UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
Commission File Number: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE
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04-3297858
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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401 Edgewater Place, Suite 430
Wakefield, Massachusetts 01880
(Address of Principal Executive Offices, Including Zip Code)
(781)
224-0880
(Registrant’s Telephone Number, Including Area Code)
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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).
x
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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¨
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Accelerated filer
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x
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
¨
Yes
x
No
The number of shares of the registrant’s common stock outstanding as of November 7, 2011 was 15,527,681.
AMERICAN DENTAL PARTNERS, INC.
INDEX
On November 7, 2011, we announced that the Company entered into a definitive merger agreement (the “Merger
Agreement”) dated November 4, 2011 to be acquired by an affiliate of JLL Partners, Inc., for $19.00 per share in cash (the “Merger”). The transaction is valued at approximately $398 million, including $81 million in currently
outstanding debt. If the Merger is approved by the holders of a majority of the Company’s common shares entitled to vote on the matter, the transaction is expected to close by the end of the first quarter of 2012. The Merger is subject to
customary closing conditions. During a “go-shop” period beginning on the date of the Merger Agreement and continuing until 11:59 p.m., Eastern time, on December 14, 2011, the Company may initiate, solicit and facilitate alternative
acquisition proposals from third parties and may enter into and maintain discussions or negotiations with respect to alternative acquisition proposals. There can be no assurance that this process will result in a transaction more favorable to the
Company’s stockholders than the Merger.
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, or the Securities Act. For this purpose, any statements contained in this quarterly report
regarding our strategy, future plans or operations, financial position, future revenues, projected costs, prospects, and objectives of management, other than statements of historical facts, may be deemed to be forward-looking statements. Without
limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in forward-looking statements. Any such forward-looking statements relating to the Merger are subject to various
risks and uncertainties, including uncertainties as to the timing of the Merger; the possibility that alternative acquisition proposals will be made; the possibility that alternative acquisition proposals will not be made; the possibility that
various closing conditions for the Merger may not be satisfied or waived; the possibility that JLL Partners, Inc. will be unable to obtain sufficient funds to close the Merger; the failure of the Merger to close for any other reason; the amount of
fees and expenses related to the Merger; the diversion of management’s attention from ongoing business concerns; the effect of the announcement of the Merger on our business relationships, operating results and business generally, including our
ability to retain key employees; the Merger Agreement’s contractual restrictions on the conduct of our business prior to the completion of the Merger; the possible adverse effect on our business and the price of our common stock if the Merger
is not completed in a timely matter or at all; and the outcome of any legal proceedings, regulatory proceedings or enforcement matters that may be instituted against us and others relating to the Merger. There are a number of factors that could
cause actual events or results to differ materially from those indicated or implied by such forward-looking statements, many of which are beyond our control, including the factors discussed in Part I - Item 1A under the heading “Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, and as referenced in Part II - Item 1A of this report. In addition, the forward-looking statements contained herein represent our estimates only as of the
date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so,
whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.
2
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
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September 30,
2011
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December 31,
2010
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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3,507
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$
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4,798
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Short-term investments
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2,215
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—
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Accounts receivable, net
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19,061
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19,403
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Inventories
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2,994
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2,942
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Prepaid expenses and other current assets
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5,566
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4,555
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Prepaid/refundable income taxes
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820
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1,652
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Deferred income taxes
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3,921
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3,936
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Total current assets
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38,084
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37,286
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Property and equipment, net
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59,308
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53,095
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Non-current assets:
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Goodwill
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90,750
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90,750
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Service agreements and other intangible assets, net
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180,005
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185,669
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Other
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5,118
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5,556
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Total non-current assets
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275,873
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281,975
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Total assets
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$
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373,265
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$
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372,356
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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21,191
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$
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16,807
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Accrued compensation and benefits
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9,153
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9,943
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Accrued expenses
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6,778
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5,857
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Current maturities of debt
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8,038
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8,156
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Total current liabilities
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45,160
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40,763
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Non-current liabilities:
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Long-term debt
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73,350
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92,250
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Deferred income taxes
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43,570
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38,707
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Other liabilities
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4,005
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5,202
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Total non-current liabilities
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120,925
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136,159
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Total liabilities
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166,085
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176,922
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Noncontrolling interests
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562
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462
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Commitments and contingencies
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Stockholders’ equity:
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Preferred stock, par value $0.01 per share, 1,000,000 shares authorized, no shares issued or outstanding
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—
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—
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Common stock, par value $0.01 per share, 25,000,000 shares authorized, 16,516,480 and 16,382,330 shares issued; 15,527,681 and
15,393,531 shares outstanding at September 30, 2011 and December 31, 2010, respectively
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165
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163
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Additional paid-in capital
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107,644
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105,641
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Treasury stock, at cost (988,799 shares)
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(8,572
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)
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(8,572
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)
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Accumulated comprehensive income
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(490
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)
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(1,184
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)
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Retained earnings
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107,871
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98,924
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Total stockholders’ equity
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206,618
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194,972
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Total liabilities and stockholders’ equity
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$
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373,265
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$
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372,356
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See accompanying notes to interim consolidated financial statements.
3
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2011
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2010
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2011
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2010
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Net revenue
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$
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70,241
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$
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71,116
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$
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219,016
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$
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215,336
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Operating expenses:
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Salaries and benefits
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28,294
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29,242
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86,738
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87,579
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Lab fees and dental supplies
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10,776
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10,759
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34,145
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32,495
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Office occupancy
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9,655
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9,611
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28,638
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27,867
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Other operating expense
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7,453
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6,932
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22,455
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20,357
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General corporate expense
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3,023
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|
|
3,054
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10,972
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|
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10,370
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Depreciation
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|
3,125
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|
|
|
2,903
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|
|
|
9,060
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|
|
|
8,610
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Amortization of intangible assets
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2,576
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|
|
|
2,542
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|
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|
7,675
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|
|
|
7,412
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|
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Total operating expenses
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64,902
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|
|
65,043
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|
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|
199,683
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|
|
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194,690
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Earnings from operations
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5,339
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|
|
6,073
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|
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19,333
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20,646
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Interest expense
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1,028
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|
|
1,710
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4,136
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7,088
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Earnings before income taxes
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4,311
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|
|
4,363
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|
15,197
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13,558
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Income taxes
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|
|
1,602
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|
|
|
1,605
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|
|
|
6,007
|
|
|
|
5,237
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|
|
|
|
|
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|
|
|
|
|
|
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Consolidated net earnings
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|
2,709
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|
|
2,758
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|
|
|
9,190
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|
|
|
8,321
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|
Less: Net earnings attributable to non-controlling interests
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|
30
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|
|
|
43
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|
|
|
84
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|
|
|
149
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|
|
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Net earnings attributable to American Dental Partners, Inc.
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$
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2,679
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|
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$
|
2,715
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|
|
$
|
9,106
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|
|
$
|
8,172
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|
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Net earnings attributable to common stockholders per common share:
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Basic
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$
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0.17
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$
|
0.17
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$
|
0.59
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|
$
|
0.52
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|
|
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|
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Diluted
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$
|
0.17
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|
|
$
|
0.17
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|
|
$
|
0.58
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|
|
$
|
0.51
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|
|
|
|
|
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|
|
|
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|
|
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Weighted average common shares outstanding:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
15,451
|
|
|
|
15,695
|
|
|
|
15,432
|
|
|
|
15,712
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
15,700
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|
|
|
15,991
|
|
|
|
15,726
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|
|
|
16,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
4
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
NONCONTROLLING INTEREST
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Issued
|
|
|
Common
Stock in
Treasury
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock at
Cost
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Stockholders’
Equity
|
|
|
Noncontrolling
Interest
|
|
|
Balance at December 31, 2009
|
|
|
16,273
|
|
|
|
(582
|
)
|
|
$
|
162
|
|
|
$
|
103,151
|
|
|
$
|
87,661
|
|
|
$
|
(3,874
|
)
|
|
$
|
(1,641
|
)
|
|
$
|
185,459
|
|
|
$
|
1,857
|
|
|
Issuance of common stock for employee stock purchase plan including tax benefit of $0
|
|
|
51
|
|
|
|
—
|
|
|
|
1
|
|
|
|
448
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449
|
|
|
|
—
|
|
|
Issuance of common stock for exercised stock options, including tax benefit of $1
|
|
|
26
|
|
|
|
—
|
|
|
|
—
|
|
|
|
165
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
165
|
|
|
|
—
|
|
|
Income tax shortfall from stock option plans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(77
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(77
|
)
|
|
|
—
|
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,273
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,273
|
|
|
|
—
|
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
(222
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,468
|
)
|
|
|
—
|
|
|
|
(2,468
|
)
|
|
|
—
|
|
|
Accumulated other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
232
|
|
|
|
232
|
|
|
|
—
|
|
|
Fair value adjustment of noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
860
|
|
|
|
—
|
|
|
|
—
|
|
|
|
860
|
|
|
|
(860
|
)
|
|
Noncontrolling interest distribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(593
|
)
|
|
Purchase of additional interest in subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
Sale of interest in subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
|
|
—
|
|
|
Net earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,172
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,172
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
16,350
|
|
|
|
(804
|
)
|
|
$
|
163
|
|
|
$
|
104,994
|
|
|
$
|
96,693
|
|
|
$
|
(6,342
|
)
|
|
$
|
(1,409
|
)
|
|
$
|
194,099
|
|
|
$
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
16,382
|
|
|
|
(989
|
)
|
|
$
|
163
|
|
|
$
|
105,641
|
|
|
$
|
98,924
|
|
|
$
|
(8,572
|
)
|
|
$
|
(1,184
|
)
|
|
$
|
194,972
|
|
|
$
|
462
|
|
|
Issuance of common stock for employee stock purchase plan
|
|
|
39
|
|
|
|
|
|
|
|
1
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408
|
|
|
|
|
|
|
Issuance of common stock for exercised stock options, including tax benefit of $3
|
|
|
29
|
|
|
|
—
|
|
|
|
—
|
|
|
|
119
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
119
|
|
|
|
—
|
|
|
Issuance of common stock for performance shares
|
|
|
66
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
Income tax shortfall from stock option plans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
—
|
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,468
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,468
|
|
|
|
—
|
|
|
Unrealized-gain on available for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
|
13
|
|
|
|
—
|
|
|
Accumulated other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
681
|
|
|
|
681
|
|
|
|
—
|
|
|
Fair value adjustment of noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(159
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(159
|
)
|
|
|
159
|
|
|
Noncontrolling interest contribution (distribution)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
(143
|
)
|
|
Net earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,106
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,106
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
|
16,516
|
|
|
|
(989
|
)
|
|
$
|
165
|
|
|
$
|
107,644
|
|
|
$
|
107,871
|
|
|
$
|
(8,572
|
)
|
|
$
|
(490
|
)
|
|
$
|
206,618
|
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
5
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
$
|
9,190
|
|
|
$
|
8,321
|
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
9,060
|
|
|
|
8,610
|
|
|
Stock-based compensation
|
|
|
1,468
|
|
|
|
1,273
|
|
|
Amortization of intangible assets
|
|
|
7,675
|
|
|
|
7,412
|
|
|
Other amortization
|
|
|
1,307
|
|
|
|
1,933
|
|
|
Deferred income tax benefit
|
|
|
4,858
|
|
|
|
(339
|
)
|
|
Amortization of premium on available-for-sale securities
|
|
|
30
|
|
|
|
—
|
|
|
Loss on disposal of property and equipment
|
|
|
191
|
|
|
|
37
|
|
|
Changes in assets and liabilities, net of acquisitions and affiliations:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
410
|
|
|
|
1,513
|
|
|
Other current assets
|
|
|
(1,099
|
)
|
|
|
(323
|
)
|
|
Accounts payable and accrued expenses
|
|
|
4,958
|
|
|
|
625
|
|
|
Accrued compensation and benefits
|
|
|
(790
|
)
|
|
|
(383
|
)
|
|
Income taxes payable/refundable, net
|
|
|
832
|
|
|
|
(1,219
|
)
|
|
Other, net
|
|
|
(569
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
37,521
|
|
|
|
27,318
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(2,713
|
)
|
|
|
(18,773
|
)
|
|
Capital expenditures
|
|
|
(14,516
|
)
|
|
|
(5,350
|
)
|
|
Contingent and deferred payments
|
|
|
—
|
|
|
|
(1,800
|
)
|
|
Purchase of available-for-sale securities
|
|
|
(2,184
|
)
|
|
|
—
|
|
|
Sale of available-for-sale securities
|
|
|
56
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,357
|
)
|
|
|
(25,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
1
|
|
|
|
1
|
|
|
Proceeds from credit facilities
|
|
|
101,989
|
|
|
|
212,350
|
|
|
Repayments under revolving and term credit facilities
|
|
|
(120,889
|
)
|
|
|
(208,350
|
)
|
|
Repayments of debt
|
|
|
(118
|
)
|
|
|
(147
|
)
|
|
Contributions from (distributions to) noncontrolling interest holders
|
|
|
(122
|
)
|
|
|
(593
|
)
|
|
Purchase of additional interest in subsidiary
|
|
|
—
|
|
|
|
(45
|
)
|
|
Sale of interest in subsidiary
|
|
|
—
|
|
|
|
34
|
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
(2,468
|
)
|
|
Proceeds from shares issued under employee stock purchase plan
|
|
|
407
|
|
|
|
448
|
|
|
Proceeds from issuance of common stock for exercise of stock options
|
|
|
116
|
|
|
|
164
|
|
|
Tax benefit on exercise of stock options
|
|
|
3
|
|
|
|
1
|
|
|
Payment of debt issuance costs
|
|
|
(842
|
)
|
|
|
(1,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(19,455
|
)
|
|
|
(535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in cash and cash equivalents
|
|
|
(1,291
|
)
|
|
|
860
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
4,798
|
|
|
|
6,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,507
|
|
|
$
|
7,667
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
2,831
|
|
|
$
|
5,307
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
930
|
|
|
$
|
7,319
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures accrued for, not paid
|
|
$
|
149
|
|
|
$
|
427
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
6
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Description of Business
American Dental Partners, Inc. (the “Company”) is a leading provider of business services, support staff and dental
facilities to multidisciplinary dental group practices in selected markets throughout the United States. The Company customarily acquires selected assets of the dental practices with which it affiliates and enters into long-term service agreements
with those dental practices, which are organized as professional corporations, professional associations or service corporations and are not owned by the Company. The Company is responsible for providing all services necessary for the administration
of the non-clinical aspects of the dental operations, while the affiliated practices are responsible for providing dental care to patients. Services provided to the affiliated practices include providing assistance with organizational planning and
development; recruiting; retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems and practice technology; marketing; payor contracting;
and financial planning, reporting and analysis. The Company operates in one segment.
(2) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (“GAAP”) and include the accounts of the Company, its wholly-owned subsidiaries, its Arizona’s Tooth Doctor for Kids (“Arizona Tooth Doctor”) subsidiary, which is owned 94% by the Company, and
its CFK of Texas, LLC subsidiary, which is owned 99% by the Company. All intercompany balances and transactions have been eliminated in consolidation. Management has determined that, based on the provisions of its service agreements, the Company is
not required to consolidate the financial statements of the affiliated practices that are affiliated with the Company by means of those service agreements.
