<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 12, 1999
INTERDENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-25549 95-4710504
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
222 North Sepulveda Boulevard, Suite 740, El Segundo, California 90245-4340
(Address of principal executive offices) (Zip Code)
(310) 765-2400
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
1
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 12, 1999, the Company completed the previously announced mergers
with Gentle Dental Service Corporation ("GDSC") and Dental Care Alliance Inc.
("DCA"). In the completed combination, GDSC and DCA each became a
wholly-owned subsidiary of InterDent, Inc. ("InterDent"), a new Delaware
corporation headquartered in El Segundo, California. InterDent is traded on
the Nasdaq National Market under the trading symbol DENT.
In the mergers each share of DCA's 7,031,187 common stock was exchanged for
1.67 shares of InterDent Common Stock. Also, each share of GDSC's 9,178,602
total shares of outstanding common stock, including earn-out shares that were
earned but not yet issued, automatically converted into one share of common
stock of InterDent. Each 10 shares of GDSC's 100 outstanding shares of
Preferred Stock -- Series C automatically converted into one share of common
stock of InterDent. Also, each share of GDSC's 100 outstanding shares of
Preferred Stock -- Series A and 1,628,663 outstanding shares of Convertible
Preferred Stock -- Series D converted into one share of preferred stock of
InterDent with the same rights, preferences, and privileges as to InterDent as
the share of Preferred Stock had with respect to GDSC.
The mergers have been accounted for using the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for the periods
prior to the completion of the combination have been restated as though the
companies had been combined. The restated financial statements have been
adjusted to conform the lives in computing depreciation of equipment and
amortization of intangible assets. The related adjustments were not material
to the financial statements.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
Audited consolidated balance sheets as of December 31, 1997 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1998.
Included as pages 4 to 41 of this Form 8-K/A Amendment No. 1.
(c) Exhibits.
23.1 Consent of Independent Accountants
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report.................................................................................4
Consolidated Balance Sheets at December 31, 1997 and 1998..................................................5-6
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and
1998.........................................................................................................7
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1997 and
1998......................................................................................................8-10
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998.....................................................................................................11-13
Notes to Consolidated Financial Statements...............................................................14-41
</TABLE>
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Interdent, Inc.:
We have audited the accompanying consolidated balance sheets of Interdent, Inc.
and subsidiaries as of December 31, 1997 and 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Dental Care Alliance, Inc. and subsidiaries, which financial statements reflect
total assets constituting 39% and 25% as of December 31, 1997 and 1998,
respectively, and total revenues constituting 10%, 15% and 22% for each of the
years in the three-year period ended December 31, 1998, respectively, of the
related consolidated totals. Those financial statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Dental Care Alliance, Inc. and subsidiaries,
is based solely on the report of the other auditors. Separate financial
statements of Gentle Dental Service Corporation and subsidiaries also included
in the 1996 consolidated financial statements were audited by other
auditors whose report dated February 28, 1997, expressed an unqualified opinion
on those financial statements. The contribution of Gentle Dentle Service
Corporation and Subsidiaries to total revenues and net loss amounted to 66%
and 66% of the respective totals for 1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Interdent, Inc. and subsidiaries as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Orange County, California
May 27, 1999
4
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS (NOTE 7) 1997 1998
-------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,670 $ 8,244
Accounts receivable, net of allowances of $4,159 and $6,855 in 1997
and 1998, respectively 6,395 10,616
Management fee receivables 2,645 4,536
Current portion of notes and advances receivable from professional
associations, net 567 1,157
Supplies inventory 1,238 2,887
Prepaid expenses and other current assets 1,851 3,164
-------------------- -------------------
Total current assets 33,366 30,604
Property and equipment, net (note 4) 11,207 21,379
Intangible assets, net (note 5) 27,584 105,111
Notes and advances receivable from professional associations, net of
current portion 314 4,062
Other assets 501 3,978
-------------------- -------------------
Total assets $ 72,972 $ 165,134
==================== ===================
LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,090 $ 4,223
Accrued payroll and payroll related costs 2,149 4,862
Other current liabilities (note 6) 4,690 10,809
Current portion of long-term debt and capital lease obligations
(notes 7 and 14) 846 4,001
-------------------- -------------------
Total current liabilities 10,775 23,895
Long-term liabilities:
Obligations under capital lease, net of current portion (note 14) 833 1,243
Long-term debt, net of current portion (note 7) 14,407 35,854
Convertible senior subordinated debt -- 30,000
Deferred income taxes 773 2,914
Other long-term liabilities 115 136
-------------------- -------------------
Total long-term liabilities 16,128 70,147
-------------------- -------------------
Total liabilities 26,903 94,042
-------------------- -------------------
</TABLE>
5
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1997 and 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1997 1998
-------------------- -------------------
<S> <C> <C>
Redeemable common stock, no par value, 183,686 and 180,712 shares issued
and outstanding in 1997 and 1998, respectively (note 9) $ 2,130 $ 2,102
-------------------- -------------------
Shareholders' equity (notes 8 and 10):
Preferred stock, 30,000,000 shares authorized:
Preferred stock - Series A, no par value, 100 shares authorized;
zero and 100 shares issued and outstanding in 1997 and 1998,
respectively -- 1
Convertible preferred stock - Series B, no par value, 70,000
shares authorized, zero shares issued and outstanding in 1997
and 1998, respectively -- --
Preferred stock - Series C, no par value, 100 shares authorized;
zero and 100 shares issued and outstanding in 1997 and 1998,
respectively -- --
Convertible preferred stock - Series D, no par value, 2,000,000
shares authorized; zero and 1,628,663 shares issued and
outstanding in 1997 and 1998, respectively -- 12,089
Common stock, $0.001 par value, 50,000,000 authorized, 19,183,540 and
20,584,426 shares issued and outstanding in 1997 and 1998,
respectively 19 21
Additional paid-in capital 49,399 61,629
Shareholder notes receivable (577) (596)
Accumulated deficit (4,902) (3,654)
-------------------- -------------------
Total shareholders' equity 43,949 68,990
Commitments and contingencies (notes 3 and 14)
-------------------- -------------------
Total liabilities, redeemable common stock and
shareholders' equity $ 72,972 $ 165,134
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1997 and 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Dental practice net patient service revenue $ 3,701 $ 29,327 $ 103,136
Net management fees 12,002 21,664 30,827
Licensing and other fees 348 291 695
-------------------- -------------------- -------------------
Total revenues 16,051 51,282 134,658
-------------------- -------------------- -------------------
Costs and expenses:
Clinical salaries and benefits and provider
costs 1,605 14,712 50,894
Practice nonclinical salaries and benefits 4,391 9,683 19,418
Dental supplies and lab expenses 3,008 7,892 17,267
Practice occupancy expenses 1,670 4,525 8,884
Practice selling, general and administrative
expenses 1,900 6,178 14,234
Corporate selling, general and administrative
expenses 3,779 6,592 8,613
Corporate restructure and merger costs -- 1,809 3,994
Depreciation and amortization 1,019 2,001 5,361
-------------------- -------------------- -------------------
Total operating expenses 17,372 53,392 128,665
-------------------- -------------------- -------------------
Operating income (loss) (1,321) (2,110) 5,993
-------------------- -------------------- -------------------
Nonoperating expense:
Interest expenses, net (728) (390) (2,407)
Other expense, net (55) (74) (14)
-------------------- -------------------- -------------------
Nonoperating expense, net (783) (464) (2,421)
-------------------- -------------------- -------------------
Income (loss) before income taxes (2,104) (2,574) 3,572
Provision (benefit) for income taxes (619) 187 2,302
-------------------- -------------------- -------------------
Net income (loss) (1,485) (2,761) 1,270
Dividends on redeemable convertible preferred
stock (246) (1,032) --
Accretion of redeemable common stock (282) (34) (22)
-------------------- -------------------- -------------------
Net income (loss) attributable to
common stock $ (2,013) $ (3,827) $ 1,248
==================== ==================== ===================
Net income (loss) per share attributable to common stock:
Basic $ (0.25) $ (0.31) $ 0.06
Diluted (0.25) (0.31) 0.06
==================== ==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDER RETAINED
PREFERRED COMMON STOCK PAID-IN NOTES EARNINGS
STOCK CAPITAL RECEIVABLE (DEFICIT) TOTAL
