<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________ to ___________
COMMISSION FILE NUMBER: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3297858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMERICAN DENTAL PARTNERS, INC.
301 Edgewater Place, Suite 320
WAKEFIELD, MASSACHUSETTS 01880
(Address of principal executive offices, including zip code)
(781) 224-0880
(781) 224-4216 (FAX)
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [_] NO
Indicate the number of shares outstanding of each of the issurer's classes of
common stock as of the latest practicable date.
Common Stock, $0.01 par value, outstanding as of November 10, 2000:
7,130,532 shares
================================================================================
Exhibit Index appears on Page 22
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999
and September 30, 2000 (unaudited).......................... 3
Consolidated Statements of Earnings for the Three Months
and Nine Months Ended September 30, 1999 and 2000
(unaudited)................................................. 4
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended September 30, 2000 (unaudited) ........... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 2000 (unaudited)............... 6
Notes to Interim Consolidated Financial Statements ......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 19
Item 2. Changes in Securities and Use of Proceeds................... 19
Item 3. Defaults Upon Senior Securities ............................ 19
Item 4. Submission of Matters to a Vote of Security Holders ........ 19
Item 5. Other Information .......................................... 19
Item 6. Exhibits and Reports on Form 8-K ........................... 20
Signatures................................................................ 21
Exhibit Index............................................................. 22
</TABLE>
2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 2,325 $ 1,053
Accounts receivable............................ 261 215
Receivables due from affiliated dental groups.. 9,637 15,582
Income taxes receivable........................ 416 -
Inventories.................................... 1,491 1,770
Prepaid expenses and other receivables......... 2,436 3,053
Deferred income taxes.......................... 397 397
-------- --------
Total current assets........................ 16,963 22,070
-------- --------
Property and equipment, net...................... 23,006 26,827
-------- --------
Non-current assets:
Intangible assets, net......................... 69,175 81,643
Deferred income taxes.......................... 563 674
Other assets................................... 293 910
-------- --------
Total non-current assets.................... 70,031 83,227
-------- --------
Total assets................................ $110,000 $132,124
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 7,154 $ 6,594
Accrued compensation, benefits and taxes....... 4,452 5,097
Accrued expenses............................... 3,833 5,445
Income taxes payable........................... - 211
Current maturities of debt..................... 1,502 1,574
-------- --------
Total current liabilities................... 16,941 18,921
-------- --------
Non-current liabilities:
Long-term debt................................. 40,249 55,895
Other liabilities.............................. 581 340
-------- --------
Total non-current liabilities............... 40,830 56,235
-------- --------
Total liabilities........................... 57,771 75,156
-------- --------
Stockholders' equity:
Preferred stock, par value $0.01 per share,
1,000,000 shares authorized, no shares
issued or outstanding........................ - -
Common stock, par value $0.01 per share,
25,000,000 shares authorized, 7,537,311 and
7,600,532 shares issued and 7,107,311 and
7,130,532 shares outstanding................. 75 76
Additional paid-in capital..................... 46,584 46,959
Retained earnings.............................. 8,526 13,177
Treasury stock, at cost, 430,000 and 470,000
shares....................................... (2,956) (3,244)
-------- --------
Total stockholders' equity.................. 52,229 56,968
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity.. $110,000 $132,124
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1999 2000 1999 2000
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net revenue.......................... $30,512 $36,901 $84,885 $106,258
------- ------- ------- --------
Operating expenses:
Salaries and benefits................ 14,836 17,422 41,576 50,598
Lab fees and dental supplies......... 4,327 5,435 11,544 15,445
Office occupancy..................... 2,965 3,806 8,131 10,741
Other operating expenses............. 2,399 2,795 6,723 8,241
General corporate expenses........... 1,139 1,402 3,553 4,087
Depreciation......................... 975 1,243 2,635 3,435
Amortization of intangible assets.... 863 1,833 2,460
------- ------- ------- --------
Total operating expenses............. 27,321 32,966 75,995 95,007
------- ------- ------- --------
Earnings from operations............. 3,191 3,935 8,890 11,251
Interest expense, net................ 506 1,245 1,185 3,041
------- ------- ------- --------
Earnings before income taxes......... 2,685 2,690 7,705 8,210
Income taxes......................... 1,127 1,166 3,329 3,559
------- ------- ------- --------
Net earnings......................... $ 1,558 $ 1,524 $ 4,376 $ 4,651
======= ======= ======= ========
Net earnings per common share:
Basic................................ $0.21 $0.21 $0.58 $0.65
Diluted.............................. $0.20 $0.21 $0.57 $0.64
Weighted average common shares
outstanding:
Basic................................ 7,535 7,122 7,508 7,116
Diluted.............................. 7,797 7,325 7,744 7,316
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------
COMMON COMMON ADDITIONAL TREASURY TOTAL
STOCK STOCK IN COMMON PAID-IN RETAINED STOCK AT STOCKHOLDERS'
ISSUED TREASURY STOCK CAPITAL EARNINGS COST EQUITY
------------------------------ ----------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999................ 7,537 (430) $75 $46,584 $ 8,526 $(2,956) $52,229
Issuance of common stock for
employee stock purchase plan............. 64 - 1 375 - - 376
Repurchase of common stock................ - (40) - - - (288) (288)
Net earnings.............................. - - - - 4,651 - 4,651
----- ---- --- ------- ------- ------- -------
Balance at September 30, 2000............... 7,601 (470) $76 $46,959 $13,177 $(3,244) $56,968
===== ==== === ======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
