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Table of Contents
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, 2010
Commission File Number: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 04-3297858 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
American Dental Partners, Inc.
401 Edgewater Place, Suite 430
Wakefield, Massachusetts 01880
(Address of Principal Executive Offices, Including Zip Code)
(781) 224-0880
(Registrants 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). ¨ 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)
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
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 registrants common stock outstanding as of November 3, 2010 was 15,409,079.
Table of Contents
AMERICAN DENTAL PARTNERS, INC.
INDEX
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. 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, 2009, 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.
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AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
September 30, 2010 |
December 31, 2009 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 7,667 | $ | 6,807 | ||||
Accounts receivable, net |
19,635 | 20,811 | ||||||
Inventories |
2,840 | 2,539 | ||||||
Prepaid expenses and other current assets |
10,044 | 9,559 | ||||||
Prepaid/refundable income taxes |
292 | | ||||||
Deferred income taxes |
4,032 | 3,431 | ||||||
Total current assets |
44,510 | 43,147 | ||||||
Property and equipment, net |
52,301 | 53,766 | ||||||
Non-current assets: |
||||||||
Goodwill |
90,750 | 86,852 | ||||||
Service agreements and other intangible assets, net |
187,800 | 180,573 | ||||||
Deferred income taxes |
3,167 | 3,761 | ||||||
Other |
5,923 | 5,912 | ||||||
Total non-current assets |
287,640 | 277,098 | ||||||
Total assets |
$ | 384,451 | $ | 374,011 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 15,963 | $ | 15,977 | ||||
Accrued compensation and benefits |
10,709 | 10,883 | ||||||
Accrued expenses |
12,216 | 11,234 | ||||||
Income tax payable |
| 927 | ||||||
Deferred income taxes |
325 | 244 | ||||||
Current maturities of debt |
8,156 | 8,685 | ||||||
Total current liabilities |
47,369 | 47,950 | ||||||
Non-current liabilities: |
||||||||
Long-term debt |
97,888 | 93,506 | ||||||
Deferred income taxes |
39,240 | 39,573 | ||||||
Other liabilities |
5,347 | 5,666 | ||||||
Total non-current liabilities |
142,475 | 138,745 | ||||||
Total liabilities |
189,844 | 186,695 | ||||||
Noncontrolling interest |
508 | 1,857 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, par value $0.01 per share, 1,000,000 shares authorized, no shares issued or outstanding |
| | ||||||
Common stock, par value $0.01 per share, 25,000,000 shares authorized, 16,350,432 and 16,272,786 shares issued; 15,546,043 and 15,690,286 shares outstanding at September 30, 2010 and December 31, 2009, respectively |
163 | 162 | ||||||
Additional paid-in capital |
104,994 | 103,151 | ||||||
Treasury stock, at cost, 804,389 and 582,500 shares at September 30, 2010 and December 31, 2009, respectively |
(6,342 | ) | (3,874 | ) | ||||
Accumulated comprehensive income |
(1,409 | ) | (1,641 | ) | ||||
Retained earnings |
96,693 | 87,661 | ||||||
Total stockholders equity |
194,099 | 185,459 | ||||||
Total liabilities and stockholders equity |
$ | 384,451 | $ | 374,011 | ||||
See accompanying notes to interim consolidated financial statements.
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AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenue |
$ | 71,116 | $ | 67,986 | $ | 215,336 | $ | 207,749 | ||||||||
Operating expenses: |
||||||||||||||||
Salaries and benefits |
29,242 | 29,384 | 87,579 | 89,361 | ||||||||||||
Lab fees and dental supplies |
10,759 | 9,527 | 32,495 | 30,141 | ||||||||||||
Office occupancy |
9,611 | 8,647 | 27,867 | 25,688 | ||||||||||||
Other operating expense |
6,932 | 6,232 | 20,357 | 18,005 | ||||||||||||
General corporate expense |
3,054 | 3,546 | 10,370 | 10,238 | ||||||||||||
Depreciation |
2,903 | 2,688 | 8,610 | 8,103 | ||||||||||||
Amortization of intangible assets |
2,542 | 2,289 | 7,412 | 7,138 | ||||||||||||
Total operating expenses |
65,043 | 62,313 | 194,690 | 188,674 | ||||||||||||
Earnings from operations |
6,073 | 5,673 | 20,646 | 19,075 | ||||||||||||
Interest expense |
1,710 | 2,927 | 7,088 | 8,484 | ||||||||||||
Earnings before income taxes |
4,363 | 2,746 | 13,558 | 10,591 | ||||||||||||
Income taxes |
1,605 | 1,091 | 5,237 | 4,203 | ||||||||||||
Consolidated net earnings |
2,758 | 1,655 | 8,321 | 6,388 | ||||||||||||
Noncontrolling interest |
43 | 223 | 149 | 524 | ||||||||||||
Net earnings |
$ | 2,715 | $ | 1,432 | $ | 8,172 | $ | 5,864 | ||||||||
Net earnings per common share: |
||||||||||||||||
Basic |
$ | 0.17 | $ | 0.10 | $ | 0.52 | $ | 0.44 | ||||||||
Diluted |
$ | 0.17 | $ | 0.10 | $ | 0.51 | $ | 0.43 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
15,695 | 14,186 | 15,712 | 13,361 | ||||||||||||
Diluted |
15,991 | 14,521 | 16,032 | 13,666 | ||||||||||||
See accompanying notes to interim consolidated financial statements.
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AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND
NONCONTROLLING INTEREST
(in thousands)
(unaudited)
Stockholders Equity | ||||||||||||||||||||||||||||||||||||
Number of Shares | ||||||||||||||||||||||||||||||||||||
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, 2008 |
13,484 | (582 | ) | $ | 135 | $ | 71,096 | $ | 81,200 | $ | (3,874 | ) | $ | (2,059 | ) | $ | 146,498 | $ | 584 | |||||||||||||||||
Issuance of common stock for employee stock purchase plan including tax benefit of $0 |
75 | | 1 | 444 | | | | 445 | | |||||||||||||||||||||||||||
Issuance of common stock for exercised stock options, including tax benefit of $52 |
103 | | | 693 | | | | 693 | | |||||||||||||||||||||||||||
Issuance of common stock for equity offering |
2,599 | | 26 | 29,201 | | | | 29,227 | | |||||||||||||||||||||||||||
Stock-based compensation expense |
| | | 1,167 | | | | 1,167 | | |||||||||||||||||||||||||||
Accumulated other comprehensive income |
| | | | | | 266 | 266 | | |||||||||||||||||||||||||||
Cumulative fair value adjustment of noncontrolling interest |
| | | | (764 | ) | | | (764 | ) | 764 | |||||||||||||||||||||||||
Noncontrolling interest distributions |
| | | 14 | | | | 14 | (584 | ) | ||||||||||||||||||||||||||
Net earnings |
| | | | 5,864 | | | 5,864 | 524 | |||||||||||||||||||||||||||
Balance at September 30, 2009 |
16,261 | (582 | ) | $ | 162 | $ | 102,615 | $ | 86,300 | $ | (3,874 | ) | $ | (1,793 | ) | $ | 183,410 | $ | 1,288 | |||||||||||||||||
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 interest |
| | | | 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 | |||||||||||||||||
See accompanying notes to interim consolidated financial statements.
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AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Consolidated net earnings |
$ | 8,321 | $ | 6,388 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Depreciation |
8,610 | 8,103 | ||||||
Stock-based compensation |
1,273 | 1,167 | ||||||
Amortization of intangible assets |
7,412 | 7,138 | ||||||
Other amortization |
1,933 | 1,184 | ||||||
Deferred income tax benefit |
(339 | ) | 1,455 | |||||
Loss on disposal of property and equipment |
37 | 10 | ||||||
Changes in assets and liabilities, net of acquisitions, affiliations and assets transferred: |
||||||||
Accounts receivable, net |
1,513 | 5,475 | ||||||
Other current assets |
(323 | ) | 205 | |||||
Accounts payable and accrued expenses |
625 | (2,145 | ) | |||||
Accrued compensation and benefits |
(383 | ) | 2,187 | |||||
Income taxes payable/refundable, net |
(1,219 | ) | 765 | |||||
Other, net |
(142 | ) | 707 | |||||
Net cash provided by operating activities |
27,318 | 32,639 | ||||||
Cash flows from investing activities: |
||||||||
Cash paid for acquisition and affiliation transactions |
(18,773 | ) | (125 | ) | ||||
Capital expenditures, net |
(5,350 | ) | (4,455 | ) | ||||
Payment of affiliation costs |
| (69 | ) | |||||
Contingent and deferred payments |
(1,800 | ) | (300 | ) | ||||
Net cash used in investing activities |
(25,923 | ) | (4,949 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
1 | 29,228 | ||||||
Proceeds from credit facilities |
212,350 | 86,956 | ||||||
Repayments under revolving and term credit facilities |
(208,350 | ) | (138,056 | ) | ||||
Repayments of debt |
(147 | ) | (160 | ) | ||||
Noncontrolling interest distribution |
(593 | ) | (570 | ) | ||||
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 |
448 | 444 | ||||||
Proceeds from issuance of common stock for exercise of stock options |
164 | 641 | ||||||
Tax benefit on exercise of stock options |
1 | 52 | ||||||
Payment of debt issuance costs |
(1,930 | ) | (5,771 | ) | ||||
Net cash used in financing activities |
(535 | ) | (27,236 | ) | ||||
Increase in cash and cash equivalents |
860 | 454 | ||||||
Cash and cash equivalents at beginning of period |
6,807 | 6,626 | ||||||
Cash and cash equivalents at end of period |
$ | 7,667 | $ | 7,080 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the period for interest |
$ | 5,307 | $ | 7,063 | ||||
Cash paid during the period for income taxes, net |
$ | 7,319 | $ | 2,522 | ||||
Non-cash investing activities: |
||||||||
Capital expenditures and intangibles accrued for, not paid |
$ | 427 | $ | 83 | ||||
See accompanying notes to interim consolidated financial statements.