-------------- -------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ -- $ 8 $ 3,219 $ (40) $ 922 $ 4,109
Reclassification of
members capital upon
C-Corporation election -- -- 175 -- (175) --
Redeemable convertible
preferred stock -
Series B initial
issuance and issuance -- -- (1,266) -- -- (1,266)
costs
Convertible preferred
stock - Series A
issued for acquisitions 1 -- 295 -- -- 296
Convertible preferred
stock - Series C
issued for acquisitions 1 -- 1,733 -- -- 1,734
Common stock issued in
connection with:
Acquisitions -- -- 99 -- -- 99
Other -- -- 332 -- -- 332
Exchange for
shareholder notes
receivable -- -- 137 (136) -- 1
Stock warrants issued
related to debt
financing -- 1 309 -- -- 310
Common stock and
options granted to
nonemployees -- -- 77 -- -- 77
Accretion of redeemable
common stock -- -- (191) -- (91) (282)
Payments on shareholder
notes receivable -- -- -- 40 -- 40
Dividends on redeemable
convertible preferred
stock -- -- -- -- (246) (246)
Net loss -- -- -- -- (1,485) (1,485)
-------------- -------------- -------------- -------------- ---------------- --------------
Balance, December 31, 1996 2 9 4,919 (136) (1,075) 3,719
-------------- -------------- -------------- -------------- ---------------- --------------
</TABLE>
8
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity, Continued
Years ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDER
PREFERRED COMMON STOCK PAID-IN NOTES ACCUMULATED
STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
-------------- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Convertible preferred
stock - Series C
issued for acquisitions -- -- 1,156 -- -- 1,156
Common stock issued in
connection with: -- -- -- -- -- --
Acquisitions -- -- 475 -- -- 475
Initial public
offerings, net of -- 5 27,307 -- -- 27,312
issuance costs
Other -- 1 676 -- -- 677
Stock subscription
receivable -- -- -- (273) -- (273)
Employee purchase plan -- -- 17 -- -- 17
Pursuant to options
for shareholder
notes receivable -- -- 151 (150) -- 1
Exercise of stock
options -- -- 520 -- -- 520
Stock options granted to
nonemployees -- -- 56 -- -- 56
Conversion of convertible
preferred stock -
Series A, B and C into
common stock (2) 3 12,173 -- -- 12,174
Adjustment to redemption
value of mandatorily
redeemable preferred
stock -- -- -- -- (11) (11)
Conversion of mandatorily
redeemable preferred
stock -- 1 1,784 -- 11 1,796
Accrued dividends on
mandatorily redeemable
preferred stock -- -- -- -- (1,032) (1,032)
Accretion of redeemable
common stock -- -- -- -- (34) (34)
Elimination of put rights
on common stock -- -- (191) -- -- (191)
Interest accrued on
shareholder notes
receivable -- -- -- (18) -- (18)
Value of shares to be
issued under earn-outs -- -- 356 -- -- 356
Net loss -- -- -- -- (2,761) (2,761)
-------------- -------------- -------------- -------------- --------------- --------------
Balance, December 31, 1997 -- 19 49,399 (577) (4,902) 43,939
-------------- -------------- -------------- -------------- --------------- --------------
</TABLE>
9
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity, Continued
Years ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDER
PREFERRED COMMON STOCK PAID-IN NOTES ACCUMULATED
STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
-------------- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock - Series A
issued for private
placement 1 -- -- -- -- 1
Convertible preferred
stock - Series D
issued for private
placement, net of
issuance costs 12,089 -- -- -- -- 12,089
Common stock issued in connection
with:
Acquisitions -- 2 10,495 -- -- 10,497
Employee purchase plan -- -- 172 -- -- 172
Exercise of stock options -- -- 126 -- -- 126
Stock options granted to
nonemployees -- -- 196 -- -- 196
Accretion of redeemable
common stock -- -- -- -- (22) (22)
Interest accrued on
shareholder notes
receivable -- -- -- (19) -- (19)
Issuance of common stock
warrants for financing -- -- 92 -- -- 92
Value of shares to be
issued under earn-outs -- -- 649 -- -- 649
Net income -- -- -- -- 1,270 1,270
-------------- -------------- -------------- -------------- --------------- --------------
Balance, December 31, 1998 $ 12,090 $ 21 $ 61,129 $ (596) $ (3,654) $ 68,990
============== ============== ============== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- ------------------ --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,485) $ (2,761) $ 1,270
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,019 2,001 5,361
Loss on disposal of assets 63 31 4
Loss on investment in joint venture 95 135 4
Non-employee stock options granted and
stock issued for fees and compensation 77 56 59
Interest accrued on shareholder notes
receivable -- (18) (19)
Amortization of deferred financing costs 242 25 204
Deferred income taxes (146) 91 169
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable, net (1,144) (6) (614)
Management fees receivable from
Professional Associations (916) (1,138) (3,610)
Supplies inventory 63 (399) (335)
Prepaid expenses and other current assets 52 (1,155) (661)
Other assets (161) 266 (922)
Accounts payable 803 354 (800)
Accrued payroll and payroll related costs 1,253 423 539
Other liabilities 74 1,699 1,686
-------------------- ------------------ --------------------
Net cash provided by (used in)
operating activities (111) (396) 2,335
-------------------- ------------------ --------------------
</TABLE>
11
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- ------------------ --------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchase of property and equipment $ (877) $ (3,413) $ (8,348)
Net payments received (advances) on notes
receivable from Professional Associations 3 (370) (336)
Cash paid for investment in joint venture (82) -- --
Advances to Professional Associations (17) (467) (3,860)
Cash paid for acquisitions, including directs
costs, net of cash acquired (7,754) (10,729) (62,959)
-------------------- ------------------ --------------------
Net cash used in investing activities
(8,727) (14,979) (75,503)
Cash flows from financing activities:
Net proceeds (payments) on short-term
borrowings 1,048 (2,097) --
Net borrowings from credit facilities -- 10,000 19,874
Proceeds from issuance of long-term debt 584 327 31,545
Payments of long-term debt and obligations
under capital leases (1,298) (3,617) (1,319)
Payments of deferred financing costs (150) (30) (1,784)
Proceeds from issuance of common and preferred
stock 11,946 28,490 15,265
Common and preferred stock issuance costs (500) (918) (2,818)
Payments on shareholder notes receivable 40 -- --
Exercise of put rights (90) (103) (50)
Exercise of options -- 520 29
-------------------- ------------------ --------------------
Net cash provided by financing
activities 11,580 32,572 60,742
-------------------- ------------------ --------------------
Increase (decrease) in cash and cash
equivalents 2,742 17,197 (12,426)
Cash and cash equivalents, beginning of year
731 3,473 20,670
-------------------- ------------------ --------------------
Cash and cash equivalents, end of year $ 3,473 $ 20,670 $ 8,244
==================== ================== ====================
</TABLE>
12
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- ------------------ --------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid (received) during period:
Interest $ 503 $ 654 $ 2,567
Income taxes (159) 128 1,899
Non Cash Transactions:
Purchase of property and equipment under capital
leases 825 278 --
Issuance of shareholder notes receivable 136 150 --
Interest accrued on shareholders notes receivable -- 18 19
Accretion of redeemable common stock 282 34 22
Issuance of common stock to founders and to
purchase the predecessor companies 530 -- --
Issuance of redeemable convertible preferred stock
- Series B to investment bankers for services 314 -- --
Conversion of convertible preferred stock Series,
A, B, and C into shares of common stock -- 12,174 --
Conversion of mandatorily redeemable preferred
stock into shares of common stock -- 1,796 --
Warrants issued in connection with public and
private offerings -- 150 92
Effect of acquisitions:
Liabilities assumed or issued 2,921 8,887 16,353
Common and convertible preferred stock and
warrants issued 2,725 1,635 10,496
Value of shares to be issued under earn-out
agreements -- 356 649
Elimination of put rights on common stock -- 191 --
Elimination of minority interest 19 -- --
==================== ================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
INTERDENT, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 1997 and 1998
(In thousands, except share and per share amounts)
(1) ORGANIZATION
InterDent, Inc. ("InterDent" or the "Company"), incorporated on October 13,
1998, is a Delaware corporation headquartered in El Segundo, California. The
Company is one of the largest providers of dental practice management services
to multi-specialty dental professional corporations and associations ("PAs") in
the United States. Each PA employs and directs the professional dental staff and
provides all of the clinical services to the patients. The Company provides
management services to dental practices in selected markets in California,
Florida, Georgia, Hawaii, Idaho, Indiana, Michigan, Nevada, Oregon, Pennsylvania
and Washington.
As part of a delivery network of multi-specialty dental care, the Company
provides management services to affiliated PAs under long-term management
service agreements. Under the terms of the management service agreements, the
Company bills and collects patient receivables and provides all administrative
support services to the PAs. The dentists employed through the Company's network
of affiliated dental practices provide comprehensive general dentistry services
and offer specialty dental services, which include orthodontics, periodontics,
endodontics, pedodontics, prosthodontics, oral surgery and oral pathology. The
Company's practice management services facilitate the delivery of convenient,
high quality, comprehensive and affordable dental care to patients in a
comfortable environment. The Company seeks to build geographically dense dental
practice networks in selected markets through a combination of affiliating with
existing dental practices and/or selectively developing new offices.
