case law or
as a matter of general public policy, entities not wholly owned or controlled by
dentists, such as us, from practicing dentistry, from employing dentists and, in
certain circumstances, dental assistants and dental hygienists, or from
exercising control over the provision of dental services. Many states prohibit
or restrict the ability of a person other than a licensed dentist to own, manage
or control the assets, equipment or offices used in a dental practice. The laws
of some states prohibit the advertising of dental services under a trade or
corporate name and require all advertisements to be in the name of the dentist.
A number of states also regulate the content of advertisements of dental
services and the use of promotional gift items. These laws and their
interpretation vary from state to state and are enforced by regulatory
authorities with broad discretion.
There are certain regulatory issues associated with our role in negotiating
and administering managed care contracts. To the extent that we or any
affiliated dental group contracts with third party payors, including self-
insured plans, under a capitated or other arrangement which causes us or such
affiliated dental group to assume a portion of the financial risk of providing
dental care, we or such affiliated dental group may become subject to state
insurance laws. If we or any affiliated dental group is determined to be engaged
in the business of insurance, we may be required to change the method of payment
from third party payors or to seek appropriate licensure. Any regulation of us
or our affiliated dental groups under insurance laws could have a material
adverse effect on our business, financial condition and results of operations.
Many states have fraud and abuse laws, including anti-kickback laws, which
are similar to the federal laws, discussed below, and in many cases these laws
apply to all referrals for items or services reimbursable by any payor. A number
of states also impose significant criminal and civil penalties for false claims,
false or improper billings, or inappropriate coding for dental services. Many
states either prohibit or require disclosure of self-referral arrangements and
impose criminal and civil penalties for violations of these laws.
Many states also prohibit a dentist from paying a portion of fees received
for dental services to another person or entity. In some states, this "fee-
splitting" prohibition applies only to payments in exchange for referrals.
Other states flatly prohibit any rebates or split fees regardless of whether
referrals are involved. There can be no assurance that management fees paid to
us, to the extent based on a percentage of dental service revenues or profits,
will not be deemed to violate such laws.
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Many states have antitrust laws which prohibit agreements in restraint of
trade, the exercise of monopoly power and other practices that are considered to
be anti-competitive, including cooperation by separate economic entities to fix
the prices of services. Dental practices are also subject to compliance with
state and local regulatory standards in the areas of safety and health.
Most states' laws and regulations relating to the practice of dentistry were
adopted prior to the emergence of providers of business services to dental
groups like us. As a result, a number of states, including states in which we
currently operate, are in the process of reviewing and/or amending their laws
and regulations relating to the practice of dentistry and dentists' business
arrangements with unlicensed persons like us. There can be no assurance that
any amendments or new laws or regulations will not have a material adverse
effect on our business, financial condition and results of operations.
Federal Regulation
The dental industry is also regulated at the federal level to the extent that
dental services are reimbursed under federal programs. Participation by the
affiliated dental groups and their dentists in such programs subject them, and
potentially us, to significant regulation regarding the provision of services to
beneficiaries, submission of claims and related matters, including the types of
regulations discussed below. Violation of these laws or regulations can result
in civil and criminal penalties, including possible exclusion of individuals and
entities from participation in federal payment programs.
The federal anti-kickback statutes prohibit, in part, and subject to certain
safe harbors, the payment or receipt of remuneration in return for, or in order
to induce, referrals, or arranging for referrals, for items or services which
are reimbursable under federal payment programs. Other federal laws impose
significant penalties for false or improper billings or inappropriate coding for
dental services regardless of the payor source. The federal self-referral law,
or "Stark law," prohibits dentists from making referrals for certain
designated health services reimbursable under federal payment programs to
entities with which they have financial relationships unless a specific
exception applies. The Stark law also prohibits the entity receiving such
referrals from submitting a claim for services provided pursuant to such
referral. We may be subject to federal payor rules prohibiting the assignment of
the right to receive payment for services rendered unless certain conditions are
met. These rules prohibit a billing agent from receiving a fee based on a
percentage of collections and may require payments for the services of the
dentists to be made directly to the dentist providing the services or to a lock-
box account held in the name of the dentist or his or her dental group. In
addition, these rules provide that accounts receivables from federal payors are
not saleable or assignable.
Federal antitrust laws prohibit agreements in restraint of trade, the
exercise of monopoly power and other practices that are considered to be anti-
competitive, including cooperation by separate economic entities to fix the
prices of services. Finally, dental practices are also subject to compliance
with federal regulatory standards in the areas of safety and health.
INSURANCE
We maintain property-casualty insurance covering our dental facilities, local
management offices and our corporate office on a replacement cost basis. Each
affiliated PC maintains, or causes to be maintained, professional liability
insurance covering itself and its employees and contractors, including the
dentists, hygienists and dental assistants employed by, or contracted by such
affiliated PC in the amount of $1 million per occurrence and $3 million annual
aggregate. We generally are a named insured under such policies. We also
maintain umbrella liability coverage for our property-casualty policies in the
amount of $10 million. Certain types of risks and liabilities may not be covered
by insurance, however, and there can be no assurance that coverage will continue
to be available upon terms satisfactory to us or that the coverage will be
adequate to cover losses. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims asserted against the
dentists, the PCs or us may have a material adverse effect on our business,
financial condition and operating results. While we believe our insurance
policies are adequate in amount and coverage for our current operations, there
can be no assurance that the coverage maintained by us will be sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
LEGAL PROCEEDINGS
From time to time, we may be subject to litigation incidental to our
business. We are not presently a party to any material litigation. The dentists
employed by, or independent contractors of, our affiliated PCs are from time to
time subject to malpractice claims. Such claims, if successful, could result in
damage awards exceeding applicable insurance coverage which could have a
material adverse effect on our business, financial condition and results of
operations.
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FACILITIES AND EMPLOYEES
We lease most of our dental facilities. Typically, each acquired dental
facility is located at the site used by the dental group prior to affiliating
with us. As of March 31, 2000, we owned or leased 138 dental facilities, seven
local management offices and our corporate office. Our corporate office is
located at 301 Edgewater Place, Suite 320, Wakefield, Massachusetts, in
approximately 6,900 square feet occupied under a lease which expires in March
2002.
As of March 31, 2000, we employed 1,441 people. This amount included 717
hygienists and dental assistants and 724 administrative and management personnel
located at our dental facilities, local management offices and our corporate
office. In addition, we are affiliated with 334 dentists, as well as 162
hygienists and dental assistants located in states which prohibit our employment
of hygienists and/or dental assistants, all of whom were employees or
independent contractors of their respective affiliated PCs. We consider our
relations with our employees to be good.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information concerning each of our executive
officers:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Gregory A. Serrao........................ 37 Chairman, President and Chief Executive Officer
William H. Bottlinger.................... 55 Senior Vice President - Regional Operations and Chief
Information Officer
Joseph V. Errante, D.D.S................. 44 Senior Vice President - Regional Operations and Business
Development
Michael F. Frisch........................ 42 Senior Vice President - Regional Operations
Ronald M. Levenson....................... 44 Senior Vice President, Chief Financial Officer and Treasurer
Breht T. Feigh........................... 33 Vice President - Strategic Initiatives
Lee S. Feldman........................... 32 Vice President - General Counsel
Jesley C. Ruff, D.D.S.................... 45 Vice President - Chief Professional Officer
Peter G. Swenson......................... 28 Vice President - Market Development
Michael J. Vaughan....................... 46 Vice President - Operations
Gregory T. Swenson, D.D.S................ 65 President of Park Dental and Director
James T. Kelly (1)....................... 53 Director
Martin J. Mannion (1)(2)................. 40 Director
Derril W. Reeves (1)(2).................. 56 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Serrao founded American Dental Partners, Inc. and has served as
President, Chief Executive Officer and a Director since December 1995 and as
Chairman since October 1997. From 1992 through December 1995, Mr. Serrao served
as the President of National Specialty Services, Inc., a subsidiary of Cardinal
Health, Inc. ("Cardinal Health"). From 1991 to 1992, Mr. Serrao served as Vice
President--Corporate Development of Cardinal Health. Before joining Cardinal
Health, Mr. Serrao was an investment banker at Dean Witter Reynolds Inc. where
he co-founded its health care investment banking group and specialized in
mergers, acquisitions and public equity offerings.
Mr. Bottlinger has served as Senior Vice President - Regional Operations and
Chief Information Officer of American Dental Partners, Inc. since January 2000.
From November 1997 through December 1999, Mr. Bottlinger served as Vice
President - Regional Operations and Chief Information Officer. From 1985 through
1996, Mr. Bottlinger served as Senior Vice President and Chief Information
Officer for Cardinal Health and Senior Vice President and General Manager of
CORD Logistics, Inc., a Cardinal Health subsidiary which provided pharmaceutical
distribution and information technology services for emerging biotechnical
manufacturing companies. During his career, Mr. Bottlinger has initiated the use
of state of the art information system technology in a variety of businesses
engaged in retailing, food wholesaling, pharmaceutical manufacturing and
distribution, pharmacy operations and financial services.
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Dr. Errante has served as Senior Vice President - Regional Operations and
Business Development of American Dental Partners, Inc. since January 2000. From
November 1998 through December 1999, Dr. Errante served as Vice President -
Regional Operations. From January 1996 to October 1998, Dr. Errante served as
Chief Executive Officer of Innovative Practice Concepts, Inc. (which we acquired
in January 1998). From January 1996 to January 1998, Dr. Errante also served as
Chairman of Associated Dental Care Providers, P.C., one of our affiliated dental
groups, which he co-founded in 1985. From 1992 to 1996, Dr. Errante served as
Chief Executive Officer and Chairman of Associated Companies, Inc., the
management company that operated Associated Health Plans, Inc. ("AHP"), a
managed care dental plan in Arizona. From 1985 to 1992, Dr. Errante served as
the Dental Director for AHP. Dr. Errante currently serves as President of the
American Academy of Dental Group Practice ("AADGP") and sits on the Managed
Care Dental Advisory Board to Proctor and Gamble.
Mr. Frisch has served as Senior Vice President - Regional Operations of
American Dental Partners, Inc. since January 2000. From June 1997 through
December 1999, Mr. Frisch served as Vice President - Regional Operations. From
January 1997 to June 1997, Mr. Frisch was Director - National Support
Initiatives. From July 1996 to January 1997, Mr. Frisch was an independent
consultant to us. From June 1993 to July 1996, Mr. Frisch served as Vice
President and General Manager of National Specialty Services, Inc., a subsidiary
of Cardinal Health. From July 1986 to June 1993, Mr. Frisch was employed by VHA,
Inc., a national health care alliance, in a variety of marketing, business
development and management positions.
Mr. Levenson has served as Senior Vice President, Chief Financial Officer and
Treasurer of American Dental Partners, Inc. since April 1996. Prior to joining
us, Mr. Levenson was employed by American Medical Response, Inc. ("AMR"), a
national provider of ambulance services, where he served as Senior Vice
President and Chief Accounting Officer from October 1992 to April 1996 and also
served as Treasurer from August 1995 to April 1996. Prior to joining AMR, Mr.
Levenson was a Senior Manager at KPMG Peat Marwick LLP, a public accounting
firm, where he was employed from 1979 through 1992.
