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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________
COMMISSION FILE NUMBER: 000-25549
INTERDENT, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 95-4710504
- ------------------------------------ --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
222 NO. SEPULVEDA BLVD., SUITE 740, EL SEGUNDO, CA 90245
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(Address of principal executive offices)
Issuer's telephone number (310) 765-2400
NO CHANGE
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
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As of May 7, 1999, 20,925,268 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,790 $ 8,244
Accounts receivable, net 11,502 10,616
Management fee receivables 5,287 4,536
Current portion of notes and advances receivable from
professional associations, net 1,145 1,157
Supplies inventory 2,969 2,887
Prepaid and other current assets 3,513 3,164
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Total current assets 32,206 30,604
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Property and equipment, net 22,700 21,379
Intangible assets, net 114,129 105,111
Notes and advances receivable from professional
associations, net of current portion 5,554 4,062
Other assets 3,235 3,978
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Total assets $177,824 $165,134
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-------- --------
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,339 $ 4,223
Accrued payroll and payroll related costs 6,589 4,862
Other current liabilities 13,691 10,809
Current portion of long-term debt and capital lease obligations 3,045 4,001
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Total current liabilities 27,664 23,895
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Long-term liabilities:
Obligations under capital leases, net of current portion 1,100 1,243
Long-term debt, net of current portion 45,463 35,854
Convertible senior subordinated debt 30,000 30,000
Deferred income taxes 2,928 2,914
Other long-term liabilities 142 136
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Total long-term liabilities 79,633 70,147
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Total liabilities 107,297 94,042
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Redeemable common stock, no par
value, 180,712 shares issued and outstanding 2,106 2,102
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Shareholders' equity:
Preferred stock, 30,000,000 shares authorized:
Preferred stock - Series A, no par value, 100 shares
authorized and outstanding 1 1
Convertible Preferred stock - Series B, no par
value, 70,000 shares authorized, zero shares issued
and outstanding - -
Preferred stock - Series C, no par value, zero and 100 shares
authorized and outstanding in 1999 and 1998,
respectively - 1
Convertible Preferred stock - Series D, no par
value, 2,000,000 shares authorized, 1,628,663 shares
issued and outstanding 12,089 12,089
Common stock, no par value, 50,000,000 shares
authorized, 20,659,628 and 20,584,416 shares issued
and outstanding in 1999 and 1998, respectively 32,740 32,551
Additional paid-in capital 28,549 28,598
Shareholder notes receivable (601) (596)
Accumulated deficit (4,357) (3,654)
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Total shareholders' equity 68,421 68,990
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-------- --------
Total liabilities, redeemable common stock
and shareholders' equity $177,824 $165,134
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
Dental practice net patient service revenue $40,397 $17,859
Net management fees 10,716 5,296
Licensing and other fees 265 121
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Net revenues 51,378 23,276
Cost and expenses:
Clinical salaries and benefits and provider costs 19,651 8,824
Practice nonclinical salaries and benefits 6,992 3,505
Dental supplies and lab expenses 6,415 3,048
Practice occupancy expenses 3,123 1,608
Practice selling, general and administrative expenses 5,782 2,606
Corporate selling, general and administrative expenses 2,796 1,797
Corporate restructure and merger costs 3,681 -
Depreciation and amortization 2,117 827
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Operating income 821 1,061
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Nonoperating income (expense):
Interest expense, net (1,351) (195)
Other income (expense), net 22 (18)
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Nonoperating expense, net (1,329) (213)
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Income (loss) before income taxes (508) 848
Income taxes 191 322
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Net income (loss) (699) 526
Accretion of redeemable common stock (4) (7)
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Net income (loss) attributable to common stock $ (703) $ 519
------- -------
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Income (loss) per share attributable to common stock - basic and diluted $ (0.03) $ 0.03
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (699) $ 526
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,117 827
Loss on investment in joint venture - 4
Non-employee stock options granted and stock issued
for fees and compensation 16 14
Interest accrued on shareholder notes receivables (5) (4)
Amortization of deferred financing costs 65 3
Deferred income taxes 13 (90)
Changes in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net (500) 190
Management fee receivables from professional associations (237) (1,448)
Supplies inventory 5 (154)
Prepaid expenses and other current assets (211) (575)
Other assets 49 (228)
Accounts payable (432) (508)
Accrued payroll and payroll related costs 1,727 (459)
Other liabilities 567 18
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Net cash provided by (used in) operating activities 2,475 (1,884)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,368) (2,363)
Net payments received (advances) on notes
receivable from professional associations 26 (428)
Advances to professional associations (1,711) (188)
Cash paid for acquisitions, including direct
costs, net of cash acquired (7,206) (15,791)
-------- --------
Net cash used in investing activities (10,259) (18,770)
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Cash flows from financing activities:
Net proceeds from credit facilities 8,828 11,469
Payments on long-term debt and obligations under capital leases (1,554) (210)
Payments of deferred financing costs - (13)
Proceeds from issuance of common and preferred stock 56 27
Exercise of stock options - 25
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Net cash provided by financing activities 7,330 11,298
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Decrease in cash and cash equivalents (454) (9,356)
Cash and cash equivalents, beginning of period 8,244 20,670
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Cash and cash equivalents, end of period $ 7,790 $ 11,314
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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INTERDENT, INC.
