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| ADPI > SEC Filings for ADPI > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
Introduction
The following information should be read in conjunction with the financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management's 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, 2007.
Cautionary Statement Regarding Forward-Looking Statements
Some of the information in this Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "project," and similar expressions, among others, identify forward-looking statements. Forward-looking statements speak only as of the date the statement was made. Such forward-looking statements are subject to risks and uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied. Certain factors that might cause such a difference include, among others, our risks associated with overall or regional economic conditions, our affiliated practices contracts with third party payors and the impact of any terminations or potential terminations of such contracts, the cost of and access to capital, fluctuations in labor markets, our expansion strategy, management of rapid growth, dependence upon affiliated practices, dependence upon service agreements, settlements or judgments of pending litigation and government regulation of the dental industry. Additional risks, uncertainties and other factors are set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations-"Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
Overview
American Dental Partners is a leading provider of dental facilities, support staff, and business services to multi-disciplinary dental group practices in selected markets throughout the United States. We are committed to the growth and success of the affiliated practices, and we make substantial investments to support each affiliated practice's growth. We provide or assist 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. At June 30, 2008, we were affiliated with 27 dental group practices, comprising 554 full-time equivalent dentists practicing in 242 dental facilities in 18 states.
Legal Proceedings
PDG Litigation
As previously disclosed, we entered into a definitive settlement agreement and related agreements, effective February 29, 2008, to resolve the outstanding litigation, filed in the Fourth Judicial District of Hennepin County, Minnesota, court file number 27-CV-06-2500, among us, our subsidiary PDHC, Ltd. ("PDHC") and PDG, P.A. ("PDG"). Under the terms of the definitive settlement agreement and in settlement and dismissal of the litigation among us, we transferred to PDG the leases and operating assets associated with 25 of 31 Park Dental facilities and tradenames, including "Park Dental," owned by us. As part of the settlement of litigation among us, we also entered into a transition services agreement with PDG effective February 29, 2008 in which we agreed to provide interim management services to PDG for a period of up to nine months commencing on January 1, 2008. PDG will pay us a transition service fee of $19,000,000 regardless of whether PDG utilizes the interim management services during the nine month period.
Shareholder Litigation
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-CV-10230-RGS, and "Monihan v. American Dental Partners, Inc. et al.," civil action number 1:08-CV-10410-RGS, which were filed in the United States District Court for the District of Massachusetts. The actions each purport 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 allege that we and certain of our executive officers violated the federal securities laws by making allegedly material misrepresentations and failing to disclose allegedly material facts concerning the litigation with PDG during the Class Period, which had the effect of artificially inflating the market price of our stock.
On or about May 29, 2008, the Court appointed a new named plaintiff, the Operating Engineers Construction Industry and Miscellaneous Pension Fund, as lead plaintiff and its counsel, the law firm of Grant & Eisenhofer P.A. ("Grant & Eisenhofer"), 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. We have been informed that the Operating Engineers Construction Industry and Miscellaneous Pension Fund intends to file with the Court a consolidated amended complaint. Our response is due within sixty days thereafter. We intend to defend the matters vigorously.
Derivative Litigation
On or about June 2, 2008, we were named as a nominal defendant and certain of our former and present directors and present executive officers (collectively, the "Musselman Individual Defendants") were named as defendants in a derivative action brought in the Business Litigation Session of Suffolk Superior Court of the Commonwealth of Massachusetts on behalf of us entitled "Musselman v. Serrao et al.," civil action number 08-2444-BLS. The complaint was amended on July 31, 2008. Plaintiffs Teresa and Stephen Musselman filed the action without first making a demand on our Board of Directors to address the allegations. The amended complaint involves factual allegations relating to our prior litigation with PDG and asserts claims for breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and aiding and abetting breaches of fiduciary duties against all of the Musselman Individual Defendants and claims for unjust enrichment and insider selling against some of the Individual Defendants. The current deadline for our response is August 11, 2008.