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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, dental facilities and support staff 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 professional corporations, professional associations or service corporations that 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 and payor relations; 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 and its Arizonas Tooth Doctor for Kids (Arizona Tooth Doctor) subsidiary. Effective April 1, 2010, the Company acquired additional interest in Arizona Tooth Doctor, which is now 94% owned by the Company. Pursuant to agreements with noncontrolling interest holders of Arizona Tooth Doctor, effective September 1, 2010, selected holders elected to purchase 2.5% of the Companys management subsidiary affiliated with Care for Kids of Texas, PLLC, the affiliated practice at Texas Tooth Doctor for Kids (Texas Tooth Doctor). 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 a long-term service agreement with its own.
The accompanying interim consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. 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 herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
(3) 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 Companys 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 Companys affiliation and acquisition transactions 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 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.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) Reclassifications
Other operating expenses of $639,000 for the three months ended September 30, 2009 have been reclassified to salaries and benefits to conform to the three months ended September 30, 2010 presentation. Other operating expenses of $1,867,000 for the nine months ended September 30, 2009 have been reclassified to salaries and benefits to conform to the nine months ended September 30, 2010 presentation.
(5) Recent Affiliations
During the third quarter of 2010, the Company completed in-market practice acquisitions with two dental practices that joined Wisconsin Dental Group, S.C. and Western New York Dental Group, P.C. and became subject to existing service agreements. Cash paid, net of cash acquired, in connection with these transactions amounted to $800,000. In connection with these transactions, the Company recorded approximately $765,000 in intangibles relating to the service agreements with the affiliated practices, with an amortization period of 25 years. The terms of the affiliations do not provide for contingent payments.
On June 1, 2010, the Company completed an acquisition of the non-clinical assets of Cincinnati Dental Services (CDS) and Dentco, Inc. (together with CDS, Cincinnati Dental) to establish a presence in Ohio and Kentucky. In connection with the acquisition, the Company entered into a 40-year service agreement with Pinnacle One Dental Group, Inc., the affiliated practice at Cincinnati Dental. The acquisition was funded with borrowings. The acquired business contributed revenue of $2,362,000 and earnings from operations of $383,000 to the Company for the three months ended September 30, 2010. The acquired business contributed revenue of $3,268,000 and earnings from operations of $688,000 to the Company during the period June 1, 2010 to September 30, 2010.
For the three months ended September 30, 2010, the Company incurred $51,000 of acquisition costs related to Cincinnati Dental attributable to legal and consulting services. For the nine months ended September 30, 2010, the Company incurred $338,000 of acquisition costs related to Cincinnati Dental attributable to legal and consulting services. These expenses are included in general corporate expense in the Companys consolidated statement of income.
The Company accounted for the acquisition of Cincinnati Dental as a business combination using the acquisition method. The following table summarizes the consideration paid to acquire the non-clinical assets of Cincinnati Dental, the amounts of identified assets acquired and the liabilities assumed at the acquisition date:
Amount | ||||
Current assets |
$ | 792,000 | ||
Non-current assets |
8,000 | |||
Property and equipment |
1,788,000 | |||
Service agreement |
10,900,000 | |||
Trade name |
1,200,000 | |||
Goodwill |
3,898,000 | |||
Total assets acquired |
18,586,000 | |||
Accrued expenses and other current liabilities |
(541,000 | ) | ||
Other long-term liabilities |
(47,000 | ) | ||
Total liabilities assumed |
(588,000 | ) | ||
Purchase price allocation, net of cash acquired |
$ | (17,998,000 | ) | |
In connection with the Cincinnati Dental acquisition, the Company recorded $10,900,000 of a tax-deductible intangible asset related to the service agreement with the affiliated practice and $1,200,000 of an intangible asset classified as an indefinite-lived trade name intangible. The intangible asset related to the service agreement is amortized over 25 years. In addition, the Company recorded tax deductible goodwill of $3,898,000. The Company believes the resulting amount of goodwill reflects the synergistic benefits expected to result from the application of the Companys experience and resources to the operations at Cincinnati Dental, which the Company believes will lead to enhanced growth and operating margins.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following unaudited pro forma summary presents consolidated information of the Company as if the business combination with Cincinnati Dental had occurred on January 1, 2009:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenue |
$ | 71,116 | $ | 71,635 | $ | 221,157 | $ | 218,515 | ||||||||
Net income |
2,747 | 1,739 | 8,658 | 6,825 | ||||||||||||
Earnings per share-basic |
0.18 | 0.12 | 0.55 | 0.51 | ||||||||||||
Earnings per share-diluted |
0.17 | 0.12 | 0.54 | 0.50 |
These amounts have been calculated after applying the Companys accounting policies and adjusting the results of Cincinnati Dental to reflect the additional interest, depreciation and amortization that would have been charged assuming interest had been applied on the borrowed portion of the purchase price from January 1, 2009 and fair value adjustments to property, plant and equipment, and intangible assets had been applied from January 1, 2009, together with the consequential tax effects. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative either of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the respective periods or of future results.
(6) Intangible Assets and Goodwill
Intangible assets consisted of the following as of September 30, 2010 and December 31, 2009 (in thousands):
Service Agreements |
Customer Relationships |
Covenants not to Compete |
Trade Names | Total | ||||||||||||||||
As of September 30, 2010: |
||||||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Gross carrying amount |
$ | 249,448 | $ | 605 | $ | 220 | $ | | $ | 250,273 | ||||||||||
Accumulated amortization |
(68,182 | ) | (513 | ) | (37 | ) | | (68,732 | ) | |||||||||||
Intangible assets not subject to amortization: |
||||||||||||||||||||
Carrying amount |
| | | 6,259 | 6,259 | |||||||||||||||
Total identifiable intangible assets |
$ | 181,266 | $ | 92 | $ | 183 | $ | 6,259 | $ | 187,800 | ||||||||||
As of December 31, 2009: |
||||||||||||||||||||
Intangible assets subject to amortization: |
||||||||||||||||||||
Gross carrying amount |
$ | 236,009 | $ | 605 | $ | 220 | $ | | $ | 236,834 | ||||||||||
Accumulated amortization |
(60,819 | ) | (497 | ) | (4 | ) | | (61,320 | ) | |||||||||||
Intangible assets not subject to amortization: |
||||||||||||||||||||
Carrying amount |
| | | 5,059 | 5,059 | |||||||||||||||
Total identifiable intangible assets |
$ | 175,190 | $ | 108 | $ | 216 | $ | 5,059 | $ | 180,573 | ||||||||||
Intangible asset amortization expense for the three and nine months ended September 30, 2010 was $2,542,000 and $7,412,000, respectively. Intangible asset amortization expense for the three and nine months ended September 30, 2009 was $2,289,000 and $7,138,000, respectively. Annual amortization expense for each of the next five fiscal years will be approximately $10,098,000. The amortization period for service agreements is 25 years. On March 31, 2010, Reston Dental Group, P.C., the affiliated practice at Dental Arts Center, merged with Greater Maryland Dental Partners, P.A., the affiliated practice at Greater Maryland Dental Partners, the former became subject to the service agreement between Greater Maryland Dental Partners, P.A. and the Company. In addition, the Company recorded a $1,800,000 adjustment to service agreements related to a contingent payment obligation.
The weighted average amortization period for customer relationships is seven 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 19 years.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The change in the carrying amount of goodwill during the first nine months of 2010 was as follows (in thousands):
2010 | ||||
Balance as of January 1 |
$ | 86,852 | ||
Goodwill acquired |
3,898 | |||
Balance as of September 30 |
$ | 90,750 | ||
(7) Stock-based Compensation
Options granted under the Companys Amended 2005 Equity Incentive Plan, as amended, have a ten-year term and a vesting period of four years. Options granted under the Companys Amended 2005 Directors Stock Option Plan, as amended, have a ten-year term and a vesting period of three years. At September 30, 2010, options for 1,589,324 shares were vested under all of the Companys equity incentive plans and 405,025 shares were available for future grants under the Amended 2005 Equity Incentive Plan and the Amended 2005 Directors Stock Option Plan. No shares are available for issuance under any of the Companys other equity incentive plans. The Company issues new shares upon stock option exercises. No restricted shares have been awarded. The Company grants employee stock purchase rights under its 1997 Employee Stock Purchase Plan, as amended (ESPP). A total of 574,486 shares have been purchased under the ESPP since inception of the plan and 225,514 shares were available for purchase as of September 30, 2010. The Company issues new shares for ESPP purchases.
