American Dental Partners, Inc. Q3 2008 Earnings Call Transcript

American Dental Partners, Inc. (ADPI)

Q3 2008 Earnings Call Transcript

October 28, 2008, 10:00 am ET

Executives

Greg Serrao -- Chairman, President & CEO

Breht Feigh -- EVP, CFO and Treasurer

Analysts

Brooks O’Neil – Dougherty and Company

Mitra Ramgopal [ph]

Graham Rain [ph] -- Bears Capital [ph]

Jerry Hafernik [ph]

Travis Devitt [ph]

Mark Cooper – Wells Capital

Presentation

Operator

Good morning and thank you for standing by. At this time, all participants are in listen-only mode. After presentation, we will conduct the question-and-answer session.

(Operator instructions)

I’d like to introduce your host for today’s conference Mr. Greg Serrao. You may begin.

Greg Serrao

Thanks Kathy. Good morning and thanks for joining us. I’m joined by Breht Feigh, the company’s Chief Financial Officer and Mark Vargo, the company’s Chief Accounting Officer. I’d like to begin this conference call by reading a brief but important disclaimer. During the course of this conference call, we may make forward-looking statements regarding the future financial performance or business trends of American Dental Partners or other future events affecting the company within the meaning of the Private Securities Litigation Reform Act of 1995.

The words believe, expect, anticipate, project, intend and similar expressions among others identified forward-looking statements. We cautioned you that such statement are only predictions and that actual results might differ materially from those projected in the forward-looking statement. Certain factors that might cause such a difference include among others, the company’s risk associated with its affiliated down group contracts with third party payers and the impact of any terminations or potential termination of such contracts, the cost of and access to capital, fluctuating labor markets, the lost of key personnel, professional liability claims against the affiliated practices, the company’s acquisition and affiliation strategy, dependence upon affiliated dental group practices, dependence upon service agreements, settlements or judgments of pending litigation in government regulation of the dental industry. For a detailed of the factors that could cause such a difference and other risk factors and uncertainties that could materially affect the company’s business and financial results, please refer to our Form 10-K filed with the Security and Exchange Commission.

In our call today, we will discuss certain financial measures that are not in the quarter’s generally accepted accounting principal, please see our press release which is available on our website www.amdpi.com for presentation of the most comparable GAAP measures and a reconciliation of these non-GAAP measures.

Right now, I will discuss financial and operational highlights allowing direct questions from participants after our prepared remarks. Before turning the call over to Breht for the financial review, I would like to mention a few highlights.

Pro Forma net revenue increased 22%, Pro Forma EBITDA increased 32% and Pro Forma earnings from operations increased 23% reflecting increased amortization related to last year’s affiliation activity. Same market revenue growth was 4.8% and internal growth which excludes in market affiliations was 1.5%. While the economy continues to challenge our business, this same market growth excluding affiliations was an increased from the second quarter’s result of a negative 0.2%.

On a clerical front, Arizona’s Tooth Doctor for Kids received three-year accreditation status from the Accreditation Association for Ambulatory Healthcare. We’re quite please with this accomplishment.

Now, I’d like to turn the call over to Breht.

Breht Feigh

Thanks Greg. Our third quarter earnings release provides both GAAP and Pro Forma financial presentations. Before getting in to the financial details, I’d like to spend a few minutes commenting on what is included in the GAAP results and what has been excluded from the Pro Forma results. The GAAP results include both ongoing operations and activities which are not ongoing in nature. With respect to the ongoing operations, the GAAP results include the following: Our 25 dental group practices affiliated with us to the means of a service agreement, our pediatric Medicaid business, our dental laboratories and our dental benefit third party administrator or TPA. With respect to activities which are not ongoing in nature during the quarter, those include revenue and estimated expenses of our transition services agreement with PDG and other miscellaneous income and expenses related to the settlement.

We have included a Pro Forma presentation in the press release so you can better understand the results of our ongoing operations of which exclude the items just referred to as not ongoing in nature. For comparability purposes, we have prepared a Pro Forma third quarter 2007 income statement on the same basis as the 2008 Pro Forma. As a result, the Pro Forma presentation for both quarters excluded the all revenue and expenses associated with the litigation and the 25 dental facilities transferred to PDG.