AND SUBSIDIARIES
March 31, 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
(1) ORGANIZATION
InterDent, Inc. ("InterDent" or the "Company"), incorporated on October 13,
1998, is a Delaware corporation headquartered in El Segundo, California.
InterDent is one of the largest providers of dental practice management services
to multi-specialty dental professional corporations and associations ("PAs") in
the United States. Including affiliations completed through May 1, 1999,
InterDent provides management services to professional dental associations at
180 dental offices with 540 dentists, including 130 specialists, and 1,538
operatories 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 PAs 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 affiliations with dental
practices existing in the area and/or selectively developing new offices.
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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. The
combination is being accounted for using the pooling-of-interests method of
accounting and reflects the combined financial position and operating results of
GDSC and DCA for all periods presented. The consolidated financial statements
include the accounts of InterDent, Inc. and its subsidiaries and certain PAs, as
discussed below. All significant intercompany transactions and accounts have
been eliminated.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board has evaluated certain matters relating to the physician practice
management industry (EITF issue number 97-2) and reached a consensus on the
accounting for transactions between physician practice management companies and
physician practices and the financial reporting of such entities. 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.
Corporate practice of medicine laws in the states in which InterDent currently
operates generally 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 those PAs. As of March 31, 1999 there are 101 clinical
locations included within the condensed consolidated statements of operations,
including the net patient revenues and related expenses of the PAs.
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 condensed consolidated statements of
operations include only the Company's net management fee revenue generated from
those MSAs and the Company's expenses associated with those MSAs, representing
78 clinical locations as of March 31, 1999.
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INTERIM REPORTING
The accompanying unaudited interim consolidated financial statements of
InterDent have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and note
disclosures normally included in annual consolidated financial statements have
been condensed or omitted as permitted under those rules and regulations. We
believe all adjustments, consisting only of normal, recurring adjustments
considered necessary for a fair presentation, have been included and that the
disclosures made are adequate to insure that the information presented is not
misleading. To obtain a more detailed understanding of our results, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and related notes for the year ended December
31, 1998 included in the 1998 Form 10-K of Gentle Dental Service Corporation and
the 1998 Form 10-K of Dental Care Alliance, Inc. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of the
results of operations for the entire year.
NET REVENUES
Revenues consist primarily of PA net patient service 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 under MSAs to the unconsolidated PAs
on an agreed-upon percentage of the PAs net patient service revenue, net of
provisions for contractual adjustments and doubtful accounts.
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 revenues, 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. Accounts receivable is reported net of allowances of
$7,403 and $6,855 at March 31, 1999 and 1998, respectively.
RECEIVABLE FROM PAS
Management fee 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 account
receivables of the PAs and adjusts its management fee receivable accordingly.
Advances consist primarily of receivables due in connection with working capital
advances made to certain unconsolidated PAs. Such advances bear interest at
8.5%, adjusted for any changes in the Company's borrowing rate, and are due upon
demand. Note receivables relate to the financing of medical and non-medical
capital additions made by certain unconsolidated PAs. The notes, which are
personally guaranteed by the PA owners, bear interest at rates ranging between
8.5% and 18.5%. The collectibility of receivables from PAs is reviewed based
upon cash flow of the PAs and, where appropriate, the fair market value of
collateral assets. Advance and note amounts to be collected within the next year
are classified as current assets in the accompanying consolidated balance
sheets.
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. Depreciation for property and
equipment is recorded using the straight-line method over the estimated useful
life of the asset. Leasehold improvements are amortized over the shorter of
their estimated useful life or related lease period.
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
non-competition covenants, management services agreements, and goodwill
associated with dental practice acquisition asset and stock purchase
transactions. Intangibles relating to management service agreements consist of
the costs of purchasing the rights to provide management support services to PAs
over the initial non-cancelable terms of the related agreements. 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
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acquired PAs, providing facilities, equipment, support staffing, management
and other ancillary services. The agreements, which are generally for 25 to
40 year terms, are non-cancelable except for performance defaults, as
defined. Intangible assets are amortized on the straight-line method, ranging
from 5 years for other intangible assets to 25 years for MSAs and goodwill.
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 non-discounted 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 three months
ended March 31, 1999 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
InterDent 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 the 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 comprised of 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 three months ended March 31,1999, as their effect
is anti-dilutive. Such excluded issuable shares were 5,312,307 for the three
months ended March 31, 1999. The following table summarizes the computation of
earnings per share:
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Net income (loss) attributable to common stock $ (703) $ 519
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Basic Shares Reconciliation:
Weighted average common shares outstanding 20,821,369 19,407,695
Contingently issuable common shares 79,788 57,564
Contingently repurchasable common shares (564,525) (286,395)
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Basic shares 20,336,632 19,178,864
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Income (loss) per share attributable to common stock - basic $ (.03) $ 0.03
----------- -----------
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Diluted Shares Reconciliation:
Basic shares 20,336,632 19,178,864
Effects of dilutive potential common shares:
Warrants - 222,092
Stock options - 315,963
Put rights - 53,489
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Diluted shares 20,336,632 19,770,408
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Income (loss) per share attributable to common stock - diluted $ (.03) $ 0.03
----------- -----------
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</TABLE>
COMPREHENSIVE INCOME
The Company adopted 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,
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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 comprehensive income.