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
On March 12, 1999, Gentle Dental Service Corporation ("GDSC") and Dental Care
Alliance, Inc. ("DCA") completed mergers in which each entity became a wholly
owned subsidiary of InterDent, Inc., a newly formed corporation. These
consolidated financial statements have been prepared following the
pooling-of-interests method of accounting and reflect the combined financial
position and operating results of GDSC and DCA (and certain PAs as discussed
below) for all periods presented.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board reached a consensus on the accounting for transactions between
physician practice management companies and physician practices and the
financial reporting of such entities (EITF issue number 97-2). For financial
reporting purposes, EITF 97-2 mandates the consolidation of physician
practice activities with the practice management company when certain
conditions have been met, even though the practice management company does
not have an equity investment in the physician practice. The accompanying
financial statements are prepared in conformity with the consensus reached in
EITF 97-2. All significant intercompany transactions and accounts have been
eliminated.
Corporate practice of medicine laws in the states in which Interdent currently
operates prohibit it from owning dental practices. In response to these laws the
Company has executed management services agreements ("MSAs") with various PAs.
Under those circumstances where the MSAs meet the criteria for consolidation as
outlined in EITF 97-2, all the accounts of those PAs are included in the
accompanying consolidated financial statements. Accordingly, the consolidated
statements of operations include the net patient revenues and related expenses
of these PAs.
14
<PAGE>
In instances where the MSAs have not met the criteria for consolidation, the
Company does not consolidate the accounts of the PAs. Accordingly, the
consolidated statements of operations exclude the net patient revenues and
expenses of these PAs. Rather, the consolidated statements of operations include
only the Company's net management fee revenues generated from those MSAs and the
Company's expenses associated with those MSAs.
DEPENDENCE ON PAs
The Company receives fees for services provided to the PAs under MSAs but does
not employ dentists or control the practices of the dentists employed by the
PAs. The Company's revenue is dependent on revenue generated by the PAs and,
therefore, effective and continued performance of the managed dental offices
during the term of the MSAs is essential to the Company's long-term success.
NET REVENUES
Revenues consist primarily of PA net patient service revenue ("net patient
revenue") and Company net management fees. Net patient revenue represents the
consolidated revenue of the PAs reported at the estimated net realizable amounts
from patients, third party payors and others for services rendered, net of
contractual adjustments. Net management fees represent amounts charged to the
unconsolidated PAs on an agreed-upon percentage of the PAs net patient service
revenue under MSAs, net of provisions for contractual adjustments and doubtful
accounts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from patients and
insurance carriers for dental services provided by the related PAs and are
recorded net of contractual adjustments and allowance for doubtful accounts.
Contractual allowances, included as a reduction of net receivables, represent an
estimate of the difference between the amount billed by the Company and the
amount which the patient, third party payor or others are contractually
obligated to pay the Company. A provision for doubtful accounts is provided
based upon expected collections and is included in practice selling, general and
administrative expenses.
RECEIVABLES FROM PAs
Management fees receivable represents amounts owed to the Company from
unconsolidated PAs related to revenue recorded in accordance with their MSAs and
is recorded based upon the net realizable value of patient accounts receivables
of the PAs. The Company reviews the collectibility of the patient accounts
receivables of the PAs and adjusts its management fees receivable accordingly.
Advances consist primarily of receivables from PAs due in connection with
working capital advances made to certain unconsolidated PAs. The Company reviews
the collectibility of its receivables related to advances to PAs. This review is
based upon the cash flow of the PAs, and the fair market value of the collateral
of the assets of the PAs. Commencing August 1997, under terms of note agreements
such advances are repayable under terms calling for interest at 8 1/2%, adjusted
for any changes in the Company's borrowing rate, and are due on demand. All
advances and payables between PAs and the Company under common ownership have a
right of offset included in the agreement. The Company has established a reserve
for these advances of $86 and $149 as of December 31, 1997 and 1998,
respectively.
15
<PAGE>
Notes receivable from PAs relate to financing of medical and non-medical
capital additions made by certain unconsolidated PAs. Notes receivables from
PAs generally have terms of 2 to 10 years, bearing interest with rates
between 8 1/2 % and 18 1/2 %, and are secured by the assets of the PAs. Such
notes are personally guaranteed by the PA owners.
Advance and note amounts to be collected within the next year are classified
as current assets in the accompanying consolidated balance sheets.
SUPPLIES
Supplies consist primarily of disposable dental supplies and instruments stored
at the clinics. Supplies are stated at the lower of cost (first-in, first-out
basis) or market (net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged to expense as
incurred and expenditures for additions and improvements are capitalized.
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the lease. Leasehold improvements are
amortized over their estimated useful life or the remaining lease period,
whichever is less. Depreciation of property and equipment is recorded using the
straight-line method over the shorter of the related lease term or the estimated
useful lives, which are as follows:
<TABLE>
<CAPTION>
RANGE OF LIVES
(IN YEARS)
--------------------
<S> <C>
Dental equipment 3-15
Computer equipment 3
Furniture, fixtures, & equipment 3-15
Leasehold improvements 3-20
Vehicles 5
Buildings 25
</TABLE>
INTANGIBLE ASSETS
Intangible assets result primarily from the excess of cost over the fair
value of net tangible assets purchased. Such intangibles relate primarily to
noncompetition covenants, MSAs, and goodwill associated with dental practice
acquisitions. Intangibles relating to MSAs consist of the costs of purchasing
the rights to provide management support services to PAs over the initial
noncancelable terms of the related agreements, usually 25 to 40 years. Under
these agreements, the PAs have agreed to provide dental services on an
exclusive basis only through facilities provided by the Company, which is the
exclusive administrator of all non-dental aspects of the acquired PAs,
providing facilities, equipment, support staffing, management and other
ancillary services. The agreements are noncancelable except for performance
defaults.
Intangible assets are amortized on the straight-line method, ranging from 5
years for other intangibles to 25 years for MSAs and goodwill.
16
<PAGE>
LONG-LIVED ASSETS
The Company reviews its asset balances for impairment at the end of each quarter
or more frequently when events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. To perform that review, the
Company estimates the sum of expected future undiscounted net cash flows from
assets. If the estimated net cash flows are less than the carrying amount of the
asset, the Company recognizes an impairment loss in an amount necessary to
write-down the asset to a fair value as determined from expected future
discounted cash flows. No write-down of assets was recorded for the years ended
December 31, 1996, 1997 and 1998.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The Company estimates the fair value of its monetary assets and liabilities,
based upon the existing interest rates relate to such assets and liabilities,
redeemable common stock compared to current market rates of interest for
instruments with a similar nature and degree of risk. The Company estimates
that the carrying value of all of its monetary assets and liabilities
approximates fair value as of December 31, 1997 and 1998.
USE OF ESTIMATES
In preparing the financial statements conforming to generally accepted
accounting principals ("GAAP"), we have made estimates and assumptions that
affect the following:
- Reported amounts of assets and liabilities at the date of the
financial statements;
- Disclosure of contingent assets and liabilities at the date of the
financial statements; and
- Reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
NET INCOME (LOSS) PER SHARE
The Company utilizes Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). In accordance with SFAS 128, the Company
presents "basic" earnings per share, which is net income divided by the average
weighted common shares outstanding during period, and "diluted" earnings per
share, which considers the impact of common share equivalents. Dilutive
potential common shares represent shares issuable using the treasury stock
method. Dilutive potential common shares comprising convertible preferred stock,
convertible subordinated debt, contingent shares, and the exercise of certain
options, warrants, and put rights have been excluded from the computation of
diluted loss per share for the
17
<PAGE>
years ended December 31, 1996 and 1997 as their effect is anti-dilutive. Such
excluded issuable shares were 131,033 and 589,242, respectively, for the years
ended December 31, 1996 and 1997. The following table summarizes the computation
of earnings (loss) per share:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- -------------------- --------------------
<S> <C> <C> <C>
Net income (loss) attributable to common
stock - basic and diluted $ (2,013) $ (3,827) $ 1,248
=================== ==================== ====================
Basic shares reconciliation:
Weighted average common shares
outstanding 8,101,573 12,258,393 20,087,462
Contingently repurchaseable common
shares -- -- (570,890)
------------------- -------------------- --------------------
Basic shares 8,101,573 12,258,393 19,516,572
=================== ==================== ====================
Diluted Shares Reconciliation:
Basic Shares 8,101,573 12,258,393 19,516,572
Effects of Dilutive Potential Common
Shares:
Convertible preferred stock -- -- 1,023,159
Warrants -- -- 108,888
Put rights -- -- 64,862
Contingent shares -- -- 68,329
Assumed conversion of options -- -- 440,425
------------------- -------------------- --------------------
Diluted shares 8,101,573 12,258,393 21,222,235
=================== ==================== ====================
Net income (loss) attributable to
common stock:
Basic $ (0.25) $ (0.31) $ 0.06
Diluted (0.25) (0.31) 0.06
=================== ==================== ====================
</TABLE>
COMPREHENSIVE INCOME
The Company adopted the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses). The adoption
of SFAS 130 did not have an effect on the Company's financial position or
results of operations as the Company does not have components of other
comprehensive income.