The supplemental non-GAAP financial measures tables in the press release provides sufficient detail to reconcile to our GAAP results. Rather than discussing each line item of our financial results, I intend to review revenue and just those expense blind items that have a trend which merit discussion.

First, I’d like to refer to the table entitled “Patient Revenue and Same Market Patient Revenue Growth,” which is included in the press release. Patient revenue and the affiliated practices increased 1.7% or $103.6 million for the quarter. As you read in footnote S of this table, 2007 includes the patient revenue of the 25 PDG facilities. Despite 2008 reflecting the loss of the significant contribution of these facilities, patient revenue increased 1.7% as a result of 2007 affiliation activity and internal growth. As Greg mentioned earlier, the same market patient revenue growth was 4.8% for the quarter, which excludes platform affiliation activity and same market growth excluding in market affiliation activity was 1.5%.

Despite the heightened economic uncertainty in our country and the impact of two severe hurricanes during the quarter, we witnessed an increase in the internal growth rate from the second quarter’s result of minus 0.2%. The components to same market growth for the quarter were 5% greater provider hours, 0.5% increase in productivity per hour and a 0.7% deterioration and reimbursement rates.

Now, I’d like to refer to the table entitled “Pro Forma consolidated statement of income,” for the three months ended September 30, 2008 and September 30, 2007, which is included in the press release. Net revenue for the quarter was $68 million, a 22% increase over the prior year. This increase is largely the result of 2007 affiliation activity and internal same market growth in several markets offset by some serious economic challenges and a few geographic markets and the negative impacts of hurricanes Gustav and Ike in Louisiana and Texas.

Salaries and benefits increased 30% over the prior year to $30 million, as the percentage in that revenue, as expense increased 250 basis points to 44.3%. This increase is largely attributable to the six dental facilities retained as part of the litigation settlement with PDG and to a lesser extent, the 2007 platform affiliation. We continue to work to integrate these six facilities with our Metro Dental Care affiliate.

Lab fees and dental supplies increased 12% over the prior year to $10 million or 14.6% of net revenue, a decrease of 140 basis points from the same period last year. This decrease is a result of reduced lab fees and to a lesser extent, due to reduced supplies of the percentage of revenue. Lower lab fees were the result of our Metro Dental Care affiliation in which Metro utilizes in internal lab, and the reduction in dental supplies as a percentage of revenue is a result of our 2007 affiliation where dental supplies expense is less than our other affiliates.

General corporate expense decreased 27% to $3.1 million or 4.5% of net revenue, a 300 basis points decrease from the same period last year. Last year’s third quarter expense of $4,164,000 provides a favorable comparison for this year. If we recall, we had a number of expense item increased in last year’s general corporate expense but we didn’t anticipate it would repeat. Without these items, our general corporate expense has been running about $3.5 million to $3.6 million quarterly. As a result, our year-to-date financial performance in bonus targets, certain bonuses were not accrued for in this year’s quarter explaining the reduction in general corporate expense below historical trend.

Depreciation expense increased 42% to $2.6 million or 3.9% of net revenue, a 60 basis point increase from the same period last year. As a percentage of revenue, depreciation increased due to facility investment projects including 16 of our facilities and two relocated facilities along with the entry [ph] utilization of the six retained Park Dental facilities.

Amortization expense increased 40% to $2.4 million, the increase as a result of our 2007 affiliation activity. As a result of the above items, Pro Forma EBITDA increased 32% to $10.1 million and earnings from operations increased 23% to $5 million.

Interest expense increased $1.6 million for the quarter. The increase is primarily the result of greater borrowings largely the result of 2007 affiliation activity.

Diluted earnings per share were $0.12 for the quarter, and diluted cash earnings per share were $0.22 which excludes the after tax impact of service agreement amortization expense.

Cash flow from operations was $13.1 million for the quarter compared to $6.2 million for the prior year, neither of which is Pro Forma. The increase is due to improve patient receivable, collections to several of our affiliates and a cash flow contribution of our 2007 affiliation.

Our affiliates witnessed a decrease in patient DSO from 38 days last year to 34 days this year.