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 $450,000 and $403,000 during the three months ended September 30, 2010 and 2009, respectively. The Company recognized stock-based compensation expense under its Amended 2005 Equity Incentive Plan, Amended 2005 Directors Stock Option Plan and ESPP of $1,273,000 and $1,167,000 during the nine months ended September 30, 2010 and 2009, respectively. This expense was recorded within general corporate expense on the Companys consolidated statement of income and no amounts were capitalized. In addition, the Company recorded a deferred tax benefit associated with stock-based compensation for option grants of $164,000 and $151,000 during the three months ended September 30, 2010 and 2009, respectively. The Company recorded a deferred tax benefit associated with stock-based compensation of $391,000 and $428,000 during the nine months ended September 30, 2010 and 2009, respectively. The remaining unrecognized stock-based compensation expense for unvested stock option awards at September 30, 2010 was approximately $3,072,000, and the weighted average period of time over which this cost will be recognized is 1.6 years. The fair value for these options and employee stock purchase rights 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 2010 and 2009:
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Stock Options |
ESPP | Stock Options |
ESPP | |||||||||||||
Risk-free interest rate |
2.75 | % | 2.55 | % | 2.09 | % | 2.87 | % | ||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Expected volatility |
52.35 | % | 37.94 | % | 58.06 | % | 50.12 | % | ||||||||
Expected life (years) |
6.0 years | 0.5 years | 6.0 years | 0.5 years | ||||||||||||
Expected forfeiture |
3 | % | 0 | % | 4 | % | 0 | % | ||||||||
Weighted average fair value of options / purchase rights granted during the quarter |
$ | 6.88 | $ | 1.40 | $ | 3.81 | $ | 1.33 |
The Company calculated the volatility assumption using a blend of a historical volatility rate for a period equal to the expected term and an expected volatility rate based on more recent activity. 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 Companys ESPP purchase rights reflects the length of each plan period (six months) at the end of which shares are purchased. The Company estimates forfeitures based on historical experience.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes stock option transactions during the first nine months of 2010:
Shares (in thousands) |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value (in thousands) |
|||||||||||||
Outstanding at December 31, 2009 |
1,989 | $ | 10.25 | | | |||||||||||
Granted |
365 | 13.17 | | | ||||||||||||
Exercised |
(27 | ) | 6.11 | | | |||||||||||
Forfeited or expired |
(40 | ) | 19.18 | | | |||||||||||
Outstanding at September 30, 2010 |
2,287 | $ | 10.61 | 5.51 | $ | 6,827 | ||||||||||
Vested and unvested expected to vest at September 30, 2010 |
2,246 | $ | 10.60 | 5.45 | $ | 6,756 | ||||||||||
Exercisable at September 30, 2010 |
1,589 | $ | 10.30 | 4.09 | $ | 5,452 | ||||||||||
Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the first nine months of 2010 and 2009 are provided in the following table (in thousands):
2010 | 2009 | |||||||
Proceeds from stock options exercised |
$ | 164 | $ | 641 | ||||
Tax benefit related to stock options exercised |
$ | 1 | $ | 52 | ||||
Intrinsic value of stock options exercised |
$ | 148 | $ | 516 |
(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 Companys captive insurance subsidiary, its dental laboratories and its dental benefits third-party administrator. The following table lists receivables due from the affiliated practices and other receivables as of September 30, 2010 and December 31, 2009 (in thousands):
September 30, 2010 |
December 31, 2009 |
|||||||
Receivables due from affiliated practices |
$ | 16,477 | $ | 17,410 | ||||
Other receivables, net |
3,158 | 3,401 | ||||||
Accounts receivable, net |
$ | 19,635 | $ | 20,811 | ||||
Receivables due from Northland Dental Partners, PLLC, the affiliated practice at Metro Dentalcare, represented approximately 17% and 20% of the Companys consolidated accounts receivables, net, for the first nine months of 2010 and the full year of 2009, respectively. Receivables due from Wisconsin Dental Group, S.C., the affiliated practice at ForwardDental, represented approximately 18% and 17% of the Companys consolidated accounts receivables, net, for the first nine months of 2010 and the full year of 2009, respectively. Accounts receivables of Arizona Tooth Doctor included in other receivables, net, represented approximately 12% of the Companys consolidated accounts receivables, net, for the first nine months of 2010 and the full year of 2009. No other receivables exceeded 10% of the Companys consolidated accounts receivables, net, in the first nine months of 2010 or 2009.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Net Revenue
The Companys 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 clinic 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 Companys dental benefits third-party administrator, fees earned by the Companys dental laboratories and other miscellaneous revenue.
The Companys 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, 2010 and 2009 (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Reimbursement of expenses: |
||||||||||||||||
Salaries and benefits |
$ | 21,010 | $ | 20,874 | $ | 62,256 | $ | 63,554 | ||||||||
Lab fees and dental supplies |
11,618 | 10,316 | 35,348 | 32,786 | ||||||||||||
Office occupancy expenses |
8,556 | 7,664 | 24,845 | 22,818 | ||||||||||||
Other operating expenses |
5,980 | 5,106 | 17,525 | 15,432 | ||||||||||||
Depreciation expense |
2,535 | 2,289 | 7,432 | 6,890 | ||||||||||||
Total reimbursement of expenses |
49,699 | 46,249 | 147,406 | 141,480 | ||||||||||||
Business service fees |
15,259 | 14,403 | 49,187 | 45,141 | ||||||||||||
Revenue earned under service agreements |
64,958 | 60,652 | 196,593 | 186,621 | ||||||||||||
Patient revenue, professional services, dental laboratory fees and other miscellaneous revenue |
6,158 | 7,334 | 18,743 | 21,128 | ||||||||||||
Net revenue |
$ | 71,116 | $ | 67,986 | $ | 215,336 | $ | 207,749 | ||||||||
Net revenue derived from the Companys service agreement with Northland Dental Partners, PLLC, the affiliated practice at Metro Dentalcare, represented approximately 21% and 22% of the Companys consolidated net revenue for the three and nine months ended September 30, 2010 and represented approximately 22% of consolidated net revenue for the three and nine months ended September 30, 2009. Net revenue from the Companys service agreement with Wisconsin Dental Group, S.C., the affiliated practice at ForwardDental, represented approximately 12% of the Companys consolidated net revenue for the three and nine months ended September 30, 2010 and represented approximately 14% of consolidated net revenue for the three and nine months ended September 30, 2009. No other service agreement or customer accounted for greater than 10% of the Companys consolidated net revenue for the three and nine months ended September 30, 2010 and 2009.
(9) Debt
In May 2010, the Company entered into an $180,000,000 senior secured credit facility, comprising a $100,000,000 revolving line of credit and an $80,000,000 term loan. Borrowings under the new senior secured credit facility were used to refinance the Companys existing $130,000,000 senior secured credit facility. The new senior secured credit facility matures in May 2014 and can be used for general corporate purposes, including working capital, acquisitions and affiliations and capital expenditures. Borrowings under the senior secured credit facility bear interest at the Companys option of the Base Rate plus a margin or LIBOR plus a margin. The Base Rate is defined as the greater of Bank of Americas prevailing prime rate, the Federal Funds rate plus 0.50% or the LIBOR rate plus 1.00%. The margin is based upon the Companys leverage ratio and ranges from 1.00% to 2.75% for Base Rate borrowings and 2.00% to 3.75% for LIBOR borrowings. In addition, the Company pays a commitment fee ranging from 0.375% to 0.500% on the unused balance of the revolving line of credit based on its leverage ratio.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 the Companys assets, including a pledge of the stock of the Companys subsidiaries.
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 2010 and ending in March 2014 and a $48,000,000 payment at maturity. The total amount of repayments expected in 2010 is $8,000,000, which includes a $2,000,000 repayment under our prior credit facility term loan.
The Company must comply with financial and other covenants, including minimum net worth, leverage and fixed charge coverage ratios as defined by the senior secured credit facility. Pursuant to provisions of the senior secured credit facility, the Company is permitted to borrow up to $50,000,000 annually for acquisitions, excluding the consideration paid in connection with the Cincinnati Dental acquisition in June 2010. The Company was in compliance with its covenants as of September 30, 2010.
The outstanding balance with respect to the senior secured credit facility as of September 30, 2010 was $76,000,000 under the term loan and $29,850,000 under the revolving line of credit. The Company had stand-by letters of credit amounting to $1,912,000 at September 30, 2010, and based on borrowing covenants, reduced by the stand-by letters of credit, approximately $48,649,000 was available for borrowing under the revolving line of credit.