The accompanying interim consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements and the notes to these statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, all adjustments, which consist only of normal and recurring adjustments, necessary for a fair presentation of financial position and
results of operations, have been reflected in these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
(3) Variable Interest Entities
Accounting guidance under Accounting Standards Codification (“ASC”) 810, “Consolidation,” requires the Company to
consolidate the financial statements of a practice that is affiliated with it by means of a service agreement with its financial results if the affiliated practice is a variable interest entity (VIE) and is the primary beneficiary of such VIE. The
Company’s evaluation is subjective in nature and incorporates both qualitative and quantitative factors to determine if an affiliated practice is a VIE and if the Company is the primary beneficiary such that financial statement consolidation
would be required. An affiliated practice would be considered a VIE if (a) it is thinly capitalized (i.e., the equity is not sufficient to fund the affiliated practice’s activities without additional subordinated financial support) or
(b) the equity holders of the affiliated practice as a group have one of the following four characteristics: (i) lack the power to direct the activities that most significantly affect the affiliated practice’s economic performance,
(ii) possess nonsubstantive voting rights, (iii) lack the obligation to absorb the affiliated practice’s expected losses or (iv) lack the right to receive the affiliated practice’s expected residual returns. Although the
characteristics of (b) do not exist, with respect to (a) the Company may and does provide advances to certain affiliated practices in instances when their cash flow is not sufficient to meet their working capital obligations, which may
indicate that an affiliated practice is thinly capitalized. These circumstances led the Company to conduct an analysis, pursuant to ASC 810, and conclude that certain of its affiliated practices may be VIEs.
The analysis included a review of the Company’s contractual agreements with each of the affiliated practices to ascertain whether the Company had
the power to direct the activities of the affiliated practice that most significantly affect its economic performance and the obligation to absorb losses or the right to receive benefits of the affiliated practice. The Company would be considered
the primary beneficiary of a VIE, to the extent the affiliated practice is a VIE, if it met both of the criteria. Based upon the Company’s assessment of the affiliated practices, the Company
7
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
believes that operating risk (including sales volume risk, price risk and other
operating cost risk) is the risk that will have the most significant impact on an affiliated practice’s economic performance. The Company believes that the activities that most significantly affect an affiliated practice’s economic
performance are with respect to patient revenue; expenses, including those attributable to dentist compensation and benefits; and collection policies. Following its review of the terms of the service agreements with each of the affiliated practices,
the Company has determined that it does not have the power to direct the activities of the affiliated practices that most significantly affect their economic performance. The Company has neither an obligation to absorb the affiliated practices’
losses, nor the right to receive the affiliated practices’ benefits. Therefore, the Company is not the primary beneficiary of the VIEs, to the extent they exist, and it has not consolidated the financial statements of the practices that are
affiliated with the Company by means of a service agreement with its financial statements for any period presented. The Company considers each time that it enters into a new service agreement or enters into a material amendment to an existing
service agreement whether the terms of that agreement or amendment would change the elements it considers important to the primary beneficiary conclusion.
As of September 30, 2011, the Company was not the primary beneficiary for its VIEs, to the extent any affiliated practice is a VIE. The Company’s maximum risk of loss related to these possible
VIEs is limited to its receivables due from the affiliated practices of approximately $16,277,000 and $16,806,000 at September 30, 2011 and December 31, 2010, respectively.
(4) Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s carrying amount of accounts
receivable, net, requires management to make estimates and assumptions regarding the collectability of accounts receivable in its consolidated financial statements. The Company’s acquisitions accounted for as business combinations typically
result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that the Company will incur. The Company’s acquisitions that are accounted for as acquisitions of
assets typically result in other intangible assets, which affect the amount of future period amortization expense. The determination of the value of these intangible assets requires management to make estimates and assumptions that affect the
consolidated financial statements. The Company and the affiliated practices maintain insurance coverage for various business activities. Certain of the coverages have retentions that require the Company to make estimates and assumptions regarding
losses below applicable retention levels. There can be no assurance that actual results will not differ from those estimates.
(5) Recent Acquisitions
During the third quarter of 2011, the Company did not complete any acquisitions.
8
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Intangible Assets and Goodwill
Intangible assets consisted of the following as of September 30, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Agreements
|
|
|
Customer
Relationships
|
|
|
Covenants not
to Compete
|
|
|
Trade Names
|
|
|
Total
|
|
|
As of September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
251,618
|
|
|
$
|
674
|
|
|
$
|
410
|
|
|
$
|
—
|
|
|
$
|
252,702
|
|
|
Accumulated amortization
|
|
|
(78,334
|
)
|
|
|
(530
|
)
|
|
|
(92
|
)
|
|
|
—
|
|
|
|
(78,956
|
)
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,259
|
|
|
|
6,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$
|
173,284
|
|
|
$
|
144
|
|
|
$
|
318
|
|
|
$
|
6,259
|
|
|
$
|
180,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
249,866
|
|
|
$
|
605
|
|
|
$
|
220
|
|
|
$
|
—
|
|
|
$
|
250,691
|
|
|
Accumulated amortization
|
|
|
(70,715
|
)
|
|
|
(518
|
)
|
|
|
(48
|
)
|
|
|
—
|
|
|
|
(71,281
|
)
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,259
|
|
|
|
6,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
$
|
179,151
|
|
|
$
|
87
|
|
|
$
|
172
|
|
|
$
|
6,259
|
|
|
$
|
185,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset amortization expense for the three and nine months ended September 30, 2011 was $2,576,000 and
$7,675,000, respectively. Intangible asset amortization expense for the three and nine months ended September 30, 2010 was $2,542,000 and $7,412,000, respectively. Excluding any future acquisitions, annual amortization expense for each of the
next five fiscal years will be approximately $10,230,000. The amortization period for service agreements is 25 years.
The weighted average
remaining life of customer relationships is five years. The weighted average remaining life of covenants not to compete is four years. The weighted average remaining life of all intangible assets, excluding indefinite-lived trade names, is
approximately 20 years.
There was no change in the carrying amount of goodwill during the first nine months of 2011 (in thousands):
|
|
|
|
|
|
|
|
|
2011
|
|
|
Balance as of January 1
|
|
$
|
90,750
|
|
|
Goodwill acquired
|
|
|
—
|
|
|
|
|
|
|
|
|
Balance as of September 30
|
|
$
|
90,750
|
|
|
|
|
|
|
|
9
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(7) Stock-based Compensation
Options granted under the Company’s Amended 2005 Equity Incentive Plan, as amended, have a ten-year term and a vesting period of
four years. Options granted under the Company’s Amended 2005 Directors Stock Option Plan, as amended, have a ten-year term and a vesting period of three years. At September 30, 2011, options for 1,759,192 shares were vested under all of
the Company’s equity incentive plans and options for an additional 764,156 shares would vest immediately upon consummation of the Merger. At September 30, 2011, 551,025 shares were available for future grants under the Amended 2005 Equity
Incentive Plan and 160,000 shares were available for future grants under the Amended 2005 Directors Stock Option Plan. No shares are available for issuance under any of the Company’s other equity incentive plans. The Company issues new shares
upon stock option exercises. The Company grants employee stock purchase rights under its 1997 Employee Stock Purchase Plan, as amended (“ESPP”). A total of 613,027 shares have been purchased under the ESPP since inception of the plan, and
186,973 shares were available for purchase as of September 30, 2011. The Company issues new shares for ESPP purchases.
Performance
shares granted to date under the Company’s Amended 2005 Equity Incentive Plan have a performance period of three years and vest based upon achievement of specific annual financial performance goals. The performance shares are subject to
restrictions on transfer for an additional one-year period following the performance period. At September 30, 2011, 66,100 performance shares were issued under the Company’s Amended 2005 Equity Incentive Plan. All performance shares were
unvested as of September 30, 2011. Under the terms of the performance shares, all unvested performance shares would vest immediately upon consummation of the Merger.
The Company recognized stock-based compensation expense for options granted under its Amended 2005 Equity Incentive Plan, Amended 2005 Directors Stock Option Plan and ESPP of $473,000 and $450,000 during
the three months ended September 30, 2011 and 2010, respectively. The Company recognized stock-based compensation expense for options granted under its Amended 2005 Equity Incentive Plan, Amended 2005 Directors Stock Option Plan and ESPP of
$1,368,000 and $1,273,000 during the nine months ended September 30, 2011 and 2010, respectively. This expense was recorded within general corporate expense on the Company’s consolidated statement of income. In addition, the Company
recorded a deferred tax benefit associated with stock-based compensation for option grants of $140,000 and $164,000 during the three months ended September 30, 2011 and 2010, respectively. The Company recorded a deferred tax benefit associated
with stock-based compensation for option grants of $469,000 and $391,000 during the nine months ended September 30, 2011 and 2010, respectively. The Company recognized stock-based compensation expense for performance shares issued under its
Amended 2005 Equity Incentive Plan of $62,000 and $100,000 during the three and nine months ended September 30, 2011, respectively. This expense was recorded within general corporate expense on the Company’s consolidated statement of
income. In addition the Company recorded a deferred tax benefit associated with stock-based compensation for performance shares of $25,000 and $34,000 during the three and nine months ended September 30, 2011, respectively. The remaining
unrecognized stock-based compensation expense for unvested awards as of September 30, 2011 was approximately $3,667,000 and the weighted average period of time over which this cost will be recognized is 1.8 years.
The fair value for these options, employee stock purchase rights and performance shares granted was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions for the first nine months of 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
Performance
Shares
|
|
|
Stock
Options
|
|
|
ESPP
|
|
|
Risk-free interest rate
|
|
|
2.48
|
%
|
|
|
2.29
|
%
|
|
|
2.57
|
%
|
|
|
2.75
|
%
|
|
|
2.55
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
51.26
|
%
|
|
|
28.69
|
%
|
|
|
51.26
|
%
|
|
|
52.35
|
%
|
|
|
37.94
|
%
|
|
Expected life (years)
|
|
|
6.1 years
|
|
|
|
0.5 years
|
|
|
|
3.75 years
|
|
|
|
6.0 years
|
|
|
|
0.5 years
|
|
|
Expected forfeiture
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
|
Weighted average fair value of options / purchase rights / performace shares granted during the quarter
|
|
$
|
6.59
|
|
|
$
|
1.14
|
|
|
$
|
13.12
|
|
|
$
|
6.88
|
|
|
$
|
1.40
|
|
10
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company calculated the volatility assumption using a blend of a historical volatility rate for a
period equal to the expected term. The Company estimated the expected life of its stock options using the weighted average of the actual term of all stock option exercises. Expected life of the Company’s ESPP purchase rights reflects the length
of each plan period (nine months) at the end of which shares are purchased. The Company estimated the expected life of its performance shares using the actual performance and restriction periods. The Company estimates forfeitures based on historical
experience.
The following table summarizes stock option and performance share transactions during the first nine months of 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
Performance Shares Unvested
|
|
|
|
|
Shares (in
thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
|
Shares (in
thousands)
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Outstanding at December 31, 2010
|
|
|
2,252
|
|
|
$
|
10.67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
330
|
|
|
|
12.85
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66
|
|
|
|
13.12
|
|
|
Exercised
|
|
|
(39
|
)
|
|
|
5.43
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited or expired
|
|
|
(17
|
)
|
|
|
12.06
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
|
2,526
|
|
|
$
|
11.03
|
|
|
|
5.25
|
|
|
$
|
3,421
|
|
|
|
66
|
|
|
$
|
13.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and unvested expected to vest at September 30, 2011
|
|
|
2,489
|
|
|
$
|
11.02
|
|
|
|
5.20
|
|
|
$
|
3,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2011
|
|
|
1,759
|
|
|
$
|
10.75
|
|
|
|
3.80
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds and intrinsic value related to total stock options exercised during the first nine months of 2011 and 2010
are provided in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Proceeds from stock options exercised
|
|
$
|
116
|
|
|
$
|
164
|
|
|
Tax benefit related to stock options exercised
|
|
$
|
3
|
|
|
$
|
1
|
|
|
Intrinsic value of stock options exercised
|
|
$
|
247
|
|
|
$
|
148
|
|
(8) Accounts Receivable, Net and Net Revenue
Accounts Receivable, Net
Accounts receivable, net, reflects receivables due from the affiliated practices and represents amounts due pursuant to the terms of the service agreements and other receivables, which include trade
receivables of Arizona Tooth Doctor, the Company’s captive insurance subsidiary, its dental laboratories and its dental benefits third-party administrator subsidiary. The following table lists receivables due from the affiliated practices and
other receivables as of September 30, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
Receivables due from affiliated practices
|
|
$
|
16,277
|
|
|
$
|
16,806
|
|
|
Other receivables, net
|
|
|
2,784
|
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
19,061
|
|
|
$
|
19,403
|
|
|
|
|
|
|
|
|
|
|
|
11
AMERICAN DENTAL PARTNERS, INC.
MERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Receivables due from Northland Dental Partners, PLLC, the affiliated practice at Metro Dentalcare,
represented approximately 11% and 17% of the Company’s consolidated accounts receivable, net, as of September 30, 2011 and December 31, 2010, respectively. Receivables due from Wisconsin Dental Group, S.C., the affiliated practice at
ForwardDental, represented approximately 17% and 18% of the Company’s consolidated accounts receivable, net, as of September 30, 2011 and December 31, 2010, respectively. No other receivables exceeded 10% of the Company’s
receivables due from affiliated practices as of September 30, 2011 and December 31, 2010.
Net Revenue
The Company’s net revenue includes management fees earned by the Company pursuant to the terms of the service agreements with the affiliated
practices, as well as reimbursement of other expenses paid by the Company on behalf of the affiliated practices, and other revenue, which includes patient revenue of Arizona Tooth Doctor, fees earned by the Company’s dental benefits third-party
administrator subsidiary, fees earned by the Company’s dental laboratories.
The Company’s net revenue from the reimbursement of
expenses is accounted for on an accrual basis and is recognized when these expenses are incurred by the affiliated practices. Reimbursement of expenses includes costs incurred by the Company for the operation and administration of the dental
facilities, which include salaries and benefits for non-dentist personnel working at the dental facilities (the administrative staff and, where permitted by law, the dental assistants and dental hygienists); lab fees and dental supplies; office
occupancy costs of the dental facilities; depreciation related to the fixed assets at the dental facilities; and other expenses such as professional fees, marketing costs and general and administrative expenses.