Capital expenditures were $2.5 million for the quarter. During the quarter, we relocated one facility. Amounts paid for affiliation and an acquisition including deferred and contingent payments or $1.6 million which included a contingent payment of $601,000 related to our acquisition of Metropolitan Dental Holdings. We completed one in-market affiliation during the quarter for our North Carolina affiliate. Affiliations completed so far this year represent about $2.5 million of annualized patient revenue.

Now, I’d like to spend a few minutes on our year-to-date cash flow. For the year, we have generated cash flow from operations of $27.9 million. We estimate the after tax cash flow provided by the entered interim management services agreement with PDG was approximately $8 million on a year-to-day basis. We invested $9.3 million in capital expenditures and $13.3 million in affiliations and acquisitions including $9.7 million earn out related to the acquisition of Metropolitan Dental Holdings. If one were to exclude both the PDG interim service fee and the Metro Dental earn out, our cash flow from operation has comfortably exceeded our 2008 investment activities.

Finally, I’d like to spend a few minutes on our capital structure. At September 30, we had debt outstanding at $136 million which is nearly a $10 million decrease from a $145 million at June 30. Since completing the Metro Dental Care in Barzman and Kasimov, these affiliations last call – we have been able to reduce our debt-to-total capitalization from 52% to 42%, while at the sane time continue to make significant reinvestment in to our affiliated dental groups.

As mentioned in our press release, we negotiated an extension to our two credit facilities to January 20, 2010. These extensions will afford us additional to refinance these borrowing, hopefully in calmer credit markets.

I will now turn the call back to Greg to conclude today’s prepared remarks.

Greg Serrao

Thank you Brett.

As we head for the final turn of 2008, we our reminded that this year began quite differently than we ever thought it would. The jury’s verdict in the PDG litigation was shocking both in its conclusions and its scope. Nevertheless, as we have done during other adverse times in our history, we stepped up and let the challenge head on. During 2008, we successfully fulfilled our obligation under the PDG transition services agreement and our Minnesota integration plan has proceeded more quickly than we anticipated. In addition, despite the loss of the 25 Park Dental Facilities, we have generated significant cash flow from operation this year. Even when considering the positive cash flow impact from the one time PDG payment, and our current EBITDA is approximating historic levels when we’re still affiliated with Park Dental. This year also brought the challenge of the worst economic crisis we have experienced as a company. We began to experience the economic slow down at the tail end of the third quarter of 2007, and the economy has gotten progressively worse since, adversely impacting our business in each quarter of this year.

Doctor productivity per hour has decline during the year as the economy is impacting the choices the patients make for their dental care. Patients are commonly opting for lower cost procedures and postponing high cost electric procedures. Our affiliates have also witnessed a shift in business mix towards hygiene. Hygiene hours increased sharply for the quarter while productivity per hour remained relatively unchanged. And that affect is that hygiene is a higher percentage of overall revenue mix resulting in a lower overall productivity per hour for the business. The positive of this trend is continuing healthy patient flow, but the negative is hygiene is much less profitable in dentistry.

And I’ll make one final comment on the challenged we faced with our revenue during the quarter. While our business is geographically diversified, 20% of our business is located in the West and South Central part of the U.S., and both of these regions are facing significant economic down turns or experienced the negative effect of the hurricanes during the quarter.

While we are cautious on the economy, we intend to continue to execute on our long term strategic plan including the expansion of our Pediatric Medicaid business. We are pleased to announced, during the quarter that Arizona’s Tooth Doctor for Kids achieved three-year accreditation status with the Accreditation Association for Ambulatory Healthcare. The structure and processes require of accreditation will be the foundation for the national expansion of our Pediatric Medicaid business. We intend to open our first Pediatric Medicaid practice outside of the state of Arizona in the fourth quarter of this year, and to accelerate the development of Pediatric Medicaid practices in 2009.

The underlying fundamentals of the dental profession, particularly, demographic trends and patient’s interest in their oral health and appearance still provide long term growth opportunities. While the economy may have a short term negative impact, we believe the long term growth prospects of the dental profession are as compelling as ever.

Now, Kathy, we would like to open the call up to participants please.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Brooks O’Neil, Dougherty and Company.