(10) Shareholder Litigation
On or about April 9, 2010, the United States District Court for the District of Massachusetts approved a Class Action Settlement Agreement, dated December 15, 2009, resolving allegations made against the Company and certain of the Companys executive officers pursuant to the shareholder class action lawsuit. Pursuant to the terms of the Class Action Settlement Agreement, the insurance company that issued the Companys Directors, Officers and Corporate Liability Insurance Policy has paid $6,000,000 into a settlement fund that will be distributed in accordance with the Courts order, dated April 9, 2010. As a result of the settlement, the Company has recorded $6,000,000 in accrued expenses to reflect the settlement and $6,000,000 in prepaid expenses and other current assets to reflect the receipt of insurance proceeds. As of September 30, 2010, no claim reimbursements had been distributed from the settlement fund.
(11) Stockholders Equity
On June 11, 2010, the Board of Directors authorized the Company to repurchase up to $10,000,000 of its common stock in the open market, in block trades, through privately negotiated transactions or otherwise. The repurchase program has no expiration date. The Company repurchased 221,889 shares of its common stock at a cost of $2,468,000 for the three months ended September 30, 2010 under the existing share repurchase program. The repurchased shares of common stock were classified as treasury stock. As of September 30, 2010, the Company had 14,823 treasury shares purchased but not settled, at a total cost of $176,000.
(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.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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, 2010 and 2009 (in thousands, except per share amounts):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic Earnings Per Share: |
||||||||||||||||
Net earnings available to common stockholders |
$ | 2,715 | $ | 1,432 | $ | 8,172 | $ | 5,864 | ||||||||
Weighted average common shares outstanding |
15,695 | 14,186 | 15,712 | 13,361 | ||||||||||||
Net earnings per share |
$ | 0.17 | $ | 0.10 | $ | 0.52 | $ | 0.44 | ||||||||
Diluted Earnings Per Share: |
||||||||||||||||
Net earnings available to common stockholders |
$ | 2,715 | $ | 1,432 | $ | 8,172 | $ | 5,864 | ||||||||
Weighted average common shares outstanding |
15,695 | 14,186 | 15,712 | 13,361 | ||||||||||||
Add: Dilutive effect of options (a) |
296 | 335 | 320 | 305 | ||||||||||||
Weighted average common shares as adjusted |
15,991 | 14,521 | 16,032 | 13,666 | ||||||||||||
Net earnings per share |
$ | 0.17 | $ | 0.10 | $ | 0.51 | $ | 0.43 | ||||||||
(a) | 578,764 and 237,361 options were excluded from the computation of diluted net earnings per share for the three months ended September 30, 2010 and 2009, respectively, due to their antidilutive effect. 502,018 and 625,918 options were excluded from the computation of diluted net earnings per share for the nine months ended September 30, 2010 and 2009, 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 $3,001,000, which include approximately $375,000 in capitalized interest, in connection with this system as of September 30, 2010. These costs will be depreciated over ten years. The Company began to depreciate costs associated with the first development phase in October 2005 and the second development phase in April 2009. Depreciation expense for the three and nine months ended September 30, 2010 was $28,000 and $83,000, respectively. Depreciation expense for the three and nine months ended September 30, 2009 was $28,000 and $78,000, respectively. Accumulated depreciation as of September 30, 2010 was $481,000.
(14) Fair Value Measurement
Authoritative guidance establishes a framework for measuring fair value and the related disclosure requirements. Fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Based upon the authoritative guidance for fair value measurement and disclosures, accounting for leases and leasing transactions are excluded. The Company adopted the authoritative guidance as of January 1, 2008, with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities, which the Company adopted as of January 1, 2009. This statement did not have a material impact on the Companys consolidated financial statements.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company uses the market approach technique to value its financial instruments. There were no changes in valuation techniques during 2010. The Companys financial assets and liabilities are primarily composed of cash equivalents and an interest rate swap.
The current 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. 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 liabilitys 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, 2010 and December 31, 2009:
September 30, 2010 |
||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Interest rate swap |
$ | | $ | (1,409 | ) | $ | | $ | (1,409 | ) | ||||||
Cash equivalents |
4,402 | | | 4,402 | ||||||||||||
Total |
$ | 4,402 | $ | (1,409 | ) | $ | | $ | 2,993 | |||||||
December 31, 2009 |
||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Interest rate swap |
$ | | $ | (1,641 | ) | $ | | $ | (1,641 | ) | ||||||
Cash equivalents |
4,665 | | | 4,665 | ||||||||||||
Total |
$ | 4,665 | $ | (1,641 | ) | $ | | $ | 3,024 | |||||||
As of September 30, 2010, there has been no change in classification between Level 1 and Level 2 financial assets.
The Companys long-term debt is carried at cost and is more fully described in Note 9. As of September 30, 2010, the estimated fair value of the Companys revolving line of credit was $28,179,000, and the estimated fair value of the term loan was $72,001,000.
(15) Income Taxes
As of September 30, 2010, the Company had $575,000 of gross unrecognized income tax benefits, of which $450,000 would have affected the Companys effective tax rate if recognized. Gross unrecognized income tax benefit decreased from $689,000 to $575,000, or $114,000, during the nine months ended September 30, 2010 primarily due to expiration of statutes of limitation 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, 2010, the Company had approximately $134,000 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 and 2009 remain open to examination by federal authorities and the tax years 2007, 2008 and 2009 remain open to examination by state authorities.
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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, 2010 included in other non-current liabilities, with an offset to other comprehensive income (OCI). The impact of the interest swap hedge on the Companys consolidated financial statements as of September 30, 2010 and December 31, 2009 is set forth below (in thousands):
September 30, 2010 |
December 31, 2009 |
Balance Sheet Location | ||||||||
Interest Rate Swap (a) |
$ | 1,409 | $ | 1,641 | Other non-current liabilities | |||||
The impact on OCI from the interest rate swap for the periods ended September 30, 2010 and December 31, 2009 was as follows (in thousands):
Amount of Gain Recognized in OCI |
||||||||
2010 | 2009 | |||||||
Interest Rate Swap (a) |
$ | 232 | $ | 418 | ||||
(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, 2010 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 accounting for distributions to stockholders with components of stock and cash. The guidance clarifies that the stock portion of a distribution to stockholders that allows stockholders to elect to receive either cash or shares, with a potential limitation on the amount of cash that stockholders may elect to receive, is considered a share issuance. The guidance is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The guidance did not have an impact on the Companys consolidated financial statements.
In January 2010, the FASB issued authoritative guidance on accounting for consolidations with a focus on accounting and reporting for decreases in ownership of a subsidiary. The guidance clarifies the scope of the decrease in ownership provisions and expands the disclosure requirements about de-consolidation of a subsidiary or de-recognition of a group of assets. The guidance is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should be applied retrospectively. The guidance did not have an impact on the Companys consolidated financial statements.
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AMERICAN DENTAL PARTNERS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
In January 2010, the 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 Companys consolidated financial statements. The guidance is effective for fiscal years beginning after December 15, 2010 and is not expected to affect the Companys 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 derivative and hedging and is effective for interim and annual periods beginning after June 15, 2010. The guidance did not have an impact on the Companys consolidated financial statements.
In August 2010, the FASB issued authoritative guidance on presentation of insurance claims and related insurance recoveries. The amendments in this guidance clarify that a healthcare entity may not net insurance recoveries against related claim liabilities. In addition, the amendments clarify that the amount of the claim liability must be determined without considerations of insurance recoveries. The guidance is effective for fiscal years beginning after December 15, 2010 and is not expected to affect the Companys consolidated financial statements.
(18) Subsequent events
Pursuant to a Board of Directors approved share repurchase program, the Company repurchased 137,439 shares at a cost of $1,668,000 between September 30, 2010 and the date of issuance of these consolidated financial statements. There were no other subsequent events.
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AMERICAN DENTAL PARTNERS, INC.
Item 2. | Managements 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 Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our annual report on Form 10-K for the year ended December 31, 2009.
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 Arizonas 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 practice technology, marketing, payor contracting, and financial planning, reporting and analysis. At September 30, 2010, we were affiliated with 26 dental group practices, comprising 574 full-time equivalent dentists practicing in 275 dental facilities in 21 states.
Affiliation and Acquisition Summary
When affiliating with a dental practice, we customarily acquire selected assets and enter into a long-term service agreement with the affiliated practice. Under our service agreements, we are responsible for providing all services necessary for the administration of the non-clinical aspects of the dental operations. The affiliated practice is responsible for the provision of dental care. Each of our service agreements has an initial term of 40 years.
During the third quarter of 2010, we completed in-market affiliations with two dental practices that joined Wisconsin Dental Group, S.C. and Western New York Dental Group, P.C. and became subject to existing service agreements. Cash paid, net of cash acquired, in connection with these transactions amounted to $800,000. In connection with these transactions, we recorded approximately $765,000 in intangibles relating to the service agreements with the affiliated practices, with an amortization period of 25 years. The terms of the affiliations do not provide for contingent payments.
Pursuant to agreements with noncontrolling interest holders of Arizona Tooth Doctor, effective September 1, 2010, selected holders elected to purchase 2.5% of our management subsidiary affiliated with Care for Kids of Texas, PLLC, the affiliated practice at Texas Tooth Doctor for Kids, or Texas Tooth Doctor.
We regularly evaluate potential affiliation and acquisition transactions with dental practices and acquisitions of other dental-related companies that would expand our business capabilities.