INCOME TAXES
Income taxes are accounted for under the asset and liability method in
accordance with Statement of Financial and Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109"). Upon its incorporation on October
23, 1996, DCA, a wholly owned subsidiary of InterDent, Inc. terminated its
predecessor status as a Limited Liability Corporation and became subject to
income taxes.
18
<PAGE>
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). Under SFAS 123, the Company may elect to recognize stock-based
compensation expense based on the fair value of the awards or continue to
account for stock-based compensation under Accounting Principles Board Opinion
No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and disclose in the
notes to the financial statements the effects of SFAS 123 as if the recognition
provisions were adopted. The Company has elected to account for stock-based
compensation under APB 25.
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS"
131"). SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing the
performance as the source of the Company's reportable segments. The adoption of
SFAS 131 did not have an impact for the reporting and display of segment
information as each of the affiliated dental practices are considered to have
similar economic characteristics, as defined in the pronouncement, and therefore
are aggregated.
(3) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
Business Combinations
On March 12, 1999, the Company completed mergers with GDSC and DCA through the
exchange of 1 share for each share of GDSC common stock and 1.67 shares for each
share of DCA common stock. In the completed combination, GDSC and DCA each
became a wholly-owned subsidiary of the Company. See note 15.
The mergers have been accounted for using the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for the periods
prior to the completion of the combination have been restated as though the
companies had been combined. The restated financial statements have been
adjusted to conform the lives in computing depreciation of equipment and
amortization of intangible assets. The related adjustments were not material to
the financial statements.
The results of operations of GDSC and DCA for the years ended December 31,
1996, 1997, and 1998 as previously reported are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Dental practice net patient
service revenue:
GDSC $ 3,701 $29,327 $103,136
DCA - - -
----------- ----------- -----------
$ 3,701 $29,327 $103,136
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net management fees:
GDSC $ 10,712 $ 14,076 $ 2,186
DCA 1,290 7,588 28,641
----------- ----------- -----------
$ 12,002 $ 21,664 $ 30,827
----------- ----------- -----------
----------- ----------- -----------
Consulting and licensing fees:
GDSC $ - $ - $ -
DCA 348 291 695
----------- ----------- -----------
Net income (loss): $ 348 $ 291 $ 695
----------- ----------- -----------
----------- ----------- -----------
GDSC $ (1,687) $ (3,187) $ (1,800)
DCA 202 420 3,098
Adjustments to Conform
Accounting Methods - 6 (28)
----------- ----------- -----------
----------- ----------- -----------
$ (1,485) $ (2,761) $ 1,270
</TABLE>
In connection with the mergers, the Company recorded direct merger expenses of
$2,241 in the fourth quarter of 1998. These expenses consist primarily of
accounting, legal and other advisory fees. Also, the Company recorded a
restructuring charge in 1998 of $1,590 relating to severance packages. The
Company anticipates additional merger and restructure charges to be incurred
throughout 1999.
On November 4, 1997, GMS Dental Group, Inc. merged into GDSC. In connection with
the merger transaction, all of the issued and outstanding shares of GMS common
stock were converted into 4,548,161 shares of common stock of GDSC. The merger
has been accounted for as a pooling of interests.
As a result of the merger, GDSC recorded direct merger expenses of $677. These
expenses consist primarily of accounting, legal and other advisory fees. Also,
GDSC recorded a restructuring charge of $1,295, of which $1,132 was recorded in
1997 while an additional $163 was recorded when incurred in 1998. The charge
included $289 for employee related costs, $311 for facility consolidation and
related leasehold and fixed asset write-offs and $695 for the redirection of
certain duplicative operations and programs and other costs. These charges were
substantially completed in 1998 as the remaining obligation related to the
restructuring charges was approximately $130 at December 31, 1998 and included
in other current liabilities in the accompanying financial statements.
DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
20
<PAGE>
During 1997, the Company entered into 11 MSAs representing 11 office locations.
The MSAs have not met the EITF consolidation requirements. Accordingly, the
consolidated statements of operations exclude the net patient revenues and
expenses of the PAs associated with these MSAs. Rather, the consolidated
statements of operations include only the management fees revenues from those
MSAs and the Company's expense associated with those MSAs.
In 1997, the Company also acquired substantially all of the assets of 15 dental
office locations, including cash, accounts receivable, supplies and fixed assets
and entered into MSAs with the PAs that met the EITF consolidation requirements.
Accordingly, the consolidated statements of operations include the net patient
revenues and related expenses of the PAs.
On December 29, 1997, the Company acquired all of the outstanding capital
stock of Marketplace Dental, Inc., a Florida corporation ("Marketplace"),
pursuant to the merger (the "Merger") of Marketplace with and into Dental
Care Alliance of Florida, Inc. ("DCA Florida"), a wholly-owned subsidiary of
the Company. Marketplace was a dental practice management company, which
managed six dental practices in Palm Beach County. Pursuant to the Merger DCA
acquired all of the assets and assumed certain liabilities of Marketplace.
Such assets consisted primarily of non-dental assets (including dental
equipment) and management agreements. Pursuant to the Merger, all shares of
Marketplace common stock were converted into the right to receive, in the
aggregate 133,600 shares of unregistered common stock of the Company and an
amount in cash of approximately $500, which is included other current
liabilities. Approximately $1,760 of the purchase price has been allocated to
intangible assets.
The total price for the fair value of the assets acquired, including
intangible assets was $21,251. Approximately $11,187 of the purchase price
has been allocated to intangible assets. The total purchase consideration
included $10,729 in cash, $1,635 in nonredeemable preferred and common stock,
warrants, and $8,827 in liabilities issued or assumed. Additional shares may
be issued for future earnouts based upon the financial performance of the PAs.
The Company and its related Washington and Oregon PAs entered into asset
purchase and management service agreements (collectively, the "Agreements")
on January 1, 1998. The new Agreements meet the criteria for consolidation of
the PA accounts with the Company for financial reporting purposes.
Under the terms of the Agreements, the Company acquired all of the fixed assets
and assumed certain liabilities of the PAs. In exchange, the Company paid
consideration of $1,674 in addition to the assumption of certain liabilities,
which was offset by the Company's $1,674 receivable from the PAs. In addition,
the Company will pay $575 in cash over 18 equal monthly installments and may pay
future consideration, to be determined upon the achievement of certain financial
results, as described in the Agreements.
During 1998, the Company entered into twenty-one MSAs representing 44 office
locations. The MSAs have not met the EITF consolidation requirements.
Accordingly, the consolidated statements of operations exclude the net patient
revenues and expenses of the PAs associated with these MSAs. Rather, the
consolidated statements of operations include only the management fees revenues
from those MSAs and the Company's expense associated with those MSAs.
The Company also acquired substantially all of the assets of 41 dental office
locations, including cash, accounts receivable, supplies and fixed assets and
entered into MSAs with the PAs that met the EITF consolidation requirements.
Accordingly, the consolidated statements of operations include the net patient
revenues and related expenses of these. Additionally, the Company acquired all
of the outstanding capital stock of the following entities:
21
<PAGE>
- - - Capitol Dental Care, Inc., ("CDC") an Oregon corporation. CDC provides
capitated dental services under the Oregon Health Plan pursuant to a
contract with the State of Oregon Office of Medical Assistance Programs.
- - - Managed Dental Care of Oregon, Inc., ("MDCO"). MDCO is a dental care entity
that contracts with the Oregon Health Plan pursuant to a contract with the
State of Oregon Office of Medical Assistance Programs.
- - - Dedicated Dental Systems, Inc. ("Dedicated Dental"), a Bakersfield,
California company. Dedicated Dental owns and operates 11 staff model
dental offices pursuant to a license granted under the California
Knox-Keene Health Care Service Plan Act of 1975.
- - - Dental One Associates, Inc., a Georgia corporation ("Dental One").
The aggregate dental practice acquisition purchase price recorded by the
Company during the year ended December 31, 1998, representing the fair value
of the net assets acquired in the above affiliations and earnout
consideration accrued or paid for transactions completed in current and prior
periods was $90,457. Approximately $80,357 of the purchase price has been
allocated to intangible assets. The total purchase consideration included
$62,959 in cash, $10,496 in common stock issued (1,264,361 shares), and
$16,353 in liabilities incurred and assumed. Additionally, an aggregate value
of $649 shares have been earned under earn-out agreements and additional
amounts may be earned under earn-out agreements.
In connection with certain completed affiliation transactions, the Company has
agreed to pay to the seller's possible future consideration in the form of cash
and Company capital stock. The amount of future consideration payable by the
Company under earn-outs is generally computed based upon financial performance
of the affiliated dental practices during certain specified periods. The Company
accrues for earn-out payments with respect to prior practice acquisitions when
such amounts are probable and reasonably estimable.