<S> <C> <C>
1999 2000
-------- --------
Cash flows from operating activities:
Net earnings....................................... $ 4,376 $ 4,651
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation....................................... 2,635 3,435
Amortization of intangible assets.................. 1,833 2,460
Other amortization................................. 80 86
Changes in assets and liabilities, net of
acquisitions and affiliations:
Accounts receivable................................ 558 46
Receivables due from affiliated dental groups...... (3,287) (5,590)
Other current assets............................... (1,025) (378)
Accounts payable and accrued expenses.............. 2,808 1,821
Accrued compensation, benefits and taxes........... 235 639
Income taxes payable and receivable, net........... (776) 627
-------- --------
Net cash provided by operating activities.......... 7,437 7,797
-------- --------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash
acquired......................................... (19,797) (14,699)
Capital expenditures, net.......................... (9,762) (7,362)
Contingent and deferred payments................... (496) (497)
Other.............................................. (2,195) (252)
-------- --------
Net cash used for investing activities............. (32,250) (22,810)
-------- --------
Cash flows from financing activities:
Borrowings under revolving line of credit, net..... 26,197 15,510
Repayment of borrowings............................ (1,179) (1,049)
Common stock issued for the employee stock
purchase plan.................................... 491 376
Repurchase of common stock......................... - (288)
Payment of debt issuance costs..................... (14) (808)
-------- --------
Net cash provided by financing activities.......... 25,495 13,741
-------- --------
Increase (decrease) in cash and cash equivalents... 682 (1,272)
Cash and cash equivalents at beginning of period... 2,420 2,325
-------- --------
Cash and cash equivalents at end of period ....... $ 3,102 $ 1,053
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net...... $ 796 $ 2,605
======== ========
Cash paid during the period for income taxes, net.. $ 4,101 $ 2,932
======== ========
Acquisitions and affiliations:
Assets acquired.................................... $ 27,475 $ 17,510
Liabilities assumed and issued..................... (7,159) (2,811)
Common stock issued................................ (352) -
-------- --------
Cash paid.......................................... 19,964 14,699
Less cash acquired................................. (167) -
-------- --------
Net cash paid for acquisitions and affiliations.... $ 19,797 $ 14,699
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of American
Dental Partners, Inc. and its wholly-owned subsidiaries (the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
The Company does not own any interests in or control the activities of the
affiliated dental practices. Accordingly, the financial statements of the
affiliated dental practices are not consolidated with those of the Company.
The interim consolidated financial statements are unaudited, but in the
opinion of management include all adjustments, which consist only of normal and
recurring adjustments, necessary for a fair presentation of its financial
position and results of operations. Results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with the
Company's consolidated financial statements as of and for the year ended
December 31, 1999.
Certain reclassifications have been made to the interim consolidated financial
statements for the three months and nine months ended September 30, 1999 in
order to conform with the September 30, 2000 presentation.
(2) ADJUSTED GROSS REVENUE AND NET REVENUE
Adjusted Gross Revenue - Affiliated Dental Groups
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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
------- -------- -------- ---------
Adjusted gross revenue - affiliated dental groups......... $39,820 $49,737 $109,958 $143,260
Amounts retained by affiliated dental groups.............. 11,887 15,715 32,512 45,309
------- ------- -------- --------
Net revenue earned by the Company under service
agreements............................................... $27,933 $34,022 $ 77,446 $ 97,951
======= ======= ======== ========
</TABLE>
7
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. Additionally, the Company's net revenue includes amounts from
dental benefit providers related to the arrangement of the provision of care to
patients. Net revenue consisted of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -------------------
1999 2000 1999 2000
------- ------- ------- --------
<S> <C> <C> <C> <C>
Reimbursement of expenses:
Rent expense....................... $ 2,125 $ 2,742 $ 5,876 $ 7,725
Other operating expenses........... 18,853 22,624 51,470 64,995
------- ------- ------- --------
Total reimbursement of expenses.. 20,978 25,366 57,346 72,720
------- ------- ------- --------
Business service fees:
Monthly fee........................ 6,717 8,041 19,118 22,298
Additional variable fee............ 238 615 982 2,933
------- ------- ------- --------
Total business service fees...... 6,955 8,656 20,100 25,231
------- ------- ------- --------
Net revenue earned by the Company
under service agreements....... 27,933 34,022 77,446 97,951
Revenue related to the arrangement
of the provision of care to
patients and other................. 2,579 2,879 7,439 8,307
------- ------- ------- --------
Total net revenue................ $30,512 $36,901 $84,885 $106,258
======= ======= ======= ========
</TABLE>
Net revenue from the Company's service agreement with Park Dental represented
approximately 33% and 31% of its consolidated net revenue for the three months
ended September 30, 1999 and 2000, respectively, and 35% and 32% of consolidated
net revenue for the nine months ended September 30, 1999 and 2000, respectively.
(3) Acquisitions and Affiliations
During calendar 1999, the Company acquired substantially all the assets of 15
dental practices (12 transactions) and simultaneously entered into 40-year
service agreements with eight of the affiliated dental groups (seven practices
joined existing affiliates). The aggregate purchase price paid in connection
with these transactions consisted of approximately $20.0 million in cash, $2.5
million in subordinated promissory notes, $0.9 million in deferred payments and
50,568 shares of Common Stock valued at approximately $0.4 million. All
transactions completed in 1999 are referred to as the "1999 Transactions."