Mr. Feigh has served as Vice President - Strategic Initiatives of American
Dental Partners, Inc. since January 2000 and was Director - Corporate
Development from October 1997 to December 1999. Prior to joining us, Mr. Feigh
was employed by Robertson, Stephens & Company where he was a senior associate in
the health care mergers and acquisition group from 1996 to 1997. From 1994 to
1996, he was employed in the Latin American investment banking group of ING
Barings and from 1989 to 1993, he was employed in the health care investment
banking group of Dean Witter Reynolds Inc.
Mr. Feldman has served as Vice President - General Counsel of American Dental
Partners, Inc. since November 1998. Prior to joining us, Mr. Feldman was
employed by Professional Dental Associates, Inc., a dental practice management
company, where he served as Vice President - General Counsel and Secretary from
June 1997 to November 1998. From 1993 to 1997, Mr. Feldman was an associate with
Ropes and Gray, a law firm located in Boston, Massachusetts.
Dr. Ruff has served as Vice President - Chief Professional Officer of
American Dental Partners, Inc. since January 1999 and has chaired our National
Professional Advisory Forum since January 1997. From 1992 to 1998, Dr. Ruff
served as President of Wisconsin Dental Group, S.C., one of our affiliated
dental groups, where he was employed as a practicing dentist and held a variety
of positions since 1985. In 1994, Dr. Ruff served on the Board of Directors of
the National Association of Prepaid Dental Plans. From 1983 to 1991, Dr. Ruff
was an Assistant Professor at the Marquette University School of Dentistry and
an adjunct faculty member from 1991 to 1996, where he held a variety of clinical
faculty and grant-related positions.
Mr. Swenson has served as Vice President - Market Development of American
Dental Partners, Inc. since January 2000. Mr. Swenson was Director - Market
Development from January 1998 to December 1999 and Director - Facility
Development from November 1996 to December 1997. From April 1994 to November
1996, Mr. Swenson was Manager - Facilities Development of Park Dental, prior to
its affiliation with us.
Mr. Vaughan has served as Vice President - Operations of American Dental
Partners, Inc. since January 2000. From 1996 to 1999, Mr. Vaughan served as
Regional Vice President for Cardinal Distribution, a subsidiary of Cardinal
Health. From 1988 to 1995, Mr. Vaughan held the positions of Vice President and
General Manager of Cardinal Distribution's Knoxville, Tennessee and Zanesville,
Ohio facilities, and also Vice President of Strategic Initiatives. Prior to
joining Cardinal Health, Mr. Vaughan worked for Mckesson HBOC in various sales
management positions.
Dr. Swenson has served as President of PDHC, Ltd., President of Park Dental
and one of our Directors since November 1996. From 1983, when he co-founded
Park, to November 1996, Dr. Swenson served as Chairman and Chief Executive
Officer of Park. Dr. Swenson was a member of the AADGP from 1980 until 1995,
serving on many occasions as a practice auditor in the AADGP's accreditation
program. In 1978, Park's predecessor was the second group practice to receive
AADGP's accreditation certificate. In 1973, a national referee committee
selected Dr. Swenson to the American Association of Endodontics, a society
36
<PAGE>
with which he maintained a membership until 1989. In 1972, after practicing solo
dentistry for ten years, he formed a partnership with colleagues and helped
build Park's predecessor group practice. Dr. Swenson is a member of the
Minnesota State Dental Association, the American Dental Association, and
Federation Dentaire Internationale. From 1980 to 1996, Dr. Swenson served on the
Board of Directors of Marquette Bank Brookdale.
Mr. Kelly has been one of our Directors since February 1997. Mr. Kelly served
as Chairman of the Board of Lincare Holdings Inc., a provider of home
respiratory therapy services, from April 1994 to March 2000. Mr. Kelly served as
the Chief Executive Officer of Lincare from June 1986 through December 1996.
Prior to 1986, Mr. Kelly served in a number of capacities within the Mining and
Metals Division of Union Carbide Corporation over a 19-year period.
Mr. Mannion has been one of our Directors since January 1996 and served as
our Chairman from January 1996 to October 1997. Mr. Mannion is a general partner
with Summit Partners, a private equity capital firm, where he has been employed
since 1985.
Mr. Reeves has been one of our Directors since February 1997. Mr. Reeves is a
founder, Vice Chairman of the Board of Directors and Chief Development Officer
of PhyCor, Inc., a physician practice management company, where he has been
employed since 1988. From 1974 to 1976, Mr. Reeves was with Hospital Affiliates
International ("HAI") where he served as Vice President of Hospital Management
Corporation, the hospital management subsidiary of HAI. In 1977, he joined
Hospital Corporation of America ("HCA") to head the growth function for HCA's
management company. Mr. Reeves was a Vice President of HCA and also Vice
President of Development for HCA Management Company until 1985. In 1985, he
moved to HCA Health Plans as Vice President of Sales and Marketing and was
instrumental in the creation of Equicor where he was Senior Vice President,
National Sales.
BOARD OF DIRECTORS
Our Board of Directors is divided into three classes, with each class elected
to serve a staggered three-year term. The Class I director, whose term will
expire at the 2001 annual meeting of stockholders, is Dr. Swenson. The Class II
directors, whose terms will expire at the 2002 annual meeting of stockholders,
are Messrs. Mannion and Kelly. The Class III directors, whose terms will expire
at the 2000 annual meeting of stockholders, are Messrs. Serrao and Reeves. The
classified Board of Directors may increase the difficulty of consummating or
discourage a business combination or an attempt to gain control of us that is
not approved by our Board of Directors. Our executive officers are elected
annually by and serve at the discretion of our Board of Directors. See "--
Employment Agreements."
COMPENSATION OF DIRECTORS
Directors who are not our employees, employees of one of our subsidiaries or
our largest shareholder (collectively, "Compensated Directors") receive a fee of
$1,000 for attending each Board of Directors' meeting and $500 for attending
each committee meeting. In addition, directors who are not our employees or
employees of one of our subsidiaries are eligible to receive options under our
1996 Amended and Restated Directors Stock Option Plan. These options are issued
at such times and in such amounts as may be determined by the Directors Stock
Option Plan Committee. Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof.
Beginning in 2000, each Compensated Director also receives an annual fee of
$10,000. Directors who are not Compensated Directors do not receive additional
compensation for serving as directors.
37
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information with respect to compensation paid
to or accrued on behalf of our Chief Executive Officer and our four most highly
compensated executive officers whose annual compensation exceeded $100,000
during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM AWARDS
----------------------------------------------------------- --------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
YEAR SALARY ($) BONUS ($) COMPENSATION(1) OPTIONS (#) COMPENSATION (2)
-------- -------------- -------------- ----------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gregory A. 1999 $185,000 $111,000 $ - 25,000 $2,447
Serrao......... 1998 $170,000 $102,000 $ - 12,000 $2,259
Chairman, 1997 $153,000 $123,600 $ - 189,600 $1,946
President
and Chief
Executive
Officer
Ronald M. 1999 $177,500 $ 71,000 $ - 20,000 $4,614
Levenson....... 1998 $165,000 $ 66,000 $ - 12,000 $2,200
Senior Vice 1997 $153,000 $ 82,400 $ - 126,000 $1,946
President,
Chief Financial
Officer
and Treasurer
William H. 1999 $159,000 $ 63,600 $ - 8,225 $2,202
Bottlinger..... 1998 $152,880 $ 65,800 $ - 4,523 $ -
Senior Vice 1997 $143,000 (3) $ 58,800 $ 57,900 (4) 15,000 $ -
President-
Regional
Operations
and Chief
Information
Officer
Joseph V. Errante, 1999 $140,000 $ 44,100 $ - 6,000 $2,100
DDS............ 1998 $120,000 $ 717 $ - 11,000 $4,943
Senior Vice 1997 $ - $ - $ - - $ -
President-
Regional
Operations and
Business
Development
Jesley C. Ruff, 1999 $140,000 $ 35,000 $ - 1,000 $2,000
DDS....... 1998 $ - $ - $ - - $ -
Vice 1997 $ - $ - $ - - $ -
President-Chief
Professional
Officer
</TABLE>
__________________
(1) Except as specifically noted, no Other Annual Compensation for any Named
Executive Officer exceeded $50,000 or 10% of the total salary and bonus for
such officer.
(2) Represents matching contributions under our 401(k) plan.
(3) Represents less than one full year's compensation.
(4) Consists of moving and relocation expenses.
38
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all grants of stock options to the executive
officers named in the Summary Compensation Table during 1999:
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
----------------------------------------------------------------- Annual Rates of Stock
Number of Price Appreciation
Securities % of Total Exercise for Option Term
Underlying Options Options Granted Price Expiration -----------------------
Granted (#)(1) in Fiscal Year ($/Share) Date 5% ($) 10% ($)
------------------ ------------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gregory A. Serrao.............. 25,000 14% $7.25 2/26/09 $113,987 $288,866
Ronald M. Levenson............. 20,000 11% $7.25 2/26/09 $ 91,190 $231,093
William H. Bottlinger.......... 8,225 5% $7.25 2/26/09 $ 37,502 $ 95,037
Joseph V. Errante, D.D.S....... 6,000 3% $7.25 2/26/09 $ 27,357 $ 69,328
Jesley C. Ruff, D.D.S.......... 1,000 1% $7.25 2/26/09 $ 4,559 $ 11,555
</TABLE>
- -----------------------
(1) All option grants were issued under the Amended and Restated 1996 Stock
Option Plan, as amended. The exercise price of such options is no less than
the fair market value of our Common Stock on the date of grant. Options
become exercisable in equal annual installments over a four-year period.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES
The following table sets forth the number of securities underlying
unexercised options and the value of in-the-money stock options held by the
executive officers named in the Summary Compensation Table as of December 31,
1999 (1):
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Unexercised Options at In-the-Money Options
December 31, 1999 (#) at December 31, 1999 ($)
------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Gregory A. Serrao............... 373,274 123,596 $1,802,701 $ -
Ronald M. Levenson.............. 137,204 101,796 $ 440,220 $100,050
William H. Bottlinger........... 9,607 18,141 $ - $ -
Joseph V. Errante, D.D.S........ 2,750 14,250 $ - $ -
Jesley C. Ruff, D.D.S........... 2,700 3,100 $ - $ -
</TABLE>
- -----------------------------
(1) There were no stock options exercised by executive officers named in the
Summary Compensation Table during 1999.
EMPLOYMENT AGREEMENTS
We have a five-year employment agreement with Mr. Serrao which terminates in
January 2001. Under his employment agreement, Mr. Serrao receives an annual base
salary, which was $185,000 in 1999 (subject to potential annual salary
increases), and a bonus in an amount up to 60% of his then current base salary.
Mr. Serrao is also subject to non-competition and confidentiality provisions in
the employment agreement. If Mr. Serrao's employment is terminated prior to the
end of the five-year term by us without cause or by Mr. Serrao for ''good
reason'' (as defined in the employment agreement), he is entitled to receive
severance benefits which include severance payments in an amount equal to his
then current annual base salary and health care benefits for one year after
termination.
We have a four-year employment agreement with Dr. Errante which terminates in
January 2003. Under his employment agreement, Dr. Errante receives an annual
base salary, which was $140,000 in 1999 (subject to potential annual salary
increases), and a bonus in an amount up to 35% of his then current base salary.