Net revenue consisted of the following for the three and nine months ended September 30, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Reimbursement of expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
$
|
21,249
|
|
|
$
|
21,010
|
|
|
$
|
64,240
|
|
|
$
|
62,256
|
|
|
Lab fees and dental supplies
|
|
|
11,707
|
|
|
|
11,618
|
|
|
|
37,283
|
|
|
|
35,348
|
|
|
Office occupancy expenses
|
|
|
8,752
|
|
|
|
8,556
|
|
|
|
25,958
|
|
|
|
24,845
|
|
|
Other operating expenses
|
|
|
6,244
|
|
|
|
5,980
|
|
|
|
18,976
|
|
|
|
17,525
|
|
|
Depreciation expense
|
|
|
2,757
|
|
|
|
2,535
|
|
|
|
7,947
|
|
|
|
7,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reimbursement of expenses
|
|
|
50,709
|
|
|
|
49,699
|
|
|
|
154,404
|
|
|
|
147,406
|
|
|
Business service fees
|
|
|
14,269
|
|
|
|
15,259
|
|
|
|
48,945
|
|
|
|
49,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
64,978
|
|
|
|
64,958
|
|
|
|
203,349
|
|
|
|
196,593
|
|
|
Patient revenue, professional services, dental laboratory fees and other miscellaneous revenue
|
|
|
5,263
|
|
|
|
6,158
|
|
|
|
15,667
|
|
|
|
18,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
70,241
|
|
|
$
|
71,116
|
|
|
$
|
219,016
|
|
|
$
|
215,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue derived from the Company’s service agreement with Northland Dental Partners, PLLC, the affiliated
practice at Metro Dentalcare, represented approximately 21% of the Company’s consolidated net revenue for the three and nine months ended September 30, 2011 and 21% and 22% for the three and nine months ended September 30, 2010. Net
revenue from the Company’s service agreement with Wisconsin Dental Group, S.C., the affiliated practice at ForwardDental, represented approximately 12% of the Company’s consolidated net revenue for the three and nine months ended
September 30, 2011 and approximately 12% of the Company’s consolidated net revenue for the three and nine months ended September 30, 2010. No other service agreement or customer accounted for greater than 10% of the Company’s
consolidated net revenue for the three and nine months ended September 30, 2011 and 2010.
12
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(9) Debt
In May 2011, the Company entered into an amendment to its senior secured credit facility. The $180,000,000 senior secured credit
facility has a $100,000,000 revolving line of credit and an $80,000,000 term loan. The senior secured credit facility matures in May 2016 and can be used for general corporate purposes, including working capital, acquisitions and capital
expenditures. Borrowings under the senior secured credit facility bear interest at the Company’s option of the Base Rate plus a margin or the LIBOR plus a margin. The “Base Rate” is defined as the greater of Bank of America’s
prevailing prime rate, which was 3.25% as of September 30, 2011; the Federal Funds rate plus 0.50%; or the LIBOR rate plus 1.00%. The margin is based upon the Company’s leverage ratio and ranges from 0.50% to 2.25% for Base Rate borrowings
and 1.50% to 3.25% for LIBOR borrowings. In addition, the Company pays a commitment fee ranging from 0.25% to 0.50% on the unused balance of the revolving line of credit based on its leverage ratio.
The Company is required to make quarterly payments of principal on the term loan in an amount equal to $2,000,000 beginning in June 2011 and ending in
May 2016 and a $40,000,000 payment at maturity. The total amount of repayments in 2011 is scheduled to be $8,000,000.
Pursuant to the senior
secured credit facility, the aggregate consideration paid for all acquisitions made during the same fiscal year may not exceed $50,000,000. The aggregate amount of all share repurchases over the term of the senior secured credit facility may not
exceed $50,000,000 and on an annual basis may not exceed $20,000,000. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and amortization (“EBITDA”), adjusted for certain items, and are
collateralized 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 must comply with financial and other covenants under its senior secured credit facility. The Company’s senior secured credit facility required that its net worth as of September 30,
2011 be no less than $172,253,000, its maximum EBITDA leverage ratio be no more than 3.0 and its fixed charge minimum coverage be no less than 1.15. As of September 30, 2011, the Company was in compliance with these financial covenants. As per
covenant calculations, the Company’s net worth was $206,618,000, its EBITDA leverage ratio was 1.7 and its fixed charge coverage was 1.2.
The outstanding balance with respect to the senior secured credit facility as of September 30, 2011 was $76,000,000 under the term loan and
$5,350,000 under the revolving line of credit. The Company had stand-by letters of credit amounting to $1,512,291 at September 30, 2011, and based on borrowing covenants, reduced by the stand-by letters of credit, approximately $65,000,000
was available for borrowing under the revolving line of credit.
(10) Litigation
Litigation with Dental Associates, P.C.
On March 17, 2011, Dental Associates, P.C., the affiliated practice at Redwood Dental Group, filed a lawsuit against the Company and its subsidiary, American Dental Partners of Michigan, LLC, in the
Wayne County Circuit Court in Michigan, Case No. 11-003213-CK. On April 15, 2011, the Company filed all necessary papers to move the lawsuit to the United States District Court for the Eastern District of Michigan, where the action is now
pending, Case No. 2:11-cv-11624-DPH-MJH.
The complaint claims, among other things, (i) that the Company and its subsidiary breached
fiduciary duties owed to Dental Associates; (ii) that its subsidiary breached the service agreement between it and Dental Associates; (iii) that the Company and its subsidiary tortiously interfered with Dental Associates’
relationships with its employees, patients, prospective patients and the state of Michigan; and (iv) that the Company and its subsidiary were unjustly enriched by these alleged actions.
The complaint seeks, among other things, (i) unspecified monetary damages; (ii) attorneys’ fees and litigation costs; (iii) certain injunctive relief, including termination of the
service agreement; (iv) the establishment of a constructive trust with respect to certain Dental Associates’ funds managed by the Company; (v) a detailed audit and accounting with respect to revenues generated by Dental Associates and
the payment of those funds to or for the benefit of the Company and its subsidiary; and (vi) such other equitable or just relief as the Court finds appropriate. The Company is unable to provide a range of potential damages with respect to this
action.
13
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
On May 9, 2011, the Company and its subsidiary filed a Rule 12(b)(1) and (6) motion to dismiss
the complaint for lack of subject matter jurisdiction and failure to state a claim and to compel arbitration, or alternatively to stay litigation pending arbitration. The Court held a hearing on this motion on September 27, 2011, but has not
yet issued a ruling. The Company and its subsidiary intend to defend themselves vigorously with respect to this matter.
Litigation with
Elias, Elliott, Lampasi, Fehn, Harris and Nguyen, a Dental Practice, Inc.
On August 17, 2011, Elias, Elliott, Lampasi, Fehn, Harris
and Nguyen, a Dental Practice, Inc. (the “Elias Group”), the affiliated practice at Riverside Dental, filed a complaint against the Company and its subsidiary, American Dental Partners of California, Inc., in the Riverside County Superior
Court in California, Case No. RIC 1113589. The Elias Group filed an amended complaint on August 25, 2011. On September 30, 2011, the Company filed all necessary papers to move the lawsuit to the United States District Court for the Central
District of California, where the action is now pending, Case No. 5:11-cv-01565-JST.
The amended complaint includes a single cause of
action alleging that the Company and its subsidiary breached a fiduciary duty owed to the Elias Group. The amended complaint seeks, among other things, (i) a determination that the Company and its subsidiary violated a material fiduciary duty
owed to the Elias Group; (ii) monetary damages in an amount in excess of $50,000; (iii) upon determination of a breach of fiduciary duty, an order declaring the Elias Group’s right to terminate its service agreement with the
subsidiary; and (iv) punitive or exemplary damages. The Company is unable to provide a range of potential damages with respect to this action.
On October 14, 2011, the Company filed an amended Rule 12(b)(1) and (6) motion to dismiss and to compel arbitration, or alternatively to stay litigation pending arbitration. On October 28,
2011, the Elias Group filed a motion to remand the matter to the Riverside County Superior Court. The Court has scheduled a hearing on both motions for November 28, 2011. The Company and its subsidiary intend to defend themselves vigorously
with respect to this matter.
For the year ended December 31, 2010 and the nine months ended September 30, 2011, the net revenue the
Company received under the service agreement with the Elias Group represented approximately 5% of its consolidated net revenue for both periods and approximately 2% of its consolidated earnings before interest, taxes, depreciation and amortization
for both periods.
(11) Short-term Investments
All short-term investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported
as a component of stockholders’ equity. The fair value of short-term investments and unrealized gains at September 30, 2011 were as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Fair
Value
|
|
|
U.S. federal government securities
|
|
$
|
1,128
|
|
|
$
|
18
|
|
|
$
|
1,146
|
|
|
Corporate bonds
|
|
|
1,066
|
|
|
|
3
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
2,194
|
|
|
$
|
21
|
|
|
$
|
2,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company periodically reviews its investments for other than temporary decline in fair value and writes down
investments to their fair value when an other-than-temporary decline occurs. When investments are evaluated for other-than-temporary impairment, factors considered include the length of time and extent to which fair value has been below cost basis,
the financial condition of the issuer, the Company’s intent to sell the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis. The Company
evaluated its short-term investment portfolio and concluded that there had been no decline in market value at September 30, 2011 that was considered to be other-than-temporary.
14
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(12) 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 anti-dilutive.
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three
and nine months ended September 30, 2011 and 2010 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
2,679
|
|
|
$
|
2,715
|
|
|
$
|
9,106
|
|
|
$
|
8,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
15,451
|
|
|
|
15,695
|
|
|
|
15,432
|
|
|
|
15,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.59
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stockholders
|
|
$
|
2,679
|
|
|
$
|
2,715
|
|
|
$
|
9,106
|
|
|
$
|
8,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
15,451
|
|
|
|
15,695
|
|
|
|
15,432
|
|
|
|
15,712
|
|
|
Add: Dilutive effect of options (1)
|
|
|
249
|
|
|
|
296
|
|
|
|
294
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares as adjusted
|
|
|
15,700
|
|
|
|
15,991
|
|
|
|
15,726
|
|
|
|
16,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.58
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
785,224 and 578,764 options were excluded from the computation of diluted net earnings per share for the three months ended September 30, 2011 and 2010,
respectively, due to their antidilutive effect. 614,878 and 502,018 options were excluded from the computation of diluted net earnings per share for the nine months ended September 30, 2011 and 2010, respectively, due to their antidilutive
effect.
|
(13) Internal Use Software
The Company has a proprietary practice management software system, Improvis
®
. The Company has recorded aggregate capitalized software development costs amounting to $3,291,000, which includes
approximately $424,000 in capitalized interest, in connection with this system as of September 30, 2011. These costs are being depreciated over ten years. Improvis currently has six separate modules, including scheduling/billing, electronic
dental record, timekeeping, management dashboard, digital radiography and orthodontics. The Company began to depreciate costs associated with the scheduling/billing module in October 2005, costs associated with the timekeeping module in April 2009,
costs associated with the management dashboard module in October 2010 and costs associated with the electronic dental record in January 2011. Depreciation expense for the three and nine months ended September 30, 2011 was $58,000 and $174,000,
respectively. Depreciation expense for the three and nine months ended September 30, 2010 was $28,000 and $83,000, respectively. Accumulated depreciation as of September 30, 2011 was $687,000.
15
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(14) Fair Value Measurement
The Company uses the market approach technique to value its financial instruments. There were no changes in valuation techniques during
the nine months ended September 30, 2011. The Company’s financial assets and liabilities are primarily composed of cash equivalents, available-for-sale securities and an interest rate swap.
The authoritative guidance for fair value measurement and disclosure establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. The financial assets in Level 1 are money market funds and available-for-sale
securities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term
of the financial instrument. Level 3 inputs are unobservable inputs that are not corroborated by market data based on assumptions of the Company used to measure assets and liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The
following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(503
|
)
|
|
$
|
—
|
|
|
$
|
(503
|
)
|
|
Cash equivalents
|
|
|
1,484
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,484
|
|
|
U.S. federal government securities
|
|
|
1,146
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,146
|
|
|
Corporate bonds
|
|
|
1,069
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,699
|
|
|
$
|
(503
|
)
|
|
$
|
—
|
|
|
$
|
3,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(1,184
|
)
|
|
$
|
—
|
|
|
$
|
(1,184
|
)
|
|
Cash equivalents
|
|
|
3,463
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,463
|
|
|
$
|
(1,184
|
)
|
|
$
|
—
|
|
|
$
|
2,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011, there had been no movement in classification between Level 1 and Level 2 financial assets.
The Company’s long-term debt is carried at cost and is more fully described in Note 9. As of September 30, 2011, the estimated fair value of the Company’s revolving line of credit was $7,753,000 and the estimated fair value of the
term loan was $71,757,000.
(15) Income Taxes
As of September 30, 2011, the Company had $545,000 of gross unrecognized income tax benefits, of which $437,000 would have
affected the Company’s effective tax rate if recognized. Gross unrecognized income tax benefit decreased from $552,000 to $545,000 during the nine months ended September 30, 2011 primarily due to the expiration of the statute of
limitations on uncertain tax benefits.
The Company recognizes interest and penalties associated with uncertain tax positions as a component
of the provision for income taxes. As of September 30, 2011, the Company had approximately $132,000 of accrued interest and penalties related to uncertain tax positions.
The Company and its subsidiaries are subject to U.S. federal income tax and income tax of multiple state jurisdictions. In the normal course of business, the Company is subject to examination by U.S.
federal and state taxing authorities. The tax years 2008, 2009 and 2010 remain open to examination by both federal and state authorities.
16
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(16) Interest Rate Swap
The Company entered into an interest rate swap arrangement on May 9, 2007 to fix the interest rate on $20,000,000 of borrowings
under its senior secured credit facility as a cash flow hedging instrument that matures in February 2012. The terms of this agreement provide that the Company exchange its variable rate three-month LIBOR payment, plus a credit spread, for a fixed
rate of 5%, plus a credit spread. Swaps are generally held to maturity and are intended to mitigate the interest rate risk inherent with variable rate debt. Accordingly, interest expense associated with the hedge reflects the fixed rate and the
change in the fair value of the hedge as of September 30, 2011 included in current liabilities, with an offset to other comprehensive income (“OCI”). The impact of the interest swap hedge on the Company’s consolidated financial
statements for the periods ended September 30, 2011 and December 31, 2010 is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
Interest Rate Swap (a) (b)
|
|
$
|
503
|
|
|
$
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Derivative designated as cash flow hedging instrument.
|
|
(b)
|
As of September 30, 2011, the interest rate swap was classified as a current liability. As of December 31, 2010, the interest rate swap was classified as a
long-term liability.
|
The impact on OCI from the interest rate swap for the quarter ended September 30, 2011 and the full
year ended December 31, 2010 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
Recognized in OCI
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Interest Rate Swap (a)
|
|
$
|
681
|
|
|
$
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Derivative designated as cash flow hedging instrument.
|
Pursuant to authoritative guidance for accounting for derivative instruments and hedging activities, the Company performed its hedge effectiveness analysis for the period ended September 30, 2011 and
concluded that the interest rate swap was effective.
(17) Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board, (“FASB”), issued authoritative guidance on improving disclosure
requirements about fair value measurements. The guidance improves disclosures originally required under accounting for fair value. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the
disclosure requirements about purchases, sales, issuances and settlements in the roll-forward of activity in Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years beginning after December 15, 2010 and for
interim periods within those years. The guidance effective for interim and annual periods beginning after December 15, 2009 did not have an impact on the Company’s consolidated financial statements. The guidance effective for fiscal years
beginning after December 15, 2010 did not have an impact on the Company’s consolidated financial statements.
In March 2010, the
FASB issued authoritative guidance on derivatives and hedging with a focus on embedded credit derivatives. The guidance improves disclosures originally required under accounting for derivatives and hedging and is effective for interim and annual
periods beginning after June 15, 2010. The guidance did not have an impact on the Company’s consolidated financial statements.