From January 1, 2000 to September 30, 2000, the Company acquired substantially
all the assets of eight dental practices and simultaneously entered into 40-year
service agreements with two of the affiliated dental groups (six practices
joined existing affiliates). The aggregate purchase price paid in connection
with these transactions consisted of approximately $14.7 million in cash, $1.3
million in subordinated promissory notes and $0.5 million in deferred payments.
All transactions completed in the first nine months of 2000 are referred to as
the "2000 Transactions."
8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The 1999 and 2000 Transactions completed through September 30, 2000 are as
follows:
<TABLE>
<CAPTION>
DATE AFFILIATED DENTAL PRACTICE LOCATION(S)
---- -------------------------- -----------
<S> <C> <C>
February 1999.... Dental Care of Alabama Birmingham and Tuscaloosa, AL
February 1999.... CIGNA HealthCare of Arizona Phoenix, AZ
March 1999....... OK Dental Oklahoma City and Tulsa, OK
March 1999....... Kenneth W. Van Sickle, Jr., D.M.D. Mt. Pleasant, PA
March 1999....... Jack G. Stacker, D.D.S. Wausau, WI
June 1999........ Kevin M. Strezo, D.D.S. Homer City, PA
June 1999........ Hill Dental Group Columbia, MD
June 1999........ University Dental Associates Winston-Salem, NC
June 1999........ Karen L. Wedde, D.D.S. Appleton and Green Bay, WI
July 1999........ Kenneth P. Dick, D.M.D. Johnstown, PA
July 1999........ Gary R. Christman, D.D.S. Humble and Kingwood, TX
September 1999... Dental Associates of Corona, Dental Corona, Moreno Valley and
Associates of Moreno Valley, Riverside, CA
Dental Associates of Riverside
and Riverside Dental Group
January 2000..... Western New York Dental Group Buffalo, NY
February 2000.... Columbia Dental Associates Columbia, MD
February 2000.... Robert E. Ford, D.M.D. Birmingham, AL
April 2000....... The Dental Center Gadsden, AL
June 2000........ Nathan Bell, D.D.S. Charlotte and Raleigh-Durham, NC
June 2000........ Ronald G. White, D.D.S. Riverside, CA
July 2000........ Ronald L. Moore, D.D.S. Corona, CA
September 2000... American Family Dentistry Southaven, MS and Knoxville,
Memphis and Nashville, TN
</TABLE>
The accompanying interim consolidated financial statements include the results
of operations under the service agreements from the dates of acquisition. The
excess of the purchase price of all the 1999 and 2000 Transactions over the
estimated fair value of the net assets acquired has been recorded as intangible
assets.
(4) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of common shares outstanding during the period plus the dilutive
effect of outstanding stock options using the "treasury stock" method. The
computation of diluted earnings per share does not include the effect of
outstanding stock options that would be antidilutive.
9
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of basic and diluted earnings per share computations for the
three months and nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1999 2000 1999 2000
------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common stockholders....... $1,558 $1,524 $4,376 $4,651
====== ====== ====== ======
Weighted average common shares outstanding.......... 7,535 7,122 7,508 7,116
====== ====== ====== ======
Net earnings per share.............................. $ 0.21 $ 0.21 $ 0.58 $ 0.65
====== ====== ====== ======
DILUTED EARNINGS PER SHARE
Net earnings available to common stockholders....... $1,558 $1,524 $4,376 $4,651
====== ====== ====== ======
Weighted average common shares outstanding.......... 7,535 7,122 7,508 7,116
Add: Dilutive effect of stock options............. 262 203 236 200
------ ------ ------ ------
Weighted average common shares as adjusted.......... 7,797 7,325 7,744 7,316
====== ====== ====== ======
Net earnings per share.............................. $ 0.20 $ 0.21 $ 0.57 $ 0.64
====== ====== ====== ======
</TABLE>
10
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Report on Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "project," "estimate,"
"forecast" and similar expressions, among others, identify forward-looking
statements. Forward-looking statements speak only as of the date the statements
were made. Such forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from those
projected, anticipated or implied. Certain factors that might cause such a
difference include, among others, risks associated with the tight labor market,
access to and cost of capital, our acquisition and affiliation strategy,
management of rapid growth, dependence upon affiliated dental groups, dependence
upon service agreements and government regulation of the dental industry.
Additional risks, uncertainties and other factors are set forth in the "Risk
Factors" section of our Registration Statement on Form S-4 (File No. 333-56941).
OVERVIEW
American Dental Partners, Inc. is a leading provider of business services to
multi-disciplinary dental groups in selected markets in the United States. We
were formed in December 1995, commenced operations in January 1996 and began
providing business services to dental groups in November 1996, concurrent with
the completion of our first dental group affiliation. Our rapid growth has
resulted primarily from our affiliations with dental groups. From November 1996
to September 30, 2000, we completed 39 affiliation transactions, comprising 19
dental groups, and at September 30, 2000, we operated 158 dental facilities with
1,407 operatories in 15 states.