Dr. Errante is also subject to non-competition and confidentiality provisions in
the employment agreement. If Dr. Errante's employment is terminated prior to the
end of the four-
39
<PAGE>
year term by us for any reason other than for cause, he is entitled to receive
severance benefits which include severance payments in an amount equal to the
lesser of the remainder of the term or one year of his then current base salary.
COMPENSATION COMMITTEE INTERLOCKS
Messrs. Mannion and Reeves serve as the current members of our Compensation
Committee. There are no interlocking relationships between any of our executive
officers and any entity whose directors or executive officers serve on our Board
of Directors or Compensation Committee.
CERTAIN TRANSACTIONS
We acquired PDHC, Ltd. ("Park") pursuant to an Acquisition and Exchange
Agreement effective November 12, 1996 (the "Acquisition Agreement"), among us,
Park and all of the shareholders of Park, including Dr. Swenson. Under the
Acquisition Agreement, the shareholders of Park received an aggregate of $3.3
million in cash, $1.5 million principal amount of Subordinated Notes and
1,260,000 shares of our Common Stock in consideration for the exchange of all of
their Park shares. Dr. Swenson received $74,848 in principal and interest
payments under the Subordinated Notes in 1999. We expect to continue to make
payments under the Subordinated Notes in 2000. The terms and conditions of the
acquisition of Park, including the consideration received for the exchange of
the Park shares, were based upon arms-length negotiations between our
representatives and representatives of Park, including Dr. Swenson.
We acquired Smileage Dental Care, Inc. pursuant to an Agreement and Plan of
Merger and Reorganization effective December 23,1996 (the "Merger Agreement"),
among us, American Dental Partners of Wisconsin, Inc. ("American"), Smileage
Dental Care, Inc. ("Smileage") and the shareholders of Smileage, including
Jesley C. Ruff., D.D.S., who became our Vice President - Chief Professional
Officer on January 1, 1999. Under the Merger Agreement, the shareholders of
Smileage received an aggregate of $546,250 in cash, $247,500 principal amount of
Subordinated Notes and 304,200 shares of our Common Stock in consideration of
the merger of Smileage with American. Dr. Ruff received $3,955 in principal and
interest payments under the Subordinated Notes in 1999. We expect to continue
to make payments under the Subordinated Notes in 2000. The terms and conditions
of the acquisition of Smileage, including the consideration received for the
exchange of the Smileage shares, were based upon arms-length negotiations
between our representatives and representatives of Smileage, including Dr. Ruff.
We acquired Innovative Practice Concepts, Inc. pursuant to a Stock Purchase
Agreement dated December 22, 1997 (the "Purchase Agreement") among us,
Associated Dental Care Providers, P.C. ("Associated"), Innovative Practice
Concepts, Inc. ("IPC") and the shareholders of IPC. The transaction was
effective January 1, 1998. Under the Purchase Agreement, the shareholders of
IPC received an aggregate of $2,910,000 in cash less certain amounts applied to
pay off indebtedness of IPC to Joseph V. Errante, D.D.S. and his sister Margaret
E. Errante, D.D.S., $500,000 principal amount of Subordinated Notes and 34,800
shares of our Common Stock in consideration for the exchange of all of their IPC
shares. All of the stock of IPC was owned by Dr. Joseph Errante, Dr. Margaret
Errante and trusts for the benefit of certain members of their families. The
terms and conditions of the acquisition of IPC, including the consideration
received for the exchange of the IPC shares, were based upon arms-length
negotiations between our representatives and representatives of IPC, including
Dr. Joseph Errante, who became our Vice President - Regional Operations in
November 1998 and is currently Senior Vice President - Regional Operations and
Business Development. Dr. Joseph Errante received $51,428 in principal and
interest payments under the Subordinated Notes in 1999. We expect to continue
to make payments under the Subordinated Notes in 2000.
We entered into registration rights agreements with the former shareholders
of each of Park and Smileage. These registration rights agreements contain
provisions which grant the former shareholders of Park and Smileage piggy back
registration rights in the event we register any of our securities for either
ourself or for security holders exercising their registration rights. In
addition, the former Park shareholders may require registration of their shares
of Common Stock (subject to the other general applicable limitations on our
registration obligations) on one occasion if and to the extent that they have
not otherwise had the opportunity to register their shares during the three-year
period following the completion of the IPO.
In connection with the Park, Smileage and IPC transactions, we entered into
service agreements with the professional corporations owned in part by Drs.
Swenson, Ruff and Errante, respectively. See "Business - Affiliation Structure -
Service Agreement." These professional corporations are PDG, P.A. ("PDG"),
Wisconsin Dental Group, S.C. ("WDG") and Associated Dental Care Providers, P.C.
("Associated"). These service agreements are on substantially the same terms
and conditions as all of our other service agreements. The amounts received by
our subsidiaries under the service agreements with PDG, WDG and Associated in
1999 were approximately $39,977,000, $11,819,000 and $10,638,000, respectively,
of which $31,205,000, $8,285,000 and $8,550,000, respectively, were
reimbursements for expenses incurred in connection with the operation and
40
<PAGE>
administration of the related dental facilities. Dr. Swenson owns approximately
6% of the issued and outstanding capital stock of PDG, Dr. Ruff owns
approximately 12% of the issued and outstanding capital stock of WDG and Dr.
Errante owns approximately 18% of the issued and outstanding capital stock of
Associated.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of March 31, 2000, by: (i) each person who is known
to us to own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each director; (iii) our Chief Executive Officer and the four other
most highly compensated executive officers named in the Summary Compensation
Table; and (iv) our directors and executive officers as a group. Under the rules
of the Securities and Exchange Commission, a person is deemed to be a
"beneficial owner" of a security if he or she has or shares the power to vote
or direct the voting of such security, has or shares the power to dispose of or
direct the disposition of such security, or has the right to acquire the
security within 60 days. Accordingly, more than one person may be deemed to be
the beneficial owner of the same security. All persons listed have sole voting
and investment power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
-----------------------------------
Number Percentage
----------------- ----------------
<S> <C> <C>
Summit Ventures(2)(3)......................................................... 2,377,162 33.5%
Martin J. Mannion(2)(3)....................................................... 2,377,162 33.5%
Gregory A. Serrao(3)(4)....................................................... 716,924 9.6%
Capital Research and Management Company(5).................................... 443,000 6.2%
Wanger Asset Management, L.P.(6).............................................. 369,000 5.2%
Gregory T. Swenson, D.D.S.(3)(7).............................................. 345,585 4.9%
Ronald M. Levenson(3)(8)...................................................... 207,332 2.9%
Jesley C. Ruff, D.D.S.(3)..................................................... 43,515 *
Joseph V. Errante, D.D.S. (3)(9).............................................. 30,179 *
William H. Bottlinger(3)...................................................... 17,303 *
Derril W. Reeves(3)........................................................... 11,925 *
James T. Kelly(3)............................................................. 8,925 *
All executive officers and directors as a group (14 persons)(10).............. 3,800,136 49.2%
</TABLE>
___________________
* less than 1%
(1) This table includes for each person or group of persons shares of Common
Stock that may be purchased by such person or group pursuant to options
which are currently exercisable or exercisable within 60 days of March 31,
2000. As of such date, a total of 7,099,084 shares of Common Stock were
issued and outstanding and options for 894,329 shares were exercisable.
(2) Represents 2,285,869 and 90,293 shares of Common Stock owned by Summit
Ventures IV, L.P. and Summit Investors II, L.P., respectively. Summit
Partners is affiliated with both limited partnerships. Mr. Mannion, one of
our directors, is a general partner of Summit Partners. The address of
Summit Partners and Mr. Mannion is 600 Atlantic Avenue, Suite 2800, Boston,
Massachusetts 02110.
(3) Includes options for 1,000 shares for Mr. Mannion, 384,924 shares for Mr.
Serrao, 15,750 shares for Dr. Swenson, 161,704 shares for Mr. Levenson,
2,950 shares for Dr. Ruff, 4,500 shares for Dr. Errante, 14,257 shares for
Mr. Bottlinger, 8,925 shares for Mr. Reeves and 8,925 shares for Mr. Kelly,
respectively, which are currently exercisable or exercisable within 60 days
of March 31, 2000.
(4) Includes 26,170 shares owned by a family trust, of which Mr. Serrao is the
grantor and trustee, 5,000 shares held by Mr. Serrao's minor children and
5,000 shares held by Mr. Serrao's wife. The address for Mr. Serrao is
American Dental Partners, Inc., 301 Edgewater Place, Suite 320, Wakefield,
Massachusetts 01880.
(5) The address for Capital Research and Management Company is 333 South Hope
Street, Los Angeles, California 90071.
(6) The address for Wanger Asset Management, L.P. is 227 West Monroe Street-
3000, Chicago, Illinois 60606-5016.
(7) Includes 96,000 shares owned by a family trust, of which Dr. Swenson is the
grantor.
(8) Includes 950 shares held by Mr. Levenson's minor children.
(9) Includes 932 shares owned by a family trust, of which Dr. Errante is the
grantor, and 1,390 shares owned by a family trust, of which Dr. Errante is
the trustee.
(10) Includes options for 622,765 shares for all executive officers and
directors as a group which are currently exercisable or exercisable within
60 days of March 31, 2000.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Preferred Stock
We are authorized to issue up to 1,000,000 shares of Preferred Stock, $0.01
par value. At the closing of the initial public offering, 400,000 shares of our
Series A Convertible Preferred Stock (which were converted into 2,399,995 shares
of our Common Stock) and 70,000 shares of our Series B Redeemable Preferred
Stock (which were redeemed for cash) were restored to the status of undesignated
preferred stock available for issuance.
Preferred Stock may be issued in one or more series as determined by the
Board of Directors without further stockholder approval, and the Board or
Directors is authorized to fix and determine the terms, limitations, and
relative rights and preferences of such Preferred Stock, and to fix and
determine the variations among series of Preferred Stock. Any new Preferred
Stock issued would have priority over the Common Stock with respect to dividends
and other distributions, including the distribution of assets upon liquidation
and dissolution. Such Preferred Stock may be subject to repurchase or redemption
by us. The Board of Directors, without stockholder approval, could issue
Preferred Stock with voting and conversion rights that could adversely affect
the voting power of the holders of Common Stock and the issuance of which, could
be used by the Board of Directors in defense of a hostile takeover of us. As of
March 31, 2000, there were no shares of Preferred Stock issued or outstanding.
Common Stock
We are authorized to issue up to 25,000,000 shares of Common Stock, $0.01 par
value, of which 7,569,084 shares were issued and 7,099,084 were outstanding as
of March 31, 2000. The holders of shares of Common Stock are entitled to one
vote per share for the election of directors and on all other matters submitted
to a vote of stockholders. Holders of shares of Common Stock are not entitled to
preemptive rights or to cumulative voting for the election of directors. Subject
to any senior rights of the Preferred Stock which may from time to time be
outstanding, holders of the Common Stock are entitled to receive such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Upon our dissolution and liquidation, holders
of our Common Stock are entitled to a ratable share of our net assets remaining
after payments to our creditors and to the holders of our Preferred Stock of the
full preferential amounts to which they may be entitled. All outstanding shares
of Common Stock are, and the shares of Common Stock offered hereby will be,
validly issued, fully paid and nonassessable.