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 Employee's and disclose in 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
("SFAS 131"), Disclosures about Segments of and Enterprise and Related
Information. 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 are therefore aggregated.
(3) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS
BUSINESS COMBINATIONS
On March 12, 1999 GDSC and DCA completed mergers in which each entity became a
wholly-owned subsidiary of InterDent, Inc. In the mergers, 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. Each share of DCA's
7,031,187 total shares of outstanding common stock was exchanged for 1.67 shares
of InterDent stock. Upon consummation of the mergers, GDSC and DCA stockholders
represent a 43.5% and 56.5%, respective ownership of InterDent, excluding common
share equivalents. Including the impact of potential dilutive common shares
outstanding, upon consummation of the mergers, GDSC and DCA stockholder
ownership was approximately 53.5% and 46.5%, respectively.
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. The
individual results of operations of GDSC and DCA for 1999 through February 28,
1999, representing the latest available financial statements of the individual
corporations prior to the mergers, are as follows:
<TABLE>
<CAPTION>
GDSC DCA
------- ------
<S> <C> <C>
PA net patient service revenue $26,048 $ -
Management, consulting, and licensing fees 532 6,441
Net income 1,129 595
</TABLE>
As a result of the mergers the Company recorded direct merger expenses of
$2,165 during the three months ended March 31, 1999, consisting of investment
banker fees, advisors fees, investor relations expense, legal fees,
accounting fees, printing expense, and other costs. Also, the Company
recorded a restructuring charge of $1,516 relating to the Company's
restructuring plan, including charges for employee related costs, the
redirection of certain duplicative operations and programs, and other costs.
Total restructure costs paid during the three months ended March 31, 1999 was
$1,078. Included in other current liabilities is $3,755 in accrued merger and
restructure costs, of which $1,980 relates to accrued restructure costs.
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DENTAL PRACTICE AFFILIATIONS
During the three months ended March 31, 1999, the Company acquired substantially
all of the assets of thirteen dental office locations, including cash, accounts
receivable, supplies and fixed assets. The aggregate dental practice acquisition
purchase price recorded during the three months ended March 31, 1999,
representing the fair value of the assets acquired in the above affiliations and
earn-out consideration accrued or paid for transactions completed in current and
prior periods was $11,507. Approximately $10,237 of the purchase price has been
allocated to intangible assets. The total purchase consideration included $7,206
in cash, $2,469 in liabilities incurred and assumed, and $1,832 aggregate value
of payments accrued and shares reserved under earn-out agreements.
In connection with the completion of certain affiliation transactions, the
Company has agreed to pay to the selling parties possible future consideration
in the form of cash and InterDent common 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 earn-out payments with respect to
practice acquisitions when such amounts are probable and reasonably estimable.
As of March 31, 1999, the Company has accrued $5,200 for future earn-out
payments, of which $944 is included in additional paid-in capital for
anticipated stock to be issued 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 $20,000 and $30,000 from
March 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 $1,200 annually.
The above asset purchases in 1999 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 representing the
estimated future value of the management services agreements 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.
(4) DEBT
The Company currently has two credit facilities providing for a maximum
borrowing of $60,000. One credit facility for $45,000 has a revolving feature
that 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. The $15,000
credit facility includes a revolving note that expires in May 1999. The
financial institution has provided notice of its intention to renew the facility
for one additional year under similar terms. Accordingly, all amounts due under
the credit facilities are included in the long-term portion of debt. The Company
is negotiating to expand its $45,000 credit facility to $90,000, see note 6 for
further discussion.
The credit facilities require the Company to pay an unused commitment and
contain several covenants including restrictions on the ability of the
Company to incur indebtedness, prohibits dividends without prior approval,
and requirements relating to maintenance of a specified net worth and
compliance with specified financial ratios. In addition, the credit
facilities require 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 facilities 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.
The Company has issued $30,000 of subordinated convertible notes
("Notes"). The Notes have an eight-year term and bear interest at 7.0%. See
note 5 for discussion on the conversion of the Notes.
(5) SHAREHOLDERS' EQUITY
In June 1998, the Company completed a $45,000 private placement, consisting of
$30,000 of subordinated convertible 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, if any, 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.
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The presently authorized series of preferred stock include the following series:
- - Series A - 100 shares authorized, issued and outstanding
- - Series B - 70,000 shares authorized, zero issued or outstanding
- - Series C - 100 shares authorized, zero shares issued or outstanding
- - Series D - 2,000,000 shares authorized, 1,628,663 shares are issued and
outstanding.
The shares of 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 (assuming there are no declared but unpaid dividends on the
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 (assuming
there are no declared but unpaid dividends on the Series D preferred stock), in
each case subject to adjustment for stock splits, reverse splits, stock
dividends, reorganizations and the like. The Series A preferred stock and Series
C preferred stock are not convertible.