17
AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In December 2010, the FASB issued authoritative guidance for disclosure requirements of supplementary
pro forma information for business combinations. The amendment in this update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business
combination(s) occurred during the current year and had occurred as of the beginning of the comparable prior annual reporting period only. The guidance is effective for fiscal years beginning after December 15, 2010 and did not have an impact
on the Company’s consolidated financial statements.
In June 2011, the FASB issued authoritative guidance for presentation requirements
of other comprehensive income (OCI). The guidance requires entities to present comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements, eliminating the option to present
components of OCI as part of the statement of changes in shareholder’s equity. In addition, the amended guidance requires entities to show the effects of items reclassified from OCI to net earnings on the face of the financial statements. The
guidance is effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. The guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In July 2011, the FASB issued authoritative guidance for the presentation and disclosure of patient revenue, provision for bad debts and the
allowance for doubtful accounts for certain health care entities. The objective of the guidance is to provide financial statement users greater transparency regarding net patient revenue and the related allowance for doubtful accounts. The
amendments require certain health care entities that recognize significant amounts of patient service revenue at the time of service to modify the presentation of the income statement by reclassifying the associated provision for bad debts from an
operating expense to a deduction from patient service revenue, net of contractual allowances and discounts. In addition, the amendments require enhanced disclosure of patient service revenue as well as qualitative and quantitative information about
changes in the allowance for doubtful accounts. The guidance is effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. The Company already records the provision for bad debts as a
deduction from patient revenue for Arizona Tooth Doctor, the only affiliated practice where it consolidates patient revenue. The guidance is not expected to have a significant impact on the Company’s disclosure requirements.
In September 2011, the FASB issued Accounting Standards Update No. 2011–08, Testing for Goodwill Impairment. The intention of the revised
standard is to reduce the cost and complexity of the annual goodwill impairment test by providing the option of performing a qualitative assessment to determine whether further impairment testing is necessary. Companies can choose to perform the
qualitative assessment on none, some or all of its reporting units. In addition, a company can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of impairment testing, and then perform a
qualitative assessment in any subsequent period. The standard is effective for annual and interim tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted provided the entity has not yet issued financial
statements for the period that includes its annual test date. The guidance will not impact the Company’s consolidated financial statements.
(18) Subsequent events
On November 4, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with JLL Crown
Holdings, LLC, a Delaware limited liability company (“Parent”), and JLL Crown Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into
American Dental Partners, Inc. (the “Merger”), with American Dental Partners, Inc. surviving the Merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by funds affiliated with JLL Partners, Inc. The
Merger Agreement was approved by the Company’s Board of Directors, acting upon the recommendation of a special committee composed of independent directors of the Board.
At the effective time of the Merger, each share of common stock issued and outstanding immediately prior to the effective time (other than shares owned by (i) Parent, Merger Sub or any other direct
or indirect wholly-owned subsidiary of Parent, (ii) the Company, or (iii) stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be converted automatically into the right to receive $19.00 in cash
without interest and less applicable withholding taxes.
During a “go-shop” period beginning on the date of the Merger Agreement and
continuing until 11:59 p.m., Eastern time, on December 14, 2011, the Company may initiate, solicit and facilitate alternative acquisition proposals from third parties and may enter into and maintain discussions or negotiations with respect to
alternative acquisition proposals. There can be no assurance that this process will result in a transaction more favorable to the Company’s stockholders than the Merger.
Consummation of the Merger is subject to customary conditions, including, among other things, shareholder approval, the absence of law or ruling prohibiting the Merger and the expiration or early
termination of the applicable waiting period, and the securing of any necessary approvals, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
In connection with the Merger, Key Bank National Association (“KeyBank”), CIT Healthcare, LLC (“CIT Healthcare”), CIT Bank (“CIT Bank”), CIT Capital Securities
(“CITCS”) and NXT Capital, LLC (“NXT” and together with KeyBank, CIT Healthcare, CIT Bank and CITCS, the “Commitment Parties”) have committed to provide an aggregate $256 million senior secured credit facility,
comprised of (i) a $220.0 million term loan facility and (ii) a $36.0 million revolving facility, on the terms and subject to the conditions set forth in a debt commitment letter (the “Debt Commitment Letter”). KeyBank, CITCS and
NXT will act as joint lead arrangers; KeyBank, CIT and NXT will act as joint book running managers; KeyBank will act as the administrative agent (the “Administrative Agent”) and collateral agent; and CIT Healthcare and NXT will act as
co-syndication agents for the debt financing.
The obligation of the Commitment Parties to provide debt financing under the Debt Commitment
Letter is subject to a number of conditions, including without limitation (i) receipt at closing of executed loan documentation; customary legal opinions, charter documents and certain certificates; corporate approval of the financing;
insurance certificates; notice of borrowing; and certification from Parent’s chief financial officer certifying that Parent, after giving effect to the Merger, is solvent; (ii) accuracy of certain representations; (iii) the
refinancing of the Company’s outstanding senior secured credit facility; (iv) since December 31, 2010, there has been no “material adverse effect,” as defined in the Commitment Letter; (v) the Merger has been
consummated or shall be consummated substantially concurrently with the initial funding of the senior secured facilities; (vi) prior to or substantially concurrently with the initial funding contemplated by the Commitment Letter, the Sponsor
and/or certain other investors shall have made the equity contribution to Parent; (vii) all fees and expenses due to the Commitment Parties shall have been paid; (viii) the Commitment Parties shall have received requested financial
information regarding the Company; (ix) certification that, as of the closing date, the total leverage ratio does not exceed 3.75 to 1.00 (calculated on a pro forma basis after giving effect to the Merger, with permitted adjustments);
(x) the Administrative Agent shall have received all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the PATRIOT
Act; (xi) there shall not have been any competing issues of debt securities or syndicated commercial bank or other syndicated credit facilities by or on behalf of Parent, Merger Sub or the Company or any of its subsidiaries being offered,
placed or arranged that have materially impaired the primary syndication; and (xii) the lead arrangers shall have been afforded a Marketing Period of at least 20 consecutive business days (excluding certain days) to market the senior secured
facilities to prospective lenders. For further information on the Merger, the Merger Agreement and related agreements, please refer to the Current Report on Form 8-K filed on November 7, 2011 and the Merger Agreement filed as an exhibit
thereto. The foregoing description of the Merger does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Merger Agreement and related agreements.
18
AMERICAN DENTAL PARTNERS, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following information
should be read in conjunction with the financial statements and accompanying notes in Part I - Item 1 of this quarterly report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our financial
statements and accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2010.
As used in this
quarterly report, “practice” refers to a dentist-owned professional corporation, professional association, professional limited liability company or service corporation that is responsible for providing dental care to patients. “Group
practice” refers to a practice that employs multiple dentists and typically is owned by more than one dentist. “Affiliated practice” refers to a practice that has entered into a long-term service agreement with one of our subsidiary
service companies. “Affiliated dental group” refers collectively to the affiliated practice and service company that are parties to the service agreement. An affiliated dental group typically comprises several dental facilities in a given
metropolitan market. The terms “affiliated practice” and “affiliated dental group” also include Arizona’s Tooth Doctor for Kids, or Arizona Tooth Doctor, a corporation that is 94% owned by us and, as permitted by applicable
state law, employs dentists.
Overview
We are a leading provider of business services, support staff and dental facilities to multidisciplinary dental group practices in selected markets throughout the United States. We are committed to the
success of the affiliated practices and make substantial investments to support their operations. We provide dental facilities and support staff to the affiliated practices and provide or assist with organizational planning and development; staff
recruitment; employee retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems and technology; marketing; payor contracting; and
financial planning, reporting and analysis. At September 30, 2011, we were affiliated with 27 dental group practices, comprising 566 full-time equivalent dentists practicing in 282 dental facilities in 21 states.
Recent Developments
On November 4,
2011, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with JLL Crown Holdings, LLC, a Delaware limited liability (“Parent”), and JLL Crown Merger Sub, Inc., a Delaware corporation and a wholly-owned
subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into American Dental Partners, Inc. (the “Merger”), with American Dental Partners, Inc. surviving the Merger as a wholly-owned subsidiary of
Parent. Parent and Merger Sub are beneficially owned by affiliates of JLL Partners, Inc. The Merger Agreement was approved by our Board of Directors, acting upon the recommendation of a special committee composed of independent directors of the
Board.
At the effective time of the Merger, each share of common stock issued and outstanding immediately prior to the effective time (other
than shares owned by (i) Parent, Merger Sub or any other direct or indirect wholly-owned subsidiary of Parent, (ii) us, or (iii) stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be
converted automatically into the right to receive $19.00 in cash without interest and less applicable withholding taxes.
Consummation of the
Merger is subject to customary conditions, including, among other things, shareholder approval, the absence of law or ruling prohibiting the Merger and the expiration or early termination of the applicable waiting period, and the securing of any
necessary approvals, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
During a “go-shop” period
beginning on the date of the Merger Agreement and continuing until 11:59 p.m., Eastern time, on December 14, 2011, we may initiate, solicit and facilitate alternative acquisition proposals from third parties and may enter into and maintain
discussions or negotiations with respect to alternative acquisition proposals. There can be no assurance that this process will result in a transaction more favorable to our stockholders than the Merger.
In connection with the Merger, Key Bank National Association (“KeyBank”), CIT Healthcare, LLC (“CIT Healthcare”), CIT Bank (“CIT
Bank”), CIT Capital Securities (“CITCS”) and NXT Capital, LLC (“NXT” and together with KeyBank, CIT Healthcare, CIT Bank and CITCS, the “Commitment Parties”) have committed to provide an aggregate $256 million
senior secured credit facility, composed of (i) a $220.0 million term loan facility and (ii) a $36.0 million revolving facility, on the terms and subject to the conditions set forth in a debt commitment letter (the “Debt Commitment
Letter”). KeyBank, CITCS and NXT will act as joint lead arrangers; KeyBank, CIT and NXT will act as joint book running managers; KeyBank will act as the administrative agent (the “Administrative Agent”) and collateral agent; and CIT
Healthcare and NXT will act as co-syndication agents for the debt financing.
The obligation of the Commitment Parties to provide debt
financing under the Debt Commitment Letter is subject to a number of conditions, including without limitation (i) receipt at closing of executed loan documentation; customary legal opinions, charter documents and certain certificates; corporate
approval of the financing; insurance certificates; notice of borrowing; and certification from Parent’s chief financial officer certifying that Parent, after giving effect to the Merger, is solvent; (ii) accuracy of certain
representations; (iii) the refinancing of our outstanding senior secured credit facility; (iv) since December 31, 2010, there has been no “material adverse effect,” as defined in the Commitment Letter; (v) the Merger
has been consummated or shall be consummated substantially concurrently with the initial funding of the senior secured facilities; (vi) prior to or substantially concurrently with the initial funding contemplated by the Commitment Letter, the
Sponsor and/or certain other investors shall have made the equity contribution to Parent; (vii) all fees and expenses due to the Commitment Parties shall have been paid; (viii) the Commitment Parties shall have received requested financial
information regarding from us; (ix) certification that, as of the closing date, the total leverage ratio does not exceed 3.75 to 1.00 (calculated on a pro forma basis after giving effect to the Merger, with permitted adjustments); (x) the
Administrative Agent shall have received all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the PATRIOT Act;
(xi) there shall not have been any competing issues of debt securities or syndicated commercial bank or other syndicated credit facilities by or on behalf of Parent, Merger Sub or us or any of our subsidiaries being offered, placed or arranged
that have materially impaired the primary syndication; and (xii) the lead arrangers shall have been afforded a Marketing Period of at least 20 consecutive business days (excluding certain days) to market the senior secured facilities to
prospective lenders. For further information on the Merger, the Merger Agreement and related agreements, please refer to the Current Report on Form 8-K filed on November 7, 2011 and the Merger Agreement filed as an exhibit to that Form 8-K. The
foregoing description of the Merger does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Merger Agreement and related agreements.
Our representations and warranties contained in the Merger Agreement have been made solely for the benefit of Parent and Merger Sub. In addition, such representations and warranties (a) have been made
only for purposes of the Merger Agreement, (b) have been qualified by confidential disclosures made to Parent and Merger Sub in connection with the Merger Agreement, (c) are subject to materiality qualifications contained in the Merger Agreement,
which may differ from what may be viewed as material by investors, (d) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement and (e) have been included in the Merger Agreement for the
purpose of allocating risk between the contracting parties rather than establishing matters as facts. Accordingly, the summary of the Merger Agreement and certain of its terms is included with this filing only to provide investors with information
regarding the terms of the Merger Agreement, and not to provide investors with any other factual information regarding us or our business. Investors should not rely on the representations and warranties or any descriptions thereof as
characterizations of the actual state of facts or condition of our or any of our subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement,
which subsequent information may or may not be fully reflected in our public disclosures. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding us that is or will be contained
in, or incorporated by reference into, the Forms 10-K, Forms 10-Q, proxy statements and other documents that we file with the Securities and Exchange Commission.
Acquisition Summary
“Platform acquisitions” are acquisitions in which we acquire
non-clinical assets of a practice and simultaneously enter into a 40-year service agreement with the practice. If the assets acquired and liabilities assumed in a platform acquisition constitute a business, specifically a dental practice management
business or management service organization, we account for them as a business combination; otherwise we account for them as an acquisition of assets.
“In-market acquisitions” are acquisitions in which we acquire non-clinical assets of a practice and simultaneously the seller agrees to merge the remaining clinical assets of the practice with
another practice that has previously entered into a service agreement with one of our subsidiary service companies and thereby becomes subject to that existing service agreement. The assets acquired and liabilities assumed in an in-market
acquisition generally do not constitute a business, specifically a dental practice management business or management service organization, and under these circumstances we account for the transaction as an asset acquisition rather than a business
combination.
During the third quarter of 2011, we did not complete any acquisitions.
We are constantly evaluating potential acquisition transactions with practices and acquisitions of other dental-related companies that would expand our
business capabilities.
19
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Revenue Overview
Net Revenue
Our net revenue includes business service fees earned by us pursuant to the
terms of the service agreements with the affiliated practices, as well as reimbursement of clinic expenses paid by us on behalf of the affiliated practices, and other revenue, which includes patient revenue of Arizona Tooth Doctor, fees earned by
our dental benefits third-party administrator subsidiary, fees earned by our dental laboratories and other miscellaneous revenue.
The
following table provides the components of our net revenue for the three and nine months ended September 30, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Reimbursement of expenses
|
|
$
|
50,709
|
|
|
$
|
49,699
|
|
|
$
|
154,404
|
|
|
$
|
147,406
|
|
|
Business service fees
|
|
|
14,269
|
|
|
|
15,259
|
|
|
|
48,945
|
|
|
|
49,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue earned under service agreements
|
|
|
64,978
|
|
|
|
64,958
|
|
|
|
203,349
|
|
|
|
196,593
|
|
|
Other revenue
|
|
|
5,263
|
|
|
|
6,158
|
|
|
|
15,667
|
|
|
|
18,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
70,241
|
|
|
$
|
71,116
|
|
|
$
|
219,016
|
|
|
$
|
215,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees earned under service agreements include reimbursement of expenses incurred by us on behalf of the affiliated
practices in connection with the operation and administration of dental facilities and business service fees charged to the affiliated practices pursuant to the terms of the service agreements for management services and capital committed by us. We
account for net revenue from the reimbursement of expenses on an accrual basis and recognize revenue when these expenses are incurred by the affiliated practices. Reimbursement of expenses includes costs incurred by us for the operation and
administration of the dental facilities, which include salaries and benefits for non-dentist personnel working at the dental facilities (the administrative staff and, where permitted by law, the dental assistants and dental hygienists), lab fees,
dental supplies, office occupancy costs of the dental facilities, depreciation related to the fixed assets at the dental facilities and other expenses such as professional fees, marketing costs and general and administrative expenses.