AFFILIATION SUMMARY
When affiliating with a dental group, we acquire substantially all its assets
except those required by law to be owned or maintained by dentists (such as
third party contracts, certain governmental receivables and patient records),
and enter into a long-term service agreement with the affiliated dental group or
professional corporation ("PC"). Under our service agreements, we are
responsible for providing all services necessary for the administration of the
non-clinical aspects of the dental operations. The PC is responsible for the
provision of dental care. Each of our service agreements is for an initial term
of 40 years. We do not own or control the affiliated dental groups and,
accordingly, do not consolidate the financial statements of the PCs with ours.
1999 Transactions
During 1999, we acquired substantially all the assets of 15 dental practices
(12 transactions) and simultaneously entered into 40-year service agreements
with eight of the affiliated dental groups (seven practices joined existing
affiliates). In total, these affiliations resulted in the addition of 27 dental
facilities with 297 operatories.
2000 Completed and Pending Transactions
During the first nine months of 2000, we acquired substantially all the assets
of eight dental practices and simultaneously entered into 40-year service
agreements with two of the affiliated dental groups (six practices joined
existing affiliates). In total, these affiliations resulted in the addition of
24 dental facilities with 169 operatories.
In addition, we currently are in discussions with a number of dentists and
owners of dental groups about possible affiliations with us. While we continue
to evaluate new affiliation opportunities, we intend to focus more intently on
internal operations and reduce indebtedness over the next 12 months.
Accordingly, there can be no assurance that we will consummate any possible
affiliations.
11
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
COMPONENTS OF REVENUE AND EXPENSES
Affiliate Adjusted Gross Revenue and Payor Mix. Our affiliated dental groups
generate revenue from patients and dental benefit providers under fee-for-
service, PPO plans and capitated managed care plans. The affiliated dental
groups record revenue at established rates reduced by contractual adjustments
and allowances for doubtful accounts to arrive at adjusted gross revenue.
Contractual adjustments represent the difference between gross billable charges
at established rates and the portion of those charges reimbursed pursuant to
certain dental benefit provider contracts. While payor mix varies from market to
market, the aggregate payor mix percentage of our affiliated groups for the nine
months ended September 30, 1999 was approximately 44% fee-for-service, 14% PPO
plans and 42% capitated managed care plans. For the nine months ended
September 30, 2000, the aggregate payor mix percentage of our affiliated groups
was approximately 46% fee-for-service, 20% PPO plans and 34% capitated managed
care plans.
The PC reimburses us for expenses incurred on its behalf in connection with
the operation and administration of the dental facilities and pays fees to us
for management services. Expenses incurred for the operation and administration
of the dental facilities include salaries and benefits for non-dentist personnel
working at the dental facilities (the administrative staff and, where permitted
by law, the dental hygienists and dental assistants), lab fees, dental supplies,
office occupancy costs of the dental facilities (rent, utilities, etc.) and
depreciation related to the fixed assets at the dental facilities. The PC is
also responsible for provider expenses, which generally consist of the salaries,
benefits and certain other expenses of the dentists.
Net Revenue. Our net revenue represents reimbursement of expenses and fees
charged to the affiliated dental groups pursuant to the terms of the long-term
service agreements under which we agree to provide business services of the
dental practice. Under such agreements, the affiliated dental groups reimburse
us for actual expenses incurred in connection with the operation and
administration of the dental facilities and pay fees to us for our business
services. Under certain service agreements, our service fee consists of a
variable monthly fee which is based upon a specified percentage of the amount by
which the PC's adjusted gross revenue exceeds expenses incurred in connection
with the operation and administration of the dental facilities. Under certain
service agreements, our service fees consist of a fixed monthly fee and an
additional variable fee. To the extent that there is operating income after
payment of the fixed monthly fee, reimbursement of expenses incurred in
connection with the operation and administration of the dental facilities and
payment of provider expenses, an additional variable fee is paid to us in the
amount of such excess up to budgeted operating income and 50% of such excess
over budgeted operating income. Under certain service agreements, our service
fee consists entirely of a fixed monthly fee. The fixed monthly fees are
determined by agreement of us and the affiliated dental group in a formal
budgeting process. Additionally, our net revenue includes amounts from dental
benefit providers related to the arrangement of the provision of care to
patients.
Operating Expenses. Operating expenses (excluding general corporate expenses,
depreciation and amortization of intangible assets) consist of the expenses
incurred by us in fulfilling our obligations under the service agreements. These
expenses are operating costs and expenses that would have been incurred by the
affiliated dental groups had they not affiliated with us and include non-dentist
salaries and benefits, lab fees and dental supplies, office occupancy cost and
other expenses related to operations. Salaries and benefits expense are for
personnel working for us at the dental facilities, as well as the local
operating management. At the facility level, we generally employ the
administrative staff and, where permitted by law, the dental hygienists and
dental assistants. The local operating management team supervises and supports
the staff at the dental facilities. Office occupancy includes rent expense and
certain other operating costs such as utilities associated with dental
facilities and the local administrative offices. Such costs vary based on the
size of each facility and the market rental rate for dental office space in the
particular geographic market. Other expenses consist of professional fees,
marketing costs and other general and administrative expenses.
General Corporate Expenses. General corporate expenses consist of
compensation expenses for our corporate personnel and administrative staff, as
well as facility and other administrative costs of our corporate office. We
provide management, administrative, third party contracting and other services
to the affiliated groups.