(6) SUBSEQUENT EVENTS
Subsequent to March 31, 1999, the Company completed the acquisition of 2 PAs,
representing three clinical office locations. 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 the Company signed a letter of intent to expand its current $45,000
credit facility to $90,000. If consummated, the increase in the credit facility
will be utilized to pay down all existing obligations under the $15,000 credit
facility currently outstanding. The bank in which the $15,000 credit facility
exists is expected to participate in the syndication of the $90,000 credit
facility expansion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
InterDent, Inc ("InterDent" or 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. Including the
affiliations completed through May 1, 1999, InterDent provides management and
licensing services to dental practices at 180 dental offices with 540
dentists, including 130 specialists, and 1,538 operatories in selected
markets in California, Florida, Georgia, Hawaii, Idaho, Indiana, Michigan,
Nevada, Oregon, Pennsylvania and Washington.
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 dentists affiliated through the Company's
network of PAs 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 strategic objective is to maintain and expand its leadership position
in the dental practice management industry. To achieve this objective, the
Company seeks to enter selected geographic markets and develop locally
prominent, multi-specialty dental delivery networks. The key elements of the
Company's strategy are as follows:
- - Provide convenient, comprehensive dental care
- - Focus on quality of patient care
- - Establish a comprehensive dental care network
- - Achieve operational efficiencies and enhance revenue
- - Integrate and leverage management information systems
- - Expand patient volume through proactive marketing
- - Capitalize on managed care expertise
As part of a delivery network of multi-specialty dental care, the Company
provides management and licensing services to affiliated PAs under long-term
management service agreements (collectively referred to as "MSAs"). Under the
terms of the MSAs, the Company bills and collects patient receivables and
provides all administrative and management support services to the PAs. These
administrative and management support services include: financial, accounting,
training, efficiency and productivity enhancement, recruiting, team building,
marketing, advertising, purchasing, and related support personnel. Licensing
services include marketing, advertising, and purchasing.
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As compensation for services provided under the MSAs, the Company receives
management fees from the PAs. Depending upon the individual MSA provisions, the
management fee is calculated based upon one of two methods. Under one method the
management fee is equal to reimbursement of expenses incurred in the performance
of its obligations under the MSAs, plus an additional fee equal to a percentage
of the net revenues of the PAs. Under the other method, the management fee is
simply a set percentage of the net revenues of the PAs, as defined.
The MSAs have initial terms ranging from 25-40 years with automatic extensions
thereafter, unless either party gives notice before the end of the term. The
MSAs are not subject to early termination by the PAs unless the Company is the
subject of bankruptcy proceedings or the Company materially breaches the MSAs
and does not cure the breach following notice. Certain MSAs have additional
termination events, including the refusal to comply with the decisions of the
joint operating committee, failure to pay the management fee, and a material
change in applicable federal or state law.
RESULTS OF OPERATIONS
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board evaluated certain matters relating to the physician practice management
industry (EITF issue number 97-2) and reached a consensus on the accounting for
transactions between physician practice management companies and physician
practices and the financial reporting of such entities. 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.
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 those PAs. 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 statements of operations include
only the Company's net management fee revenue generated from those MSAs and the
Company's expenses incurred in the performance of its obligations under those
MSAs. The following discussion highlights changes in historical revenues and
expense levels for the three months ended March 31, 1999 and 1998 as reported in
the accompanying condensed consolidated financial statements.
THREE MONTHS ENDED MARCH 31, 1999 STATEMENT OF OPERATIONS COMPARED TO THREE
MONTHS ENDED MARCH 31, 1998
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue
represents the clinical patient revenues at 101 current clinical locations where
the consolidation requirements of EITF 97-2 have been met, as discussed above.
Revenues increased to $40.4 million for the three months ended March 31, 1999
from $17.9 million for the three months ended March 31, 1998, an increase of
126%. The Company is pursuing an aggressive expansion strategy through
additional PA affiliations. As a result, the majority of this growth is due to
seventeen affiliations completed during the year ended December 31, 1998 and
three months ended March 31, 1999, representing fifty-nine current clinical
locations. These affiliations have management services agreements that meet the
Emerging Issues Task Force's consolidation requirements.
The Company was also effectively able to increase total dental practice net
patient service revenue at existing facilities. The Company worked with
affiliated PAs to recruit additional dentists to meet additional demand,
negotiated additional contracts with managed care organizations and third
party-payors, leveraged additional specialty dental services, and increased the
level of patients finishing their treatment programs with the use of internally
developed propriety software. For those locations affiliated as of January 1,
1998 where the MSAs meet the criteria for consolidation, same-store dental
practice net patient revenue for the three months ended March 31, 1999 increased
11.7% when compared to revenues for the three months ended March 31,1998.
NET MANAGEMENT FEES. Net management fees consist of revenues earned by the
Company in the performance of its obligations under MSAs at 78 current
unconsolidated PA clinical locations. Net management fees increased to $10.7
million for the three months ended March 31, 1999 from $5.3 million for the
three months ended March 31, 1998, or an increase of $5.4 million and over 100%.
The Company is pursuing an aggressive expansion strategy through additional PA
affiliations. As a result, the majority of this growth is related to the
affiliation of 32 clinical locations during 1998 and 1999.
LICENSING AND OTHER FEES. The Company earns certain fees from unconsolidated PAs
for various licensing and consulting services. Licensing and other fees
increased 120% from $121,000 for the three months ended March 31, 1998, to
$265,000 for the three months ended March 31, 1999. The increase is entirely
attributed to the addition of 32 unconsolidated clinical locations.