We own 94% of Arizona Tooth Doctor. Arizona Tooth Doctor has seven locations in the greater Phoenix area and Globe, Arizona. As permitted by applicable
state law, Arizona Tooth Doctor employs dentists and dental assistants in addition to administrative staff. Accordingly, we recognize patient revenue of Arizona Tooth Doctor. While we employ the dentists, we do not exercise control over, or
otherwise influence, their clinical judgment, decisions or practice. Approximately 92% of Arizona Tooth Doctor’s revenue is derived from PPO health plans that are contracted with the Arizona Health Care Cost Containment System, or AHCCCS, the
state’s Medicaid program. In October 2009, AHCCCS reduced reimbursement to participating health plans by 5%, and these plans passed this reduction on to Arizona Tooth Doctor. AHCCCS reduced reimbursement by an additional 5% effective
April 1, 2011, and two of the six major PPO health plans, representing approximately 25% of Arizona Tooth Doctor’s patient revenue, agreed not to pass this reimbursement reduction on to Arizona Tooth Doctor. As of September 1, 2011,
an additional 5% reduction has been proposed by AHCCCS. This reduction has not been approved by the federal government. If the reduction is approved, it would not apply to 25% of Arizona Tooth Doctor’s revenue, pursuant to our agreements
with selected PPO health plans.
Our net revenue depends primarily on revenue generated by the affiliated practices. We estimate approximately
90% of patients at the affiliated practices have dental insurance. In general, dental insurance covers 100% of preventative care, 80% of basic restorative procedures and 50% of more extensive restorative procedures. In addition, dental insurance
often caps benefits at an annual maximum of $1,000 to $1,500 per person. As a result, even patients with dental insurance are financially responsible for a considerable portion of their dental expenditures. We believe the affiliated practices have
been affected by high rates of unemployment. The affiliated
20
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
practices have observed patients either delaying care because of their financial situation or loss of
their dental insurance or, for those patients with dental insurance, opting for dental procedures that are largely covered by insurance. We anticipate that high levels of unemployment will continue to adversely affect our business for the
foreseeable future, although we are unable to predict the likely duration or severity of those conditions or the magnitude of the effect on our business or results of operations. We do not, however, believe that these conditions will lessen the
dental care needs of patients and do not therefore expect lasting long-term impact on the dental care industry. As a result of these conditions, existing facility growth was negative for 2010 and for the nine months ended September 30, 2011.
Patient Revenue of the Affiliated Practices
We do not consolidate the financial statements of the affiliated practices other than Arizona Tooth Doctor. Patient revenue of the affiliated practices is, however, a financial measure used by our
management to monitor operating performance and to help identify and analyze trends of the affiliated practices that may affect our business. Most of the operating expenses incurred by us, pursuant to service agreements, are on behalf of the
affiliated practices in the operation of dental facilities. These expenses are significantly affected by the patient revenue of the affiliated practices.
The affiliated practices generate revenue from providing care to patients and receive payment from patients and third-party payors on a fee-for-service basis and under indemnity plans, PPO and dental
referral plans, managed care capitation plans, and Medicaid and Children’s Health Insurance Programs, or CHIP. Patient revenue reflects the amounts billed by an affiliated practice at its established rates reduced by any contractual adjustments
and allowances for uncollectible accounts. Contractual adjustments represent discounts off established rates negotiated pursuant to certain contracts between the affiliated practices and third-party payors. While payor mix varies from market to
market, the following table provides the aggregate payor mix of all affiliated practices for the nine months ended September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Fee-for-service and indemnity plans
|
|
|
12
|
%
|
|
|
16
|
%
|
|
PPO and dental referral plans
|
|
|
78
|
%
|
|
|
74
|
%
|
|
Capitated managed care plans
|
|
|
5
|
%
|
|
|
5
|
%
|
|
Medicaid and CHIP programs
|
|
|
5
|
%
|
|
|
5
|
%
|
For the affiliated practices, except Arizona Tooth Doctor, after collection of fees from patients and third-party payors
for the provision of dental care and payment to us of our service fee and reimbursement of clinic expenses incurred by us on their behalf, the amounts remaining are available to and used by these affiliated practices as each affiliated practice so
determines, including for compensation of dentists and, in certain states, dental hygienists and/or dental assistants who are employed by them.
21
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
The following table sets forth for the three and nine months ended September 30, 2011 and 2010,
same market patient revenue of all the affiliated practices, amounts due to us under service agreements, and amounts retained by the affiliated practices for compensation of dentists and, where applicable, other clinical staff (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
%
|
|
|
Nine Months Ended
September 30,
|
|
|
%
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Total patient revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platform dental group practices affiliated with us in both periods of comparison
|
|
$
|
110,313
|
|
|
$
|
111,318
|
|
|
|
-0.9
|
%
|
|
$
|
329,907
|
|
|
$
|
327,494
|
|
|
|
0.7
|
%
|
|
Platform dental group practices that affiliated with us from July 1, 2010 to September 30, 2011
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,955
|
|
|
|
6,516
|
|
|
|
114.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total patient revenue
|
|
|
110,321
|
|
|
|
111,318
|
|
|
|
-0.9
|
%
|
|
|
343,862
|
|
|
|
334,010
|
|
|
|
2.9
|
%
|
|
Patient revenue of Arizona Tooth Doctor
|
|
|
4,848
|
|
|
|
5,645
|
|
|
|
-14.1
|
%
|
|
|
14,492
|
|
|
|
17,050
|
|
|
|
-15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient revenue of practice affiliated with us by means of service agreements
|
|
|
105,473
|
|
|
|
105,673
|
|
|
|
-0.2
|
%
|
|
|
329,370
|
|
|
|
316,960
|
|
|
|
3.9
|
%
|
|
Net revenue due to us under service agreements
|
|
|
64,978
|
|
|
|
64,958
|
|
|
|
0.0
|
%
|
|
|
203,349
|
|
|
|
196,594
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts retained by practices affiliated with us by means of service agreements
|
|
$
|
40,495
|
|
|
$
|
40,715
|
|
|
|
-0.5
|
%
|
|
$
|
126,021
|
|
|
$
|
120,366
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same market patient revenue decreased 0.9% for the three months ended September 30, 2011 from the same period in the
prior year, which was composed of a 0.4% decrease in provider hours, a 3.2% increase in provider productivity per hour and a 3.7% deterioration in effectivity. Same market patient revenue growth for the three months ended September 30, 2011
excludes group practices that affiliated with us on or after July 1, 2010. Same market patient revenue increased 0.7% for the nine months ended September 30, 2011 from the same period in the prior year. The increase was composed of a 0.4%
increase in provider hours, a 3.3% increase in provider productivity per hour and a 3.0% deterioration in effectivity. Same market patient revenue growth for the nine months ended September 30, 2011 excludes group practices that affiliated with
us on or after January 1, 2010. Effectivity is the negotiated contractual reimbursement rate with third-party payors as a percentage of usual and customary fees, and a deterioration indicates negotiated rate increases were less than the
increase in usual and customary fees.
Amounts retained by the affiliated practices, other than Arizona Tooth Doctor, remained relatively
consistent as a percentage of patient revenue of the affiliated practices at 38.4% for the three months ended September 30, 2011 compared to 38.5% for the three months ended September 30, 2010.
22
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Results of Operations
The following table sets forth our net revenue and results of operations for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2011
|
|
|
Three Months Ended
September 30, 2010
|
|
|
|
|
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
% Change
|
|
|
Net revenue
|
|
$
|
70,241
|
|
|
|
100.0
|
%
|
|
$
|
71,116
|
|
|
|
100.0
|
%
|
|
|
-1.2
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
28,294
|
|
|
|
40.3
|
%
|
|
|
29,242
|
|
|
|
41.1
|
%
|
|
|
-3.2
|
%
|
|
Lab fees and dental supplies
|
|
|
10,776
|
|
|
|
15.3
|
%
|
|
|
10,759
|
|
|
|
15.1
|
%
|
|
|
0.2
|
%
|
|
Office occupancy
|
|
|
9,655
|
|
|
|
13.7
|
%
|
|
|
9,611
|
|
|
|
13.5
|
%
|
|
|
0.5
|
%
|
|
Other operating expenses
|
|
|
7,453
|
|
|
|
10.6
|
%
|
|
|
6,932
|
|
|
|
9.7
|
%
|
|
|
7.5
|
%
|
|
General corporate expenses
|
|
|
3,023
|
|
|
|
4.3
|
%
|
|
|
3,054
|
|
|
|
4.3
|
%
|
|
|
-1.0
|
%
|
|
Depreciation
|
|
|
3,125
|
|
|
|
4.4
|
%
|
|
|
2,903
|
|
|
|
4.1
|
%
|
|
|
7.6
|
%
|
|
Amortization of intangible assets
|
|
|
2,576
|
|
|
|
3.7
|
%
|
|
|
2,542
|
|
|
|
3.6
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
64,902
|
|
|
|
92.4
|
%
|
|
|
65,043
|
|
|
|
91.5
|
%
|
|
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
5,339
|
|
|
|
7.6
|
%
|
|
|
6,073
|
|
|
|
8.5
|
%
|
|
|
-12.1
|
%
|
|
Interest expense
|
|
|
1,028
|
|
|
|
1.5
|
%
|
|
|
1,710
|
|
|
|
2.4
|
%
|
|
|
-39.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
4,311
|
|
|
|
6.1
|
%
|
|
|
4,363
|
|
|
|
6.1
|
%
|
|
|
-1.2
|
%
|
|
Income taxes
|
|
|
1,602
|
|
|
|
2.3
|
%
|
|
|
1,605
|
|
|
|
2.3
|
%
|
|
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
2,709
|
|
|
|
3.9
|
%
|
|
|
2,758
|
|
|
|
3.9
|
%
|
|
|
-1.8
|
%
|
|
Net earnings attributable to non-controlling interests
|
|
|
30
|
|
|
|
0.0
|
%
|
|
|
43
|
|
|
|
0.1
|
%
|
|
|
-30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to American Dental Partners, Inc.
|
|
$
|
2,679
|
|
|
|
3.8
|
%
|
|
$
|
2,715
|
|
|
|
3.8
|
%
|
|
|
-1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2011
|
|
|
Nine Months Ended
September 30, 2010
|
|
|
|
|
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
% Change
|
|
|
Net revenue
|
|
$
|
219,016
|
|
|
|
100.0
|
%
|
|
$
|
215,336
|
|
|
|
100.0
|
%
|
|
|
1.7
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
86,738
|
|
|
|
39.6
|
%
|
|
|
87,579
|
|
|
|
40.7
|
%
|
|
|
-1.0
|
%
|
|
Lab fees and dental supplies
|
|
|
34,145
|
|
|
|
15.6
|
%
|
|
|
32,495
|
|
|
|
15.1
|
%
|
|
|
5.1
|
%
|
|
Office occupancy
|
|
|
28,638
|
|
|
|
13.1
|
%
|
|
|
27,867
|
|
|
|
12.9
|
%
|
|
|
2.8
|
%
|
|
Other operating expenses
|
|
|
22,455
|
|
|
|
10.3
|
%
|
|
|
20,357
|
|
|
|
9.5
|
%
|
|
|
10.3
|
%
|
|
General corporate expenses
|
|
|
10,972
|
|
|
|
5.0
|
%
|
|
|
10,370
|
|
|
|
4.8
|
%
|
|
|
5.8
|
%
|
|
Depreciation
|
|
|
9,060
|
|
|
|
4.1
|
%
|
|
|
8,610
|
|
|
|
4.0
|
%
|
|
|
5.2
|
%
|
|
Amortization of intangible assets
|
|
|
7,675
|
|
|
|
3.5
|
%
|
|
|
7,412
|
|
|
|
3.4
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
199,683
|
|
|
|
91.2
|
%
|
|
|
194,690
|
|
|
|
90.4
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
19,333
|
|
|
|
8.8
|
%
|
|
|
20,646
|
|
|
|
9.6
|
%
|
|
|
-6.4
|
%
|
|
Interest expense
|
|
|
4,136
|
|
|
|
1.9
|
%
|
|
|
7,088
|
|
|
|
3.3
|
%
|
|
|
-41.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
15,197
|
|
|
|
6.9
|
%
|
|
|
13,558
|
|
|
|
6.3
|
%
|
|
|
12.1
|
%
|
|
Income taxes
|
|
|
6,007
|
|
|
|
2.7
|
%
|
|
|
5,237
|
|
|
|
2.4
|
%
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
9,190
|
|
|
|
4.2
|
%
|
|
|
8,321
|
|
|
|
3.9
|
%
|
|
|
10.4
|
%
|
|
Net earnings attributable to non-controlling interests
|
|
|
84
|
|
|
|
0.0
|
%
|
|
|
149
|
|
|
|
0.1
|
%
|
|
|
-43.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to American Dental Partners, Inc.
|
|
$
|
9,106
|
|
|
|
4.2
|
%
|
|
$
|
8,172
|
|
|
|
3.8
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Income Statement Impact of New Affiliated Practices
We completed a platform acquisition by acquiring the non-clinical assets of Cincinnati Dental Services, Inc. and Dentco, Inc., or collectively Cincinnati
Dental, on June 1, 2010, which affected our net revenue, operating expenses and margins. Pursuant to state laws, the dental hygienists and dental assistants at Cincinnati Dental are employed by the affiliated practice, rather than by us. As a
result, the net revenue we earn from Cincinnati Dental in the form of expense reimbursement and the expenses we incur in the form of salaries and benefits are less than many of our other affiliated practices and our overall consolidated results of
operations. This additionally affected our consolidated operating margins for the nine months ended September 30, 2011 by decreasing salaries and benefits as a percentage of net revenue and increasing our other operating expenses as a
percentage of net revenue.
Our subsidiary, CFK of Texas, LLC, entered into service agreement with Texas Tooth Doctor for Kids, a group
practice, in 2009 and has subsequently developed nine de novo facilities in San Antonio and Houston. In August 2011, CFK of Texas, LLC also entered into a service agreement with a group practice and has subsequently developed three de novo
dental facilities in Dallas-Ft. Worth. As a result, our operating results have been and will be negatively impacted by the initial start up and subsequent operating costs of these dental facilities until the facilities are established.
Net Revenue
Net revenue
decreased 1.2% to $70,241,000 for the three months ended September 30, 2011 from $71,116,000 for the three months ended September 30, 2010. Net revenue increased 1.7% to $219,016,000 for the nine months ended September 30, 2011 from
$215,336,000 for the nine months ended September 30, 2010. For the three months ended September 30, 2011, the decrease was primarily the result of decreased revenue at Arizona Tooth Doctor as a result of reduced AHCCCS reimbursement rates.