Brooks O’Neil – Dougherty and Company

Good morning, guys. I have a couple of questions. You mentioned in your prepared remarks that the integration of Metro is proceeding ahead of schedule. Can you provide any details on exactly how that’s going and what impact you’d been able to have on the practice so far?

Greg Serrao

Sure. I think what we’re referring to Brooks is bringing two Metro Dental Care – first of all, many of the practice managers that were with us when we operated the Park Dental, so how on that level of expertise that the practice level has been very helpful. Also, having integrated the management teams of the two organizations has proceeded very well. I think we have now a combined management team that is extremely strong. I think we’ve picked up some significant improvement in areas such as clinical administration and recruiting for doctors and marketing and then maintain the strength of the Park – what we would have caught to our Park Dental management prior to. In addition, the combination of that and the cooperation, of course, of the doctor group, we have seen margins improved about 400 basis points so far from the time of the acquisition, and provided that we can maintain productivity per hour levels. I think we expect to see that margin improvements to continue from here, which is exciting of course.

The other thing I would say that’s been exciting is – we affiliated with Metro just about a year ago, a little more than that now. And over the past weekend all of their practices were converted – all 40 were converted to Improvis which was certainly a lot quicker than we thought we would have done that. Very dedicated and committed professional team and management team at Metro has allowed us to accomplish many of our goals quicker than we anticipated we would.

Brooks O’Neil – Dougherty and Company

That’s great. You guys mentioned and I noticed obviously that salary expense was the one expense item that was really quite a bit higher than I had expected myself and you elude it to the fact that a good part of that was related to under performance. I guess I’d say in the six Park practices what – what do you expect to do over the next couple of quarters to try to get that number down or do you think you can get that number down during that timeframe?

Greg Serrao

The six former Part practices.

Brooks O’Neil – Dougherty and Company

All right. I’m sorry I misstated that.

Greg Serrao

You’re right. I see we’re not – we definitely have experienced a revenue short fall from what we anticipated in those practices. The doctors have been very cooperative in those practices. Several of the doctors that were new to us – we have relocated some of the doctors to the existing six practices and then found that the patient’s volume didn’t want that, so these doctors have moved to other Metro Dental Care practices, which has been very helpful in both relieve costs at the six former Park practices and to address patient demand at the Metro Dental practices. So I think our hope now is just to continue to build from here in terms of revenue and as the revenue comes in I think the cost will be coming to line and I don’t think there is more expense cutting that, that we anticipate doing in those practices.

Brooks O’Neil – Dougherty and Company

Okay good. Breht mentioned that reimbursement declined by 0.7% I think. Are you guys seeing pricing pressures in key markets around your system today?

Greg Serrao

I don’t think we’re seeing pricing pressures Brooks. I do – everybody I think is experiencing economic pressure and I think we are hearing from our third party partners – third party payer partners that they are experiencing pressure as well. I think more so from just enrollment numbers, employers cutting back on benefits or employment. I would say that some of this – for instance the tooth doctor for kids now being on Improvis and some of these other practices that we’re converting to Improvis we’re getting a better read on their gross revenue versus their adjusted gross revenue and that’s impacting this overall effectivity number which may not be a real decline in effectivity if I’m making sense?

Brooks O’Neil – Dougherty and Company

Yes.

Greg Serrao

I think the systems conversions are contributing because we have a more accurate reading so to speak of both the revenue growths and the revenue adjusted.

Brooks O’Neil – Dougherty and Company

Okay that makes sense. Let me just ask one more and then maybe I’ll pop back into the queue. Breht, can you give us any feel for the impact of the debt re-negotiation? By the way congratulations on extending those terms but can you give us any field for any incremental cost we should expect particularly relative to what we might have expected under the old terms?

Breht Feigh

We stated in the press release that we’re going to be borrowing at 450 basis points over LIBOR now. The $100 million term loan we had been borrowing at 350 over LIBOR and that facility has a 50 basis points step up each quarter and still have three financed in the bank as part of this extension. The facility have agreed or go to the next step up so if we refinanced within six months then we’ll I guess – we wouldn’t have seen our – we wouldn’t have seen a 450 basis points increase. Anyway, I don’t know if that made sense but I guess the point is we went from 350 to 450 and if the banks agreed to forego one of the 50 basis points step ups. And then, the revolving credit facility we are borrowing at 250 and that goes to 450 as well and then there were fees to the banks that agreed to the amendments. On top of that, that didn’t get amortized over the remaining term of the facilities which is now through January of 2010.