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Revenue Overview
Net Revenue
Our net revenue includes management 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, 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, 2010 and 2009 (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Reimbursement of expenses |
$ | 49,699 | $ | 46,249 | $ | 147,406 | $ | 141,480 | ||||||||
Business service fees |
15,259 | 14,403 | 49,187 | 45,141 | ||||||||||||
Revenue earned under service agreements |
64,958 | 60,652 | 196,593 | 186,621 | ||||||||||||
Other revenue |
6,158 | 7,334 | 18,743 | 21,128 | ||||||||||||
Net revenue |
$ | 71,116 | $ | 67,986 | $ | 215,336 | $ | 207,749 | ||||||||
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.
Our net revenue depends primarily on revenue generated by the affiliated practices. Under current economic conditions, demand for dental care has declined among patients both with and without dental insurance. 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. As a result, even patients with dental insurance are financially responsible for a considerable portion of their dental expenditures. The continuing economic downturn has caused consumer spending patterns to change. The affiliated practices have observed patients either delaying care or, for those patients with dental insurance, opting for dental procedures that are largely covered by insurance. As a result, revenue growth rates of the affiliated practices have decreased and revenue mix has shifted towards lower cost and lower profitability dental procedures. The effect to us has been lower net revenue. Our profit margins would have also declined if not for our concerted efforts to manage operating expenses. We anticipate that negative macroeconomic conditions 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 the current economic conditions will lessen the dental care needs of patients and do not therefore expect lasting long-term impact on the dental care industry.
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Arizona Tooth Doctor is a dental group practice that provides dental care primarily to children. Approximately 90% of the groups revenue is derived from preferred provider organization health plans that are contracted with the Arizona Health Care Cost Containment System, or AHCCCS, the states Medicaid program. AHCCCS reduced reimbursement rates by 5% in October 2009 and has indicated the possibility of additional future rate reductions. We cannot be certain the extent to which reimbursement rate reductions will be implemented or the extent to which they will be passed on to us by the health plans. We, therefore, cannot be certain what effect reimbursement rate reductions will have on the patient revenue of Arizona Tooth Doctor.
Patient Revenue of the Affiliated Practices
We believe it is important for investors to understand patient revenue of the affiliated practices, which, with the exception of Arizona Tooth Doctor, we do not own or control. We do not consolidate the financial statements of the affiliated practices, other than Arizona Tooth Doctor, with ours, and accordingly their patient revenue is not a measure of our financial performance under generally accepted accounting principles. It is, however, a financial measure we use 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 dental benefit providers, or payors, on a fee-for-service basis and under indemnity plans, PPO and dental referral plans, managed care capitation plans, and Medicaid and Childrens 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 dental benefit plan provider contracts with the affiliated practices. 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, 2010 and 2009:
Nine Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Fee-for-service and indemnity plans |
16 | % | 16 | % | ||||
PPO and dental referral plans |
74 | % | 71 | % | ||||
Capitated managed care plans |
5 | % | 8 | % | ||||
Medicaid and CHIP programs |
5 | % | 5 | % |
For the affiliated practices that we do not own and are affiliated with us by means of a service agreement, after collection of fees from patients and third-party insurers 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 used by these affiliated practices for compensation of dentists and, in certain states, dental hygienists and/or dental assistants who are employed by them.
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS 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, 2010 and 2009 same market patient revenue of all the affiliated practices, the 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, |
% | |||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
Patient revenue of affiliated practices: |
||||||||||||||||||||||||
Platform dental group practices affiliated with us in both periods of comparison |
$ | 101,529 | $ | 103,224 | -1.6 | % | $ | 308,766 | $ | 316,347 | -2.4 | % | ||||||||||||
Platform dental group practices that affiliated with us during periods of comparison |
9,789 | | | 25,244 | 681 | | ||||||||||||||||||
Total patient revenue |
111,318 | 103,224 | 7.8 | % | 334,010 | 317,028 | 5.4 | % | ||||||||||||||||
Patient revenue of Arizona Tooth Doctor |
5,645 | 6,765 | -16.6 | % | 17,050 | 19,163 | -11.0 | % | ||||||||||||||||
Patient revenue of affiliated practices other than Arizona Tooth Doctor |
105,673 | 96,459 | 9.6 | % | 316,960 | 297,865 | 6.4 | % | ||||||||||||||||
Amounts due to us under service agreements |
64,958 | 60,652 | 7.1 | % | 196,594 | 186,621 | 5.3 | % | ||||||||||||||||
Amounts retained by affiliated practices other than Arizona Tooth Doctor |
$ | 40,715 | $ | 35,807 | 13.7 | % | $ | 120,366 | $ | 111,244 | 8.2 | % | ||||||||||||
Same market patient revenue declined 1.6% for the three months ended September 30, 2010, which was composed of a 2.1% decrease in provider hours, a 2.5% increase in provider productivity per hour and a 2.0% deterioration in reimbursement rates received from dental benefit insurers. Same market patient revenue growth for the three months ended September 30, 2010 excludes platform affiliations that occurred after July 1, 2009. Same market patient revenue declined 2.4% for the nine months ended September 30, 2010, which was composed of a 2.3% decrease in provider hours, a 1.9% increase in provider productivity per hour and 2.0% deterioration in reimbursement rates received from dental benefit insurers. Same market patient revenue growth for the nine months ended September 30, 2010 excludes platform affiliations that occurred after January 1, 2009.
Amounts retained by the affiliated practices, excluding Arizona Tooth Doctor, increased as a percentage of patient revenue of the affiliated practices we do not own to 38.5% for the three months ended September 30, 2010 from 37.1% for the three months ended September 30, 2009. The increase was primarily due to higher amounts retained for compensation of the clinical staff as a result of the Christie Dental and the Cincinnati Dental affiliations, where in each case the dental assistants and dental hygienists are employed by the affiliated practices.
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Table of Contents
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS 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, 2010 and 2009 (dollars in thousands):
Three Months Ended September 30, 2010 |
Three Months Ended September 30, 2009 |
|||||||||||||||||||
Amount | % of Net Revenue |
Amount | % of Net Revenue |
% Change | ||||||||||||||||
Net revenue |
$ | 71,116 | 100.0 | % | $ | 67,986 | 100.0 | % | 4.6 | % | ||||||||||
Operating expenses: |
||||||||||||||||||||
Salaries and benefits |
29,242 | 41.1 | % | 29,384 | 43.2 | % | -0.5 | % | ||||||||||||
Lab fees and dental supplies |
10,759 | 15.1 | % | 9,527 | 14.0 | % | 12.9 | % | ||||||||||||
Office occupancy |
9,611 | 13.5 | % | 8,647 | 12.7 | % | 11.1 | % | ||||||||||||
Other operating expenses |
6,932 | 9.7 | % | 6,232 | 9.2 | % | 11.2 | % | ||||||||||||
General corporate expenses |
3,054 | 4.3 | % | 3,546 | 5.2 | % | -13.9 | % | ||||||||||||
Depreciation expense |
2,903 | 4.1 | % | 2,688 | 4.0 | % | 8.0 | % | ||||||||||||
Amortization of intangible assets |
2,542 | 3.6 | % | 2,289 | 3.4 | % | 11.1 | % | ||||||||||||
Total operating expenses |
65,043 | 91.5 | % | 62,313 | 91.7 | % | 4.4 | % | ||||||||||||
Earnings from operations |
6,073 | 8.5 | % | 5,673 | 8.3 | % | 7.1 | % | ||||||||||||
Interest expense |
1,710 | 2.4 | % | 2,927 | 4.3 | % | -41.6 | % | ||||||||||||
Earnings before income taxes |
4,363 | 6.1 | % | 2,746 | 4.0 | % | 58.9 | % | ||||||||||||
Income taxes |
1,605 | 2.3 | % | 1,091 | 1.6 | % | 47.1 | % | ||||||||||||
Consolidated net earnings |
2,758 | 3.9 | % | 1,655 | 2.4 | % | 66.6 | % | ||||||||||||
Noncontrolling interest |
43 | 0.1 | % | 223 | 0.3 | % | -80.7 | % | ||||||||||||
Net earnings |
$ | 2,715 | 3.8 | % | $ | 1,432 | 2.1 | % | 89.6 | % | ||||||||||
Nine Months Ended September 30, 2010 |
Nine Months Ended September 30, 2009 |
|||||||||||||||||||
Amount | % of Net Revenue |
Amount | % of Net Revenue |
% Change | ||||||||||||||||
Net revenue |
$ | 215,336 | 100.0 | % | $ | 207,749 | 100.0 | % | 3.7 | % | ||||||||||
Operating expenses: |
||||||||||||||||||||
Salaries and benefits |
87,579 | 40.7 | % | 89,361 | 43.0 | % | -2.0 | % | ||||||||||||
Lab fees and dental supplies |
32,495 | 15.1 | % | 30,141 | 14.5 | % | 7.8 | % | ||||||||||||
Office occupancy |
27,867 | 12.9 | % | 25,688 | 12.4 | % | 8.5 | % | ||||||||||||
Other operating expenses |
20,357 | 9.5 | % | 18,005 | 8.7 | % | 13.1 | % | ||||||||||||
General corporate expenses |
10,370 | 4.8 | % | 10,238 | 4.9 | % | 1.3 | % | ||||||||||||
Depreciation expense |
8,610 | 4.0 | % | 8,103 | 3.9 | % | 6.3 | % | ||||||||||||
Amortization of intangible assets |
7,412 | 3.4 | % | 7,138 | 3.4 | % | 3.8 | % | ||||||||||||
Total operating expenses |
194,690 | 90.4 | % | 188,674 | 90.8 | % | 3.2 | % | ||||||||||||
Earnings from operations |
20,646 | 9.6 | % | 19,075 | 9.2 | % | 8.2 | % | ||||||||||||
Interest expense |
7,088 | 3.3 | % | 8,484 | 4.1 | % | -16.5 | % | ||||||||||||
Earnings before income taxes |
13,558 | 6.3 | % | 10,591 | 5.1 | % | 28.0 | % | ||||||||||||
Income taxes |
5,237 | 2.4 | % | 4,203 | 2.0 | % | 24.6 | % | ||||||||||||
Consolidated net earnings |
8,321 | 3.9 | % | 6,388 | 3.1 | % | 30.3 | % | ||||||||||||
Noncontrolling interest |
149 | 0.1 | % | 524 | 0.3 | % | -71.6 | % | ||||||||||||
Net earnings |
$ | 8,172 | 3.8 | % | $ | 5,864 | 2.8 | % | 39.4 | % | ||||||||||
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Table of Contents
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
We completed the platform affiliation with Christie Dental on December 1, 2009 and the platform affiliation with Cincinnati Dental on June 1, 2010. Although we generally prefer to employ the dental assistants and dental hygienists at our affiliated dental groups, state law prohibits us from doing so in the jurisdictions in which Christie Dental and Cincinnati Dental operate. At Christie Dental and Cincinnati Dental, the dental assistants and dental hygienists are consequently employed by the affiliated practices. This arrangement leads to a reduction in our salaries and benefits expense. Our salaries and benefits expense is reimbursed to us pursuant to the terms of our service agreements by the affiliated practices. Since reimbursement of this expense is typically a significant component of our net revenue at our other affiliated dental groups, our net revenue at Christie Dental and Cincinnati Dental is less than what it would otherwise be if we employed the dental assistants and dental hygienists. This effect on our net revenue causes our operating expenses as a percentage of consolidated net revenue, except salaries and benefits, to be higher at Christie Dental and Cincinnati Dental than is typically the case with our other affiliated dental groups where we employ the dental assistants and dental hygienists.