As of December 31, 1998, the Company had accrued $3,985 for future earnout
payments, of which $1,005 is included in additional paid-in capital for
anticipated stock issuances while the remaining accrual for anticipated cash
payments is included in other current liabilities. For those acquisitions with
earn-out provisions, the Company estimates the total maximum earn-out that could
be paid, including amounts already accrued, is between $20 and $27 million from
January 1999 to December 2002, of which the majority is expected to be paid in
cash. In future years, such additional earn-out consideration could result in
additional amortization of $800 to $1,080 annually.
The above transactions have been accounted for using the purchase method of
accounting. The excess of the total purchase price over the fair value of the
net tangible and identifiable intangible assets acquired are being amortized
over the lesser of the term of the related management service agreements or 25
years using the straight-line method. The results of operations for these
practices have been included in the consolidated financial statements of the
Company since the dates of their affiliation.
The following unaudited pro forma information presents the condensed
consolidated results of operations as if the 1997 and 1998 affiliations and
acquisitions discussed above, and related financing activities had occurred as
of January 1, 1997. The pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of what the actual results of
operations would have been had the practices been affiliated as of that date,
nor does it purport to represent future operations of the Company:
22
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
As Reported:
Net patient service revenue $ 3,701 $ 29,327 $ 103,136
Net management, licensing and other fees 12,350 21,955 31,522
Net income (loss) attributable to common stock (2,013) (3,827) 1,248
Net income (loss) per share attributed to
common stock --Diluted $ (0.25) $ (0.31) $ 0.06
=================== =================== ===================
Pro forma:
Net patient service revenue $ 31,006 $ 138,157 $ 145,387
Net management, licensing and other fees 15,991 15,638 32,674
Net income (loss) (1,080) 3,458 4,882
Net income (loss) per share attributed to common
stock -- Diluted $ (0.12) $ 0.19 $ 0.21
=================== =================== ===================
</TABLE>
Net Income (loss) amounts reflected above include the effect of merger and
restructure costs of $1,809 and $3,994 during the years ended December 31, 1997
and 1998, respectively, as outlined in the business combination discussion
above.
23
<PAGE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Dental equipment $ 6,207 $ 11,876
Computer equipment 2,028 3,411
Furniture, fixtures and equipment 1,278 3,075
Leasehold improvements 3,962 6,646
Vehicles 46 70
Buildings 48 792
Land 10 395
------------------- -------------------
Total property and equipment 13,579 26,265
Less accumulated depreciation and amortization (2,372) (4,886)
------------------- -------------------
$ 11,207 $ 21,379
=================== ===================
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Management Services Agreements $ 28,468 $ 70,581
Goodwill -- 38,166
Other 127 205
------------------- -------------------
Total intangible assets 28,595 108,952
Less accumulated depreciation (1,011) (3,841)
------------------- -------------------
$ 27,584 $ 105,111
=================== ===================
</TABLE>
(6) OTHER CURRENT LIABILITIES
Other current liabilities consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Accrued earn-outs $ 386 $ 2,980
Merger and restructure costs 1,266 2,212
Acquisition and affiliation obligations 920 --
Other 2,118 5,617
------------------- -------------------
$ 4,690 $ 10,809
=================== ===================
</TABLE>
(7) DEBT
The Company has two credit facilities at December 31, 1998, providing for a
maximum borrowing of $60,000. One credit facility provides for a maximum
borrowing of $45,000. The revolving feature of the credit facility expires on
September 30, 2001, at which time it will convert into a four year term loan
to be repaid in 16 equal quarterly installments. Principal amounts owed under
the credit facility bear interest (7.48% at December 31, 1998), at varying
amounts over LIBOR (2.25% - 3.00%) or the prime rate (0.50% - 1.25%), at the
Company's option, based on its leverage ratio. The credit facility requires
the Company to pay an unused commitment fee in an amount ranging from 0.375%
to 0.750% per annum of the average daily amount by which the bank commitment
under the credit facility exceeds the aggregate amount of all loans then
outstanding. The credit facility contains several covenants including
restrictions on the ability of the Company to incur indebtedness, repurchase
of shares, pay dividends without
24
<PAGE>
prior approval and contains requirements relating to maintenance of a
specified net worth and compliance with specified financial ratios. In
addition, the credit facility requires the Company to notify the lenders
prior to making any acquisition and to obtain the consent of the lenders
prior to making acquisitions over a specified purchase price. The obligations
of the Company under the credit facility and the subsidiaries under the
guarantees are secured by a security interest in the equipment, fixtures,
inventory, receivables, subsidiary stock, certain debt instruments, accounts
and general intangibles of each of such entities.
In March 1998, the Company also executed an agreement for a $15,000 line of
credit (Revolving Note) with a financial institution. The Revolving Note is
subject to a fee for the unused portion of the line of credit of 0.25%. Certain
restrictive covenants, including debt liquidity ratios and interest, liability
and liquidity coverage, were included in the agreement and as of December 31,
1998, the Company was in compliance with such covenants. The Revolving Note
expires in May 1999, and the financial institution has provided notice of their
intention to renew for one additional year under similar terms. As such, these
amounts are included in the long-term portion of debt.
On June 3, 1998, the Company issued $30,000 of subordinated convertible notes
("Notes"). The Notes have an eight-year term and bear interest at 7.0%. See note
8 for discussion on the conversion of the Notes.
25
<PAGE>
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Credit facility, interest at 3.25% in excess of LIBOR rate, terminated
and repaid during 1998 $ 10,000 $ --
Credit facility, interest at 7.48% at December 31,1998 -- 23,518
Revolving note, interest at 1.75% over the Eurodollar rate payable
monthly. -- 6,356
Senior subordinated note payable, face value of $2,083 discounted
interest at 8%; due July 2002 1,448 1,568
Subordinated note payable, interest at 8%, interest payable annually
through January 2002; due January 2002 696 696
Senior subordinated note payable, interest at 8%; due in monthly
installments of principal and interest of $14; due July 2002 637 515
Senior subordinated note payable, face value of $500 discounted interest
at 8%; due in July 1999 441 478
Note payable, interest at 9.375%; payable in monthly installments of $4,
secured by land and building; due April 1999 -- 381
Note payable to seller, interest at 8.5%, principal and interest payable
quarterly, maturing in March 2003, secured by stock in subsidiary -- 917
Various unsecured acquisition notes payable, due in monthly and quarterly
installments of principal and interest at rates ranging
from 8.25% to 10.0%; due through November 2003 1,449 4,582
Notes payable, secured by underlying assets at specific dental
practices, interest at rates ranging from 2.65% to 11.9%, maturing
through 2002 117 114
------------------- -------------------
14,788 39,125
Less current portion (381) (3,271)
------------------- -------------------
$ 14,407 $ 35,854
=================== ===================
</TABLE>
26
<PAGE>
At December 31, 1998, the aggregate maturities of long-term debt for each of the
next five years are as follows:
<TABLE>
<S> <C>
1999 $ 3,271
2000 7,847
2001 1,720
2002 2,524
2003 117
Thereafter 23,646
------------------
$ 39,125
===================
</TABLE>
(8) SHAREHOLDERS' EQUITY
In 1997 GMS merged into GDSC. GMS had preferred stock outstanding consisting of
convertible preferred stock Series A, redeemable convertible preferred stock -
Series B and convertible preferred stock - Series C. The redeemable convertible
preferred stock - Series B, including dividends and the convertible preferred
stock Series A and C, were converted into 7,603,677 shares (3,384,302 shares of
GDSC common stock) of GMS common stock on November 4, 1997 prior to the GMS
merger. Upon closing of the merger between GMS and
27
<PAGE>
GDSC, all 10,218,578 outstanding GMS common shares were converted into 4,548,161
shares of GDSC's common stock. A reconciliation of the total shares of preferred
and common stock outstanding during the years ended December 31, 1996, 1997 and
1998 is as follows:
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON
STOCK - STOCK - STOCK - STOCK - STOCK - STOCK
SERIES A SERIES A SERIES C SERIES C SERIES D
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 -- -- -- -- -- 7,698,134
Convertible preferred stock -
Series A issued for
acquisitions 395 -- -- -- -- --
Convertible preferred stock -
Series C issued for
acquisitions -- -- 1,777 -- -- --
Common stock issued in
connection with:
Acquisitions -- -- -- -- -- 226,452
Other -- -- -- -- -- 340,430
Pursuant to options for
shareholder notes receivable -- -- -- -- -- 608,524
Exercise of stock options -- -- -- -- -- 2,000
Repurchase of common stock -- -- -- -- -- (24,000)
Common stock granted to
nonemployees -- -- -- -- -- 2,500
------------ ----------- ------------ ------------ ------------ ------------
Balance, December 31, 1996 395 -- 1,777 -- -- 8,854,040
Convertible preferred stock -
Series C issued for -- -- 1,156 -- -- --
acquisitions
Common stock issued in connection with:
Acquisitions -- -- -- -- -- 109,039
Initial public offering -- -- -- -- -- 4,840,000
Employee purchase plan -- -- -- -- -- 1,902
Other -- -- -- -- -- 133,600
Pursuant to options on
shareholder notes receivable -- -- -- -- -- 333,816
Exercise of stock options -- -- -- -- -- 434,063
Conversion of preferred stock -- -- -- -- -- 1,092,778
Conversion of preferred stock -
Series A, B and C into
common stock (395) -- (2,933) -- -- 3,384,302
------------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1997 -- -- -- -- -- 19,183,540
Preferred stock - Series A
issued for private placement -- 100 -- -- -- --
Convertible preferred stock -
Series C issued for private -- -- -- -- -- 10
placement, convert into
common stock
Convertible preferred stock -
Series D for private
placement -- -- -- -- 1,628,663 --
Common stock issued in connection with:
Acquisitions -- -- -- -- -- 1,264,361
Employee purchase plan -- -- -- -- -- 23,497
Other -- -- -- -- -- 89,323
Exercise of warrants -- -- -- -- -- 1,961
Exercise of options -- -- -- -- -- 21,734
------------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1998 -- 100 -- -- 1,628,663 20,584,426
============= =========== ============= ============ ============= ============
</TABLE>
COMMON STOCK
28
<PAGE>
An aggregate of 608,524 shares of common stock were issued in 1996 at a purchase
price of $.225 per share. 269,278 of these shares are subject to a four-year
vesting schedule whereby one-quarter of the shares vested upon issuance and
one-quarter of the shares vested in October 1997. The remaining shares vest on a
monthly basis during the remaining thirty-six months.