Brooks O’Neil – Dougherty and Company

Okay, that’s helpful. Thank you very much.

Breht Feigh

Thank you.

Operator

Our next question is from Mitra Ramgopal [ph].

Mitra Ramgopal

Hi. Good morning guys. This is a question. I believe you mentioned the economy is clearly having an impact on the business and during the third quarter with one month pretty much gone in the fourth quarter. You continued to see that impact?

Greg Serrao

Yes. I think our expectation is that the economy is going to continue to be a challenge for us into the foreseeable future. I think we mentioned that after the first quarter having recognized that that was a relatively slow growth quarter for us especially for first quarter. Our groups responded by – got everybody energized and doing out what we call the performance improvement plan which were initiated by the end of the second quarter. We’re quite pleased we did that because that’s definitely helping the results considering the lighter revenue but I don’t think we expect the economic challenges to abate anytime soon.

Mitra Ramgopal

With regards to the new affiliations I believe you added one in the quarter. Are you seeing more opportunity as a result of what’s happening out there? Would you be tempted to be more active on that front?

Greg Serrao

We’re very active. We anticipate that we’ll close several more transactions by year end, not large transactions, and I do think that the economic pressures are driving people to consider practice sales as is the concern that the capital gains rate is going to go up under a new administration.

Mitra Ramgopal

So the terms are more favorable than for you?

Greg Serrao

Yes.

Mitra Ramgopal

Okay. And then I guess if you have to look at tooth doctor clearly that did really well, it would seem at least from a reimbursement standpoint or Medicaid side as well as impact yet from the economy and that business.

Greg Serrao

That’s correct. I mean, it’s countered cyclical to what’s going on in the economy.

Mitra Ramgopal

With the issues the states are having or – you don’t expect any cause there?

Greg Serrao

No.

Mitra Ramgopal

Okay. Thank you.

Greg Serrao

Thank you Mitra.

Operator

Our next question is from Graham Rain [ph] from Bears Capital [ph].

Graham Rain – Bears Capital

Hi Greg. In the last quarter, you talked about the patient flow is still strong. Some people might be putting off elective procedures but now the patients coming through your offices are still strong. Have you seen that change at all? Are you still comfortable with having that instrument [ph]?

Greg Serrao

No. It’s still very strong. I think as Breht mentioned or maybe it was in my part. I apologize for not recalling but the hygiene hours are up significantly which is an indication of the patient flow is strong particularly new patient flow. We continue to see strong patient flow into the practice, both existing patients and new patients but we’re not seeing them to choose the treatment plan that are being prepared by the doctors and certainly putting off elective procedures.

Graham Rain – Bears Capital

Okay. In terms of evaluations for the acquisitional change you might be seeing. Does that change materially in the last few months or is it still what you’re seeing?

Greg Serrao

Well I think it has changed. What we had commented on about a year ago, this time particularly when we were doing the Metro deal – deals of the size of Metro Dental Care where you would get a private equity investor as your competitor for an acquisition. We were seeing the multiples at 10 plus times EBITDA. Of course with the private equity market and with the credit crisis the way it is. The private equity players are taking a much a different tact towards – well first of all, you are thinking to get transactions done but if they are they are, they are not levering them the way they would and that’s – I think that’s how to triple down the effect on all acquisitions. I’d say, for the large acquisitions, the multiples are down significantly and then for the roll ends, I don’t think that we see a big impact there. I think we’re still in that like four times to five times earnings.

Graham Rain – Bears Capital

Okay.

Greg Serrao

Not EBITDA, the earnings so three-and-a-half, four-and-a-half times EBITDA.

Graham Rain – Bears Capital

Okay. Thanks a lot.

Greg Serrao

Sure.

Operator

Our next question is from Jerry Hafernik [ph].

Jerry Hafernik

Good morning guys. Thank you very much for the call.