On or about July 1, 2008, we were named as a nominal defendant and certain of our present directors and executive officers (collectively, the "Dyer Individual Defendants") were named as defendants in a derivative action brought in Middlesex Superior Court of the Commonwealth of Massachusetts on behalf of us entitled "Dyer v. Serrao et al.," civil action number 08-2417. Plaintiff Dyer filed the action without first making a demand on our Board of Directors to address the allegations. The complaint involves factual allegations relating to our prior litigation with PDG and asserts a claim for breach of fiduciary duty of good faith against all of the Dyer Individual Defendants.
On July 31, 2008, plaintiffs in the Dyer and the Musselman actions, we and the Individual Defendants filed a Joint Motion For Transfer and Consolidation, requesting that the court transfer and consolidate the Dyer and Musselman actions in the Business Litigation Session of Suffolk Superior Court of the Commonwealth of Massachusetts.
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 is for an initial term of 40 years.
We are constantly evaluating potential acquisition and affiliation transactions with dental practices and acquisitions of other dental-related companies that would expand our business capabilities. However, because our amended revolving credit agreement and our term loan have certain borrowing limitations (see "Liquidity and Capital Resources"), we expect that the number of new affiliations and acquisitions in 2008 will be at levels lower than we achieved in recent years.
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 their behalf, and other revenue which includes patient revenue of Arizona's Tooth Doctor for Kids ("Tooth Doctor"), fees earned by our TPA, fees earned by our dental laboratory and revenue earned under the transition services agreement with PDG.
The following table provides the components of our net revenue for the three and six months ended June 30, 2008 and 2007 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 (1) 2007
Reimbursement of expenses $ 48,359 $ 43,158 $ 96,521 $ 85,925
Business service fees 14,673 16,401 29,450 32,114
Revenue earned under service agreements 63,032 59,559 125,971 118,039
Other revenue 7,000 6,993 14,116 13,971
Revenue earned under transition service agreement
with PDG 4,607 - 14,363 -
Net revenue $ 74,639 $ 66,552 $ 154,450 $ 132,010
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(1) 2008 revenue reflects approximately $144 in revenue earned under service agreements where business service fees are based upon a percentage of patient revenue or collections on patient revenue.
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 service fees charged to the affiliated practices pursuant to the terms of the service agreements for management services and capital provided by us. Expenses incurred for the operation and administration of the dental facilities include salaries and benefits for non-dentist personnel working at the dental facilities (the administrative staff and, where permitted by law, the dental assistants and 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.
For additional information on components of our net revenue, see Note 7 of "Notes to Interim Consolidated Financial Statements."
Patient Revenue of the Affiliated Practices
We believe it is important to understand patient revenue of the affiliated practices. This includes the practices that we do not control, nor own any equity interests in, and are affiliated with us by means of service agreements. We do not consolidate the financial statements of these affiliated practices with ours, and accordingly their patient revenue is not a measure of our financial performance under generally accepted accounting principles because it is not our revenue. It is, however, a financial measure we use, along with the patient revenue of Tooth Doctor, to monitor operating performance and to help identify and analyze trends of the affiliated practices which may impact 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, under fee-for-service, PPO plans and managed care capitation plans. 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. While payor mix varies from market to market, the following table provides the aggregate payor mix of all affiliated practices, including Tooth Doctor, for the six months ended June 30:
Six Months Ended
June 30,
2008 2007
Fee-for-service 20 % 27 %
PPO and dental referral plans 69 % 58 %
Capitated managed care plans 11 % 15 %
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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, hygienists and/or dental assistants who are employed by these affiliated practices.