A total of 254,901 and 339,246 outstanding shares of the Company common stock,
issued at a price of $.45 and $.225 per share, respectively are subject to
repurchase at cost as a result of the Company's failure to achieve certain
specified performance targets through December 31, 1998. These shares are
expected to be repurchased in the future.
PREFERRED STOCK
The Board of Directors may issue preferred stock with preferences to be
determined at the time of issuance.
On June 3, 1998, the Company completed a $45,000 private placement, consisting
of $30,000 of subordinated notes and $15,000 of preferred stock. The
subordinated notes have eight year terms and are convertible into shares of the
common stock at $9.21 for each share of common stock issuable upon conversion of
outstanding principal and accrued but unpaid interest on such subordinated
notes. If certain events of default occur, the subordinated notes then
outstanding will automatically convert into shares of Series B preferred stock
at a rate of one share of Series B preferred stock for each thousand dollars in
outstanding principal and accrued but unpaid interest on the subordinated notes,
subject to adjustment for stock splits, reverse splits, stock dividends,
reorganizations and the like. The subordinated notes and all outstanding shares
of preferred stock shall be automatically converted into common stock (or, in
the case of Series A preferred stock and Series C preferred stock, redeemed at
nominal cost) if the rolling 21-day average closing market price of the common
stock on 20 out of any 30 consecutive trading days is more than $15.73 on or
prior to May 18, 1999, more than $16.85 on or prior to May 18, 2000, or more
than $17.98 at any time thereafter.
The presently authorized Series of preferred stock include the following
series: 100 shares of Series A preferred stock, all of which is issued and
outstanding; 70,000 shares of Series B preferred stock, none of which is
presently outstanding but which will be issued automatically upon conversion
of the then outstanding subordinated notes; 100 shares of Series C preferred
stock, none of which is presently outstanding; and 2,000,000 shares of Series
D preferred stock of which 1,628,663 shares are issued and outstanding. The
shares of convertible Series B preferred stock are convertible into shares of
common stock at the rate of 108.58 shares of common stock for each share of
Series B preferred stock, and the shares of Series D preferred stock are
convertible into shares of common stock on a share for share basis, in each
case subject to adjustment for stock splits, reverse splits, stock dividends,
reorganizations and the like. The Series A and Series C preferred stock are
not convertible.
STOCK WARRANTS
In May 1996 the Company issued warrants to purchase 4,333 shares of its common
stock at $7.50 per share to a lender in connection with a line of credit
agreement. Concurrently, the Company issued to certain directors, officers and
shareholders of the Company warrants to purchase 115,000 shares of the Company's
common stock at $7.50 per share in consideration for guaranteeing a total of
$1,000 of a line-of-credit. The line-of-credit is no longer available and has
been fully repaid. All stock warrants expire in May 2001 and no such stock
warrants have been exercised to date.
In connection with the Company's former $10,000 credit facility, warrants were
issued in 1996 entitling the bank to purchase 81,942 shares of the Company's
common stock at a price of $3.93 per share. The
29
<PAGE>
warrants were recorded at their estimated fair market value of $1 which is
included in interest expense in the accompanying financial statements. These
warrants expire in October 2001.
On January 26, 1994 and October 25, 1996, the Company issued to one of its
officers warrants to purchase 136,172 shares of company common stock (at each
grant date), with an exercise price at the then fair market value aggregate
value of $148 and $125 respectively as determined by an independent third
party appraisal. The warrants became fully vested in January 1997. All such
warrants were exercised in February 1997, and the exercise price was funded
by an interest bearing note from the Company. This interest bearing note has
been offset against additional paid-in capital in shareholders' equity at
December 31, 1997.
In connection with the GDSC's initial public offering, warrants were issued in
1997 entitling representatives of the underwriters to purchase up to 150,000
shares of the Company's common stock at a price of $6.00 per share. These
warrants were recorded at their estimated fair value of $1. As of December 31,
1998, there were 145,875 of these warrants outstanding, which expire in February
2002.
In connection with the acquisition of the net assets of dental practices, the
Company issued warrants to purchase approximately 239,160 shares of common stock
ranging at a price from $7.86 to $9.44 per share. The warrants expire in 2004;
no such stock warrants have been exercised to date. Warrants for 22,254 shares
become exercisable only if certain performance conditions are met by the
acquired dental practices. The estimated fair value was recorded as part of the
consideration for the acquisition.
In connection with the Company's $45,000 private placement, warrants were issued
in 1998 entitling the holder to purchase of 40,000 shares of the Company's
common stock at a price of $9.21 per share. The warrants estimated fair market
value of $92 is recorded as preferred stock issuance costs in the accompanying
financial statements.
These warrants expire in 2005.
In connection with an exclusive corporate development advisory agreement, the
Company issued 5 year warrants to purchase up to 48,709 shares of the Company's
common stock at an exercise price of $7.19 per share. Also, the Company issued
88,512 warrants to purchase the Company's common stock at an exercise price of
$1.04 per share. The warrants expire in 2002.
30
<PAGE>
(9) REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
The following summary presents the changes in the redeemable preferred and
common stock:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
MANDATORILY REDEEMABLE REDEEMABLE REDEEMABLE
REDEEMABLE PREFERRED PREFERRED PREFERRED SHARES OF
PREFERRED STOCK - STOCK - STOCK - REDEEMABLE REDEEMABLE
STOCK SERIES B SERIES B SERIES B COMMON STOCK COMMON STOCK
----------- ---------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 15,000 $ 1,402 6,180,000 $ 11,055 190,302 $ 2,199
Issued in connection with
private placement -- -- 107,142 188 -- --
Dividends on redeemable
convertible preferred
stock - Series B -- -- -- 932 -- --
Accretion of put rights -- -- -- -- -- 34
Exercise of put rights -- -- -- -- (6,616) (103)
Conversion into common stock (15,000) (1,402) (6,287,142) (12,175) -- --
------------- -------------- ------------- -------------- ------------- --------------
Balance, December 31, 1997 -- -- -- -- 183,686 2,130
Accretion of put rights -- -- -- -- -- 22
Exercise of put rights -- -- -- -- (2,974) (50)
------------- -------------- ------------- -------------- ------------- --------------
Balance, December 31, 1998 -- $ -- -- $ -- 180,712 $ 2,102
============= ============== ============= ============== ============= ==============
</TABLE>
REDEEMABLE COMMON STOCK
In connection with certain acquisitions, the Company granted put rights to
certain shareholders that may require the Company to redeem up to 80,712 shares
of its common stock, at a redemption price ranging from $13.38 to $19.62 per
share. If all shareholders with such outstanding put rights exercise their
options, the Company would be required to repurchase the above shares of common
stock for $1,166. The redemption periods continue through January 4, 2003. If
the shareholder does not place a redemption request during the redemption
period, the put right will expire on the stated expiration date. Put rights for
all but 20,000 shares terminate in the event of the Company successfully
completing a public offering at a price of at least $20.00 per share. The
Company redeemed 6,616 shares of redeemable common stock for $103 during 1997
and 2,974 shares for $50 during 1998.