Greg Serrao

Hey Jerry

Jerry Hafernik

Could you – in regards to 20% of your business being in the West Coast and South Central, the South Central area is certainly got quite a hit from the hurricanes. I – many businesses were out of commission for one or two weeks. Could you just tell us what the place down there with your offices?

Greg Serrao

Yes, sure. We have in Louisiana two practices, one is in the Metairie which is right outside of New Orleans and once across Lake Pontchartrain in Hammond and both of those were affected by Gustav and more so by Ike. The bigger issue for us in terms of impact on the business was what happened in Houston. We have a dental group in Texas, on of our largest dental groups that has a strong presence in the Houston market place and many of the practices there were closed for a week or more and what we’re experiencing even today is that now that the practices are open there is still a lingering effects of what those hurricanes did to people’s home and of course the dollars that they have are going to get their lives back on track and we’re seeing definitely a slower and weaker schedules in the practices in the Houston market place. Breht if you have an estimate on the revenue impact it was –?

Breht Feigh

Lower in the same market growth rates by about up to 60 basis points.

Jerry Hafernik

Well that’s what I want to ask you about. In regards to the same market growth rates being on an organic basis knowing the market growth at 1.5%, you did not make any adjustments for Texas and Louisiana did you?

Breht Feigh

No. They –

Jerry Hafernik

Okay. So some of the other markets that didn’t experience these things had a pretty strong sequential snap back from the minus 0.2% that we saw on the second quarter, is that correct?

Breht Feigh

The snap back is what we call strong these days that does.

Jerry Hafernik

Well I had a plus sign in front of it not a minus sign.

Greg Serrao

We also experienced, not to add to misery, but in North Carolina which is another large market for us for the better part of the week and actually more than a week, people couldn’t get gas, so we couldn’t get patients who aren’t coming to the dental office ‘cause they couldn’t get gas to drive. And that happened in the September timeframe as well. So when you consider those three market places and those impacts there were some other markets that contributed positively to keeping us in positive territory.

Jerry Hafernik

Okay. Now, I usually think of the second quarter ending June as a bit seasonally stronger quarter than the quarter ending September. Am I incorrect on that thought?

Greg Serrao

No, you’re correct.

Jerry Hafernik

Okay, so this comeback, it’s a pretty significant statement there. I’m not sure exactly how to explain it but the fact that despite some, excuse the pun headwinds, you still had a positive same patient organic growth rate snap back in what was normally a weaker quarter.

Breht Feigh

Yes, if you would look at the second quarter to third quarter trend over the last two or three years, it wasn’t down this year’s quarter. It was flat which I think is a reflection of probably – it’s a reflection of better same market growth rate, and also the result of the performance improvement plans and also the results at Metro, and again, I’m talking in terms of profitability here.

Jerry Hafernik

Understood. In regard –

Greg Serrao

I think you were thinking about this the right way, Jerry. If – I think we talked about this in the end of the second quarter but we had, going into the third quarter, we had a record number of new doctor hire so our dental groups have been very successful being able to attract new doctors to the practice. So the hours, the doctor hours and the hygiene hours in the third quarter of this year were, I mean, up significantly. In fact, if you took out Metro, for instance, and try – and prepared ample samples, we have 14% more hours this quarter than the same hours a year ago, which is a reflection of, of course, the patient demand that we had going into the quarter. So the challenge that we’re having again is not patients wanting to come to the practice and it’s that when they are there, how much are they going to do? If productivity per hour had not dropped in the third quarter as much as it did, we would’ve had about $7 million more in revenue.

Jerry Hafernik

Okay.

Greg Serrao

If doctor productivity per hour held steady Q2 to Q3, we would’ve had $7 million more in revenue for this quarter.

Jerry Hafernik

And I would imagine when you first bring on new doctors, that there is a little bit of a step down in productivity as they go through a learning curve.

Greg Serrao

Exactly. And particularly, if they are coming from, straight from dental school, yes.

Jerry Hafernik

Okay, okay. In regards to Metro and the institution of the Improvis systems throughout those offices, the improvement in the profit margins that we’ve seen there really cannot be attributed to that because that just happened in the recent period. I mean, in just like the last month, correct?

Greg Serrao

It happened last weekend, so it’s – so you’re correct on that.

Jerry Hafernik

Okay.