The following table sets forth for the three and six months ended June 30, 2008 and 2007, the patient revenue of all the affiliated practices, patient revenue earned by Tooth Doctor, the amounts due to us under service agreements, and amounts retained by the affiliated practices we do not own for compensation of dentists and, where applicable, other clinical staff (in thousands):
AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
(unaudited)
Three Months Ended Six Months Ended
June 30, % June 30, %
2008 2007 Change 2008 2007 Change
Patient revenue of affiliated
practices:
Platform dental group practices
affiliated with us in both periods of
comparison $ 81,249 $ 76,278 6.5 % $ 164,341 $ 151,920 8.2 %
Platform dental group practices that
affiliated with us during periods of
comparison 24,703 23,849 3.6 % 48,985 46,745 4.8 %
Total patient revenue 105,952 100,127 5.8 % 213,326 198,665 7.4 %
Patient revenue of Arizona's Tooth
Doctor for Kids 6,043 5,752 5.1 % 12,165 11,555 5.3 %
Patient revenue of platform dental
group practices affiliated with us by
means of service agreements 99,909 94,375 5.9 % 201,161 187,110 7.5 %
Amounts due to us under service
agreements 63,032 59,559 5.8 % 125,827 118,039 6.6 %
Amounts retained by platform dental
group practices affiliated with us by
means of service agreements $ 36,877 $ 34,816 5.9 % $ 75,334 $ 69,071 9.1 %
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Same market patient revenue growth was 6.5% for the three months ended June 30, 2008. Same market patient revenue growth for the three months ended June 30, 2008 and 2007 and for the six months ended June 30, 2008 and 2007 excludes platform affiliations that occurred on or after January 1, 2007 and April 1, 2007, respectively, as well as the patient revenue of the 31 dental facilities comprising Park Dental for the three and six months ended June 30, 2007 and the six dental facilities we retained for the three and six months ended June 30, 2008. For the current quarter, same market patient revenue growth was comprised of a 9.6% increase in provider hours, a 2.7% decrease in provider productivity and a 0.2% deterioration in reimbursement rates received from dental benefit insurers. Same market patient revenue growth was 8.2% for the six months ended June 30, 2008. Same market patient revenue growth for the six months ended June 30, 2008 was comprised of a 9.8% increase in provider hours, a 1.2% decrease in provider productivity and a 0.8% improvement in reimbursement rates received from dental benefit insurers.
Amounts retained by affiliated practices we do not own increased 5.9% to $36,877,000 for the three months ended June 30, 2008 from $34,816,000 for the three months ended June 30, 2007. As a percentage of their patient revenue, amounts retained by affiliated practices remained at 36.9% for both the three months ended June 30, 2008 and the three months ended June 30, 2007. Amounts retained by affiliated practices we do not own increased 9.1% to $75,334,000 for the six months ended June 30, 2008 from $69,071,000 for the six months ended June 30, 2007. As a percentage of their patient revenue, amounts retained by affiliated practices increased to 37.5% for the six months ended June 30, 2008, compared to 36.9% for the six months ended June 30, 2007. This increase is due primarily to the termination of the service agreement with PDG effective December 31, 2007 as amounts retained by PDG were lower than the blended average of our affiliated practices because PDG did not employ dental hygienists and dental assistants. Also contributing to the increase was our affiliation with Barzman, Kasimov & Vieth in August 2007 as dental hygienists and dental assistants must be employed by the affiliated practice pursuant to New York state law. The increase was partially offset by a decrease in profitability of the affiliated practices.