Net Revenue
Net revenue increased 4.6% to $71,116,000 for the three months ended September 30, 2010 from $67,986,000 for the three months ended September 30, 2009. Net revenue increased 3.7% to $215,336,000 for the nine months ended September 30, 2010 from $207,749,000 for the nine months ended September 30, 2009. For the three and nine months ended September 30, 2010, the increases were primarily the result of revenue contribution from new platform affiliations with Christie Dental and Cincinnati Dental offset by same market net revenue decrease of 1.6% for the three months ended September 30, 2010 and 2.4% for the nine months ended September 30, 2010.
Net revenue derived from our service agreement with Northland Dental Partners, PLLC, the affiliated practice at Metro Dentalcare, represented approximately 21% and 22% of our consolidated net revenue for the three and nine months ended September 30, 2010 and approximately 22% of our consolidated net revenue for the three and nine months ended September 30 2009. 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, 2010 and approximately 14% of our consolidated net revenue for the three and nine months ended September 30, 2009. 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, 2010 and 2009.
Salaries 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 generally 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 support the dental facilities.
Salaries and benefits expense as a percentage of net revenue decreased to 41.1% for the three months ended September 30, 2010 from 43.2% for the three months ended September 30, 2009. Salaries and benefits expense as a percentage of net revenue decreased to 40.7% for the nine months ended September 30, 2010 from 43.0% for the nine months ended September 30, 2009. Excluding Christie Dental and Cincinnati Dental, the percentage of revenue for the three and nine months ended September 30, 2010 was 42.6% and 41.9%, respectively. For the three and nine months ended September 30, 2010, the remaining decreases were due to our ongoing effort to manage staffing levels and compensation expense and a reduction of incentive accruals.
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 15.1% of net revenue for the three months ended September 30, 2010 from 14.0% for the three months ended September 30, 2009. Excluding Christie Dental and Cincinnati Dental, the percentage of net revenue for the three months ended September 30, 2010 was 14.6%. The remaining increase was due to an unfavorable comparison to the three months ended September 30, 2009, which included a non-recurring pricing rebate from a major vendor.
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Table of Contents
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Lab fees and dental supplies expense as a percentage of net revenue increased to 15.1% of net revenue for the nine months ended September 30, 2010 from 14.5% for the nine months ended September 30, 2009. Excluding Christie Dental and Cincinnati Dental, the percentage of net revenue for the nine months ended September 30, 2010 was 14.7%. The remaining increase as a percentage of net revenue was attributable to an unfavorable comparison with the nine months ended September 30, 2010, which included a non-recurring pricing rebate from a major vendor.
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 13.5% for the three months ended September 30, 2010 from 12.7% for the three months ended September 30, 2009. Excluding Christie Dental and Cincinnati Dental, office occupancy expense as a percentage of net revenue for the three months ended September 30, 2010 was 13.1%. The remaining increase was related to higher office occupancy expense due to additional de novo practices at Texas Tooth Doctor and a temporary increase in telecommunications expense. Office occupancy expense as a percentage of net revenue increased to 12.9% for the nine months ended September 30, 2010 from 12.4% for the nine months ended September 30, 2009. Excluding Christie Dental and Cincinnati Dental, office occupancy expense as a percentage of net revenue for the nine months ended September 30, 2010 was 12.6%. The remaining increase was related to higher office occupancy expense due to additional de novo practices at Texas Tooth Doctor, where we have completed four de novo facilities, and, to a lesser extent, two new locations added during the fourth quarter of 2009 at Arizona Tooth Doctor.
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 expense as a percentage of net revenue increased to 9.7% for the three months ended September 30, 2010 from 9.2% for the three months ended September 30, 2009. Excluding Christie Dental and Cincinnati Dental, other operating expense as a percentage of net revenue for the three months ended September 30, 2010 was 9.0%. The decrease was primarily attributable to an insurance settlement received during the three months ended September 30, 2010. Other operating expenses as a percentage of net revenue increased to 9.5% for the nine months ended September 30, 2010 from 8.7% for the nine months ended September 30, 2009. Excluding Christie Dental and Cincinnati Dental, other operating expense as a percentage of net revenue for the nine months ended September 30, 2010 was 8.9%. The remaining increase was attributable to increased professional fees and marketing costs at Texas Tooth Doctor.
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 decreased to 4.3% for the three months ended September 30, 2010 from 5.2% for the three months ended September 30, 2009. For the three months ended September 30, 2010, the decrease was primarily the result of a reduction in incentive compensation accruals and a favorable comparison to the prior period which included non-recurring
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Table of Contents
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
legal fees. General corporate expenses as a percentage of net revenue decreased to 4.8% for the nine months ended September 30, 2010 from 4.9% for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, the decrease was primarily the result of a reduction in incentive compensation accruals.
Stock-based compensation expense was $450,000 and $403,000 for the three months ended September 30, 2010 and 2009, respectively. Stock-based compensation expense was $1,273,000 and $1,167,000 for the nine months ended September 30, 2010 and 2009, respectively.
Depreciation
Depreciation expense, including amortization of leasehold improvements, as a percentage of net revenue increased to 4.1% for the three months ended September 30, 2010 from 4.0% for the three months ended September 30, 2009. Depreciation expense, including amortization of leasehold improvements, as a percentage of net revenue increased to 4.0% for the nine months ended September 30, 2010 from 3.9% for the nine months ended September 30, 2009. The increases were the result of the affiliations with Christie Dental and Cincinnati Dental.
Amortization of Service Agreements and Other Intangible Assets
Amortization expense, principally relating to our service agreements with the affiliated practices, as a percentage of net revenue increased to 3.6% for the three months ended September 30, 2010 from 3.4% for the three months ended September 30, 2009. The increase was primarily attributable to amortization expense for Christie Dental and Cincinnati Dental. Amortization expense, principally relating to our service agreements with the affiliated practices, as a percentage of net revenue remained consistent at 3.4% for the nine months ended September 30, 2010 and 2009.
Earnings from Operations
Earnings from operations increased 7.1% to $6,073,000 for the three months ended September 30, 2010 from $5,673,000 for the three months ended September 30, 2009. As a percentage of net revenue, earnings from operations increased to 8.5% for the three months ended September 30, 2010 from 8.3% for the three months ended September 30, 2009. Earnings from operations increased 8.2% to $20,646,000 for the nine months ended September 30, 2010 from $19,075,000 for the nine months ended September 30, 2009. As a percentage of net revenue, earnings from operations increased to 9.6% for the nine months ended September 30, 2010 from 9.2% for the nine months ended September 30, 2009. For the three and nine months ended September 30, 2010, the increase in earnings from operations was primarily due to an increase in net revenue, a decrease in salaries and benefits expense, partially offset by an increase in other operating expenses and increased amortization expense and depreciation expense.