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CLINICAL SALARIES AND BENEFITS AND PROVIDER COSTS. Clinical salaries and
benefits and provider costs include all patient service provider staff
compensation and related payroll costs at the consolidated dental practices,
including dentists, hygienists and dental assistants, and dental assistants for
the unconsolidated PAs. Clinical salaries and benefits and provider costs
increased 122% to $19.7 million for the three months ended March 31, 1999 from
$8.8 million for the three months ended March 31, 1998. This growth in total
expense is primarily due to seventeen affiliations completed during the year
ended December 31, 1998 and three months ended March 31, 1999, representing
fifty-nine current clinical locations. These affiliations have management
services agreements that meet the EITF 97-2 consolidation requirements. The
remaining growth is due to increased services at existing clinical locations.
Practice clinical salaries and benefits and provider costs are directly related
to the level of net patient revenues generated by the PAs. From a management
perspective, these costs are analyzed and reviewed in comparison to patient
revenues. These costs are continually monitored against current and expected
production levels and adjustments to staffing schedules are proactively
performed as necessary. For consolidated PAs, clinical salaries and benefits and
provider costs as a percentage of dental practice net patient revenue for the
three months ended March 31, 1999 and 1998 were 45.8% and 46.0%, respectively.
The decrease in these costs as a percentage of revenues is attributed to
existing facilities experiencing increased productivity.
PRACTICE NONCLINICAL SALARIES AND BENEFITS. Practice nonclinical salaries and
benefits costs include all staff compensation and related payroll costs at all
dental facilities other than dentists, hygienists, and dental assistants. These
costs increased 99.4% to $7.0 million for the three months ended March 31, 1999
from $3.5 million for the three months ended March 31, 1998. This increase was
primarily due to affiliations completed during 1998 and 1999.
DENTAL SUPPLIES AND LAB EXPENSES. Dental supplies and lab costs increased 110%
to $6.4 million for three months ended March 31, 1999 from $3.0 million for the
three months ended March 31, 1998. This increase was entirely due to the
addition of supply costs as a result of affiliations completed during 1998 and
1999 which was partially offset by a reduction of these costs at existing
practices as a result of the Company negotiating and implementing a new vender
supply agreement. As of the first quarter of 1999, the majority of our clinical
locations have implemented the new pricing program. We expect to roll-out the
program to the remaining locations during the second quarter of 1999, and to
completed affiliations upon consummation.
PRACTICE OCCUPANCY EXPENSES. Practice occupancy expenses represents facility
rent, property taxes, utilities, janitorial services, and repairs and
maintenance. These costs increased 94.2% to $3.1 million for the three months
ended March 31, 1999 from $1.6 million for the three months ended March 31,
1998. This increase was primarily due to affiliations completed during 1998 and
1999.
PRACTICE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Practice selling, general
and administrative expenses include general office, advertising, professional
(excluding dentistry), office supplies, bank processing fees, local taxes,
insurance, bad debt expense, and other miscellaneous costs at the dental
facilities. Practice selling, general and administrative expenses increased 122%
to $5.8 million for the three months ended March 31, 1999 from $2.6 million for
the three months ended March 31, 1998. This increase was primarily due to
affiliations completed during 1998 and 1999.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Corporate selling,
general and administrative expenses include: corporate salaries, general office,
investor relations, general and director & officer insurance, corporate office
supplies, and other miscellaneous costs at the corporate facilities. Overall
these costs increased 55.5% to $2.7 million for the three months ended March 31,
1999 from $1.8 million for the three months ended March 31, 1998. The rise in
total costs is the result of the Company increasing corporate staffing levels in
the marketing, human resource, finance, and operations departments to
accommodate the additional affiliations completed.
In addition to these expenses incurred during the three months ended March 31,
1999, the Company recorded $3.7 million in expenses associated with the
combination of Gentle Dental Service Corporation and Dental Care Alliance, Inc.,
each of which became a wholly-owned subsidiary of the Company. The combination
has been accounted for as a pooling-of-interests. Approximately $2.8 million of
expense relate to merger costs which consists of investment banker fees,
advisors fees, investor relations expense, legal fees, accounting fees, printing
costs, and other costs. The remaining $928K relates to the Company's
restructuring plan, including charges for employee severance and retention
related costs, and the redirection of certain duplicative operations and
programs, and other costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
three months ended March 31, 1999 and 1998 was $2.1 million and $830,000,
respectively. This increase was due to additional property and equipment
purchases and the amortization of additional intangible costs assigned to
management services agreements and goodwill associated with affiliations
completed in 1998 and 1999.
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INTEREST EXPENSE. Interest expense increased to $1.4 million for the three
months ended March 31, 1999 from $195,000 for the three months ended March 31,
1998. This increase in interest expense was due to additional debt incurred
under the Company's credit facility and private placement to complete certain
dental practice affiliations.
PROVISION FOR INCOME TAXES. The Company recognized a tax expense on its loss
before income taxes for the three months ended March 31, 1999 and income from
operations for the three months ended March 31,1998. For the three months ended
March 31, 1999, the tax expense is the result of certain merger expenses which
are not deductible for income tax purposes, and the uncertainty of realization
of deferred tax assets generated by the net operating loss in the quarter.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, cash and cash equivalents were $7.8 million, representing a
$454K decrease in cash and cash equivalents available at December 31, 1998.