For the nine months ended September 30, 2011, the increase was primarily the result of revenue contribution from the Cincinnati Dental platform acquisition and the expansion of Texas Tooth Doctor for Kids, offset by decreased revenue at Arizona
Tooth Doctor as a result of reduced AHCCCS reimbursement rates.
Net revenue derived from our service agreement with Northland Dental
Partners, PLLC, the affiliated practice at Metro Dentalcare, represented approximately 21% of our consolidated net revenue for the three and nine months ended September 30, 2011 and represented approximately 21% and 22% of our consolidated net
revenue for the three and nine months ended September 30, 2010. Net revenue from our service agreement with Wisconsin Dental Group, S.C., the affiliated practice at ForwardDental, represented approximately 12% of our consolidated net revenue
for the three and nine months ended September 30, 2011 and represented approximately 12% of our consolidated net revenue for the three and nine months ended September 30, 2010. No other service agreement or customer accounted for greater
than 10% of our consolidated net revenue for the three and nine months ended September 30, 2011 and 2010.
S
alaries and
Benefits
Salaries and benefits expense includes costs for our personnel working at the dental facilities, dental laboratories and local
and regional shared service centers. At the facility level, we employ the administrative staff and, where permitted by state law, the dental hygienists and dental assistants. We also employ the dentists at Arizona Tooth Doctor. The personnel at the
local and regional shared service centers provide management support to the dental facilities.
Salaries and benefits expense as a percentage
of net revenue decreased to 40.3% for the three months ended September 30, 2011 from 41.1% for the three months ended September 30, 2010. Salaries and benefits expense as a percentage of net revenue decreased to 39.6% for the nine months
ended September 30, 2011 from 40.7% for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2011, the decrease was primarily due to staffing adjustments at Arizona Tooth Doctor in response to
reduced AHCCCS reimbursement rates combined with a reduction in incentive compensation accruals.
24
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Lab Fees and Dental Supplies
Lab fees and dental supplies expense varies among affiliated practices and is affected by the volume and type of procedures performed.
Lab fees and dental supplies expense as a percentage of net revenue increased to 15.3% of net revenue for the three months ended September 30, 2011 from 15.1% for the three months ended
September 30, 2010. The increase was primarily attributable to lab fees, offset by a decrease in dental supplies. The increase in labs fees is spread across many affiliated dental groups and we believe can be attributed to price increases by
dental labs in response to higher precious metal costs. Cincinnati Dental contributed the majority of the decrease in dental supplies as a result of transitioning to our primary dental supplies vendor from its existing vendor at acquisition. Lab
fees and dental supplies expense as a percentage of net revenue increased to 15.6% of net revenue for the nine months ended September 30, 2011 from 15.1% for the nine months ended September 30, 2010. The increase was primarily attributable
to labs fees. Cincinnati Dental contributed the majority of the increase in lab fees with the remainder spread across many affiliated dental groups, which we believe can be attributed to price increases by dental labs in response to higher precious
metal costs.
Office Occupancy
Office occupancy expense includes rent expense and certain other operating costs, such as utilities, associated with dental facilities, dental
laboratories and local and regional shared service centers. These costs vary based on the size of each facility and the market rental rate for dental office and administrative space in each particular geographic market.
Office occupancy expense as a percentage of net revenue increased to 13.7% for the three months ended September 30, 2011 from 13.5% for the three
months ended September 30, 2010. For the three months ended September 30, 2011, the increase was primarily attributable to de novo facilities completed primarily in 2010 and 2011 at Texas Tooth Doctor for Kids offset by a reduction at an
affiliated dental group due to the consolidation of office locations. Office occupancy expense as a percentage of net revenue increased to 13.1% for the nine months ended September 30, 2011 from 12.9% for the nine months ended
September 30, 2010. For the nine months ended September 30, 2011, the increase was primarily attributable to the Cincinnati Dental platform acquisition and de novo facilities completed in 2010 and 2011 at Texas Tooth Doctor for Kids.
Other Operating Expenses
Other operating expenses includes general and administrative expenses, marketing costs, repairs and maintenance, non-employment related insurance expenses
and professional fees.
Other operating expenses as a percentage of net revenue increased to 10.6% for the three months ended
September 30, 2011 from 9.7% for the three months ended September 30, 2010. For the three months ended September 30, 2011 the increase was attributable to an insurance settlement in 2010 and costs associated with de novo facilities
completed primarily in 2010 and 2011 at Texas Tooth Doctor for Kids. The remaining increase was attributable to professional fees, including legal expenses associated with on-going litigation. Other operating expenses as a percentage of net revenue
increased to 10.3% for the nine months ended September 30, 2011 from 9.5% for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2011, the increase was primarily attributable to the Cincinnati
Dental platform acquisition and costs associated with de novo facilities completed primarily in 2010 and 2011 at Texas Tooth Doctor for Kids. The remaining increase was attributable to legal and lobbying fees.
25
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
General Corporate Expense
General corporate expense consists of compensation and travel expenses for our corporate personnel and administrative staff; facility and other administrative costs of our corporate office; and
professional fees, including legal and accounting.
General corporate expense as a percentage of net revenue remained unchanged at 4.3% for
the three months ended September 30, 2011 and, 2010. General corporate expense as a percentage of net revenue increased to 5.0% for the nine months ended September 30, 2011 from 4.8% for the nine months ended September 30, 2010. For
the nine months ended September 30, 2011, the increase was primarily attributable to higher travel expenses, salaries, legal fees and stock-based compensation expense offset by a reduction in incentive compensation accruals.
Stock-based compensation expense was $535,000 and $450,000 for the three months ended September 30, 2011 and 2010, respectively. Stock-based
compensation expense was $1,468,000 and $1,273,000 for the nine months ended September 30, 2011 and 2010, respectively.
Depreciation
Depreciation expense, including amortization of leasehold improvements, as a percentage of net revenue increased to 4.4% for the three
months ended September 30, 2011 from 4.1% for the three months ended September 30, 2010. The increase was primarily due to the implementation of Improvis’s electronic dental record at various dental facilities. Depreciation expense,
including amortization of leasehold improvements, as a percentage of net revenue increased to 4.1% for the nine months ended September 30, 2011 from 4.0% for the nine months ended September 30, 2010. The increase was primarily due to de
novo facilities completed in 2010 and 2011 at Texas Tooth Doctor for Kids.
Amortization of Intangible Assets
Amortization expense, principally relating to our service agreements with the affiliated practices, as a percentage of net revenue increased to 3.7% for
the three months ended September 30, 2011 from 3.6% for the three months ended September 30, 2010. The increase was primarily the result of amortization of intangible assets associated with Arizona Tooth Doctor. Amortization expense,
principally relating to our service agreements with the affiliated practices, as a percentage of net revenue increased to 3.5% for the nine months ended September 30, 2011 from 3.4% for the nine months ended September 30, 2010. The
increase was primarily the result of amortization of intangible assets associated with the Cincinnati Dental platform acquisition.
Earnings from Operations
Earnings from
operations decreased 12.1% to $5,339,000 for the three months ended September 30, 2011 from $6,073,000 for the three months ended September 30, 2010. As a percentage of net revenue, earnings from operations decreased to 7.6% for the three
months ended September 30, 2011 from 8.5% for the three months ended September 30, 2010. For the three months ended September 30, 2011, the decrease in earnings from operations was primarily due to a decrease in net revenue and an
increase in other operating expenses and depreciation expense partially offset by a decrease in salaries and benefits expense. Earnings from operations decreased 6.4% to $19,333,000 for the nine months ended September 30, 2011 from $20,646,000
for the nine months ended September 30, 2010. As a percentage of net revenue, earnings from operations decreased to 8.8% for the nine months ended September 30, 2011 from 9.6% for the nine months ended September 30, 2010. For the nine
months ended September 30, 2011, the decrease in earnings from operations was primarily due to increased other operating expenses, lab fees and dental supplies expense, office occupancy expense, general corporate expense and depreciation and
amortization expense, partially offset by an increase in net revenue and a decrease in salaries and benefits expense.
26
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Interest Expense
Net interest expense decreased to $1,028,000 for the three months ended September 30, 2011 from $1,710,000 for the three months ended September 30, 2010. Net interest expense decreased to
$4,136,000 for the nine months ended September 30, 2011 from $7,088,000 for the nine months ended September 30, 2010. We refinanced our bank debt in May 2011 and May 2010. The nine months ended September 30, 2011 includes the
write-off of $370,000 of previously capitalized bank fees and the nine months ended September 30, 2010 includes the write-off of $615,000 of previously capitalized bank fees. Excluding these write-offs, the decrease in interest expense for the
three and nine months ended September 30, 2011 was due to reduced debt levels and lower interest rates associated with our refinancings.
Income Taxes
Our effective tax rate
increased to 37.2% for the three months ended September 30, 2011 as compared to 36.8% for the three months ended September 30, 2010. Our effective tax rate increased to 39.5% for the nine months ended September 30, 2011 as compared to
38.6% for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2011, the increase is due to the recognition of a favorable adjustment from the expiration of an uncertain tax position in 2010. We
expect our effective tax rate to be approximately 40% for the year ending December 31, 2011.
Net Earnings Attributable to
Non-controlling Interests
Net earnings attributable to non-controlling interests decreased to $30,000 for the three months ended
September 30, 2011 as compared to $43,000 for the three months ended September 30, 2010. The decrease was primarily due to decreased earnings at Arizona Tooth Doctor as a result of a reduction in AHCCCS reimbursement rates. Net earnings
attributable to non-controlling interests decreased to $84,000 for the nine months ended September 30, 2011 as compared to $149,000 for the nine months ended September 30, 2010. The decrease was primarily due to a decrease in
non-controlling interests ownership of Arizona Tooth Doctor.
Net Earnings Attributable to American Dental Partners, Inc.
Net earnings attributable to American Dental Partners, Inc. decreased 1.3% to $2,679,000 for the three months ended September 30, 2011 from
$2,715,000 for the three months ended September 30, 2010. The decrease was primarily due to decreased net revenue and increased other operating expenses and depreciation expense partially offset by decreased salaries and benefits expense, and
interest expense. Net earnings attributable to American Dental Partners, Inc. increased 11.4% to $9,106,000 for the nine months ended September 30, 2011 from $8,172,000 for the nine months ended September 30, 2010. The increase was
primarily due to an increase in net revenue and a decrease in interest expense and salaries and benefits expense partially offset by increased other operating expenses, lab fees and dental supplies expense, office occupancy expense, general
corporate expense and depreciation and amortization expense.
27
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Non-GAAP Measures
We believe non-GAAP financial measures, such as adjusted net earnings and adjusted net earnings excluding service agreement amortization, are important financial measures for our investors’
understanding of our financial performance. Expenses relating to our debt refinancing and professional fees related to our acquisitions have been presented separately and excluded from our “adjusted net earnings”, a non-GAAP financial
measure, due to their magnitude and the fact they are not part of our ongoing operations. We record on our balance sheet definite-lived intangible assets related to service agreements, and accordingly we recognize significant non-cash amortization
expense. Amortization expense of intangible assets related to service agreements with the affiliated practices is presented separately and excluded from our “adjusted net earnings excluding service agreement amortization”, a non-GAAP
financial measure, due to its magnitude and non-cash impact on our ongoing operations and because, unlike depreciation of our dental facilities, it does not require recurring capital investment. We do not consider adjusted net earnings excluding
service agreement amortization in evaluating our financial condition or operating performance. This non-GAAP measure is provided based on previous requests from certain of our stockholders.
The primary limitation associated with our use of non-GAAP measures is that these measures may not be directly comparable to the amounts reported by other companies. In the following table, we compensate
for this limitation by providing the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net earnings (as reported)
|
|
$
|
2,679
|
|
|
$
|
2,715
|
|
|
$
|
9,106
|
|
|
$
|
8,172
|
|
|
Add: Write-off of expenses associated with debt refinancing, net of tax (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
219
|
|
|
|
377
|
|
|
Add: Expenses associated with Cincinnati Dental Services acquisition, net of tax (a)
|
|
|
—
|
|
|
|
32
|
|
|
|
—
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings
|
|
|
2,679
|
|
|
|
2,747
|
|
|
|
9,325
|
|
|
|
8,756
|
|
|
Add: Amortization related to service agreements, net of tax (a)
|
|
|
1,597
|
|
|
|
1,597
|
|
|
|
4,601
|
|
|
|
4,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings excluding service agreement amortization
|
|
$
|
4,276
|
|
|
$
|
4,344
|
|
|
$
|
13,926
|
|
|
$
|
13,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
15,700
|
|
|
|
15,991
|
|
|
|
15,726
|
|
|
|
16,032
|
|
|
Diluted adjusted net earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.59
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted adjusted net earnings excluding service agreement amortization per share
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.89
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Tax effect calculated using consolidated tax rate in the period reported.
|
28
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Liquidity and Capital Resources
Overview
We have financed our operating and capital needs, including cash used for
acquisitions, capital expenditures and working capital, principally from cash flow from operations, borrowings under our senior secured credit facility and the issuance of common stock.
We believe that cash generated from operations and amounts available under our senior secured credit facility will be sufficient to fund our operating cash needs and commitments for the next twelve
months. We expect capital expenditures in 2011 to be between $23,000,000 and $25,000,000.
If the Merger is consummated, subsequent to the
Merger we expect to be substantially leveraged. Our liquidity requirements will be significantly changed, primarily due to the addition of debt service requirements to our existing cash needs discussed above. Additionally, if the Merger is
consummated, we expect to terminate our existing Credit Facility and to enter into the New Credit Facility, which will replace the existing Credit Facility as a primary source of short-term liquidity. See “Recent Developments” for more
information on the Merger and related arrangements.
Operating Activities
For the nine months ended September 30, 2011 and 2010, cash provided by operating activities amounted to $37,521,000 and $27,318,000, respectively. Cash provided by operations primarily resulted from
cash provided by consolidated net earnings after adjusting for non-cash items, an increase in accounts payable and accrued expenses, and a decrease in income taxes receivable. The increase in accounts payable and accrued expenses was primarily
attributable to increased capital expenditures and the timing of payments between the periods of comparison. Cash used for taxes decreased because we utilized tax incentives associated with the Job Creation Act of 2010, which allows for 100%
deduction of certain capital expenditures at the time they are placed in service, and utilized an income tax receivable from the prior year.
Investing Activities
For the nine
months ended September 30, 2011 and 2010, cash used in investing activities amounted to $19,357,000 and $25,923,000, respectively. Cash paid for acquisitions, net of cash acquired, decreased $16,060,000 for the nine months ended
September 30, 2011 due to the Cincinnati Dental platform acquisition on June 1, 2010. Capital expenditures increased $9,166,000 for the nine months ended September 30, 2011 as compared to the same period in 2010 due to an increased
number of electronic dental record implementations at various dental facilities and de novo facilities completed at Texas Tooth Doctor for Kids. Our captive insurance company, Edgewater Indemnity Company, invested $2,184,000 of its cash into
available-for-sale securities during the nine months ended September 30, 2011.
Financing Activities
For the nine months ended September 30, 2011 and 2010, cash used in financing activities amounted to $19,455,000 and $535,000, respectively. For the
nine months ended September 30, 2011, we retired $18,900,000 of debt under our senior secured credit facility as a result of increased operating cash flow and decreased acquisition activity. Net borrowings for the nine months ended
September 30, 2010 were $4,000,000 associated with the Cincinnati Dental platform acquisition less repayments from operating cash flow.