Interest Expense
Net interest expense decreased to $1,710,000 for the three months ended September 30, 2010 from $2,927,000 for the three months ended September 30, 2009. The decrease was primarily the result of a favorable comparison to the third quarter of 2009 when we expensed $989,000 of previously capitalized bank fees associated with the retirement of our credit facility and to a lesser degree reduction in borrowing rates, offset by an increase in borrowing levels. Net interest expense decreased to $7,088,000 for the nine months ended September 30, 2010 from $8,484,000 for the nine months ended September 30, 2009. The decrease was primarily the result of reduced borrowing levels, reduced borrowing rates and to a lesser degree a favorable comparison to 2009 when we expensed $989,000 of previously capitalized bank fees associated with the retirement of our prior credit facility.
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Table of Contents
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Income Taxes
Our effective tax rate decreased to 36.8% for the three months ended September 30, 2010 as compared to 39.7% for the three months ended September 30, 2009. For the three months ended September 30, 2010, the decrease was primarily due to the expiration of an uncertain tax position exposure, somewhat offset by an increase in our ownership in Arizona Tooth Doctor. Our effective tax rate decreased to 38.6% for the nine months ended September 30, 2010 as compared to 39.7% for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, the decrease was primarily due to the expiration of an uncertain tax position exposure. We expect our effective tax rate will be approximately 39.0% to 39.5% for 2010.
Consolidated Net Earnings
As a result of the foregoing, consolidated net earnings increased 66.6% to $2,758,000 for the three months ended September 30, 2010 from $1,655,000 for the three months ended September 30, 2009. As a percentage of net revenue, consolidated net earnings increased to 3.9% for the three months ended September 30, 2010 from 2.4% for the three months ended September 30, 2009. The increase was primarily due to an increase in net revenue and decreases in salaries and benefits expense and interest expense. Consolidated net earnings increased 30.3% to $8,321,000 for the nine months ended September 30, 2010 from $6,388,000 for the nine months ended September 30, 2009. As a percentage of net revenue, consolidated net earnings increased to 3.9% for the nine months ended September 30, 2010 from 3.1% for the nine months ended September 30, 2009. The increase was primarily due to an increase in net revenue, decreases in salaries and benefits expense and interest expense partially offset by an increase in other operating expenses.
Noncontrolling Interest
For the three months ended September 30, 2010 and September 30, 2009, we recorded noncontrolling interest expense of $43,000 and $223,000, respectively, representing gains attributable to noncontrolling interest holders. For the nine months ended September 30, 2010 and September 30, 2009, we recorded noncontrolling interest expense of $149,000 and $524,000, respectively, representing gains attributable to noncontrolling interest holders. For the three and nine months ended September 30, 2010, the decrease in noncontrolling interest expense was primarily due to a decrease in noncontrolling interest ownership and a decrease in net earnings of Arizona Tooth Doctor as a result of a reduction in AHCCCS reimbursement rates.
Liquidity and Capital Resources
Overview
We have financed our operating and capital needs, including cash used for acquisitions and affiliations, capital expenditures and working capital, principally from cash flow from operations, borrowings under our senior secured credit facility and the issuance of equity securities.
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 2010 to be between $11,000,000 and $12,000,000.
Operating Activities
For the nine months ended September 30, 2010 and 2009, cash provided by operating activities amounted to $27,318,000 and $32,639,000, respectively. Cash provided by operations primarily resulted from cash provided by consolidated net earnings after adjusting for non-cash items, offset by changes in accounts receivable, accrued compensation, income taxes payable and accounts payable. Cash flows from accounts receivable, net, decreased primarily due to a reduction in amounts due from the affiliated practices, which was largely affected by patient receivables at the affiliated practices. Days sales outstanding decreased from 27 days as of September 30, 2009 to 25 days as of September 30, 2010.
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Table of Contents
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Days sales outstanding decreased from 35 days as of September 30, 2008 to 27 days as of September 30, 2009. Accrued compensation reduced cash flow largely as a result of incentive compensation earned in 2009 that was disbursed in 2010. Income taxes payments reduced cash flow largely due to an increase in taxable earnings in 2010 and the application of an overpayment from 2008 during the nine months ended September 30, 2009. The reduction in cash flows from accounts receivable, accrued compensation and income taxes payable was offset by an increase in cash flows from accounts payable, which was mostly attributable to timing of payments.
Investing Activities
For the nine months ended September 30, 2010 and 2009, cash used for investing activities amounted to $25,923,000 and $4,949,000, respectively. Affiliations and acquisitions, net of cash acquired, increased to $18,773,000 for the nine months ended September 30, 2010 from $125,000 for the nine months ended September 30, 2009 due to the affiliation with Cincinnati Dental on June 1, 2010 and two in-market practice acquisitions. Contingent and deferred payments increased to $1,800,000 for the nine months ended September 30, 2010 from $300,000 for the nine months ended September 30, 2009 due to a contingent payment. For the nine months ended September 30, 2010, capital expenditures increased $895,000 in 2010 as compared to 2009, as we completed four de novo dental facilities and relocated one dental facility in 2010 as compared to three de novo dental facilities and one relocated facility in 2009.
Financing Activities
For the nine months ended September 30, 2010 and 2009, cash used in financing activities amounted to $535,000 and $27,236,000, respectively. For the nine months ended September 30 2010, cash used for financing activities was mainly attributable to net cash provided by our credit facilities as a result of borrowings associated with our credit facility refinancing and cash used to repurchase common stock. We repurchased 221,889 shares of our common stock at an average price of $11.12 per share. For the nine months ended September 30, 2009, we used cash generated from operations, after cash used for investing activities, of $27,690,000 along with $29,227,000 of proceeds from issuance of common stock from the equity offering to reduce our borrowings.
Credit Agreement
In May 2010, we entered into an $180,000,000 senior secured credit facility, comprising a $100,000,000 revolving line of credit and an $80,000,000 term loan. Borrowings under the new senior secured credit facility were used to refinance our existing $130,000,000 senior secured credit facility. The new senior secured credit facility matures in May 2014 and can be used for general corporate purposes, including working capital, acquisitions and affiliations and capital expenditures. Borrowings under the senior secured credit facility bear interest at our option of the Base Rate plus a margin or LIBOR plus a margin. The Base Rate is defined as the greater of Bank of Americas prevailing prime rate, 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 1.00% to 2.75% for Base Rate borrowings and 2.00% and 3.75% for LIBOR borrowings. In addition, we pay a commitment fee ranging from 0.375% to 0.500% on the unused balance of the revolving line of credit based on a leverage ratio. 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 are required to make quarterly payments of principal on the term loan in an amount equal to $2,000,000 beginning in June 2010 and ending in March 2014 and a $48,000,000 payment at maturity. The total amount of repayments expected in 2010 is $8,000,000, which includes a $2,000,000 repayment under our prior credit facility term loan.
We must comply with financial and other covenants, including minimum net worth, leverage and fixed charge coverage ratios as defined by the senior secured credit facility. Pursuant to provisions of the senior secured credit facility, we are permitted to borrow up to $50,000,000 annually for acquisitions, excluding the consideration paid in connection with the acquisition of Cincinnati Dental in June 2010. We were in compliance with our covenants as of September 30, 2010.
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
The outstanding balance with respect to the senior secured credit facility as of September 30, 2010 was $76,000,000 under the term loan and $29,850,000 under the revolving line of credit. We had stand-by letters of credit amounting to $1,912,000 at September 30, 2010, and based on borrowing covenants, reduced by the stand-by letters of credit, approximately $48,649,000 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 are believed 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.
Valuation of Accounts Receivable
Our accounts receivable include amounts due from the affiliated practices that have entered into service agreements with us and trade receivables of Arizona Tooth Doctor, our dental benefits third-party administrator and our dental laboratory businesses. At September 30, 2010, amounts due from the affiliated practices represented 84% 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 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 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. Each affiliated practices provision for doubtful accounts is estimated in the period that services are rendered and adjusted in future periods as necessary. The estimates for the provision and related allowance 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 increases or decreases in the provision. In the event that final reimbursement or bad debt experience differs from original estimates, adjustments to the affiliated practices patient receivables would be required, which could affect the collectability of our receivables due from the affiliated practice.
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 reserves for uncollectability, other than reserves we have recorded for uncollectability 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 profile of the accounts receivable, write-off percentages and other relevant factors.
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Goodwill and Intangible Assets
We have intangible assets, including goodwill and other identifiable intangibles assets that are the result of affiliation transactions and acquisitions of businesses. The initial identification and valuation of these intangible assets and the determination of useful lives at the time of affiliation or acquisition involve the use of management judgments and estimates. These estimates are based on, among other factors, reviews of projected future income, cash flows, statutory regulations and, when necessary, input from accredited valuation consultants. At September 30, 2010, goodwill and intangible assets were $278,550,000 and represented 73% of our total assets, with goodwill and indefinite-lived intangible assets representing 35% of our intangible assets and definite-lived intangible assets related to service agreements representing 65% of our intangible assets.