Working capital at March 31, 1999 of $4.5 million represents a decrease of $2.2
million from working capital of $6.7 million at December 31, 1998. This decrease
in working capital is primarily attributed to acquisition earn-out accruals of
approximately $1.3 million and an increase in the merger and restructure accrual
of $1.4 million. Additionally, the Company used cash to pay down borrowings
under its credit facilities.
Net cash provided by operations was $2.5 million for the three months ended
March 31, 1999 compared to cash used in operations of $1.9 million for the three
months ended March 31, 1998. Excluding merger and restructure costs, net cash
provided by operations was $4.7 million for the three months ended March 31,
1999 compared to cash used in operations of $2.3 million for the three months
ended March 31, 1998. The increase of net cash provided by operations during the
three months ended March 31, 1999 is attributed to improvements in the Company's
results of operations. Excluding merger and restructure costs, net income for
the three months ended March 31, 1999 and 1998 was $2.9 million and $526K,
respectively.
Net cash used in investing activities was $10.3 million and $18.8 million for
the three months ended March 31, 1999 and 1998, respectively. Included in the
investing activities is cash paid for PA affiliations of $7.2 million and $15.8
million, respectively, for the three months ended March 31,1999 and 1998.
Affiliations were primarily funded through borrowing under the Company's
existing credit facilities. As a result, cash provided from financing activities
was $7.3 million and $11.3 million for the three months ended March 31, 1999 and
1998, respectively. The use of cash for affiliation activities is expected to
continue as the Company is pursuing an aggressive expansion strategy.
During the three months ended March 31, 1999, the Company acquired substantially
all of the assets of thirteen dental office locations, including cash, accounts
receivable, supplies and fixed assets. The affiliations have been accounted for
using the purchase method of accounting. The aggregate dental practice
acquisition purchase price recorded during the three months ended March 31,
1999, representing the fair value of the assets acquired, including intangible
assets was $11.5 million. Approximately $10.2 million of the purchase price has
been allocated to intangible assets. The total purchase consideration included
$7.2 million in cash and $2.5 million in liabilities incurred and assumed, and
$1.8 million in accrued earn-out from transactions completed in current and
prior periods.
In connection with the completion of certain affiliation transactions, the
Company has agreed to pay to the selling parties' possible future consideration
in the form of cash and InterDent common 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
practice acquisitions when such amounts are probable and reasonably estimable.
As of March 31, 1999, the Company has accrued $5.2 million for future earn-out
payments, of which $944K is included in additional paid-in capital for
anticipated stock to be issued 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 $30 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 $.8 million to $1.2 million annually.
The Company previously has made loans to various unconsolidated PAs in
connection with the PAs acquisition of assets of dental practices and has made
working capital advances to certain unconsolidated PAs for their operations. The
loans, which are evidenced by interest bearing notes that are payable upon
demand, are being paid in accordance with their terms. The PA owners personally
guarantee both the loans and advances.
The Company has two credit facilities providing a maximum credit line of $60
million. The $45 million credit facility has a revolving feature expiring on
March 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, at the Company's option at varying margins over
LIBOR (2.25%-3.0%) or the prime rate (0.5%-1.25%), at the Company's option,
based on the level of
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InterDent's leverage ratio. The credit facility requires the Company to pay
an unused commitment fee in an amount of ranging from 0.375% to 0.750% per
annum (depending on amounts of unused available credit). This fee is based on
the average daily amount by which the bank commitment under the credit
facility exceeds the aggregate amount of all loans then outstanding.
The Company also has a $15 million credit facility ("Revolving Note"). The
Revolving Note bears interest at 1.75% over the Eurodollar rate and is payable
monthly. The Revolving Note is subject to a fee for the unused portion of the
credit line of 0.25%. The Revolving Note expires in May 1999 and the financial
institution has provided notice of its intention to renew the facility for one
additional year.
The credit facilities contain several covenants including restrictions on the
ability of the Company to incur indebtedness and repurchase, or make dividends
with respect to, its capital stock; and requirements relating to maintenance of
a specified net worth and compliance with specified financial ratios. In
addition, the credit facilities require the Company to notify certain lenders
prior to making any acquisition and to obtain the consent of the lenders prior
to making acquisitions with purchase prices exceeding $12 million or when cash
consideration exceeds $7.5 million. The obligations of the Company under the
credit facilities and the subsidiaries under the guarantees are secured by a
security interest in certain equipment, fixtures, inventory, receivables,
subsidiary stock, certain debt instruments, accounts and general intangibles of
each of such entities.
In May the Company signed a letter of intent to expand its current $45 million
credit facility to $90 million. If consummated, the increase in the credit
facility will be utilized to pay down all existing obligations under the $15
million credit facility currently outstanding. The bank in which the $15 million
credit facility exists is anticipated to participate in the syndication of the
$90 million credit facility expansion.