12
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Depreciation. Depreciation expense includes depreciation charges related to
leasehold improvements and furniture, fixtures and equipment used to operate the
dental facilities, local management offices and our corporate office.
Amortization of Intangible Assets. Amortization of intangible assets relates
to intangible assets acquired in connection with completed acquisition and
affiliation transactions.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Overview
Our net earnings amounted to $1,558,000 or diluted earnings per share of $0.20
for the three months ended September 30, 1999, as compared with net earnings of
$1,524,000 or diluted earnings per share of $0.21 for the three months ended
September 30, 2000. Net earnings for 2000 includes incremental earnings from
completed acquisitions and affiliations and internal growth. This increase,
however, was offset by increased interest and financing costs associated with
our current level of indebtedness.
Net Revenue. Net revenue increased from $30,512,000 for 1999 to $36,901,000
for 2000, an increase of approximately 21%. The increase in net revenue in 2000
is due primarily to the inclusion of revenue derived from service agreements
entered into in connection with the 1999 Transactions for the entire period and
from the 2000 Transactions. In addition, same market growth from dental groups
which were our affiliates during the entirety of both periods resulted from the
addition and expansion of our facilities, successful renegotiation of certain
third party payor contracts which increased the amount of reimbursement for
services provided by our affiliated dental groups, the addition of dentists to
our affiliated dental group network and increases in certain affiliates' fees.
Salaries and Benefits Expense. Salaries and benefits amounted to $14,836,000
or 48.6% of net revenue for 1999, as compared with $17,422,000 or 47.2% of net
revenue for 2000. The decrease in salaries and benefits as a percentage of net
revenue resulted from 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, more efficient utilization of staff in existing
facilities and the regionalization of finance, operations and administrative
staff in certain markets. These cost savings were partially offset by wage
inflation due to tight labor markets. We anticipate such wage inflation
pressures will continue for the foreseeable future.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $4,327,000 or 14.2% of net revenue for 1999 to $5,435,000 or
14.7% of net revenue for 2000. Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures
performed. The increase in lab fees and dental supplies as a percentage of net
revenue is attributable to a combination of the acquisition of facilities with a
generally higher ratio of lab fees and dental supplies expense to net revenue in
their respective markets compared to the existing base of facilities and price
increases from certain lab providers due to increases in costs of certain
precious metals and their internal wage inflation. We believe such price
inflation will continue for the foreseeable future.
Office Occupancy Expense. Office occupancy expense amounted to $2,965,000 or
9.7% of net revenue for 1999, as compared with $3,806,000 or 10.3% of net
revenue for 2000. Office occupancy expense increased as a percentage of net
revenue due to investment in the relocation and addition of new dental
facilities in Arizona, California, Minnesota, North Carolina, Texas, Virginia
and Wisconsin. This investment in facilities increased our capacity in these
markets to allow for future growth. However, the increase in office occupancy
expense has not yet been fully offset by incremental net revenue. In addition,
the acquisition of facilities with a generally higher ratio of office occupancy
expense to net revenue in their respective markets compared to the existing base
of facilities further contributed to the increase in occupancy expense as a
percentage of net revenue. These increased costs were partially offset by the
leveraging of local management offices in certain markets. We expect office
occupancy to continue to increase as we invest in the relocation and expansion
of facilities in desirable markets where costs such as rent are generally at a
premium. These increases should be partially or fully offset by better
utilization of capacity in existing dental facilities.
13
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Other Operating Expenses. Other expenses amounted to $2,399,000 or 7.9% of net
revenue for 1999, as compared with $2,795,000 or 7.6% of net revenue for 2000.
Other expenses decreased as a percentage of net revenue due primarily to savings
from regionalization of administrative and data processing functions in certain
markets and the reduction of certain discretionary spending.
General Corporate Expenses. General corporate expenses were $1,139,000 or 3.7%
of net revenue for 1999, as compared with $1,402,000 or 3.8% of net revenue for
2000. Throughout 1999 and 2000, we continued to expand our management
infrastructure in the areas of finance, operations, employee benefit
administration and professional recruiting. Despite these additions, we
continue to leverage these costs. The increase in general corporate expenses in
2000 as a percentage of net revenue, however, relates to increased legal and
regulatory costs and increased costs associated with acquisitions and
affiliations, which fluctuate from period to period. The level of general
corporate expenses will likely continue to increase in the future as we continue
to expand our management infrastructure. However, it is anticipated that these
expenses will decline as a percentage of net revenue in the future.
Depreciation. Depreciation expense was $975,000 or 3.2% of net revenue for
1999, as compared with $1,243,000 or 3.4% of net revenue for 2000. The increase
in depreciation expense related primarily to the depreciation of assets acquired
and capital expenditures associated with the addition of five new facilities
located in California, Minnesota, North Carolina and Virginia and the relocation
and/or expansion of 23 facilities in Arizona, California, Maryland, Minnesota,
Pennsylvania, Texas and Wisconsin throughout 1999 and 2000. These capital
expenditures increased our capacity in these markets to allow for future growth.
The increase in depreciation expense as a percentage of net revenue from capital
expenditures was partially offset by the acquisition of facilities with a
generally lower ratio of depreciation expense to net revenue in their respective
markets compared to the existing base of facilities. We expect to continue to
invest in the relocation and expansion of our physical capacity, although at a
lower amount then prior year levels. Accordingly, depending on the amount and
timing of such future capital expenditures, depreciation expense as a percentage
of net revenue could increase.