Certain Provisions of Certificate of Incorporation and By-laws
The Certificate of Incorporation and By-laws provide that directors may not
be removed from office by the stockholders except by the affirmative vote of
stockholders exercising at least two-thirds of the voting power in the election
of directors; provided that if two-thirds of the entire Board of Directors
recommend to the stockholders that a director be removed, then such director may
be removed by the stockholders exercising at least a majority of the voting
power in the election of directors. The Certificate of Incorporation requires
all actions by stockholders to be taken at annual or special meetings. The By-
laws divide the Board of Directors into three classes, each with a term of three
years, with the term of one class expiring each year. No provision of the
Certificate of Incorporation nor certain provisions of the By-laws, including
those relating to indemnification and election and removal of directors, may be
altered, amended or repealed nor may any inconsistent provision be adopted
except by the affirmative vote of stockholders exercising at least two-thirds of
our voting power; provided that if any such action was previously approved by at
least two-thirds of the directors, then such action may be taken by the
stockholders exercising a majority of the voting power. The By-laws also provide
that any vacancy on the Board of Directors may be filled by a majority of the
directors then in office even though less than a quorum exits. The foregoing
provisions could have an anti-takeover effect by delaying, averting or
preventing a change in our control or management.
Statutory Business Combination Provision
We are subject to Section 203 of the DGCL which, with certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(a) by persons who are directors and officers and (b) by employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or after such date,
42
<PAGE>
the business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
Transfer Agent and Registrar
EquiServe, L.P. serves as our transfer agent and registrar for our Common
Stock.
DESCRIPTION OF SUBORDINATED NOTES
Except as otherwise described below, all of the Subordinated Notes to be
issued in this Offering will be on substantially the same terms and conditions
as the currently outstanding Subordinated Notes of American Dental Partners,
Inc. ("ADP"). As of March 31, 2000, ADP had approximately $7,731,000 aggregate
principal amount of Subordinated Notes issued and outstanding. All of the
outstanding Subordinated Notes bear interest at a rate of 7% per annum, are
payable in seven equal annual principal installments plus interest on the
declining unpaid principal balance due on the first seven anniversaries from
their date of issuance, are unsecured debt obligations of ADP and are subject to
subordination agreements which are substantially the same as the subordination
agreements described below.
The Subordinated Notes offered hereby will be issued on the following terms
and conditions:
Rates of Interest; Terms of Repayment
The rates of interest on the Subordinated Notes offered hereby will be
determined through negotiations with the securityholders or principal owners of
the businesses whose securities or assets are to be acquired in acquisition and
affiliation transactions. However, the rate of interest for any Subordinated
Note will not be less than a rate which is sufficient to avoid imputed interest
under any applicable section of the Internal Revenue Code as of the date of
issuance of such Subordinated Note. The Subordinated Notes will be payable in
seven equal annual principal installments plus interest on the declining unpaid
principal balance due on the first seven anniversaries from their date of
issuance. ADP will have the right to prepay all or part of the principal balance
of the Subordinated Notes at any time, without penalty. Payments under the
Subordinated Notes will be subject to indemnification setoff rights in favor of
ADP. ADP will have the right, to the extent it is entitled to indemnification
from the securityholders or principal owners of the businesses whose securities
or assets are to be acquired, to setoff the amount of damages incurred by ADP as
a result of an indemnifiable claim against amounts due from ADP under the
Subordinated Notes.
Subordination Arrangements
Each of the Subordinated Notes will be unsecured debt obligations of ADP. In
addition, each of the Subordinated Notes will be subject to subordination
agreements which will be executed by each securityholder or principal owners of
the businesses whose securities or assets are to be acquired in an acquisition
or affiliation transaction. Under the subordination agreements, the payment of
the Subordinated Notes will be subordinate and junior in right of payment to the
payment in full of all obligations of ADP for borrowed money ("Senior
Indebtedness"), except as follows: (a) debt arising under instruments delivered
by ADP to an unaffiliated entity or owners of such entity in connection with the
acquisition of such entity; (b) any preferred stock or other equity security of
ADP; and (c) any indebtedness owed by ADP to an affiliate (as defined in the
subordination agreement). Pursuant to the subordination agreements, the holders
of the Subordinated Notes (the "Holders") will not be permitted to accept or
receive any payment on the Subordinated Notes; provided that the Holders may
accept mandatory scheduled payments under the Subordinated Notes unless at the
time of such payment there exists a default on any payment for the Senior
Indebtedness or there exists any other default with respect to the Senior
Indebtedness permitting the holders of Senior Indebtedness to accelerate the
maturity of such indebtedness. If a payment default exists under the
Subordinated Notes, the Holders may give written notice of such default to the
holders of the Senior Indebtedness (the "Senior Debt Holders"). Thereafter, the
Senior Debt Holders will have 180 days to either declare a default under the
Senior Indebtedness or consent to ADP making scheduled payments under the
Subordinated Notes (the "Consent") until the Consent is terminated by the Senior
Debt Holders. If the Senior Debt Holders (i) fail to do one of the foregoing
alternatives or (ii) terminate the Consent and a payment default occurs under
the Subordinated Notes
43
<PAGE>
on either of the next two succeeding scheduled payments, then the Holders will
have the right to enforce their respective rights under the Subordinated Notes.
In the event of any dissolution, winding-up, liquidation, restructuring, or
other reorganization of ADP (a "Reorganization"), all Senior Indebtedness will
be paid in full before any payment is made on the Subordinated Notes. In
addition, the Holders will, pursuant to the Subordination Agreement, irrevocably
authorize ADP or the Senior Debt Holders to, upon the occurrence of a
Reorganization:
(a) prove and enforce any claims with respect to the Subordinated Notes in
the name of the Senior Debt Holders or the Holders;
(b) vote claims arising under the Subordinated Indebtedness; and
(c) accept and receive any payment or distribution made under the
Subordinated Notes and apply such payment or distribution to the
Senior Indebtedness.
If any payment or distribution is made to the Holders with respect to the
Subordinated Notes before all Senior Indebtedness had been paid in full and
before the obligations of the Senior Debt Holders to extend credit have been
irrevocably terminated, such payment or distribution will be held in trust by
the Holders and promptly paid over to the Senior Debt Holders for application to
the payment of all Senior Indebtedness. The Subordination Agreement also
contains material restrictions on the Holders' enforcement of remedies under the
Subordinated Notes.
As of March 31, 2000, the amount of outstanding Senior Indebtedness was
$36,457,000.
ADP conducts all of its operations through subsidiaries and expects that it
will continue to do so in the future. The Subordinated Notes represent
indebtedness of ADP only. Creditors and holders of indebtedness (including
preferred stock, if any) of each subsidiary, although not holders of Senior
Indebtedness, will have a claim on the assets of such subsidiary prior to the
claims of the Holders.
SHARES ELIGIBLE FOR FUTURE SALE
No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of our Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of our Common Stock and
could impair our future ability to raise capital through an offering of our
equity securities. See "Risk Factors--Shares Eligible for Future Sale."
SALES OF RESTRICTED SHARES
As of March 31, 2000, we had a total of 7,099,084 shares of Common Stock
outstanding. Of these shares, 2,948,036 are freely tradable without restriction
or registration under the Securities Act. Additionally 4,061,036 shares of
Common Stock outstanding are "restricted securities" as that term is defined by
Rule 144 (the "Restricted Shares"). The Restricted Shares were issued and sold
by us in private transactions in reliance upon exemptions from registration
under the Securities Act.
The 4,061,036 of Restricted Shares are eligible for sale in the public market
pursuant to Rule 144. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
restricted securities for at least one year (including the holding period of any
prior owner except an affiliate), including persons who may be deemed
"affiliates" of us, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 70,091 shares
as of the date hereof) or (ii) the average weekly trading volume of our Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner-
of-sale provisions and notice requirements, and to the availability of current
public information about us. In addition, a person who is not deemed to have
been an affiliate of us at the time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), would be
entitled to sell such shares under Rule 144 (k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
44
<PAGE>
STOCK OPTION AND PURCHASE PLANS
As of March 31, 2000, 1,828,606 shares of Common Stock were reserved for
issuance under our stock option plans, of which 1,559,628 shares were issuable
upon the exercise of outstanding stock options; 400,000 shares of Common Stock
were reserved for issuance under the employee stock purchase plan, of which
82,450 shares have been issued; and 25,000 shares of Common Stock were served
for issuance under the restricted stock plan, of which no shares have been
issued. We have filed registration statements on Form S-8 under the Securities
Act to register shares of Common Stock issuable pursuant to certain of our stock
option plans (our 1996 Stock Option Plan, 1996 Time Accelerated Restricted Stock
Option Plan and 1996 Directors Stock Option Plan), our 1997 Employee Stock
Purchase Plan and our 1999 Restricted Stock Plan. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to Rule 144 limitations applicable to affiliates.
REGISTRATION RIGHTS
The holders of 3,919,768 shares of Common Stock have the right under certain
circumstances to require us to register their shares under the Securities Act
for resale to the public, and holders of approximately 4,125,728 shares have the
right to include their shares in a registration statement filed by us. See
"Certain Transactions."
SHELF REGISTRATION FOR FUTURE AFFILIATIONS
The 750,000 shares of Common Stock issuable pursuant to this Offering
generally will be eligible for resale after their issuance as follows: (i) for
non-affiliates of the businesses we acquire, without restriction; and (ii) for
affiliates of the businesses we acquire, subject to compliance with the volume
and manner-of-sale restrictions of Rule 145, unless in each case we
contractually restrict their resale. We anticipate that the persons acquiring
shares of Common Stock in business combination transactions pursuant to this
Offering will be contractually required to hold all or some portion of the
Common Stock for some period of time. See "Shares Eligible for Future Sale."
PLAN OF DISTRIBUTION
THE COMPANY
This prospectus covers the offer and sale of up to 750,000 shares of Common
Stock and up to $25,000,000 aggregate principal amount of Subordinated Notes,
which we may issue from time to time in connection with the future direct and
indirect affiliations or acquisitions of other businesses, properties, or
securities in acquisition or affiliation transactions in accordance with Rule
415(a)(1)(viii) of Regulation C under the Securities Act or as otherwise
permitted under the Securities Act.
We expect that the terms upon which we may issue the Common Stock and/or the
Subordinated Notes in acquisition or affiliation transactions will be determined
through negotiations with the securityholders or principal owners of the
businesses whose securities or assets are to be acquired, including the rates of
interest for the Subordinated Notes. We expect that the Common Stock issued will
be valued at prices reasonably related to market prices for the Common Stock
prevailing either at the time an acquisition agreement is executed or at the
time an acquisition is consummated. The Subordinated Notes will be unsecured
debt obligations of us, subordinated to all Senior Indebtedness, payable over
seven years and on parity with all other Subordinated Notes (whether currently
outstanding or hereafter issued).
GENERAL
All expenses of this Offering will be paid by us. No underwriting discounts
or commissions will be paid in connection with our issuance of shares of Common
Stock and/or Subordinated Notes in acquisition or affiliation transactions,
although finder's fees may be paid with respect to specific transactions. Any
person receiving a finder's fee may be deemed to be an Underwriter within the
meaning of the Securities Act.