In June 1998, the Company completed a $45 million private placement, consisting
of $30 million of subordinated notes and $15 million of preferred stock. The
subordinated convertible notes have eight-year terms and are convertible into
shares of 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:
- - Series A - 100 shares authorized, issued and outstanding
- - Series B - 70,000 shares authorized, zero issued or outstanding
- - Series C - 100 shares authorized, zero shares issued or outstanding
- - Series D - 2,000,000 shares authorized, 1,628,663 shares are issued and
outstanding
The shares of 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 (assuming there are no declared but unpaid dividends on the
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 (assuming
there are no declared but unpaid dividends on the Series D preferred stock), in
each case subject to adjustment for stock splits, reverse splits, stock
dividends, reorganizations and the like. The Series A preferred stock and Series
C preferred stock are not convertible.
We believe that proceeds from our existing credit facility and cash flow from
operations will be sufficient to fund our operations for the next fiscal year.
We also believe that such funds will be sufficient to complete a number of other
future dental practice affiliations and any possible future consideration to be
paid. However, to execute our long term business strategy, the Company will
require substantial additional funding through additional long-term or
short-term borrowing arrangements or through the public or private issuance of
additional debt or equity securities to affiliate new practices and to expand
and maintain existing affiliated practices. There can be no assurance that any
such financing will be available or will be available on terms acceptable to
InterDent.
A total of 254,901 and 339,246 outstanding shares of InterDent common stock
issued at a price of $0.45 and $0.225 per share, respectively are subject to
repurchase as a result of a subsidiary's failure to achieve certain specified
performance targets through December 31,1998. It is anticipated that these
shares will be repurchased in the future.
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YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in a data
field. These programs were designed and developed without considering the impact
of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 or
earlier. The Year 2000 issue affects us in that the dental practice management
business is dependent on computer applications, such as management information
systems and financial and accounting systems.
In order to address the Year 2000 issues facing InterDent, our management
initiated a program to prepare our computer systems and applications for the
Year 2000. As the primary focus of our Year 2000 plans, we have converted
affiliated PAs to target systems identified and believed to be Year 2000
compliant. We have divided our Year 2000 plan into five phases, and chart our
progress in each of the phases, expressed as an approximate percentage of
completion of that phase:
<TABLE>
<CAPTION>
APPROXIMATE
PHASE PERCENTAGE COMPLETED
<S> <C>
Awareness .................................................100%
Assessment ................................................100%
Renovation .................................................60%
Validation .................................................80%
Implementation .............................................50%
</TABLE>
We have substantially completed the validation of mission critical systems and
the computer-related interactive vendor systems and expect to complete all
validation by June 1999. In addition, we expect to complete all phases of our
Year 2000 plan by September 30, 1999.
We expect to incur internal staff costs as well as consulting and other expenses
related to infrastructure enhancements necessary to prepare for the Year 2000.
Validation and conversion of primary system applications and hardware is
expected to cost approximately $1 million and will be incurred by the end of
fiscal year 1999.
As part of our Year 2000 plan, we are undertaking infrastructure and facilities
enhancements and performing tests necessary to ensure that the Company is
adequately prepared for the Year 2000. We are also communicating with vendors
and third-party payors to ensure that they are taking appropriate steps to
address their Year 2000 issues. We are also preparing contingency plans to
minimize potential harm to the Company in the event that any or all of the third
parties with which we conduct business with is unable to attain Year 2000
compliance. The contingency plans being prepared are system and application
specific and are intended to ensure that in the event that certain systems
and/or applications fails by or at the Year 2000, that we will be able to engage
in our core business functions in spite of such failure. The most likely worst
case Year 2000 scenario would be that we experience significant delays in
billing and collecting professional fees due to our affiliated PAs. This delay
would directly impact our cash flow and could have a material adverse effect on
our business, financial condition or results of operations.
We believe that the established Year 2000 plan and other steps being taken are
adequate to ensure that we will not be materially affected by the Year 2000
problem. However, there can be no assurance that the Year 2000 plan and related
remedial and contingency plans will fully protect us from the risks associated
with the Year 2000 problem. The analysis of, and preparation for, the Year 2000
and related problems necessarily relies on a variety of assumptions about future
events. There can be no assurance that management has accurately predicted such
future events or that the remedial and contingency plans for the Company will
adequately address such future events. In the event that our business, vendor,
or patients are disrupted as a result of the Year 2000 problem such disruption
could have a material adverse effect on the Company.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21B OF
THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, AMONG OTHERS, THE
PACE OF DEVELOPMENT AND ACQUISITION ACTIVITY, THE DEPENDENCE ON MANAGEMENT
AGREEMENTS, THE PAs AND AFFILIATED DENTISTS, THE REIMBURSEMENT RATES FOR
DENTAL SERVICES, AND OTHER RISKS DETAILED IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS. OTHER RISK FACTORS ARE LISTED IN THE COMPANY'S
REGISTRATION STATEMENT NO. 333-66475 AS FILED WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
No disclosure required.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 12, 1999 Gentle Dental Service Corporation ("GDSC") and Dental Care
Alliance, Inc. ("DCA") completed mergers of the two corporations in which each
entity became a wholly-owned subsidiary of InterDent, Inc. In the mergers, 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. Each
share of DCA's 7,031,187 total shares of outstanding common stock was exchanged
for 1.67 shares of InterDent common stock.