Results of Operations
The following tables set forth our net revenue and results of operations for the
three and six months ended June 30, 2008 and 2007 (in thousands):
Three Months Ended Three Months Ended
June 30, 2008 June 30, 2007
% of Net % of Net %
Amount Revenue Amount Revenue Change
Net revenue $ 74,639 100.0 % $ 66,552 100.0 % 12.2 %
Salaries and benefits 31,355 42.0 % 27,194 40.9 % 15.3 %
Lab fees and dental supplies 11,143 14.9 % 10,506 15.8 % 6.1 %
Office occupancy 8,480 11.4 % 7,273 10.9 % 16.6 %
Other operating expenses 6,708 9.0 % 5,559 8.4 % 20.7 %
General corporate expenses 3,465 4.6 % 3,322 5.0 % 4.3 %
Depreciation expense 2,684 3.6 % 2,206 3.3 % 21.7 %
Amortization of intangible assets 2,409 3.2 % 1,483 2.2 % 62.4 %
Litigation settlement (gain) expense (687 ) -0.9 % 822 1.2 % -183.6 %
Total operating expenses 65,557 87.8 % 58,365 87.7 % 12.3 %
Earnings from operations 9,082 12.2 % 8,187 12.3 % 10.9 %
Interest expense 2,419 3.2 % 578 0.9 % 318.5 %
Minority interest 151 0.2 % 90 0.1 % 67.8 %
Earnings before income taxes 6,512 8.7 % 7,519 11.3 % -13.4 %
Income taxes 2,539 3.4 % 2,991 4.5 % -15.1 %
Net earnings $ 3,973 5.3 % $ 4,528 6.8 % -12.3 %
Six Months Ended Six Months Ended
June 30, 2008 June 30, 2007
% of Net % of Net %
Amount Revenue Amount Revenue Change
Net revenue $ 154,450 100.0 % $ 132,010 100.0 % 17.0 %
Salaries and benefits 66,856 43.3 % 55,165 41.8 % 21.2 %
Lab fees and dental supplies 23,124 15.0 % 20,680 15.7 % 11.8 %
Office occupancy 17,493 11.3 % 14,409 10.9 % 21.4 %
Other operating expenses 13,480 8.7 % 11,060 8.4 % 21.9 %
General corporate expenses 7,095 4.6 % 6,703 5.1 % 5.8 %
Depreciation expense 5,458 3.5 % 4,310 3.3 % 26.6 %
Amortization of intangible assets 4,796 3.1 % 2,925 2.2 % 64.0 %
Litigation settlement (gain) expense (30,814 ) -20.0 % 1,348 1.0 % -2385.9 %
Total operating expenses 107,488 69.6 % 116,600 88.3 % -7.8 %
Earnings from operations 46,962 30.4 % 15,410 11.7 % 204.8 %
Interest expense 4,874 3.2 % 1,203 0.9 % 305.2 %
Minority interest 291 0.2 % 247 0.2 % 17.8 %
Earnings before income taxes 41,797 27.1 % 13,960 10.6 % 199.4 %
Income taxes 16,299 10.6 % 5,553 4.2 % 193.5 %
Net earnings $ 25,498 16.5 % $ 8,407 6.4 % 203.3 %
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Financial Presentation of Litigation Settlement
On February 29, 2008, under the terms of a settlement agreement entered into on December 26, 2007 among American Dental Partners, Inc., PDHC, one of our Minnesota subsidiaries, PDG, Dental Specialists of Minnesota, P.A. and Northland Dental Partners, P.L.L.C. to settle outstanding litigation among the parties, we transferred the operating assets of 25 of 31 Park Dental facilities and associated tradenames to PDG, forgave outstanding accounts receivable due from PDG and entered into a transition services agreement with PDG to provide interim management services through September 30, 2008 (See "Legal Proceedings").
In addition to our actual results, we believe it is necessary to provide a pro forma financial presentation to exclude temporary and non-recurring items related to the litigation settlement as we believe that such pro forma presentation is important to understanding future trends of our underlying operations.
The following table reconciles the actual results of operations to our pro forma results of operations for the three months ended June 30, 2008 (in thousands):
Pro Forma Adjustments
Settlement Management
Actual Assets Services Pro Forma
Net revenue $ 74,639 $ 1,274 $ 3,333 $ 70,032
Operating expenses
Salaries and benefits 31,355 962 355 30,038
Lab fees and dental supplies 11,143 135 - 11,008
Office occupancy expenses 8,480 229 60 8,191
Other operating expenses 6,708 (117 ) 108 6,718
General corporate expenses 3,465 - - 3,465
Litigation expenses (687 ) (687 ) - -
EBITDA 14,175 752 2,811 10,612
Depreciation 2,684 65 14 2,605
Amortization 2,409 - - 2,409
Earnings from operations 9,082 687 2,797 5,598
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