The shares of common stock subject to the put rights are reported on the
balance sheet as redeemable common stock. Such shares have been recorded at
their fair value as of date of acquisition, inclusive of accretion during
each of the three years in the period ended December 31, 1998. The Company
records
31
<PAGE>
accretion on a ratable basis over the redemption period of the respective
stock. Such accretion for the years ended December 31, 1996, 1997 and 1998
was $91, $34 and $22, respectively. Such common stock at December 31, 1998 is
redeemable as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT PRICE RANGE
-------------------- ------------------- -------------------
<S> <C> <C> <C>
1999 22,754 $ 318 $ 13.38 - 18.16
2000 20,849 308 13.60 - 19.62
2001 29,681 438 13.60 - 18.80
2002 3,714 51 13.60
2003 3,714 51 13.60
------------------- -------------------
80,712 $ 1,166
=================== ===================
</TABLE>
PRIVATE PLACEMENT OF REDEEMABLE COMMON STOCK AND WARRANTS
In 1996, GDSC completed a private placement offering (the "Placement Offering
") of 100,000 shares of the GDSC's redeemable common stock which include
warrants to purchase 100,000 additional shares of GDSC's common stock at an
exercise price of $7.50 per share. The stock warrants expire on December 14,
2001; no stock warrants have been exercised to date. In connection with the
Placement Offering, the shareholder received certain put rights which are
exercisable after June 21, 2001 but not later than June 21, 2003 if GDSC has
not completed a public offering of its common stock by June 21, 2001 at a
price of at least $22.00 per share and with net proceeds to GDSC of at least
$10,000. The per share price applicable to the put rights is 20 times GDSC's
average adjusted net income per share for the two most recent fiscal years
preceding the exercise of the rights. As of December 31, 1998, GDSC has not
recorded any accretion related to the above put rights.
(10) STOCK OPTIONS
Under GDSC's stock incentive plan and DCA's 1997 executive incentive
compensation plan and DCA's 1997 non-qualified stock option plan
(collectively the "Plans"), incentive stock options, non-statutory stock
options, stock appreciation rights or bonus rights, award of stock bonuses,
and/or sale of restricted stock of the Company have been and may be granted
to employees and non-employees. The Plans provide for the issuance of up to
3,127,000 shares of Company common stock. The Company's Board of Directors
administers the Plans. The Board has the authority to determine the persons
to whom awards will be made, the amounts, and other terms and conditions of
the awards. Shares issued under the Plans are generally subject to a three to
five-year vesting schedule from the date of grant and expire ten years from
the original grant date.
Concurrent with its initial public offering, GDSC repriced all employee stock
options then outstanding to the offering price of $5.00 per share (except for
certain stock options held by a principal shareholder, which were repriced at
110% of the offering price). All other terms with respect to such options were
maintained. No compensation expense related to the repricing of the employee
stock options was recorded as the adjusted exercise price was not below the fair
value of the common stock as of the repricing date.
Prior to the merger of GDSC and GMS, GMS had two stock-based option plans
("Former Plans") which offered essentially the same awards and stock option
terms as the GDSC's stock incentive plan. Upon consummation of the merger of GMS
with GDSC, the Former Plans were frozen to allow no additional option grants
under those plans. The number of options and option price for the options
granted under the Former Plans were converted to GDSC share (and subsequently
Company share) and share price equivalent utilizing the same conversion ratio of
GMS common stock to GDSC common stock.
32
<PAGE>
Stock options issued to non-employees have been recorded at their estimated fair
market value and are being expensed over their respective vesting lives of up to
five years. Total compensation expense recorded for the years ended December 31,
1996, 1997 and 1998 was $77, $56 and $59, respectively.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Financial Accounting Standards Board has issued SFAS 123, Accounting for
Stock Based Compensation, which defines a fair value based method of accounting
for employee stock option or similar compensation plans. However, it also allows
an entity to continue to measure compensation cost related to stock options
issued to employees under these plans using the method of accounting prescribed
by the APB 25, Accounting for Stock Issued to Employees. Entities electing to
remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed for pro forma disclosure purposes the
value of all options granted during the years ended December 31, 1996, 1997 and
1998. The options have been valued using the Black-Scholes pricing model as
prescribed by SFAS 123. The following weighted average assumptions have been
used for grants of stock options:
<TABLE>
<CAPTION>
GDSC PLAN DCA PLAN
------------------- -------------------
<S> <C> <C>
Risk free interest rate 5.7% - 6.4% 4.6% - 5.8%
Expected dividend yield -- --
Expected lives 5-6 years 3 - 4 years
Expected volatility 60% - 74% 6% - 11%
</TABLE>
Options were assumed to be exercised over the expected lives for the purpose
of this valuation. Adjustments are made for options forfeited prior to
vesting. The total estimated value of options granted which would be
amortized over the vesting period of the options is $705, $1,262 and $4,047
for the years ended December 31, 1996, 1997 and 1998, respectively. The
options granted during 1996, 1997 and 1998 were valued at a per share amount
ranging from $0.82 to $5.32.
If the Company had accounted for stock options issued to employees in accordance
with SFAS 123, the Company's net loss attributable to common stock and pro forma
net loss per share would have been reported as follows:
Net income (loss) attributable to common stock:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
As reported $ (2,013) $ (3,827) $ 1,248
Pro forma (2,334) (4,623) (1,035)
=================== =================== ===================
</TABLE>
33
<PAGE>
Pro forma net income (loss) per share attributable to common stock:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
As reported - basic and diluted $ (0.25) $ (0.31) $ 0.06
Pro forma - basic and diluted (0.26) (0.35) (0.05)
=================== =================== ===================
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1996, 1997 and 1998 are not likely to be representative of the effects on
reported net income (loss) and net income (loss) per common equivalent share
for future years, because options vest over several years and additional
awards generally are made each year.
The following summary presents the options granted and outstanding under the
Plans and Former Plans and the 1997 Plans as of December 31, 1996, 1997 and
1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
EMPLOYEE NON-EMPLOYEE TOTAL EXERCISE PRICE
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995 351,172 297,881 649,053 $ 2.98
Granted 328,284 38,705 366,989 2.50
Exercised (2,000) -- (2,000) --
Canceled (96,549) (5,833) (102,382) 8.19
------------------- ------------------- ------------------- -------------------
Outstanding, December 31, 1996 580,907 330,753 911,660 2.20
Granted 849,009 208,280 1,057,289 4.25
Exercised (626,260) (141,619) (767,879) 0.87
Canceled (142,100) (1,200) (143,300) 4.78
------------------- ------------------- ------------------- -------------------
Outstanding, December 31, 1997 661,556 396,214 1,057,770 5.22
Granted 757,015 611,433 1,368,448 7.41
Exercised (6,484) (103,762) (110,246) 1.10
Canceled (112,238) (69,955) (182,193) 6.60
------------------- ------------------- ------------------- -------------------
Outstanding, December 31, 1998 1,299,849 833,930 2,133,779 $ 6.81
=================== =================== =================== ===================
</TABLE>
34
<PAGE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options granted under the Plans and Former Plans at December 31,
1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS
------------------------------------------
EXERCISE CONTRACTUAL LIFE
PRICE RANGE OUTSTANDING EXERCISABLE REMAINING
-------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
$ 0.45 - 0.67 75,152 41,024 8.25
4.13 - 6.07 648,775 187,790 5.17
6.13 - 8.75 1,369,843 55,150 5.79
10.00 40,000 37,000 6.36
-------------------- -------------------- ------------------- -------------------
$ 6.81 2,133,779 320,964 5.77
==================== ==================== =================== ===================
</TABLE>
At December 31, 1997 there were a total of 1,057,770 shares outstanding of
which 192,287 shares were exercisable under the Plans. As of December 31,
1998, there are 841,613 shares available for future option grants under the
Plans.
(11) EMPLOYEE BENEFITS
The Company participates in two defined contribution retirement plans in
accordance with Section 401(k) of the Internal Revenue Code ("IRS"). The plans
cover substantially all employees of GDSC. Contributions to the plans by the
Company are discretionary. There were no Company contributions to the plans
during the years ended December 31, 1996, 1997 and 1998. Effective December 31,
1998, one plan was terminated while the other is currently frozen awaiting
approval for termination from the IRS. Effective January 1, 1999 a new plan was
established in accordance with Section 401(k) of the Internal Revenue Code. The
assets of the terminated plans are expected to be transferred into the new plan
and/or into other qualified individual investment plans.