Additional information regarding the rights, preferences, and privileges of
the InterDent preferred stock issued in the mergers are incorporated herein
by reference to pages 102 through 106 of InterDent's Amendment No. 4 to
Registration Statement on Form S-4 Registration No. 333-66475, filed on
February 9, 1999. The preferred stock of the InterDent was issued in the
mergers pursuant to an exemption from registration under 4(2) of the
Securities Act of 1933, as amended.
InterDent common stock is traded on the Nasdaq National Market under the trading
symbol "DENT."
The payment of dividends is within the discretion of InterDent's Board of
Directors; however, the Company intends to retain earnings from operations for
use in the operation and expansion of its business and does not expect to pay
cash dividends in the foreseeable future. Any future decision with respect to
dividends will depend on future earnings, operations, capital requirements and
availability, restrictions in future financing agreements and other business and
financial considerations. In addition, the Company's senior lender currently
prohibits the payment of cash dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<S> <C>
2.1 Amendment No. 1 to the Agreement and Plan of Reorganization and Merger,
dated February 3, 1999. Incorporated by reference to Exhibit 2.2 of
InterDent's Amendment No. 3 to Registration Statement on Form S- 4
Registration No. 333-66475, filed on February 9, 1999.
2.2 Amendment No. 2 to the Agreement and Plan of Reorganization and Merger,
dated February 9, 1999. Incorporated by reference to Exhibit 2.3 of
InterDent's Amendment No. 4 to Registration Statement on Form S- 4
Registration No. 333-66475, filed on February 9, 1999.
3.1 Restated Articles of Incorporation. Incorporated by reference to
Exhibit 3.1 of Gentle Dental's Amendment No. 1 to Registration
Statement on Form S-1, Registration No. 333-13529, filed on December 5,
1996.
3.2 Articles of Amendment of Gentle Dental's Restated Articles of
Incorporation. Incorporated by reference to Exhibit 3.2 of Gentle
Dental's Report on Form 8-K, filed on August 14, 1998.
3.3 Bylaws, as amended. Incorporated by reference to Exhibit 3.2 of Gentle
Dental's Amendment No. 1 to Registration Statement on Form S-1,
Registration No. 333-13529, filed on December 5, 1996.
4.1 Restated Articles of Incorporation (filed as Exhibit 3.1).
4.2 Articles of Amendment of Gentle Dental's Restated Articles of
Incorporation (filed as Exhibit 3.2).
4.3 Bylaws, as amended (filed as Exhibit 3.2).
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<PAGE>
10.1 Amendment No. 1 to the Agreement and Plan of Reorganization and Merger,
dated February 3, 1999 (filed as Exhibit 2.1).
10.2 Amendment No. 2 to the Agreement and Plan of Reorganization and Merger,
dated February 9, 1999 (filed as Exhibit 2.2).
27.1 Financial Data Schedule.
99.1 Pages 102 through 106 Incorporated by reference from of InterDent's
Amendment No. 4 to Registration Statement on Form S-4 Registration
No. 333-66475, filed on February 9, 1999.
</TABLE>
(b) Reports on Form 8-K.
On January 14, 1999, Gentle Dental Service Corporation, a wholly-owned
subsidiary of InterDent, filed an Amendment No. 1 to Current Report on Form
8-K/A to report under Item 2 the acquisition of all of the stock of Capital
Dental Care, Inc. and substantially all of the assets of Dental Maintenance of
Oregon, P.C.
On March 12, 1999, Gentle Dental Service Corporation and Dental Care Alliance,
Inc., each a wholly-owned subsidiary of InterDent, each filed a Current Report
on Form 8-K to report under Item 5 the release of its respective fourth quarter
and year ended 1998 financial numbers, and further to report the release by
InterDent of a Supplemental Pooled Statement of Operation for each of the
quarters and year ended 1998, which includes the combined operations of Gentle
Dental Service Corporation and Dental Care Alliance, Inc., accounted for as a
pooling-of-interest, for those periods.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERDENT, INC.
-----------------------------------------
(Registrant)
Date: May 14, 1999 By: /s/ Norman R. Huffaker
--------------------------------------
Norman R. Huffaker
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERDENT, INC.'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 7,790 8,244
<SECURITIES> 0 0
<RECEIVABLES> 17,934 16,309
<ALLOWANCES> 0 0
<INVENTORY> 2,969 2,887
<CURRENT-ASSETS> 32,206 30,604
<PP&E> 22,700 21,379
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 177,824 165,134
<CURRENT-LIABILITIES> 27,664 23,895
<BONDS> 0 0
2,106 2,102
12,090 12,091
<COMMON> 32,740 32,551
<OTHER-SE> 23,591 24,348
<TOTAL-LIABILITY-AND-EQUITY> 177,824 165,134
<SALES> 51,378 23,276
<TOTAL-REVENUES> 51,378 23,276
<CGS> 0 0
<TOTAL-COSTS> 50,557 22,215
<OTHER-EXPENSES> (22) 18
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,351 195
<INCOME-PRETAX> (508) 848
<INCOME-TAX> 191 322
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (699) 526
<EPS-PRIMARY> (.03) .03
<EPS-DILUTED> (.03) .03
</TABLE>