Greg Serrao

The improvements are coming from – well, first of all, from just a great partner, definitely, the Metro Dental doctor group is very much academic competitive type of group of people. We were able to show them how some of our other large dental groups perform financially and operate from a cost basis, and they’re very open to improvements in the business. And so they would help that, then just having the management team that – and I’m not talking just the law, just the resource group, as we call it, or the local management team but the actual practice managers of the 31 Park Dental practices, 25 that has practice managers. We got like 19 of those managers with us today. So they understand our operating methodology and they’ve brought that over to Metro, and so what’s contributing to the improvement is running the practices more leanly from a staff perspective, more cost effectively overall. That’s what’s driving the margin up.

Jerry Hafernik

Okay, so are you getting some good margin improvement due to some high quality people instituting good management structure, they would presumably be aided by the institution of the Improvis system and those offices, I would expect. Is that correct?

Greg Serrao

Right, go forward, I think, and progress is going to be very helpful from, well, certainly, from a cash flow perspective and the ability to manage receivables. And if we think it’s a far superior scheduling system that existed before at Metro Dental Care, and Improvis will serve as the platform for Metro to go totally electronic in 2009.

Jerry Hafernik

Okay, that’s great. And one last question on the extending of the – or the new terms on the revolver on term loan? Any changes to the covenant?

Breht Feigh

No, no.

Jerry Hafernik

Okay. And the fees that are result of the amendments here, were those fees to be paid out over the remaining time period of the agreement or were they a current period charge?

Breht Feigh

They were paid from a cash flow perspective, paid at the time of signing the amendments, but then they’re capitalized in the balance sheet and amortized over the remaining term of the facilities.

Jerry Hafernik

Okay, great. Thank you very much.

Breht Feigh

And, Jerry, just to comment, to give a little more insight for others and for the other benefits as well on the callers. Without giving you specific numbers, we recruited 25% more doctors than we recruited last year; and our retention rate’s better than last year.

Jerry Hafernik

Okay, that’s great.

Breht Feigh

And on the Improvis system, we historically had this system called Comdent, and having been with ADP for 11 years, we used to do a lot of data mining out of Comdent. There are ability to mine data and analyze data out of Improvis’ night and day difference from Comdent. It is phenomenal. There isn’t a question that I’ve asked to the ISP that they haven’t been able to answer. So the benefit of Improvis, I think, long-term is going to be pretty exciting for the dental groups themselves.

Jerry Hafernik

Great, thank you.

Operator

All right. The next question is Travis Devitt [ph].

Travis Devitt

Hi. Hi, guys, this is actually Quincy Lee. I have a question on the – with regards to the acquisition activity given the economy in the credit situation. Do you think you’ll be a little more cautious perhaps and pay down debt a little faster than you otherwise would have given the environment? Or just to help me understand your thoughts on the capital structure and the funding environment.

Greg Serrao

Well, we are limited with our current credit agreements with how much we can spend on acquisitions in any given year, so there is that limitation. We are always –

Travis Devitt

What is that? What is that limitation?

Greg Serrao

$15 million.

Travis Devitt

Okay.

Greg Serrao

And we are always looking for good acquisition opportunities but the current credit environment or credit markets, I think allows us or forces us but in a helpful way to use that in as a pricing discipline, so we’re not going to – at the tail end of ’07, we did the Metro Dental deal, we did the BKV deal. Those were the highest multiples we’ve ever paid and at the time, they were the right prices because we didn’t want to lose those properties; but we’re not going to have that. Presented with that opportunity today, we would up the pay-down debt and to pay those multiples.

Travis Devitt

Okay, great. And with the credit facility, is it your thinking – I mean, obviously, you bought yourself, I guess, six months or so but it’s still relatively near in the future. Is it your thinking that you will just, as the back (inaudible) to be able to do the same, get a six-month extension again? Probably, one of the things – I’d like to think it’s prudent to pay down as much debt as possible so that you’re not under the gun seven months from now.

Breht Feigh

Is there a comment?

Greg Serrao

No.

Travis Devitt

Okay. And then the fees paid, did you say how much those were or how much would you say you paid for them?

Breht Feigh

No, we haven’t disclosed the fees.