Credit Agreement
In May 2011, we
entered into an amendment to our senior secured credit facility. The $180,000,000 senior secured credit facility has a $100,000,000 revolving line of credit and an $80,000,000 term loan. The senior secured credit facility matures in May 2016 and can
be used for general corporate purposes, including working capital, acquisitions and capital expenditures. Borrowings under the senior secured credit facility bear interest at our option of the Base Rate plus a margin or the LIBOR plus a margin. The
“Base Rate” is defined as the greater of Bank of America’s prevailing prime rate, which was 3.5% as of September 30, 2011; the Federal Funds rate plus 0.50 %; or the LIBOR rate plus 1.00%. The margin is based upon our leverage
ratio and ranges from 0.50% to 2.25% for Base Rate borrowings and 1.50% to 3.25% for LIBOR borrowings. In addition, we pay a commitment fee ranging from 0.25% to 0.50% on the unused balance of the revolving line of credit based on our leverage
ratio.
29
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
We are required to make quarterly payments of principal on the term loan in an amount equal to
$2,000,000 beginning in June 2011 and ending in May 2016 and a $40,000,000 payment at maturity. The total amount of repayments in 2011 is scheduled to be $8,000,000.
Pursuant to our senior secured credit facility, the aggregate consideration paid for all acquisitions made during the same fiscal year may not exceed $50,000,000. The aggregate amount of all share
repurchases over the term of the senior secured credit facility may not exceed $50,000,000 and on an annual basis may not exceed $20,000,000. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and
amortization, or EBITDA, adjusted for certain items, and are collateralized by a first lien on substantially all of our assets, including a pledge of the stock of our subsidiaries.
We must comply with financial and other covenants under our senior secured credit facility. Our senior secured credit facility required that our net worth as of September 30, 2011 be no less than
$172,253,000, our maximum EBITDA leverage ratio be no more than 3.0 and our fixed charge minimum coverage be no less than 1.15. As of September 30, 2011, we were in compliance with these financial covenants, as per covenant calculations, our
net worth was $206,618,000, our EBITDA leverage ratio was 1.7 and our fixed charge coverage was 1.2.
The outstanding balance with respect to
the senior secured credit facility as of September 30, 2011 was $76,000,000 under the term loan and $5,350,000 under the revolving line of credit. We had stand-by letters of credit amounting to $1,512,291 at September 30, 2011, and
based on borrowing covenants, reduced by the stand-by letters of credit, approximately $65,000,000 was available for borrowing under the revolving line of credit.
Critical Accounting Policies and Estimates
The preparation of consolidated financial
statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to the carrying value of
goodwill, receivables due from the affiliated practices, other intangible assets, loss reserves for our captive insurance company and contingent accruals for litigation in accordance with authoritative guidance for accounting for contingencies. We
base our estimates on historical experience, on various other assumptions that we believe to be reasonable under the circumstances and, in certain instances, actuarial studies conducted by third parties, the results of which form the basis for
making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and the understanding of our results of operations.
Goodwill and Intangible Assets
We have
intangible assets, including goodwill and other identifiable intangible assets, which are the result of acquisitions. The initial identification and valuation of these intangible assets and the determination of useful lives at the time of
acquisition involve the use of management’s judgments and estimates. These estimates are based on, among other factors, projected future income, cash flows and, when necessary, input from accredited valuation consultants. At September 30,
2011, goodwill and intangible assets were $270,755,000 and represented 73% of our total assets, with goodwill and indefinite-lived intangible assets representing 36% of our intangible assets and definite-lived intangible assets related to service
agreements representing 64% of our intangible assets.
30
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
We recognize capitalized service agreement costs, which we account for as definite-lived intangible
assets and record at fair value. In determining the fair value of a service agreement recognized in connection with an acquisition, management estimates the timing, amount and value of future expected cash flows. With one exception, each service
agreement has an initial contractual term of 40 years, and the agreement is amortized on a straight-line basis over a period of 25 years. In the event a service agreement is terminated, the related affiliated practice is required, at our option in
most instances, to purchase the remaining unamortized balance of intangible assets at the current book value, purchase other assets at the greater of fair value or book value and assume leases and other liabilities related to the performance of our
obligations under the service agreement.
We review identified intangible assets with definite useful lives and subject to amortization for
impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires comparing the carrying amount to the sum of undiscounted cash flows
expected to be generated.
We test goodwill and indefinite-lived intangibles for impairment annually as of
October 1
st
and whenever events or circumstances make
it more likely than not that the fair value of a reporting unit has fallen below its carrying amount. Determining whether an impairment has occurred requires valuation of the respective business unit, which we estimate using a discounted cash flow
method. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans,
economic projections and market data.
We tested for impairment as of October 1, 2010. Our testing included various scenarios with
varying revenue, expense and capital investment assumptions. We determined there was no impairment of goodwill and indefinite-lived intangible assets. Our dental benefits third-party administrator subsidiary historically earned a significant
percentage of its revenue from administering capitated managed care plans. As a result of the continuing decline of capitated managed care plans in the dental profession, this subsidiary has developed additional product offerings, including dental
referral plans, to offset the decline of this part of its business. In 2010, this subsidiary experienced a reduction of revenue and incurred an operating loss as a result of the continuing decline of administrative services for capitated managed
care plans. If the additional product offerings are not successful, we may need to record an impairment charge related to the carrying value of the goodwill of this reporting unit, which is approximately $2,283,000.
While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units and other intangible assets, a
material change could possibly occur in the future. If our actual results are not consistent with the estimates and assumptions used in our impairment analysis, we may record material impairment of our goodwill or other intangible assets.
Variable Interest Entities
Accounting guidance under Accounting Standards Codification, or ASC, 810, “Consolidation,” requires us to consolidate the financial statements
of a practice that is affiliated with us by means of a service agreement with our financial results if the affiliated practice is a variable interest entity, or VIE, and we are the primary beneficiary of the VIE. Our evaluation is subjective in
nature and incorporates both qualitative and quantitative factors to determine if an affiliated practice is a VIE and if we are the primary beneficiary such that financial statement consolidation would be required. An affiliated practice would be
considered a VIE if (a) it is thinly capitalized (i.e., the equity is not sufficient to fund the affiliated practice’s activities without additional subordinated financial support) or (b) the equity holders of the affiliated practice
as a group have one of the following four characteristics: (i) lack the power to direct the activities that most significantly affect the affiliated practice’s economic performance, (ii) possess nonsubstantive voting rights,
(iii) lack the obligation to absorb the affiliated practice’s expected losses or (iv) lack the right to receive the affiliated practice’s expected residual returns. Although the characteristics of (b) do not exist, with
respect to (a) we may and do provide advances to certain affiliated practices in instances when their cash flow is not sufficient to meet their working capital obligations, which may indicate that an affiliated practice is thinly capitalized.
These circumstances led us to conduct an analysis, pursuant to ASC 810, and conclude that certain of our affiliated practices may be VIEs.
31
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
The analysis included a review of our contractual agreements with each of the affiliated practices to
ascertain whether we have the power to direct the activities of the affiliated practice that most significantly affect its economic performance and the obligation to absorb losses or the right to receive benefits of the affiliated practice. We would
be considered the primary beneficiary of a VIE, to the extent the affiliated practice is a VIE, if we meet both criteria. Based upon our assessment of the affiliated practices, we believe that operating risk (including sales volume risk, price risk
and other operating cost risk) is the risk that will have the most significant impact on an affiliated practice’s economic performance. We believe that the activities that most significantly affect an affiliated practice’s economic
performance are with respect to patient revenue; expenses, including those attributable to dentist compensation and benefits; and collection policies. Following our review of the terms of the service agreements with each of the affiliated practices,
we have determined that we do not have the power to direct the activities of the affiliated practices that most significantly affect their economic performance. We have neither an obligation to absorb the affiliated practices’ losses nor the
right to receive the affiliated practices’ benefits. Therefore, we have concluded that we are not the primary beneficiary of the VIEs, to the extent they exist, and we have not consolidated the financial statements of the practices that are
affiliated with us by means of a service agreement with our financial statements for any period presented. We consider each time that we enter into a new service agreement or enter into a material amendment to an existing service agreement whether
the terms of that agreement or amendment would change the elements we consider important to our primary beneficiary conclusion.
Valuation
of Accounts Receivable
Our accounts receivable include amounts due from the affiliated practices that have entered into service agreements
with us and accounts receivable of Arizona Tooth Doctor, our dental benefits third-party administrator subsidiary and our dental laboratory businesses. At September 30, 2011, amounts due from the affiliated practices represented 85% of our
accounts receivable.
The carrying amount of receivables due from the affiliated practices requires management to assess the collectability of
the fees we earn pursuant to the service agreements. Collection of our business service fees are dependent on the economic viability of the affiliated practices, which is based on actual and expected future financial performance, including
collectability of the affiliated practices’ patient receivables, net of contractual adjustments and allowances for doubtful accounts. The affiliated practices record revenue at established rates reduced by contractual adjustments and allowances
for doubtful accounts to arrive at patient revenue. Contractual adjustments represent the difference between gross billable charges at established usual and customary rates and the portion of those charges reimbursed pursuant to certain dental
benefit plan provider contracts. For contracts in which there is no defined benefit, contractual adjustments are based upon historical collection experience and other relevant factors. Under the terms of the service agreements, we bill patients and
third-party payors on behalf of the affiliated practices, and we also collect payments from patients and third-party payors on behalf of the affiliated practices. In connection with the billing and collection services provided by us, the affiliated
practices appoint us as their exclusive agents. Accordingly, we act as an agent on behalf of the affiliated practices for billing and collection services, but we do not assume from the affiliated practices the risk of loss of their uncollectable
accounts.
We estimate the initial provision for doubtful accounts on behalf of each of the affiliated practices, and accordingly, their
accounts receivable are recorded at their net realizable value. Our business service fee is calculated on the results of operations of the affiliated practices, and therefore our net revenue and accounts receivable are recorded at net realizable
value. Each affiliated practice’s provision for doubtful accounts is estimated in the period that services are rendered and adjusted in future periods as necessary. The estimates for allowance for doubtful accounts are based on an evaluation of
historical collection experience, the aging profile of the accounts receivable, write-off percentages and other relevant factors. Changes in these factors in future periods could result in an adjustment to the allowance for doubtful accounts. In the
event that final reimbursement or bad debt experience differs from original estimates, adjustments to the affiliated practice’s patient receivables would be required, which could affect the collectability of our receivables due from the
affiliated practice.
32
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
Except for accounts receivable due from a former affiliated practice, which we agreed to forgive
pursuant to a settlement of litigation, to date we have not recorded any losses related to our receivables due from the affiliated practices and accordingly have not recorded any allowance for doubtful accounts. We have recorded allowance for
doubtful accounts against accounts receivable of Arizona Tooth Doctor, our dental benefits third-party administrator and our dental laboratory businesses based on historical collection experience, the aging of accounts receivable, write-off
percentages and other relevant factors.
Insurance
We maintain various insurance coverages that we believe are appropriate for our business, including workers’ compensation, property, business interruption and general liability, among others. In
addition, the affiliated practices are required to maintain, or cause to be maintained, professional liability insurance with us as an additional named insured. Certain of our insurance programs are reinsured by a wholly-owned captive insurance
company licensed in the state of Vermont. Several of these insurance programs have retention levels in which we and our captive insurance company are financially obligated for insured losses below certain financial thresholds before the insurer is
financially obligated for the insured losses. We and our captive insurance company maintain reserves for certain of these programs, which are based upon estimates provided by third-party actuaries or by individual case basis valuations. Changes in
trends of loss severity or loss frequency may affect the calculation of these estimates and create the need for subsequent adjustments to estimated loss reserves.
Income Taxes
Our annual tax rate is based on our earnings before income taxes, statutory
tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant
judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties in income taxes. We review our tax positions quarterly and adjust the balances as new information becomes available.
Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to
future years to differences between the consolidated financial statement carrying amounts and the tax basis of existing assets and liabilities, as well as from net operating loss and tax credit carry forwards. We evaluate the recoverability of these
future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These
projections inherently rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight. To the extent we do not consider it more likely than not that a deferred tax asset will be
recovered, a valuation allowance is established.
We are subject to income tax obligations with respect to both the U.S. federal government
and multiple state jurisdictions. In the normal course of business, we are subject to examination by federal and state taxing authorities. The tax years 2008, 2009 and 2010 remain open to examination by both federal and state authorities.
We record interest and penalties associated with uncertain tax positions as a component of the provision for income taxes. For the nine
months ended September 30, 2011, we recognized $18,000 of interest and penalties expense in our consolidated statement of income.
Stock-Based Compensation
We account for
stock-based compensation in accordance with the fair value recognition provision of authoritative guidance for stock-based compensation. We use the Black-Scholes option-pricing model, which requires certain assumptions that include the estimated
length of time employees will retain their vested stock options before
33
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
exercising them (expected life), the estimated volatility of our common stock price over the expected life (volatility) and the number of options that will ultimately not complete their vesting
requirements (forfeitures). Changes in these assumptions and the market value of our common stock for future stock option grants can materially affect the estimate of the fair value of stock-based compensation.
Recent Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board, or FASB, issued authoritative guidance on improving disclosure about fair value measurements. The guidance improves disclosures originally required under accounting for fair value. The guidance
is effective for interim and annual periods beginning after December 15, 2009, except for the disclosure requirements about purchases, sales, issuances and settlements in the roll-forward of activity in Level 3 fair value measurements. Those
disclosure requirements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The guidance effective for interim and annual periods beginning after December 15, 2009 did not have an
impact on our consolidated financial statements. The guidance effective for fiscal years beginning after December 15, 2010 did not have an impact on our consolidated financial statements.
In March 2010, the FASB issued authoritative guidance on derivatives and hedging with a focus on embedded credit derivatives. The guidance improves
disclosures originally required under accounting for derivatives and hedging and is effective for interim and annual periods beginning after June 15, 2010. The guidance did not have an impact on our consolidated financial statements.
In December 2010, the FASB issued authoritative guidance for disclosure requirements of supplementary pro forma information for business
combinations. The amendment in this update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) occurred during the
current year and had occurred as of the beginning of the comparable prior annual reporting period only. The guidance effective for fiscal years beginning after December 15, 2010 did not have an impact on our consolidated financial statements.
In June 2011, the FASB issued authoritative guidance for presentation requirements of other comprehensive income, or OCI. The guidance
requires entities to present comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements, eliminating the option to present components of OCI as part of the statement of changes in
shareholder’s equity. In addition, the amended guidance requires entities to show the effects of items reclassified from OCI to net earnings on the face of the financial statements. The guidance is effective for interim and annual periods
beginning after December 15, 2011 and should be applied retrospectively. The guidance is not expected to have a significant impact on our consolidated financial statements.