Amortization of Intangibles. Amortization of intangibles was $680,000 or 2.2%
of net revenue for 1999, as compared with $863,000 or 2.3% of net revenue for
2000. The increase in amortization resulted from intangible assets recorded in
connection with 15 affiliations (12 transactions) completed during 1999 and
eight affiliations completed during 2000. We expect amortization of intangible
assets to increase in the future as a result of intangibles recorded in
connection with future acquisitions and affiliations.
Interest Expense, net. Net interest expense was $506,000 or 1.7% of net
revenue for 1999, as compared with $1,245,000 or 3.4% of net revenue for 2000.
The increase in interest expense resulted primarily from increased average
borrowings under our revolving credit facility in 2000 as compared to 1999 to
fund the 1999 and 2000 Transactions and a portion of our capital expenditures
throughout 1999 and 2000. In addition, an overall higher average interest rate
under our revolving credit facility in 2000 than 1999 and the issuance of
subordinated notes in connection with the 1999 and 2000 Transactions contributed
to higher expense in 2000. Interest expense as a percentage of net revenue will
likely increase in the future as a result of both a higher average level of
indebtedness and higher average interest rates under our revolving credit
facility.
Income Taxes. We incurred income tax expense of $1,127,000 for 1999, as
compared with $1,166,000 for 2000. Our effective tax rate was approximately
42.0% for 1999 as compared with 43.3% for 2000. The increase in the effective
tax rate is primarily attributable to a higher Federal statutory rate due to
higher estimated pre-tax income in 2000 and increased income in states with
higher tax rates which increased the average state tax rate. A revision of our
anticipated effective tax rate for the year ended December 31, 1999 resulted in
a year to date adjustment, reflecting the lower rate of 42.0% for the third
quarter of 1999. This revision resulted from a higher amount of amortization of
intangible assets which is deductible for tax purposes as compared with the
amount originally anticipated to be deductible for tax purposes. The increase
in the effective tax rate was partially offset by a reduction in the
proportionate amount of amortization of intangible assets which are not
deductible for tax purposes.
14
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Overview
Our net earnings amounted to $4,376,000 or diluted earnings per share of $0.57
for the nine months ended September 30, 1999, as compared with net earnings of
$4,651,000 or diluted earnings per share of $0.64 for the nine months ended
September 30, 2000. The increase in net earnings resulted from incremental
earnings provided from completed acquisitions and affiliations and from internal
growth. The increase was somewhat offset, however, by increased interest and
financing costs associated with our current level of indebtedness.
Net Revenue. Net revenue increased from $84,885,000 for 1999 to $106,258,000
for 2000, an increase of approximately 25%. The increase in net revenue in 2000
is due primarily to the inclusion of revenue derived from service agreements
entered into in connection with the 1999 Transactions for the entire period and
from the 2000 Transactions. In addition, same market growth from dental groups
which were our affiliates during the entirety of both periods resulted from the
addition and expansion of our facilities, successful renegotiation of certain
third party payor contracts which increased the amount of reimbursement for
services provided by our affiliated dental groups, the addition of dentists to
our affiliated dental group network and increases in certain affiliates' fees.
Salaries and Benefits Expense. Salaries and benefits amounted to $41,576,000
or 49.0% of net revenue for 1999, as compared with $50,598,000 or 47.6% of net
revenue for 2000. The decrease in salaries and benefits as a percentage of net
revenue resulted from affiliations completed during 1999 and 2000 with a
generally lower ratio of staffing costs to net revenue, continued leveraging of
regional management and administrative resources in certain markets and more
efficient utilization of staff in existing facilities. These cost savings were
partially offset by wage inflation due to tight labor markets. We anticipate
such wage inflation pressures will continue for the foreseeable future.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $11,544,000 or 13.6% of net revenue for 1999 to $15,445,000 or
14.5% of net revenue for 2000. Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures
performed. The increase in lab fees and dental supplies as a percentage of net
revenue is attributable to a combination of price increases from certain lab
providers due to increases in costs of certain precious metals and their
internal wage inflation and the acquisition of facilities with a generally
higher ratio of lab fees and dental supplies expense to net revenue in their
respective markets compared to the existing base of facilities. We believe such
price inflation will continue for the foreseeable future.
Office Occupancy Expense. Office occupancy expense amounted to $8,131,000 or
9.6% for 1999, as compared with $10,741,000 or 10.1% of net revenue for 2000.
Office occupancy expense increased as a percentage of net revenue due to
investment in the relocation and addition of new dental facilities in Arizona,
California, Minnesota, North Carolina, Texas, Virginia and Wisconsin. This
investment in facilities increased our capacity in these markets to allow for
future growth. Initially, however, the increase in office occupancy expense was
not fully offset by incremental net revenue. In addition, the acquisition of
facilities with a generally higher ratio of office occupancy expense to net
revenue in their respective markets compared to the existing base of facilities
further contributed to the increase in occupancy expense as a percentage of net
revenue. These increased costs were partially offset by better utilization of
capacity in existing facilities and the leveraging of local management offices
in certain markets. We expect office occupancy to continue to increase as we
invest in the relocation and expansion of facilities in desirable markets where
costs such as rent are generally at a premium. These increases should be
partially or fully offset by better utilization of capacity in existing dental
facilities.