The shares of Common Stock offered hereunder will be tradeable on the Nasdaq
National Market, but such shares may be subject to certain contractual holding
period restrictions as described above. At present, there is no market for the
Subordinated Notes, and it is not anticipated that a market for the Subordinated
Notes will develop in the foreseeable future. In addition, the acquisition
agreements to be entered into in connection with the acquisition or affiliation
transactions will set forth restrictions with respect to the transfer of the
Subordinated Notes.
45
<PAGE>
VALIDITY OF SECURITIES
The validity of the securities offered hereby will be passed upon for us by
Baker & Hostetler LLP, Columbus, Ohio. Gary A. Wadman, a partner of Baker &
Hostetler LLP, is our Secretary.
EXPERTS
The consolidated financial statements of American Dental Partners, Inc. as of
December 31, 1998 and 1999 and for each of the years in the three-year period
ended December 31, 1999 have been included herein and in the registration
statement in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
Consolidated Financial Statements
<S> <C>
Independent Auditors' Report ....................................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ....................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999 ......... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998
and 1999 .......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 ......... F-6
Notes to Consolidated Financial Statements ......................................................... F-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Dental Partners, Inc.:
We have audited the accompanying consolidated balance sheets of American
Dental Partners, Inc. (the "Company") as of December 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Dental Partners, Inc. as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Boston, Massachusetts
February 11, 2000
F-2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................. $ 2,091 $ 226
Accounts receivable ......................... 186 261
Receivables due from affiliated dental groups 4,579 9,637
Income taxes receivable ..................... -- 416
Inventories ................................. 585 1,491
Prepaid expenses and other receivables ...... 1,466 2,436
Deferred income taxes ....................... 65 397
-------- --------
Total current assets ................... 8,972 14,864
-------- --------
Property and equipment, net ...................... 12,943 23,006
-------- --------
Non-current assets:
Intangible assets, net ...................... 47,152 69,175
Deferred income taxes ....................... 1,120 563
Other assets ................................ 348 293
-------- --------
Total non-current assets ............... 48,620 70,031
-------- --------
Total assets ........................... $ 70,535 $107,901
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 3,010 $ 5,055
Accrued compensation, benefits and taxes 3,426 4,452
Accrued expenses ............................ 3,377 3,833
Income taxes payable ........................ 805 --
Current maturities of debt .................. 1,079 1,502
-------- --------
Total current liabilities .............. 11,697 14,842
-------- --------
Non-current liabilities:
Long-term debt .............................. 9,980 40,249
Other liabilities ........................... 553 581
-------- --------
Total non-current liabilities .......... 10,533 40,830
-------- --------
Total liabilities ...................... 22,230 55,672
-------- --------
Stockholders' Equity:
Preferred stock, par value $0.01 per share;
1,000,000 shares authorized; no shares
issued or outstanding....................... -- --
Common stock, par value $0.01 per share;
25,000,000 shares authorized; 7,436,066
shares issued and outstanding at December 31,
1998; 7,537,311 shares issued and 7,107,311
shares outstanding at December 31, 1999..... 74 75
Additional paid-in capital ......................... 45,742 46,584
Unearned compensation ......................... (24) --
Retained earnings ............................. 2,513 8,526
Treasury stock, at cost, 430,000 shares ....... -- (2,956)
-------- --------
Total stockholders' equity ............... 48,305 52,229
-------- --------
Commitments and contingencies
Total liabilities and stockholders'
equity................................... $ 70,535 $107,901
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C>
Net revenue ............................... $ 53,270 $ 84,090 $117,352
Operating expenses:
Salaries and benefits ................ 28,438 43,190 57,417
Lab fees and dental supplies ......... 6,435 10,796 15,866
Office occupancy ..................... 4,814 7,635 11,321
Other operating expenses ............. 6,264 6,840 9,235
General corporate expenses ........... 3,337 3,951 4,814
Depreciation ......................... 1,580 2,495 3,642
Amortization of intangible assets .... 645 1,732 2,579
-------- -------- --------
Total operating expenses ........ 51,513 76,639 104,874
-------- -------- --------
Earnings from operations .................. 1,757 7,451 12,478
Interest expense, net ................ 563 1,085 1,877
-------- -------- --------
Earnings before income taxes .............. 1,194 6,366 10,601
Income taxes ......................... 124 2,480 4,588
-------- -------- --------
Net earnings ......................... $ 1,070 $ 3,886 $ 6,013
======== ======== ========
Net earnings (loss) per common share:
Basic ................................ $ (0.05) $ 0.59 $ 0.80
Diluted .............................. $ (0.05) $ 0.54 $ 0.78
Weighted average common shares outstanding:
Basic ................................ 2,273 5,907 7,513
Diluted .............................. 2,273 6,867 7,745
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------
COMMON COMMON ADDITIONAL TREASURY TOTAL
STOCK STOCK IN COMMON PAID-IN UNEARNED RETAINED STOCK AT STOCKHOLDERS'
ISSUED TREASURY STOCK CAPITAL COMPENSATION EARNINGS COST EQUITY
------ -------- ----- ------- ------------ -------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ........... 2,213 -- $ 22 $ 2,659 $ (74) $ (2,443) $ -- $ 164
Issuance of common stock for
acquisitions and affiliations ...... 181 -- 2 840 -- -- -- 842
Amortization of unearned
compensation ....................... -- -- -- -- 25 -- -- 25
Dividends on Series A convertible
preferred stock .................... -- -- -- (632) -- -- -- (632)
Dividends on Series B redeemable
preferred stock .................... -- -- -- (560) -- -- -- (560)
Net earnings ......................... -- -- -- -- -- 1,070 -- 1,070
------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ........... 2,394 -- 24 2,307 (49) (1,373) -- 909
Issuance of common stock in
initial public offering, net ....... 2,588 -- 26 34,570 -- -- -- 34,596
Issuance of common stock for
acquisitions and affiliations ...... 54 -- -- 443 -- -- -- 443
Amortization of unearned
compensation ....................... -- -- -- -- 25 -- -- 25
Dividends on Series A convertible .... (200)
preferred stock .................... -- -- -- -- -- -- (200)
Dividends on Series B redeemable
preferred stock .................... -- -- -- (195) -- -- -- (195)
Conversion of Series A convertible
preferred stock to common stock ... 2,400 -- 24 8,817 -- -- -- 8,841
Net earnings ......................... -- -- -- -- -- 3,886 -- 3,886
------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ........... 7,436 -- 74 45,742 (24) 2,513 -- 48,305
Issuance of common stock for
acquisitions and affiliations ...... 50 -- 1 351 -- -- -- 352
Issuance of common stock for
employee stock purchase plan ....... 51 -- -- 491 -- -- -- 491
Repurchase of common stock ........... -- (430) -- -- -- -- (2,956) (2,956)
Amortization of unearned
compensation ....................... -- -- -- -- 24 -- -- 24
Net earnings ......................... -- -- -- -- -- 6,013 -- 6,013
------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1999 ........... 7,537 (430) $ 75 $ 46,584 $ -- $ 8,526 $ (2,956) $ 52,229
======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings .............................................................. $ 1,070 $ 3,886 $ 6,013
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation ........................................................... 1,580 2,495 3,642
Amortization of intangible assets ...................................... 645 1,732 2,579
Other amortization ..................................................... 65 106 106
Deferred income taxes .................................................. (32) 1,466 857
Changes in assets and liabilities, net of acquisitions and affiliations:
Accounts receivable ................................................. 1,871 864 621
Receivables due from affiliated dental groups ....................... (1,801) (764) (4,103)
Other current assets ................................................ 509 (384) (1,590)
Accounts payable and accrued expenses ............................... (314) (418) 1,825
Accrued compensation, benefits and taxes ............................ 427 118 151
Income taxes payable and receivable, net ............................ (29) 670 (1,356)
-------- -------- --------
Net cash provided by operating activities ........................ 3,991 9,771 8,745
-------- -------- --------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired ....................... (14,878) (18,290) (19,855)
Capital expenditures, net ................................................. (3,212) (5,074) (12,484)
Contingent and deferred payments .......................................... -- -- (794)
Other ..................................................................... (1,420) (1,522) (2,522)
-------- -------- --------
Net cash used for investing activities ........................... (19,510) (24,886) (35,655)
-------- -------- --------
Cash flows from financing activities:
Borrowings under (repayments of) revolving line of credit, net ............ 16,700 (12,400) 29,197
Repayment of borrowings ................................................... (1,543) (2,254) (1,673)
Proceeds from issuance of common stock in initial public offering, net of
underwriting discounts and commissions ................................. -- 36,096 --
Common stock issued for the employee stock purchase plan .................. -- -- 491
Repurchase of common stock ................................................ -- -- (2,956)
Redemption of Series B redeemable preferred stock ......................... -- (7,851) --
Payment of initial public offering costs .................................. (557) (943) --
Payment of debt issuance costs ............................................ (242) (117) (14)
-------- -------- --------
Net cash provided by financing activities ........................ 14,358 12,531 25,045
-------- -------- --------
Decrease in cash and cash equivalents ........................................ (1,161) (2,584) (1,865)
Cash and cash equivalents at beginning of year ............................... 5,836 4,675 2,091
-------- -------- --------
Cash and cash equivalents at end of year ..................................... $ 4,675 $ 2,091 $ 226
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net ............................... $ 459 $ 898 $ 1,572
======== ======== ========
Cash paid during the year for income taxes, net ........................... $ 185 $ 348 $ 5,087
======== ======== ========
Supplemental disclosure of non-cash information:
Dividends accrued on Series A convertible preferred stock and Series B
redeemable preferred stock ............................................. $ 1,192 $ 395 $ --
======== ======== ========
Conversion of Series A convertible preferred stock to common stock ........ $ -- $ 8,841 $ --
======== ======== ========
Acquisitions and affiliations:
Assets acquired ........................................................... $ 24,693 $ 26,938 $ 27,630
Liabilities assumed and issued ............................................ (7,054) (8,109) (7,256)
Common stock issued ....................................................... (842) (443) (352)
-------- -------- --------
Cash paid ................................................................. 16,797 18,386 20,022
Less cash acquired ........................................................ (1,919) (96) (167)
-------- -------- --------
Net cash paid for acquisitions and affiliations .................. $ 14,878 $ 18,290 $ 19,855
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) Description of Business
American Dental Partners, Inc. (the "Company") was formed in December 1995
to provide business services to dental groups and commenced operations in
January 1996. The Company acquires substantially all the assets of the dental
practices with which it affiliates, except those required by law to be owned or
maintained by dentists (such as third party contracts, certain governmental
receivables and patient records), and enters into long-term service agreements
with these affiliated dental groups. The Company provides all services necessary
for the administration of the non-clinical aspects of the dental operations.
Services provided to the affiliated dental groups include assistance with
information systems, planning and budgeting, facilities development and
management, capacity and utilization management, scheduling, staffing,
professional recruiting, benefits administration, economic analysis, financial
reporting, purchasing, quality assurance, organization structure and
development, analyzing and negotiating agreements with dental benefit providers
and marketing. The Company operates in one segment.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. The Company does not own any interests in or
control the activities of the affiliated dental groups. Accordingly, the
consolidated financial statements of the affiliated dental groups are not
consolidated with those of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments with an original maturity of three months or less to be cash
equivalents.