(12) INCOME TAXES
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
CURRENT DEFERRED TOTAL
------------------- -------------------- --------------------
<S> <C> <C> <C>
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C>
U.S. Federal $ (158) $ (406) $ (564)
State and local (3) (52) (55)
------------------- -------------------- --------------------
$ (161) $ (458) $ (619)
=================== ==================== ====================
1997
-----------------------------------------------------------------
CURRENT DEFERRED TOTAL
------------------- -------------------- --------------------
U.S. Federal $ 136 $ (2) $ 134
State and local 59 (6) 53
------------------- -------------------- --------------------
$ 195 $ (8) $ 187
=================== ==================== ====================
1998
-----------------------------------------------------------------
CURRENT DEFERRED TOTAL
------------------- -------------------- --------------------
U.S. Federal $ 1,836 $ 62 $ 1,898
State and local 398 6 404
------------------- -------------------- --------------------
$ 2,234 $ 68 $ 2,302
=================== ==================== ====================
</TABLE>
36
<PAGE>
The effective tax rate differed from the U.S. statutory Federal rate of 34%
due to the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- --------------------
<S> <C> <C> <C>
U.S. Federal taxes at statutory rate $ (713) $ (880) $ 1,215
Increase (decrease):
State income taxes, net of federal tax benefit (86) 27 178
Flow through entity income (52) -- --
Valuation allowance for deferred tax assets 75 691 776
Bad debt and other reserves -- 189 (125)
Non-deductible transaction costs -- -- 200
Amortization of nondeductible goodwill and other
nondeductible items 163 85 19
Other (6) 75 39
------------------- ------------------- --------------------
Income tax provision (benefit) $ (619) $ 187 $ 2,302
=================== =================== ====================
</TABLE>
Through October 23, 1996, DCA consisted predominantly of a group of limited
liability corporations and was not subject to direct income taxes during that
time period.
Deferred tax assets (liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 645 $ 846
Allowance for doubtful accounts 1,697 1,423
Intangible assets, principally due to differences in amortization
and capitalized costs 164 226
Accrued payroll and related costs 85 85
Compensated absences, principally due to accrual for financial
reporting purposes 146 246
Restructure and severance accrual -- 832
Other accruals -- 315
Other 38 195
-------------------- --------------------
Total gross deferred tax assets 2,775 4,168
Less valuation allowance (766) (1,542)
-------------------- --------------------
Deferred tax assets, net of valuation allowance $ 2,009 $ 2,626
-------------------- --------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable $ (1,410) $ (1,038)
Property and equipment principally due to differences in
depreciation and capitalized costs (521) (1,030)
Intangible assets, principally due to accrual for financial
reporting purposes (777) (3,310)
Cash versus accrual reporting for tax purposes (38) (11)
Pre-acquisition payables -- (39)
Other (2) (55)
-------------------- --------------------
Deferred tax liabilities (2,748) (5,483)
-------------------- --------------------
Net deferred tax liability $ (739) $ (2,857)
==================== ====================
Reconciliation of net deferred tax liability:
Deferred tax asset, current $ 34 $ 57
Deferred tax liability, long-term (773) (2,914)
-------------------- --------------------
Net deferred tax liability $ (739) $ (2,857)
==================== ====================
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2,300 which are available to
offset future taxable income, if any, through 2018. In addition, the Company
has alternative minimum tax credit carryforwards of approximately $12 which
are available to reduce future regular income taxes, if any, over an
indefinite period. The Company also has certain state net operating loss
carryforwards, which are available to offset future taxable income.
In accordance with the Internal Revenue Code, the annual utilization of net
operating loss carryforwards and credits existing prior to a change in control
in the Company may be limited.
(13) MALPRACTICE INSURANCE
The Company, its affiliated dental practices, and associated dentists are
insured with respect to dentistry malpractice risks on a claims-made basis.
There are known claims and incidents that may result in the assertion of
additional claims, as well as claims from unknown incidents that may be asserted
arising from services provided to patients. Management is not aware of any
claims against the Company or its affiliated groups, which might have a material
impact on the Company's financial position or results of operations.
(14) COMMITMENTS AND CONTINGENCIES
The Company has entered into a staff leasing agreement whereby certain Company
corporate employees and non-clinical facility employees are leased.
The Company has guaranteed a portion of the PAs debt. The guarantees relate
primarily to debt incurred related to the acquisition of dental practices and is
in addition to collateral already provided by the PA. As of December 31, 1998,
the amount of PA debt guaranteed by the Company is approximately $5,900.
38
<PAGE>
LEASE COMMITMENTS
The Company has primarily entered into operating leases of commercial property.
Commercial properties under operating leases mostly include space required to
perform dental services and space for administrative facilities. Lease expense,
including month-to-month rentals, for the years ended December 31, 1996, 1997
and 1998 was $ 1,550, $3,130 and $7,317, respectively.
The future minimum lease payments under capital and noncancelable operating
leases with remaining terms of one or more years consist of the following at
December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------------------------ --------------------------
<S> <C> <C>
1999 $ 926 $ 8,271
2000 765 7,475
2001 391 6,511
2002 232 5,590
2003 50 4,083
Thereafter -- 11,582
------------------------ --------------------------
Total minimum lease
obligations 2,364 $ 43,512
==========================
Less portion attributable to
interest (391)
========================
Obligations under capital
lease 1,973
Less current portion 730
========================
$ 1,243
========================
</TABLE>
39
<PAGE>
LITIGATION
The Company is subject to various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
(15) SUBSEQUENT EVENTS
In January 1999, the Company completed the acquisition of three PAs located in
Nevada and southern California, representing six clinical office locations. The
total assets acquired, including intangibles was $3,002. These affiliations were
accounted for using the purchase method of accounting and the related MSAs have
met the criteria for consolidation of the PAs operating activities. The total
purchase price was $4,476.
In January 1999, the Company executed a MSA with a dental practice in
Kissimmee, Florida. This MSA has not met the criteria for consolidation of
the PAs operating activities. The total purchase price was $27 and is being
accounted for using the purchase method of accounting.
In February 1999, the Company purchased tangible assets and executed MSAs
with seven dental practices in Michigan. These MSAs have not met the criteria
for consolidation of the PAs operating activities. The total purchase price
was $4,900 and is being accounted for using the purchase method of accounting.
On March 12, 1999, the Company completed the previously announced mergers
with Gentle Dental Service Corporation ("GDSC") and Dental Care Alliance Inc.
("DCA"). In the completed combination, GDSC and DCA each became a
wholly-owned subsidiary of InterDent, Inc. ("InterDent"), a new Delaware
corporation headquartered in El Segundo, California. InterDent is traded on
the Nasdaq National Market under the trading symbol DENT.
In the mergers each share of DCA's 7,031,187 common stock was exchanged for
1.67 shares of InterDent Common Stock. Also, each share of GDSC's 9,178,602
total shares of outstanding common stock, including earn-out shares that were
earned but not yet issued, automatically converted into one share of common
stock of InterDent. Each 10 shares of GDSC's 100 outstanding shares of
Preferred Stock -- Series C automatically converted into one share of common
stock of InterDent. Also, each share of GDSC's 100 outstanding shares of
Preferred Stock -- Series A and 1,628,663 outstanding shares of Convertible
Preferred Stock -- Series D converted into one share of preferred stock of
InterDent with the same rights, preferences, and privileges as to InterDent
as the share of Preferred Stock had with respect to GDSC.
The mergers have been accounted for using the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for the periods
prior to the completion of the combination have been restated as though the
companies had been combined. The restated financial statements have been
adjusted to conform the lives in computing depreciation of equipment and
amortization of intangible assets. The related adjustments were not material
to the financial statements.
In April 1999, the Company completed the acquisition of two PAs, representing
three clinical office locations in Oregon and Florida. The purchase price for
these affiliations totaled $1,275. The total purchase price included cash
paid of $747 and liabilities issued or assumed of $528, plus contingent
payments to be made based on future performance. These affiliations were
accounted for using the purchase method of accounting.
In May 1999, the Company completed the acquisition of ten PAs, representing
eleven clinical office locations in northern California. The purchase price
for these affiliations totaled $9,300. The total purchase price included cash
paid of $8,500 and liabilities issued of $800, plus contingent payments to be
made based on future performance. These affiliations were accounted for using
the purchase method of accounting.
40
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
The Board of Directors
InterDent, Inc.:
We consent to the incorporation by reference in this registration statement
on Form S-8 of InterDent, Inc. ("InterDent") of our report dated May 24,
1999, on the consolidated balance sheets of InterDent, Inc. and subsidiaries
as of December 31, 1997 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. Our report refers to the reports
of other auditors for the separate financial statements of Dental Care
Alliance, Inc. included in the 1996, 1997 and 1998 financial statements
restated for the 1999 pooling of interests between InterDent, Inc., Gentle
Dental Service Corporation, and Dental Care Alliance, Inc., and for the
separate financial statements of Gentle Dental Service Corporation included
in the 1996 financial statements restated for the 1997 pooling of interests
between Gentle Dental Service Corporation and GMS Dental Group, Inc. and
subsidiaries.
/s/ KPMG LLP
Orange County, California
May 27, 1999