Other Operating Expenses. Other expenses amounted to $6,723,000 or 7.9% of net
revenue for 1999, as compared with $8,241,000 or 7.8% of net revenue for 2000.
Other costs decreased slightly as a percentage of net revenue due primarily to
savings from the regionalization of administrative and data processing functions
in certain markets and the reduction of certain discretionary spending.
15
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
General Corporate Expenses. General corporate expenses were $3,553,000 or 4.2%
of net revenue for 1999, as compared with $4,087,000 or 3.8% of net revenue for
2000. Throughout 1999 and 2000, we continued to expand our management
infrastructure in the areas of finance, operations, employee benefit
administration, professional recruiting and purchasing. Despite these
additions, we continue to leverage these costs, resulting in a reduction of
general corporate expenses as a percentage of net revenue. Additionally, the
reduction in general corporate expenses as a percentage of net revenue resulted
from a lower level of discretionary spending and costs associated with
acquisitions and affiliations, which fluctuate from period to period. These
reductions were partially offset by an increase in legal and regulatory costs.
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 $2,635,000 or 3.1% of net revenue for
1999, as compared with $3,435,000 or 3.2% of net revenue for 2000. The increase
in depreciation expense related primarily to the depreciation of assets acquired
and capital expenditures associated with the addition of eight new facilities
located in Arizona, California, Minnesota, North Carolina and Virginia and the
relocation and/or expansion of 38 facilities in Arizona, California, Maryland,
Minnesota, Pennsylvania, Texas and Wisconsin throughout 1999 and 2000. These
capital expenditures increased our capacity in these markets to allow for future
growth. The increase in depreciation expense as a percentage of net revenue
from capital expenditures was partially offset by the acquisition of facilities
with a generally lower ratio of depreciation expense to net revenue in their
respective markets compared to the existing base of facilities. We expect to
continue to invest in the relocation and expansion of our physical capacity,
although at a lower amount than prior year levels. Accordingly, depending on
the amount and timing of future capital expenditures, depreciation expense as a
percentage of net revenue could increase.
Amortization of Intangibles. Amortization of intangibles was $1,833,000 or
2.2% of net revenue for 1999, as compared with $2,460,000 or 2.3% of net revenue
for 2000. The increase in amortization resulted from intangible assets recorded
in connection with our 15 affiliations (12 transactions) completed during 1999
and eight affiliations completed during 2000. We expect amortization of
intangible assets to increase in the future as a result of intangibles recorded
in connection with future acquisitions and affiliations.
Interest Expense, net. Net interest expense was $1,185,000 or 1.4% of net
revenue for 1999, as compared with $3,041,000 or 2.9% of net revenue for 2000.
The increase in interest expense resulted primarily from increased average
borrowings under our revolving credit facility in 2000 as compared to 1999 to
fund the 1999 and 2000 Transactions and a portion of our capital expenditures
through 1999 and 2000. In addition, an overall higher average interest rate
under our revolving credit facility in 2000 than 1999 and the issuance of
subordinated notes in connection with the 1999 and 2000 Transactions contributed
to higher expense in 2000. Interest expense as a percentage of net revenue will
likely increase in the future as a result of both a higher average level of
indebtedness and higher average interest rates under our revolving credit
facility.
Income Taxes. We incurred income tax expense of $3,329,000 for 1999, as
compared with $3,559,000 for 2000. Our effective tax rate was approximately
43.2% for 1999 as compared with 43.3% for 2000. The increase in the effective
tax rate is primarily attributable to a higher Federal statutory rate due to
higher estimated pre-tax income in 2000 and increased income in states with
higher tax rates which increased the average state tax rate. This increase is
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.
16
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
From January 1, 1999 through September 30, 2000, we completed 23 dental
practice affiliations (20 transactions) for aggregate consideration of
$34.7 million in cash, $3.8 million in subordinated promissory notes,
$1.4 million in deferred payments and 50,568 shares of Common Stock valued at
approximately $0.4 million.
For the nine months ended September 30, 1999 and 2000, cash provided by
operating activities amounted to $7,437,000 and $7,797,000, respectively. The
increase in cash from operations resulted primarily from incremental earnings
generated from acquisitions and affiliations and same market growth.
For the nine months ended September 30, 1999 and 2000, cash used in investing
activities amounted to $32,250,000 and $22,810,000, 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
$19,797,000 for 1999 and $14,699,000 for 2000. Cash used for capital
expenditures was $9,762,000 and $7,362,000 for 1999 and 2000, respectively.
Capital expenditures for 1999 included costs associated with the addition of new
facilities in Arizona, Minnesota and Virginia and the expansion of existing
facilities in Arizona, Minnesota, Texas and Wisconsin. Capital expenditures for
2000 included costs associated with the addition of a new facility in North
Carolina and the relocation and/or expansion of existing facilities in
California, Maryland, Minnesota, Pennsylvania, Texas and Wisconsin. The
establishment of new dental facilities and the expansion of existing dental
facilities in the future will require ongoing capital expenditures.
For the nine months ended September 30, 1999 and 2000, cash provided by
financing activities amounted to $25,495,000 and $13,741,000, respectively.