Our affiliations with dental practices as a result of those practices joining existing affiliated practices are not business combinations, and as such, do not result in recognition of goodwill. We recognize capitalized service agreement costs, which we account for as definite-lived intangible assets acquired in affiliations other than a business combination and record at fair value. In determining the fair value of a service agreement recognized in connection with an affiliation, management estimates the timing, amount and value of future expected cash flows. Each service agreement has a contractual term of 40 years, but the asset 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 nearly all instances, to purchase the remaining unamortized balance of intangible assets at the then 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 by the asset.
We test goodwill and indefinite-lived intangibles for impairment annually as of October 1st 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, such as a significant adverse change in the assets utilized by the business. Determining whether an impairment has occurred requires valuation of the respective reporting 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. If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible and intangible asset. In this case, we would supplement the cash flow approach discussed above with independent appraisals.
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, our dental benefits third-party administrator has been developing additional product offerings, including dental referral plans, to offset the decline of this part of its business. In 2009, our dental benefits third-party administrator 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. Carrying value of the goodwill for our third-party administrator is approximately $2,700,000.
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 our estimates and assumptions, we may be required to perform the second step of the impairment analysis, which could result in a material impairment of our goodwill or other intangible assets.
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
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 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.
Stock-Based Compensation
We account for stock-based compensation in accordance with the fair value recognition provision of authoritative guidance for share-based compensation. We use the Black-Scholes option-pricing model, which requires the input of subjective assumptions. These assumptions include the estimated length of time employees will retain their vested stock options before 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 stock for future stock option grants can materially affect the estimate of the fair value of stock-based compensation.
Income Taxes
Our annual tax rate is based on our income, 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 sources of income 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 from the U.S. federal government and multiple state jurisdictions. In the normal course of business, we are subject to examination by U.S. federal and state taxing authorities. The tax years 2008 and 2009 remain open to examination by federal authorities and 2007, 2008 and 2009 remain open to examination by state authorities.
Our policy for recording interest and penalties associated with uncertain tax positions is to record these items as expense. For the nine months ended September 30, 2010, we recognized $32,000 of interest and penalties expense in our consolidated statement of income.
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(unaudited)
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board, or FASB, issued authoritative guidance on accounting for distributions to stockholders with components of stock and cash. The guidance clarifies that the stock portion of a distribution to stockholders that allows shareholders to elect to receive either cash or shares, with a potential limitation on the amount of cash that shareholders may elect to receive, is considered a share issuance. The guidance is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The guidance did not have an impact on our consolidated financial statements.
In January 2010, the FASB issued authoritative guidance on accounting for consolidations with a focus on accounting and reporting for decreases in ownership of a subsidiary. The guidance clarifies the scope of the decrease in ownership provisions and expands the disclosure requirements about de-consolidation of a subsidiary or de-recognition of a group of assets. The guidance is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should be applied retrospectively. The guidance did not have an impact on our consolidated financial statements.
In January 2010, the 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 effective for interim and annual periods beginning after December 15, 2009. The guidance did not have an impact on our consolidated financial statements. The guidance is effective for fiscal years beginning after December 15, 2010, and is not expected to affect 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 derivative 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 August 2010, the FASB issued authoritative guidance on presentation of insurance claims and related insurance recoveries. The amendments in this guidance clarify that a health care entity may not net insurance recoveries against related claim liabilities. In addition, the amendments clarify that the amount of the claim liability must be determined without considerations of insurance recoveries. The guidance is effective for fiscal years beginning after December 15, 2010, and is not expected to affect our consolidated financial statements.
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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 1.00% to 2.75% for base rate borrowings and 2.00% and 3.75% 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, 2010 under our variable-rate senior secured credit facility, for each one percentage point change in interest rates would be approximately $859,000.
Item 4. | Controls and Procedures |
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934) as of September 30, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures timely alert them to material information relating to us required to be included in this report and were effective as of September 30, 2010.
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.
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AMERICAN DENTAL PARTNERS, INC.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
Shareholder Litigation
On or about April 9, 2010, the United States District Court for the District of Massachusetts approved a Class Action Settlement Agreement, dated December 15, 2009, resolving the allegations against us and certain of our executive officers in the shareholder litigation. Special Situations Fund III L.P., Special Situations Cayman Fund, L.P., and Special Situations Fund III Q.P., L.P. excluded themselves from the settlement, as discussed below.
On or about January 25, 2008, February 4, 2008, February 12, 2008 and March 13, 2008, we and certain of our executive officers were named as defendants in four actions respectively entitled Oliphant v. American Dental Partners, Inc. et. al., civil action number 1:08-CV-10119-RGS; Downey v. American Dental Partners, Inc. et. al., civil action number 1:08-CV-10169-RGS; Johnston v. American Dental Partners, Inc. et. al., civil action number 1:08-CA-10230-RGS; and Monihan v. American Dental Partners, Inc., et. al., civil action number 1:08-CV-10410-RGS, all filed in the United States District Court for the District of Massachusetts. The actions each purported to be brought on behalf of a class of purchasers of our common stock during the period August 10, 2005 through December 13, 2007. The complaints 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., titled 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 class period, which had the effect of artificially inflating the market price of our stock. Each complaint also asserted control person claims under Section 20(a) of the Securities Exchange Act against the executive officers named as defendants.
On or about May 29, 2008, the Court appointed the Operating Engineers Pension Fund as lead plaintiff and its counsel, the law firm of Grant & Eisenhofer P.A., as lead counsel. The Court also ordered that the four pending actions be consolidated under the caption In re American Dental Partners, Inc. Securities Litigation, civil action number 1:08-CV-10119-RGS. On or about June 5, 2008, one of the original named plaintiffs, W.K. Downey, agreed to enter an order that dismissed his individual claims with prejudice. On September 29, 2008, the Operating Engineers Pension Fund filed with the Court a consolidated amended complaint that alleged a new class period of February 25, 2004 through December 13, 2007 and asserted violations of the federal securities laws as described above.
On December 15, 2009, we, the other defendants and the lead plaintiff entered the Class Action Settlement Agreement to settle and release all remaining claims. Pursuant to its terms, the insurance company that issued our Directors, Officers and Corporate Liability Insurance Policy has paid $6,000,000 into a settlement fund that will be distributed in accordance with the Courts Final Order, dated April 9, 2010.
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. excluded themselves from the settlement and filed an opt-out complaint in the District of Massachusetts, against us and the same executive officers named as defendants in the prior actions, entitled Special Situations Fund III, L.P. et al. v. American Dental Partners, Inc. et al., civil action number 1:10-CV-10331, which we refer to as the Opt-Out Action. The complaint asserts that the plaintiffs purchased over 500,000 shares of our common stock during the class period, alleges the same violations of the federal securities laws described above, and claims that certain of the alleged misrepresentations also violated Section 18 of the Securities Exchange Act, 15 U.S.C. § 78(r). The plaintiffs seek an unspecified amount of money damages, costs and attorneys fees and any other relief the Court deems proper.
On June 11, 2010, we and the other defendants filed a motion to dismiss the Opt-Out Action, which was fully briefed by all parties as of September 20, 2010. The Court has not yet scheduled a hearing on the motion. We intend to defend the matter vigorously.
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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, 2009 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.
During the three months ended September 30, 2010, there were no material changes to the risk factors that were disclosed in Part I - Item 1A of our Annual Report on Form 10-K for the period ended December 31, 2009.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ISSUER PURCHASES OF EQUITY SECURITIES
(In thousands, except per share amounts)
Period |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
||||||||||||
July 1, 2010 - July 31, 2010 |
0 | $ | 0.00 | 0 | $ | 10,000 | ||||||||||
August 1, 2010 - August 31, 2010 |
91 | $ | 10.96 | 91 | $ | 9,006 | ||||||||||
September 1, 2010 - September 30, 2010 |
131 | $ | 11.24 | 131 | $ | 7,531 | ||||||||||
222 | 222 | |||||||||||||||
On June 11, 2010, our board of directors authorized us to repurchase up to $10,000,000 of our common stock in the open market, in block trades, through privately negotiated transactions or otherwise. The repurchase program has no expiration date. During the three months ended September 30, 2010, we purchased 179,039 shares in open market transactions and 42,850 shares in a block trade.
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.
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AMERICAN DENTAL PARTNERS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN DENTAL PARTNERS, INC. | ||
November 4, 2010 | /s/ Gregory A. Serrao Gregory A. Serrao Chairman, President, and Chief Executive Officer (principal executive officer) | |
November 4, 2010 | /s/ Breht T. Feigh Breht T. Feigh Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) | |
November 4, 2010 | /s/ Mark W. Vargo Mark W. Vargo Vice President, Chief Accounting Officer (principal accounting officer) |
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AMERICAN DENTAL PARTNERS, INC.
EXHIBIT INDEX
Incorporated by Reference | ||||||||||
Exhibit No. |
Description |
Filed with this Form 10-Q |
Form or |
SEC Filing Date |
SEC File | |||||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | X | ||||||||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | X | ||||||||
32 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | X |
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