Fair Value of Financial Instruments
The Company believes the carrying amount of cash and cash equivalents,
accounts receivable, receivables due from affiliated dental groups, accounts
payable and accrued expenses approximate fair value because of the short-term
nature of these items. The carrying amount of long-term debt approximates fair
value because the interest rates approximate rates at which similar types of
borrowing arrangements could be obtained by the Company.
F-7
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Net Revenue
The Company's net revenue represents reimbursement of expenses and fees
charged to affiliated dental groups pursuant to the terms of the service
agreements. Under such agreements, the affiliated dental groups reimburse the
Company for expenses incurred on their behalf in connection with the operation
and administration of the dental facilities and pay fees to the Company for its
business services. The Company's service fee consists of either (i) a variable
monthly fee which is based upon a specified percentage, (ii) a fixed monthly fee
and an additional variable fee or (iii) a fixed monthly fee. Additionally, the
Company's net revenue includes amounts from dental benefit providers related to
the arrangement of the provision of care to patients. The Company records all
revenue monthly as earned.
Inventories
Inventories consist primarily of dental supplies and are stated at the lower
of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
related assets which are 30-40 years for buildings, 3-12 years for equipment and
5-7 years for furniture and fixtures.
Property and equipment under capital leases are stated at the present value of
minimum lease payments at inception of the lease. Equipment held under capital
leases and leasehold improvements are amortized over the shorter of the lease
term or estimated useful life of the asset. Amortization of assets subject to
capital leases is included in depreciation expense.
Intangible Assets
Identifiable intangible assets result from service agreements with the
affiliated dental groups and goodwill associated with the Company's acquisition.
The estimated fair value of the service agreements is the excess of the purchase
price over the estimated fair value of the tangible assets acquired and
liabilities assumed of dental practices. Generally, intangible assets associated
with service agreements and goodwill are amortized on a straight-line basis over
25 years. In the event a service agreement is terminated, the related affiliated
dental group is generally required to purchase, at the Company's option, the
unamortized balance of intangible assets at the current book value, as well as
all related other assets associated with the affiliated dental group.
Accumulated amortization amounted to $673,000, $2,405,000 and $4,984,000 at
December 31, 1997, 1998 and 1999, respectively.
The Company reviews the carrying value of intangible assets on an entity by
entity basis to determine if facts and circumstances exist which would suggest
that the intangible assets may be impaired or that the amortization period needs
to be modified. Among the factors the Company considers in making the evaluation
are changes in the groups' market position, reputation, profitability and
geographical penetration. If conditions are present which indicate impairment is
probable, the Company will prepare a projection of the undiscounted cash flows
of the specific practice and determine if the intangible assets are recoverable
based on these undiscounted cash flows. If impairment is indicated, then an
adjustment will be made to reduce the carrying amount of the intangible assets
to their fair value based on discounted cash flows.
F-8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of
changes in the tax rate is recognized in operations in the period that includes
the enactment date.
Stock Option Plans
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," allows companies to recognize expense for the
fair value of stock-based awards or to continue to apply the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and disclose the
effects of SFAS 123 as if the fair-value-based method defined in SFAS 123 had
been applied. Under APB Opinion No. 25, compensation expense is recognized only
if on the measurement date the fair value of the underlying stock exceeds the
exercise price. The Company has elected to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS 123.
Earnings Per Share
Earnings per share are computed based on Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or contingent
stock arrangements). Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings.
F-9
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(3) ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts Receivable
Accounts receivable represent amounts due from dental benefit providers
related to the arrangement of the provision of care to patients and amounts due
from patients and dental benefit providers for dental services provided by
affiliated dental groups that were outstanding at the time the Company acquired
the assets of the practice.
Receivables Due From Affiliated Dental Groups
Receivables due from affiliated dental groups represent amounts due pursuant
to the terms of the service agreements as described below.
Adjusted Gross Revenue--Affiliated Dental Groups
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 plan provider contracts.
The Company does not consolidate the financial statements of its affiliated
dental groups with those of the Company. The adjusted gross revenue and amounts
retained by the affiliated dental groups are presented below for illustrative
purposes only (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1997 1998 1999
------------------------- ----------------------- -----------------------
Park All Affiliated Park All Affiliated Park All Affiliated
Dental Groups Dental Groups Dental Groups
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted gross revenue-affiliated dental groups........ $38,515 $64,492 $45,142 $105,438 $52,393 $151,965
Amounts retained by affiliated dental groups.......... 8,461 16,050 10,728 30,022 12,416 44,565
------- ------- ------- -------- ------- --------
Net revenue earned by the Company under service
agreements............................................. $30,054 $48,442 $34,414 $ 75,416 $39,977 $107,400
======= ======= ======= ======== ======= ========
</TABLE>
Net Revenue
The Company's net revenue represents reimbursement of expenses and fees
charged to affiliated dental groups pursuant to the terms of the service
agreements. Under such agreements, the affiliated dental groups reimburse the
Company for actual expenses incurred on their behalf in connection with the
operation and administration of the dental facilities and pay fees to the
Company for its management services. Under certain service agreements, the
Company's 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, the Company's 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 the Company in the amount of such excess up
to budgeted operating income and 50% of such excess over budgeted operating
income. Under certain service agreements, the Company's service fee consists
entirely of a fixed monthly fee. The fixed monthly fees are determined by
agreement of the Company and the affiliated dental group in a formal budgeting
process. Additionally, the Company's net revenue includes amounts from dental
benefit providers related to the arrangement of the provision of care to
patients. The Company records its revenue monthly as earned.
F-10
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
For the years ended December 31, 1997, 1998 and 1999, net revenue consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----------- ---------- ----------
Reimbursement of expenses:
<S> <C> <C> <C>
Rent expense ....................................................... $ 3,476 $ 5,590 $ 8,201
Other operating expenses ........................................... 32,910 50,688 71,273
-------- -------- --------
Total reimbursement of expenses ................................. 36,386 56,278 79,474
-------- -------- --------
Service fees:
Monthly fee ........................................................ 10,724 17,306 26,335
Additional variable fee ............................................ 1,332 1,832 1,591
-------- -------- --------
Total service fees .............................................. 12,056 19,138 27,926
-------- -------- --------
Net revenue earned by the Company under service agreements ...... 48,442 75,416 107,400
Revenue related to the arrangement of the provision of care to patients
and other .......................................................... 4,828 8,674 9,952
-------- -------- --------
Total net revenue ............................................... $ 53,270 $ 84,090 $117,352
======== ======== ========
</TABLE>
(4) ACQUISITIONS AND AFFILIATIONS
During the year ended December 31, 1998, the Company acquired substantially
all the assets of ten dental practices and simultaneously entered into 40-year
service agreements with four of the affiliated dental groups (six practices
joined existing affiliates). The aggregate purchase price paid in connection
with these transactions consisted of approximately $18.4 million in cash, $2.2
million in subordinated promissory notes, $1.0 million in deferred payments,
54,354 shares of Common Stock valued at approximately $0.4 million and future
contingent payments for one affiliation based on a multiple of service fees
received in excess of a predetermined threshold for each of the three years
ending May 31, 1999, 2000 and 2001. For the year ended May 31, 1999, this
contingent payment amounted to approximately $0.3 million. All transactions
completed in 1998 are referred to as the "1998 Transactions."
During the year ended December 31, 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."
F-11
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The 1998 and 1999 Transactions are as follows:
<TABLE>
<CAPTION>
DATE AFFILIATED DENTAL PRACTICE LOCATION(S)
---- -------------------------- -----------
<S> <C> <C>
January 1998.......................................... Associated Dental Care Providers Phoenix and Tucson, AZ
April 1998............................................ Family Care Dental Centers Janesville, Kenosha and Racine, WI
April 1998............................................ John E. Carey, D.D.S. and Madison, WI
James J. Peterman, D.D.S.
April 1998............................................ Leroy S. Crapanzano, D.D.S. Hammond, LA
June 1998............................................. Reston Dental Group Reston, VA
June 1998............................................. TSC Dental Centers Houston, TX
July 1998............................................. Indiana Dental Group Indiana, PA
September 1998........................................ Mintz & Pincus Dental Group Oxon Hill and Waldorf, MD
September 1998........................................ Westmore Dental Group Mt. Pleasant, PA
November 1998......................................... St. Croix Valley Orthodontics Hudson, WI
February 1999......................................... Dental Care of Alabama Birmingham and Tuscaloosa, AL
February 1999......................................... CIGNA HealthCare of Arizona Phoenix, AZ
March 1999............................................ OK Dental Oklahoma City and Tulsa, OK
March 1999............................................ Kenneth W. Van Sickle, Mt. Pleasant, PA
Jr., D.M.D.
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, Moreno Valley and
Corona, Dental Associates of Riverside, CA
Moreno Valley, Dental
Associates of Riverside
and Riverside Dental Group
</TABLE>
The accompanying consolidated financial statements include the results of
operations under the service agreements from the date of acquisition. The excess
of the purchase price associated with all of the 1998 and 1999 Transactions over
the estimated fair value of net assets (liabilities) acquired and assumed has
been recorded as intangible assets which are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Fair value of total consideration paid .............................................................. $ 22,050 $ 23,773
Fair value of net tangible assets (liabilities) acquired and assumed ................................ (1,055) (829)
-------- --------
Excess of fair value of the consideration paid over the fair value of net
tangible liabilities acquired................................................................... $ 23,105 $ 24,602
======== ========
</TABLE>
Subsequent to December 31, 1999, 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.
F-12
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(5) PROPERTY AND EQUIPMENT
Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Land, buildings and leasehold improvements...... $ 9,850 $ 17,122
Equipment ...................................... 9,938 14,213
Furniture and fixtures ......................... 3,461 4,889
-------- --------
Total property and equipment ................ 23,249 36,224
Less accumulated depreciation .................. (10,306) (13,218)
-------- --------
Property and equipment, net ................. $ 12,943 $ 23,006
======== ========
</TABLE>
Operating Leases
The Company is obligated under non-cancelable operating leases for premises
and equipment expiring in various years through the year 2012. Rent expense for
the years ended December 31, 1997, 1998 and 1999 amounted to $3,926,000,
$6,248,000 and $8,998,000, respectively, of which $3,476,000, $5,590,000 and
$8,201,000 were reimbursed under service agreements. The Company has several
leases with stockholders that were assumed in connection with its affiliation
transactions. Such amounts are generally reimbursed pursuant to the terms of the
service agreements.