Cash provided by financing activities in 1999 resulted from borrowings under our
revolving line of credit of $26,197,000 and proceeds from the issuance of common
stock for the employee stock purchase plan of $491,000, net of the repayment of
certain indebtedness. Cash provided by financing activities during 2000
resulted from borrowings under our revolving line of credit of $15,510,000 and
proceeds from the issuance of common stock for the employee stock purchase plan
of $376,000. These increases were offset by the repayment of certain
indebtedness of $1,049,000, the repurchase of 40,000 shares of our Common Stock
for $288,000 and the payment of debt issuance costs associated with the
amendment of our revolving credit facility in the amount of $808,000.
In July 2000, we amended our line of credit to increase the amount available
under the line from $50 million to $75 million. The credit facility is being
used for general corporate purposes including acquisitions and affiliations.
Borrowings under this line of credit bear interest at either prime or LIBOR plus
a margin, at our option. The margin for LIBOR loans is based upon our debt
coverage ratio and ranges up to 2.75%. As a result of amending our revolving
credit facility in July 2000, the banks' margin increased by 1.00% from
historical levels. In addition, we pay a commitment fee, which ranges up to
0.375% of the average daily balance of the unused line. Borrowings are limited
to an availability formula based on adjusted EBITDA. The credit facility is
secured by a first lien on substantially all of our assets, including a pledge
of the stock of our subsidiaries. We are also required to comply with certain
financial and other covenants. The line of credit matures in July 2004. The
outstanding balance under this line as of September 30, 2000 was $49,007,000.
We have a Shelf Registration Statement on file with the Securities and
Exchange Commission (Registration No. 333-56941) covering a total of 750,000
shares of Common Stock and $25,000,000 aggregate principal amount of
subordinated promissory notes to be issued in connection with future dental
practice affiliations. As of September 30, 2000, 679,878 shares and $20,737,000
of notes remain available for issuance under this Shelf Registration Statement.
17
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Our growth to date has resulted in large measure from our ability to affiliate
with additional dental practices. Although we have affiliated with many dental
practices since our initial affiliation in November 1996, there can be no
assurance that additional affiliation candidates can be identified, consummated
or successfully integrated into our operations. We have used a combination of
cash, common stock and subordinated debt as consideration for past acquisitions
and affiliations and plan to continue to use these sources in the future. In
the past 21 months, the consideration paid has consisted of a higher percentage
of cash and subordinated debt and a lower percentage common stock.
In addition, we currently are in discussions with a number of dentists and
owners of dental groups about possible affiliations with us. While we continue
to evaluate new affiliation opportunities, we intend to focus more intently on
internal operations and reduce indebtedness over the next 12 months.
Accordingly, there can be no assurance that we will consummate any possible
affiliations.
Furthermore, we continue to evaluate opportunities to repurchase our Common
Stock through our previously announced repurchase program, pursuant to which
approximately $1.8 million remains available for repurchases.
We believe that cash generated from operations and amounts available under our
current revolving credit facility, as amended, will be sufficient to fund our
anticipated cash needs for working capital, capital expenditures and
acquisitions and affiliations for at least the next 12 months.
RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 (the "Interpretation"), "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"). This
Interpretation clarifies the application of APB No. 25 for only certain issues,
which include, among others, (i) definition of an employee for purposes of
applying APB No. 25, (ii) criteria for determining whether a plan qualifies as a
non-compensatory plan, (iii) the accounting consequences for various
modifications to the terms of a previously fixed stock option or award and (iv)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occurred after
December 15, 1998. The Interpretation has not had a material effect on our
consolidated financial position, results of operations or cash flows.
18
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our cash in money market instruments. These instruments are
denominated in U.S. dollars. Due to the conservative nature of these
instruments, we do not believe that we have a material exposure to interest rate
or market risk.
In the ordinary course of business, we are exposed to interest rate risk. With
regard to our revolving credit facility, we are also exposed to variable rate
interest for the banks' applicable margins ranging from 1.00% to 2.75% based
upon our debt coverage ratio. As a result of amending our revolving credit
facility in July 2000, the banks' margin increased by 1.00% from historical
levels. For fixed rate debt, interest rate changes affect the fair value but do
not impact earnings or cash flow. Conversely, for floating rate debt, interest
rate changes generally do not affect the fair market value but do impact future
earnings and cash flow. We do not believe a one percentage point change in
interest rates would have a material impact on the fair market value of our
fixed rate debt. The pre-tax earnings and cash flow impact for one year based
upon the amounts outstanding at September 30, 2000 under our variable rate
revolving credit facility for each one percentage point change in interest rates
would be approximately $490,000 per annum. We do not presently undertake any
specific actions to cover our exposure to interest rate risk and we are not
party to any interest rate risk management transactions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be subject to litigation incidental to our
business. We are not presently a party to any material litigation. The dentists
employed by, or independent contractors of, our affiliated dental group
practices are from time to time subject to malpractice claims. Such claims, if
successful, could result in damage awards exceeding applicable insurance
coverage which could have a material adverse effect on our business, financial
condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
19
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PART II. OTHER INFORMATION - (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the three-month
period ended September 30, 2000.
20
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AMERICAN DENTAL PARTNERS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN DENTAL PARTNERS, INC.
November 10, 2000 /s/ Gregory A. Serrao
-----------------------------------------------
Gregory A. Serrao
Chairman, President and Chief Executive Officer
November 10, 2000 /s/ Ronald M. Levenson
-----------------------------------------------
Ronald M. Levenson
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
21
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AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
27 Financial Data Schedule
22