Travis Devitt

Okay. Thank you very much. It looks like a really good quarter. Thanks.

Greg Serrao

Thank you for listening.

Operator

And your next question is for Mark Cooper.

Mark Cooper – Wells Capital

Thank you. It’s Mark Cooper from Wells Capital. You mentioned that -- I believe you mentioned there was $8 million of cash flow from operations year-to-date that was attributable to PDG. Is that correct?

Greg Serrao

Correct. That’s what we would estimate that in-house service fee has generated for us.

Mark Cooper – Wells Capital

Okay, and that’s in the cash flow from operations only?

Greg Serrao

Right.

Mark Cooper – Wells Capital

Could you characterize for me and I’m sorry if you’ve done this before, but I’m still a little unclear as to what you think is driving the inefficiencies. Is it the – what seems obvious to me is a tooth lightening or filing or these things? What is it that’s the top line miss in your view? Not miss but not meeting the expectations that you clearly have when your pricing is missing?

Greg Serrao

Well, dentistry is – and I’m not a clinician, so we can’t give you what we experience from the business side. Dentistry is a lot of choices. This is not like if you have a heart attack, you go to the hospital. In the emergency room, they do whatever procedures they have to do and then they say, “Mr. Cooper, you need to have triple bypass surgery,” and you say, “No, I’ll do two bypass.” It’s what you get. Dentistry is not that way, so in a lot of cases. So, for instance, I was in Memphis a couple of weeks ago and Dr. Calderon, one of the doctors there, mentioned that she had a patient that she’s had a long time come in, broke into her normal treatment plan would be to do a root canal because the root was exposed, so the patient’s in pain. Do a root canal and put a crown on; about $1,100 procedure. Patient opted to have the tooth pulled, $80 procedure. And that’s the thing that we’re experiencing or our dental groups are experiencing, or mom or dad want to put their teenager, a young child into braces; but it’s not clinically necessary but they would like to straighten out the teeth but at this point in time, they make a decision that they can’t spend $5,000 to do that. That’s the things that we’re seeing. Did that make sense?

Mark Cooper – Wells Capital

Yes, that does.

Greg Serrao

Yes. Tooth widening, for sure, is an elective procedure and that’s being impacted, no doubt. So it’s a lot of these choices that the patients do have to make and can make. We’re seeing them off for what I think the doctors would say is less optimal care. I mean, they choose to have a tooth pulled and now have a gap, and then is not what any – the dentists obviously are geared towards saving teeth and maintaining proper dentition in the mouth, so pulling teeth is not really where they want to be.

Mark Cooper – Wells Capital

Is there a point in time where they go on sale in the dentist office? I know that sounds silly but why not?

Greg Serrao

Why not?

Mark Cooper – Wells Capital

Go on sale.

Greg Serrao

Go on sale meaning?

Mark Cooper – Wells Capital

Like I’ll pull your tooth for – I’ll give you the crown for $800 instead of $1,100 that thing. You just don’t think any of that would enhance the utilization at this point?

Greg Serrao

I don’t know that’s going to dramatically change the utilization patterns in the practice.

Mark Cooper – Wells Capital

Okay. Then, Greg, let me ask you one last question that you, I think you mentioned earlier in the call that the day you felt acquisition multiples were coming down relative to the potential for increase in capital gain. Is that – that’s a two months factor now at this point? Is that suggest that you have things in the harbor you get done by the end of the year or –?

Greg Serrao

I’m not sure I follow your question on this Mark. I’m sorry.

Mark Cooper – Wells Capital

Well, I thought you mentioned that you thought you had seen acquisition opportunities or pricing come down in the face of a potential tax increase under new administration and once the calendar turns up pretty much a change in tax situation, does that mean that you have deals pricing or deals eminent here before the end of the year?

Greg Serrao

We had deals that we’re closing, and I mentioned before the year ends yes.

Mark Cooper – Wells Capital

All right, thank you.

Greg Serrao

Thank you.

Operator

Thank you. (Operator instructions)

Greg Serrao

Kathy, are you still with us?

Operator

I’m still with you. There’s no other question at this time sir.

Greg Serrao

All right. Thank you Kathy. Thank you everybody for participating. We look forward to talking to you next year. Have a good fourth quarter.

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