Minimum future rental payments under non-cancelable operating leases and
amounts to be reimbursed under service agreements as of December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Amount to be
Reimbursed
Total Amount Under Service Net
Due Agreements Amount
--- ---------- ------
<S> <C> <C> <C>
2000............................................................ $ 8,100 $ 7,433 $ 667
2001............................................................ 7,138 6,527 611
2002............................................................ 6,243 5,751 492
2003............................................................ 5,557 5,211 346
2004............................................................ 4,701 4,582 119
Thereafter...................................................... 18,721 18,721 -
------- ------- ------
Total minimum lease payments.................................... $50,460 $48,225 $2,235
======= ======= ======
</TABLE>
F-13
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(6) INCOME TAXES
Income tax expense (benefit) for the years ended December 31 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
Current:
<S> <C> <C> <C>
Federal................................................................ $ 54 $ 704 $3,018
State.................................................................. 102 310 713
----- ------ ------
156 1,014 3,731
----- ------ ------
Deferred:
Federal................................................................ (32) 1,249 643
State.................................................................. - 217 214
----- ------ ------
(32) 1,466 857
----- ------ ------
Total income taxes................................................... $ 124 $2,480 $4,588
===== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
Deferred tax assets:
<S> <C> <C>
Operating loss and other carryforwards........................................... $ 91 $ 44
Property and equipment........................................................... 632 620
Organization and start-up costs.................................................. 630 633
Accrued expenses and other liabilities........................................... 524 801
------ -------
Total deferred tax assets..................................................... 1,877 2,098
------ -------
Deferred tax liabilities:
Intangibles...................................................................... (389) (884)
Other............................................................................ (303) (254)
------ -------
Total deferred tax liabilities................................................. (692) (1,138)
------ -------
Net deferred tax assets ....................................................... $1,185 $ 960
====== =======
</TABLE>
The net deferred tax assets (liabilities) consisted of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------------- ------------------------
Federal State Total Federal State Total
-------- ------ ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Current........................................ $ 49 $ 16 $ 65 $ 313 $ 84 $ 397
Non-current.................................... 1,250 562 1,812 1,274 427 1,701
------ ----- ------ ------ ----- -------
Total deferred tax assets................... 1,299 578 1,877 1,587 511 2,098
------ ----- ------ ------ ----- -------
Deferred tax liabilities:
Current........................................ - - - - - -
Non-current.................................... (497) (195) (692) (928) (210) (1,138)
------ ----- ------ ------ ----- -------
Total deferred tax liabilities............. (497) (195) (692) (928) (210) (1,138)
------ ----- ------ ------ ----- -------
Net deferred tax assets.................... $ 802 $ 383 $1,185 $ 659 $ 301 $ 960
====== ===== ====== ====== ===== =======
</TABLE>
In 1996, a valuation allowance for deferred tax assets of $3,062,000 was
established because, based on the limited operating history of the Company and
other available evidence at the time, it was considered more likely than not
that the deferred tax assets would not be realized. In 1997, the valuation
allowance was reduced by $608,000 to $2,454,000. In 1998, the valuation
allowance was reversed due to the Company's taxable earnings and management's
assessment that it was more likely than not that the remaining deferred tax
assets would be realized through future taxable earnings. The reversal of the
valuation allowance attributable to acquired deferred tax assets reduced
intangible assets by $2,083,000. The remaining reversal of the valuation
allowance provided a tax benefit of $371,000 in the Company's consolidated
statement of operations for the year ended December 31, 1998.
F-14
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
At December 31, 1998 and 1999, the Company had net operating loss
carryforwards for state income tax purposes of approximately $1,664,000 and
$1,056,000, respectively. The 1999 carryforwards will expire as follows:
$27,000 in 2001, $7,000 in 2002, $204,000 in 2003, $393,000 in 2004, $27,000 in
2008 and $398,000 in 2019.
The following table reconciles the Federal statutory income tax rate to the
Company's effective income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------ ----- -----
<S> <C> <C> <C>
Income taxes at Federal statutory rate............................ 34.0% 34.0% 35.0%
Differential due to graduated rate................................ - - (0.8)
State taxes, net of Federal benefit............................... 4.0 5.5 5.7
Valuation allowance and other changes............................. (36.6) (5.0) -
Intangibles....................................................... 4.8 3.9 2.7
Other permanent differences....................................... 4.2 0.6 0.7
------ ----- -----
Effective income tax rate...................................... 10.4% 39.0% 43.3%
====== ===== =====
</TABLE>
(7) DEBT
Long-term debt and capital lease obligations consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Revolving line of credit advances, collateralized by substantially all assets of the
Company, LIBOR-based and prime interest rates ranging from approximately 7.4%
to 8.5% ........................................................................... $ 4,300 $33,497
Mortgages payable, secured, interest rates ranging from 8.6% to 10.1% payable in
installments through 2015 .......................................................... 660 586
Note payable, unsecured, interest rate of 8.5% payable in installments, maturing
in 2004 ........................................................................... 40 35
Subordinated notes payable to stockholders and former owners, bearing interest
at 7%, maturing through 2006 ...................................................... 5,894 7,518
Capital lease obligations .......................................................... 165 115
------- -------
Total long-term debt and capital lease obligations ................................. 11,059 41,751
Less current maturities ............................................................ 1,079 1,502
------- -------
Long-term debt and capital lease obligations, excluding current maturities ......... $ 9,980 $40,249
======= =======
</TABLE>
Annual maturities of long-term debt and future minimum lease payments under
capital leases as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Long-term Capital
Debt Leases
------------- ----------------
<S> <C> <C>
2000....................................................................................... $ 1,462 $ 50
2001....................................................................................... 34,935 50
2002....................................................................................... 1,465 31
2003....................................................................................... 1,431 -
2004....................................................................................... 1,049 -
Thereafter................................................................................. 1,294 -
------- ----
Total payments............................................................................. $41,636 131
=======
Less amounts representing interest......................................................... 16
----
Total obligations under capital leases..................................................... $115
====
</TABLE>
F-15
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revolving Line of Credit
The Company has a $50 million 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 the Company's option. The margin for LIBOR loans is based upon the
Company's debt coverage ratio and ranges up to 1.625%. In addition, the Company
pays a commitment fee of 0.25% of the average daily balance of the unused line.
Borrowings are limited to an availability formula based on adjusted EBITDA. The
credit facility is secured by a first lien on substantially all of the Company's
assets, including a pledge of the stock of the Company's subsidiaries. The
Company is also required to comply with certain financial and other covenants.
The line of credit matures in December 2001.
(8) RELATED PARTY TRANSACTIONS
The Company acquired PDHC, Ltd. ("Park") and Smileage Dental Care, Inc.
("Smileage") in 1996 and Innovative Practice Concepts, Inc. ("IPC") in 1998. As
part of the consideration paid pursuant to these acquisitions, the Company
issued subordinated promissory notes to the former stockholders of Park,
Smileage and IPC in the aggregate principal amount of $2,247,500. Certain
former stockholders of Park, Smileage and IPC are current stockholders, director
and officers of the Company. The aggregate principal balance outstanding to
these stockholders, director and officers of the Company as of December 31, 1998
and 1999 was $565,000 and $474,000, respectively. These notes bear interest at
7% and mature through 2005.
In connection with the Park, Smileage and IPC transactions, the Company
entered into service agreements with three affiliated dental groups owned in
part by these certain stockholders, director and officers of the Company. These
service agreements are on substantially the same terms and conditions as all of
the Company's other service agreements. The aggregate amounts received by
subsidiaries of the Company under the service agreements with these dental
groups in 1997, 1998 and 1999 were $38,744,000, $49,151,000 and $62,434,000,
respectively, of which $29,509,000, $37,558,000 and $48,040,000 were
reimbursements for expenses incurred in connection with the operation and
administration of the related dental facilities.
(9) STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred Stock,
$0.01 par value. At the closing of the initial public offering, 400,000 shares
of Series A Convertible Preferred Stock (which were converted into 2,399,995
shares of Common Stock) and 70,000 shares of Series B Redeemable Preferred
Stock (which were redeemed for cash) were restored to the status of undesignated
preferred stock available for issuance.
Preferred Stock may be issued in one or more series as determined by the Board
of Directors without further stockholder approval, and the Board of Directors is
authorized to fix and determine the terms, limitations and relative rights and
preferences of such Preferred Stock, and to fix and determine the variations
among series of Preferred Stock. Any new Preferred Stock issued would have
priority over the Common Stock with respect to dividends and other
distributions, including the distribution of assets upon liquidation and
dissolution. Such Preferred Stock may be subject to repurchase or redemption by
the Company. The Board of Directors, without stockholder approval, could issue
Preferred Stock with voting and conversion rights that could adversely affect
the voting power of the holders of Common Stock and the issuance of which, could
be used by the Board of Directors in defense of a hostile takeover of the
Company. As of December 31, 1998 and 1999, there were no shares of Preferred
Stock issued or outstanding.
F-16
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the Years Ended December 31, 1997, 1998 and 1999
Common Stock
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$0.01 par value, of which 7,436,066 shares were issued and outstanding at
December 31, 1998; 7,537,311 shares were issued and 7,107,311 shares were
outstanding at December 31, 1999. In January 1996, the Company sold 300,000
shares of its Common Stock, which were subject to certain restrictions, for
$500. In connection with this transaction, the Company has recorded compensation
expense ratably as the restrictions have lapsed. Compensation expense amounted
to $24,884, $24,888 and $24,228 for the years ended December 31, 1997, 1998 and
1999, respectively.
Initial Public Offering
During the second quarter of 1998, the Company sold 2,587,500 shares of Common
Stock in an initial public offering ("IPO") at $15.00 per share. Net proceeds
to the Company after deducting underwriting discounts and commissions and
offering expenses totaled approximately $34,596,000.
Shelf Registration Statement
The Company has a Shelf Registration Statement on file with the Securities and
Exchange Commission covering a total of 750,000 shares of Common Stock to be
issued in connection with future dental practice affiliations. As of December
31, 1999, 679,878 shares remain available for issuance under this Shelf
Registration Statement.
Treasury Stock
On December 16, 1999, the Board of Directors authorized the Company to
repurchase up to $5,000,000 of its Common Stock in the open market. Under this
plan, the Company had repurchased 430,000 shares of its Common Stock through
December 31, 1999 at a cost of $2,956,000.
Dividend Restriction
The Company has not paid any cash dividends on its Common Stock and does not
plan to pay any cash dividends on its Common Stock in the foreseeable future.
Additionally, the terms of the Company's revolving credit facility prohibit it
from paying dividends or making other payments with respect to its Common Stock
without the lenders' consent.
(10) RESTRICTED STOCK AND STOCK OPTION PLANS
1999 Restricted Stock Plan
The Company's 1999 Restricted Stock Plan (the "Restricted Stock Plan")
provides for the grant of restricted shares of the Company's Common Stock at a
price equal to the par value of such shares ($.01 per share). Restricted shares
may be issued to key employees of the Company and shall be subject to such
restrictions as the Board of Directors determines, including, but not limited
to, time and performance restrictions. The maximum number of restricted shares
which may be issued under the Restricted Stock Plan is 25,000, and as of
December 31, 1999, there were no shares issued or outstanding under this Plan.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan, as amended (the "1996 Plan"), provides
for the grant of stock options to key employees. The 1996 Plan permits the
granting of options that qualify as incentive stock options and non-qualified
options. The exercise price of such options is no less than the fair market
value of the Common Stock at the time of grant. Options granted pursuant to the
1996 Plan expire ten years after the date of grant. At December 31, 1999,
options for a total of 1,273,246 shares were reserved for issuance and options
for 864,372 shares were outstanding under this Plan.