In July 2011, the FASB issued authoritative guidance for the presentation and disclosure of patient revenue, provision for bad debts and the allowance for doubtful accounts for certain health care
entities. The objective of the guidance is to provide financial statement users greater transparency regarding net patient revenue and the related allowance for doubtful accounts. The amendments require certain health care entities that recognize
significant amounts of patient service revenue at the time of service to modify the presentation of the income statement by reclassifying the associated provision for bad debts from an operating expense to a deduction from patient service revenue,
net of contractual allowances and discounts. In addition, the amendments require enhanced disclosure of patient service revenue as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The guidance is
effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. We already record the provision for bad debts as a deduction from patient revenue for Arizona Tooth Doctor, the only affiliated
practice where we consolidate patient revenue. The guidance is not expected to have a significant impact on our disclosure requirements.
34
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(unaudited)
In September 2011, the FASB issued Accounting Standards Update No. 2011–08, Testing for
Goodwill Impairment. The intention of the revised standard is to reduce the cost and complexity of the annual goodwill impairment test by providing the option of performing a qualitative assessment to determine whether further impairment testing is
necessary. Companies can choose to perform the qualitative assessment on none, some or all of its reporting units. In addition, companies can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of
impairment testing, and then perform a qualitative assessment in any subsequent period. The standard is effective for annual and interim tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted provided
the entity has not yet issued financial statements for the period that includes its annual test date. The guidance will not impact our consolidated financial statements.
35
AMERICAN DENTAL PARTNERS, INC.
PART I. FINANCIAL INFORMATION
(unaudited)
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
In the ordinary course of business, we are exposed to interest rate risk. With regard to our senior secured credit
facility, we are also exposed to variable rate interest for the banks’ applicable margins ranging from 0.50% to 2.25% for base rate borrowings and 1.50% to 3.25% for LIBOR borrowings based upon our debt coverage ratio. For fixed-rate debt,
interest rate changes affect the fair value, but do not affect earnings or cash flow. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value, but do affect 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. In addition, we have entered into an interest rate swap arrangement to fix the interest rate on $20,000,000 of our
borrowings. The pre-tax earnings and cash flow impact for one year, based upon the amounts outstanding at September 30, 2011 under our variable-rate senior secured credit facility and term loan for each one percentage point change in interest
rates would be approximately $614,000.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that
such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Our management, with the participation of our chief executive officer and chief financial officer, evaluated
the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures,
as of the end of the period covered by this report, were effective at that reasonable assurance level.
As required by Rule 13a-15(d) under the
Exchange Act of 1934, our management, including our chief executive officer and chief financial officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
36
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
Stockholder
Litigation
On or about September 27, 2011, the parties to the opt-out complaint entitled “Special Situations Fund III, L.P. et al. v.
American Dental Partners, Inc. et al.,” civil action number 1:10-CV-10331 (D. Mass) (the “Opt-Out Action”), entered into a confidential settlement pursuant to which the plaintiffs filed a voluntary dismissal of the Opt-Out Action. The
settlement payment was funded entirely by the Company’s insurer.
On or about February 22 and 23, 2010, Special Situations Fund III
L.P., Special Situations Cayman Fund, L.P., and Special Situations Fund III Q.P., L.P. had excluded themselves from the class action settlement resolving consolidated actions entitled “In re American Dental Partners, Inc. Securities
Litigation,” civil action number 1:08-CV-10119-RGS, and filed the Opt-Out Action. The Opt-Out Action complaint (i) asserted that the plaintiffs purchased over 500,000 shares of our common stock during the period of February 25, 2004
through December 13, 2007, (ii) alleged that we and certain of our executive officers violated the federal securities laws, in particular, Section 10(b) of the Securities Exchange Act, 15 U.S.C. §§ 78, and Rule 10b-5 promulgated
thereunder, 17 C.F.R. § 240.10b-5, by making allegedly material misrepresentations and failing to disclose allegedly material facts concerning the lawsuit by Park Dental Group, or PDG, against PDHC, Ltd., entitled PDG, P.A. v. PDHC, Ltd., Civ.
A. Nos. 27-CV-06-2500 and 27-CV-07-13030, filed in the Fourth Judicial District of Hennepin County, Minnesota on February 3, 2006 and conduct at issue in that action during the period of February 25, 2004 through December 13, 2007,
which had the effect of artificially inflating the market price of our common stock, (iii) asserted control person claims under Section 20(a) of the Securities Exchange Act against the executive officers named as defendants, and (iv) claimed
that certain of the alleged misrepresentations also violated Section 18 of the Securities Exchange Act, 15 U.S.C. § 78(r). The plaintiffs’ complaint sought an unspecified amount of money damages, costs and attorneys’ fees and any
other relief the Court may have deemed proper.
Litigation with Dental Associates, P.C.
On March 17, 2011, Dental Associates, P.C., the affiliated practice at Redwood Dental Group, filed a lawsuit against us and our subsidiary, American
Dental Partners of Michigan, LLC, in the Wayne County Circuit Court in Michigan, Case No. 11-003213-CK. On April 15, 2011, we filed all necessary papers to move the lawsuit to the United States District Court for the Eastern District of
Michigan, where the action is now pending, Case No. 2:11-cv-11624-DPH-MJH.
The complaint claims, among other things, (i) that we
and our subsidiary breached fiduciary duties owed to Dental Associates; (ii) that our subsidiary breached the service agreement between it and Dental Associates; (iii) that we and our subsidiary tortiously interfered with Dental
Associates’ relationships with its employees, patients, prospective patients and the state of Michigan; and (iv) that we and our subsidiary were unjustly enriched by these alleged actions.
The complaint seeks, among other things, (i) unspecified monetary damages; (ii) attorneys’ fees and litigation costs; (iii) certain
injunctive relief, including termination of the service agreement; (iv) the establishment of a constructive trust with respect to certain Dental Associates’ funds managed by us; (v) a detailed audit and accounting with respect to
revenues generated by Dental Associates and the payment of those funds to or for the benefit of us and our subsidiary; and (vi) such other equitable or just relief as the Court finds appropriate. We are unable to provide a range of potential
damages with respect to this action.
On May 9, 2011, we and our subsidiary filed a Rule 12(b)(1) and (6) motion to dismiss the
complaint for lack of subject matter jurisdiction and failure to state a claim and to compel arbitration, or alternatively to stay litigation pending arbitration. The Court held a hearing on this motion on September 27, 2011, but has not yet
issued a ruling.
We and our subsidiary intend to defend ourselves vigorously with respect to this matter.
For the year ended December 31, 2010 and the nine months ended September 30, 2011, the net revenue we received under the service agreement with Dental
Associates represented approximately 2% of our consolidated net revenue for both periods and earnings before interest, taxes, depreciation and amortization represented approximately 3% and 2%, respectively, of our consolidated earnings before
interest, taxes, depreciation and amortization.
Litigation with OCG, Ltd.
On or about April 29, 2011, OCG, Ltd., the affiliated practice at Orthodontic Care Specialists in Minnesota, served an amended complaint against us and our subsidiary, Apple Park Associates, Inc. The
original complaint was served on us and our subsidiary on or about November 18, 2010. The complaint is captioned for the Hennepin County District Court in Minnesota. However, as of the filing date of this quarterly report, OCG has not filed the
complaint with the Court and no case number has therefore been assigned.
The amended complaint claims, among other things: (i) that we
and our subsidiary breached fiduciary duties owed to OCG; (ii) that we and our subsidiary breached an alleged contract pursuant to which OCG would remain neutral in litigation between us and PDG, P.A. and provide certain orthodontic services
for one clinic staffed by the orthodontic practice of Metro Dentalcare, in exchange for Metro Dentalcare’s orthodontic practice being merged into OCG, which merger has not occurred; (iii) promissory estoppel with respect to alleged
promises made by us and our subsidiary to OCG regarding that merger and the elimination of Metro Dentalcare’s orthodontic practice as a competitor to OCG; and (iv) unjust enrichment with respect to alleged financial benefit received by us
and our subsidiary from our relationship with Metro Dentalcare’s orthodontic practice that would have allegedly inured to the financial benefit of OCG.
37
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
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Item 1.
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Legal Proceedings
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The amended complaint
seeks, among other things, (i) monetary damages for the breach of fiduciary duty claim in excess of $50,000; (ii) monetary damages for the breach of contract, promissory estoppel and unjust enrichment claims in excess of $50,000; and
(iii) attorneys’ fees and litigation costs. The amended complaint also provides notice of OCG’s intent to seek leave to further amend its complaint at a future time to seek punitive damages. We are unable to provide a range of
potential damages with respect to this action.
We and our subsidiary served OCG with our answer to the amended complaint on August 5,
2011.
For the year ended December 31, 2010 and the nine months ended September 30, 2011, the net revenue we received under the service
agreement with OCG represented approximately 3% of our consolidated net revenue for both periods and earnings before interest, taxes, depreciation and amortization represented approximately 5% and 4%, respectively, of our consolidated earnings
before interest, taxes, depreciation and amortization.
Litigation with Elias, Elliott, Lampasi, Fehn, Harris and Nguyen, a Dental
Practice, Inc.
On August 17, 2011, Elias, Elliott, Lampasi, Fehn, Harris and Nguyen, a Dental Practice, Inc. (the “Elias
Group”), the affiliated practice at Riverside Dental, filed a complaint against us and our subsidiary, American Dental Partners of California, Inc., in the Riverside County Superior Court in California, Case No. RIC 1113589. The Elias Group
filed an amended complaint on August 25, 2011. On September 30, 2011, we filed all necessary papers to move the lawsuit to the United States District Court for the Central District of California, where the action is now pending, Case
No. 5:11-cv-01565-JST.
The amended complaint includes a single cause of action alleging that we and our subsidiary breached a fiduciary
duty owed to the Elias Group. The amended complaint seeks, among other things, (i) a determination that we and our subsidiary violated a material fiduciary duty owed to the Elias Group; (ii) monetary damages in an amount in excess of
$50,000; (iii) upon determination of a breach of fiduciary duty, an order declaring the Elias Group’s right to terminate its service agreement with our subsidiary; and (iv) punitive or exemplary damages. We are unable to provide a
range of potential damages with respect to this action.
On October 14, 2011, we filed an amended Rule 12(b)(1) and (6) motion to
dismiss and to compel arbitration, or alternatively to stay litigation pending arbitration. On October 28, 2011, the Elias Group filed a motion to remand the matter to the Riverside County Superior Court. The Court has scheduled a hearing on
both motions for November 28, 2011.
We and our subsidiary intend to defend ourselves vigorously with respect to this matter.
For the year ended December 31, 2010 and the nine months ended September 30, 2011, the net revenue we received under the service agreement with
the Elias Group represented approximately 5% of our consolidated net revenue for both periods and approximately 2% of our consolidated earnings before interest, taxes, depreciation and amortization for both periods.
38
AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION (continued)
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in Part I - Item 1A
under the heading “Risk Factors” in our Annual Report on Form 10-K for the period ended December 31, 2010 in addition to the other information included or incorporated by reference in this quarterly report before making an investment
decision regarding our common stock. If any of these risks actually occurs, our business, financial condition or operating results would likely suffer, possibly materially, the trading price of our common stock could decline and you could lose part
or all of your investment.
The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 contains a detailed
discussion of certain risk factors that could materially adversely affect our business, our operating results, or our financial condition. The following risk factors related to the proposed Merger supplement, and should be read in conjunction with,
that discussion.
There are risks and uncertainties associated with our proposed merger with an affiliate of JLL Partners
On November 4, 2011, we entered into the Merger Agreement providing for the acquisition of American Dental Partners, Inc. by
Parent, an entity formed by affiliates of JLL Partners, Inc. Pursuant to the Merger Agreement, Merger Sub will merge with and into American Dental Partners, Inc., with American Dental Partners, Inc. surviving the merger as a wholly-owned subsidiary
of Parent. There are a number of risks and uncertainties relating to the Merger. For example, the Merger may not be consummated or may not be consummated in the timeframe or manner currently anticipated, as a result of several factors, including,
among other things, the failure of one or more of the Merger Agreement’s closing conditions, Parent’s failure to obtain sufficient financing to complete the Merger, or litigation relating to the Merger. In addition, there can be no
assurance that approval of our stockholders or relevant regulators will be obtained, that the other conditions to closing of the Merger will be satisfied or waived or that other events will not intervene to delay or result in the termination of the
Merger. If the Merger is not completed, the price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the Merger will be consummated. Pending the closing of the Merger, the
Merger Agreement also restricts us from engaging in certain actions without Parent’s consent, which could prevent us from pursuing opportunities that may arise prior to the closing of the Merger. Any delay in closing or a failure to close could
have a negative impact on our business and stock price as well as our relationships with our affiliates, vendors or employees, as well as a negative impact on our ability to pursue alternative strategic transactions and/or our ability to implement
alternative business plans. In addition, if the Merger Agreement is terminated under certain circumstances, we are required to pay a termination fee of up to $13.9 million.
Our business could be adversely impacted as a result of uncertainty related to the Merger.
The proposed Merger could cause disruptions to our business or business relationships, which could have an adverse impact on our financial condition, results of operations and cash flows. For example:
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•
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the attention of our management may be directed to transaction-related considerations (including the solicitation of alternative acquisition proposals
as permitted under the “go-shop” clause of the Merger Agreement) and may be diverted from the day-to-day operations of our business;
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•
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our employees may experience uncertainty about their future roles with us, which might adversely affect our ability to retain and hire key personnel
and other employees; and
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•
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affiliates or other parties with which we maintain business relationships may experience uncertainty about our future and seek alternative
relationships with third parties or seek to alter their business relationships with us.
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In addition, we have incurred, and
will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and many of these fees and costs are payable by us regardless of whether or not the Merger is
consummated.
Item 6. Exhibits
The list of exhibits, which are filed or furnished with this report or which are incorporated herein by reference, is set forth in the Exhibit Index immediately preceding the exhibits and is
incorporated herein by reference.
39
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.
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AMERICAN DENTAL PARTNERS, INC.
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November 9, 2011
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/s/ Gregory A. Serrao
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Gregory A. Serrao
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Chairman, President, and Chief Executive Officer
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(principal executive officer)
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November 9, 2011
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/s/ Breht T. Feigh
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Breht T. Feigh
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Executive Vice President,
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Chief Financial Officer and Treasurer
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(principal financial officer)
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November 9, 2011
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/s/ Mark W. Vargo
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Mark W. Vargo
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Vice President,
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Chief Accounting Officer
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(principal accounting officer)
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40
AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
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Incorporated by Reference
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Exhibit
No.
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Description
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Filed
with
this
Form
10-Q
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Form or
Schedule
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SEC Filing Date
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SEC File
Number
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10.1
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ForwardDental Agreement
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8-K
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November 4, 2011
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000-23363
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10.2*
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Serrao Amended Employment Agreement
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8-K
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November 4, 2011
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000-23363
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10.3
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Merger Agreement
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8-K
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November 7, 2011
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000-23363
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
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X
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
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X
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32
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
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X
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101
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The following items from the Company’s Form 10Q for the quarterly period ended June 30, 2011 formatted in Extensible Business Reporting Language (XBRL): (i) the unaudited
Consolidated Statements of Income, (ii) the unaudited Consolidated Balance Sheets, (iii) the unaudited Consolidated Statement of Shareholder’s Equity, (iv) the unaudited Consolidated Statements of Cash Flows, and (v) the unaudited Notes to the
Consolidated Financial Statements
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X
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*
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Management contract or compensatory plan
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41
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