F-17
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the Years Ended December 31, 1997, 1998 and 1999
1996 Time Accelerated Restricted Stock Option Plan
The Company's 1996 Time Accelerated Restricted Stock Option Plan, as amended
("TARSOP Plan"), provides for the grant of stock options to key employees. Only
non-qualified options may be granted pursuant to the TARSOP Plan. The exercise
price of such options is no less than the fair market value of the Common Stock
at the time of grant. These options vest at the end of the ninth year, but are
subject to accelerated vesting based on achievement of certain performance
measures. At December 31, 1999, options for a total of 360,360 shares were
reserved for issuance and options for 354,990 shares were outstanding under this
Plan. All outstanding options to purchase such shares became exercisable at the
completion of the IPO.
1996 Affiliate Stock Option Plan
The Company's 1996 Affiliate Stock Option Plan, as amended (the "Affiliate
Plan"), provides for the grant of stock options to certain persons associated
with the affiliated dental groups. Only non-qualified options may be granted
pursuant to the Affiliate Plan. The exercise price of such options is no less
than the fair market value of the Common Stock at the time of grant. Options
granted pursuant to the Affiliate Plan expire ten years after the date of grant.
At December 31, 1999, options for a total of 110,000 shares were reserved for
issuance and options for 88,986 shares were outstanding under this Plan.
1996 Directors Stock Option Plan
The Company's 1996 Directors Stock Option Plan, as amended (the "Directors
Plan"), provides for the granting of options to outside directors. Only non-
qualified options may be granted pursuant to the Directors Plan. The exercise
price of such options is no less than the fair market value of the Common Stock
at the time of grant. Options granted pursuant to the Directors Plan expire ten
years after the date of grant. At December 31, 1999, options for a total of
85,000 shares were reserved for issuance and options for 36,800 shares were
outstanding under this Plan.
Stock Option Activity
A summary of stock option activity under all the Company's stock option plans
for the years ended December 31, 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Avg. Exercise Avg. Exercise Avg. Exercise
Options Price Options Price Options Price
---------- ------------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 566,670 $ 3.50 1,118,166 $ 8.69 1,205,978 $ 8.92
Granted 552,096 14.04 101,518 12.01 177,515 7.36
Cancelled (600) 14.17 (13,706) 13.42 (38,345) 10.91
--------- ------ --------- ------ --------- ------
Outstanding at end of year 1,118,166 $ 8.69 1,205,978 $ 8.92 1,345,148 $ 8.66
========= ====== ========= ====== ========= ======
Exercisable at end of year 72,098 $ 6.90 638,573 $ 5.77 813,014 $ 7.12
========= ====== ========= ====== ========= ======
</TABLE>
F-18
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the Years Ended December 31, 1997, 1998 and 1999
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Average
Range of Number Contractual Life Exercise Number Weighted Average
Exercise Prices Outstanding (in years) Price Exercisable Exercise Price
--------------- ----------- ---------- ----- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.33 352,770 5.3 $ 0.33 337,770 $ 0.33
$7.00 - $ 8.33 371,065 7.7 $ 7.87 166,868 $ 8.32
$8.63 - $13.00 124,247 7.7 $12.60 48,148 $12.55
$14.17 497,066 7.5 $14.17 260,228 $14.17
--------- --- ------ ------- ------
1,345,148 7.0 $ 8.66 813,014 $ 7.12
========= === ====== ======= ======
</TABLE>
The Company accounts for stock options in accordance with APB No. 25, under
which no compensation cost has been recognized. Pro forma information regarding
net earnings and earnings per share is required by SFAS No. 123 and has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate......................... 6.7% 5.0% 5.3%
Dividend yield ................................. None None None
Volatility factor .............................. 0.00 0.56 0.53
Expected life .................................. 4 years 4 years 4 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options and changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share are as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Net earnings, as reported...................................... $1,070 $3,886 $6,013
Net earnings, pro forma........................................ 1,070 3,858 5,905
Earnings (loss) per share, as reported......................... (0.05) 0.54 0.78
Earnings (loss) per share, pro forma........................... (0.05) 0.54 0.78
Weighted average fair value of options granted
during the year................................................ - 3.02 3.45
</TABLE>
F-19
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(11) EMPLOYEE BENEFIT PLANS
1997 Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan, as amended (the "Employee Stock
Purchase Plan"), enables eligible employees to purchase shares of Common Stock
at a discount on a periodic basis through payroll deductions and is intended to
meet the requirements of Section 423 of the Internal Revenue Code. Purchases
occur at the end of option periods, each of six months' duration, except that
the first such option period began concurrent with the completion of the IPO and
ended on December 31, 1998. The purchase price of Common Stock under the
Employee Stock Purchase Plan is 85% of the lesser of the value of the Common
Stock at the beginning or the end of the option period. Prior to each option
period, participants may elect to have from 2% to 10% of their pay withheld and
applied to the purchase of shares at the end of the option period. The Employee
Stock Purchase Plan imposes a maximum of $10,000 on the amount that may be
withheld from any participant in any option period. A total of 200,000 shares
of Common Stock has been reserved for issuance under the Employee Stock Purchase
Plan, of which 50,677 shares were issued in 1999 and 31,773 shares were
committed for issuance as of December 31, 1999.
Under SFAS No. 123, compensation cost would have been recognized for the fair
value of the employees' purchase rights. Using the Black-Scholes option
valuation model, the weighted average fair value for these purchase rights was
estimated at the beginning of each purchase period using the following
assumptions: (i) for 1998, risk-free interest rate of 5.6%, expected life of
0.71 years, expected volatility factor of 0.56 and no dividends; (ii) for 1999,
weighted average risk-free interest rate of 4.9%, expected life of 0.50,
expected volatility factor of 0.63 and no dividends. The weighted average fair
value of these purchase rights granted in 1998 and 1999 was $4.82 and $3.48,
respectively.
Retirement Plans
The Company has a Savings and Retirement Plan (401(k) Plan), adopted October
1, 1996, which is the Company's principal defined contribution retirement plan,
which provides for a match of up to 50% of the first 6% of an employee's
eligible compensation. Additionally, at December 31, 1999, the Company had 11
other defined contribution retirement plans which were acquired in connection
with affiliation transactions. Total plan expense for the years ended December
31, 1997, 1998 and 1999 was $189,000, $423,000 and $682,000, respectively.
F-20
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the Years Ended December 31, 1997, 1998 and 1999
(12) EARNINGS PER SHARE
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted loss per share computations for the years
ended December 31 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
Basic Earnings (Loss) Per Share:
<S> <C> <C> <C>
Net earnings .................................................. $1,070 $3,886 $6,013
Less: Dividends on Series A Convertible Preferred Stock....... (632) (200) -
Dividends on Series B Redeemable Preferred Stock........ (560) (195) -
Net earnings (loss) available to common stockholders........... $ (122) $3,491 $6,013
====== ====== ======
Weighted average common shares outstanding..................... 2,273 5,907 7,513
====== ====== ======
Net earnings (loss) per share.................................. $(0.05) $0.59 $ 0.80
====== ====== ======
Diluted Earnings (Loss) Per Share:
Net earnings................................................... $1,070 $3,886 $6,013
Less: Dividends on Series A Convertible Preferred Stock....... (632) - -
Dividends on Series B Redeemable Preferred Stock........ (560) (195) -
------ ------ ------
Net earnings (loss) available to common stockholders........... $ (122) $3,691 $6,013
====== ====== ======
Weighted average common shares outstanding..................... 2,273 5,907 7,513
Add: Dilutive effect of options (1)........................... - 237 232
Assumed conversion of Series A Convertible
Preferred Stock (1)(2).................................
- 723 -
------ ------ ------
Weighted average common shares as adjusted..................... 2,273 6,867 7,745
====== ====== ======
Net earnings (loss) per share.................................. $(0.05) $0.54 $ 0.78
====== ====== ======
</TABLE>
____________________
(1) The assumed conversion of Series A Convertible Preferred Stock and the
dilutive effect of stock options were not included in the calculation of
Diluted EPS for the year ended December 31, 1997, as the inclusion of these
items would have been antidilutive.
(2) In connection with the IPO, all 400,000 shares of Series A Convertible
Preferred Stock were converted into 2,399,995 shares of Common Stock on
April 21, 1998. The Diluted EPS calculation for the year ended December
31, 1998 assumes conversion of the Series A Convertible Preferred Stock to
Common Stock as of January 1, 1998.
F-21
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the Years Ended December 31, 1997, 1998 and 1999
(13) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table sets forth summary quarterly results of operations for the
Company for the years ended December 31, 1998 and 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1998
- ----
<S> <C> <C> <C> <C>
Net revenue ........................................ $18,171 $20,217 $22,334 $23,368
Operating expenses ................................. 16,963 18,637 20,248 20,791
Earnings from operations ........................... 1,208 1,580 2,086 2,577
Earnings before income taxes ....................... 769 1,374 1,893 2,330
Income taxes ....................................... 300 536 738 906
Net earnings ....................................... $ 469 $ 838 $ 1,155 $ 1,424
Net earnings per share:
Basic .............................................. $ 0.06 $ 0.12 $ 0.16 $ 0.19
Diluted ............................................ $ 0.06 $ 0.11 $ 0.15 $ 0.19
Weighted average common shares outstanding:
Basic .............................................. 2,429 6,265 7,428 7,436
Diluted ............................................ 2,632 7,103 7,660 7,671
1999
- ----
Net revenue ........................................ $26,234 $28,139 $30,512 $32,467
Operating expenses ................................. 23,537 25,137 27,321 28,879
Earnings from operations ........................... 2,697 3,002 3,191 3,588
Earnings before income taxes ....................... 2,413 2,607 2,685 2,896
Income taxes ....................................... 1,059 1,143 1,127 1,259
Net earnings ....................................... $ 1,354 $ 1,464 $ 1,558 $ 1,637
Net earnings per share:
Basic .............................................. $ 0.18 $ 0.19 $ 0.21 $ 0.22
Diluted ............................................ $ 0.18 $ 0.19 $ 0.20 $ 0.21
Weighted average common shares outstanding:
Basic .............................................. 7,471 7,517 7,535 7,528
Diluted ............................................ 7,669 7,752 7,797 7,746
</TABLE>
F-22
<PAGE>
================================================================================
No person has been authorized in connection with the offering made hereby to
give any information or to make any representations not contained in this
prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by us. This prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any of the
securities offered hereby to any person or by anyone in any jurisdiction in
which it is unlawful to make such offer or solicitation. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
create any implications that the information contained herein is correct as of
any date subsequent to the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 8
Our Company........................................ 13
Dividend Policy.................................... 14
Price Range of Common Stock........................ 14
Capitalization..................................... 15
Selected Historical Consolidated Financial
Data............................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................... 18
Business........................................... 25
Management......................................... 35
Certain Transactions............................... 40
Principal Stockholders............................. 41
Description of Capital Stock....................... 42
Description of Subordinated Notes.................. 43
Shares Eligible for Future Sale.................... 44
Plan of Distribution............................... 45
Validity of Securities............................. 46
Experts............................................ 46
Index to Financial Statements...................... F-1
</TABLE>
================================================================================
================================================================================
AMERICAN DENTAL PARTNERS, INC.
750,000 Shares of Common Stock
AND
$25,000,000 AGGREGATE PRINCIPAL AMOUNT OF
SUBORDINATED PROMISSORY NOTES
------------
PROSPECTUS
------------
April 21, 2000
================================================================================
