<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
---------------
(Exact name of registrant 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 90245-4340
-------------------------------------------------------------
(Address of principal executive offices)
(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)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / / No /X/
As of November 5, 1999, 21,106,184 shares of the issuer's common stock were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 762 $ 8,244
Accounts receivable, net ........................................................... 16,852 10,616
Management fee receivables ......................................................... 6,085 4,536
Current portion of notes and advances receivable from
professional associations, net ................................................... 1,177 1,157
Supplies inventory ................................................................. 3,690 2,887
Prepaid and other current assets ................................................... 4,374 3,164
--------- ---------
Total current assets ........................................................ 32,940 30,604
--------- ---------
Property and equipment, net ............................................................ 28,010 21,379
Intangible assets, net ................................................................. 140,495 105,111
Notes and advances receivable from professional associations, net of current portion ... 11,329 4,062
Other assets ........................................................................... 4,797 3,978
--------- ---------
Total assets ................................................................ $ 217,571 $ 165,134
========= =========
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $ 3,603 $ 4,223
Accrued payroll and payroll related costs .......................................... 8,351 4,862
Other current liabilities .......................................................... 18,356 10,809
Current portion of long-term debt and capital lease obligations .................... 4,508 4,001
--------- ---------
Total current liabilities ................................................... 34,818 23,895
--------- ---------
Long-term liabilities:
Obligations under capital leases, net of current portion ........................... 2,885 1,243
Long-term debt, net of current portion ............................................. 70,970 35,854
Convertible senior subordinated debt ............................................... 30,000 30,000
Deferred income taxes .............................................................. 2,955 2,914
Other long-term liabilities ........................................................ 244 136
--------- ---------
Total long-term liabilities ................................................. 107,054 70,147
--------- ---------
Total liabilities ........................................................... 141,872 94,042
--------- ---------
Redeemable common stock, no par value, 157,958 and 180,712 shares issued and outstanding
in 1999 and 1998, respectively ..................................................... 1,794 2,102
--------- ---------
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, 100 shares authorized, zero shares
issued and outstanding ........................................................ -- --
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, 20,937,920 and 20,584,416
shares issued and outstanding in 1999 and 1998, respectively ..................... 21 21
Additional paid-in capital ......................................................... 62,445 61,129
Shareholder notes receivable ....................................................... (611) (596)
Accumulated deficit ................................................................ (40) (3,654)
--------- ---------
Total shareholders' equity .................................................. 73,905 68,990
========= =========
Total liabilities, redeemable common stock and shareholders' equity ......... $ 217,571 $ 165,134
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue .............. $ 50,071 $ 29,031 $ 134,487 $ 67,534
Net management fees ...................................... 10,297 8,332 31,798 21,069
Licensing and other fees ................................. 228 171 752 466
--------- --------- --------- ---------
Net revenues .................................. 60,596 37,534 167,037 89,069
Cost and expenses:
Clinical salaries and benefits ....................... 23,523 14,162 64,362 33,487
Practice non-clinical salaries and benefits .......... 8,271 5,371 22,744 13,145
Dental supplies and lab expenses ..................... 7,454 4,879 20,739 11,570
Practice occupancy expenses .......................... 3,779 2,467 10,091 6,007
Practice selling, general and administrative expenses 5,924 3,683 17,339 9,133
Corporate selling, general and administrative expenses 2,735 2,387 8,530 6,173
Corporate restructure and merger costs ............... 1,101 -- 6,130 --
Depreciation and amortization ........................ 2,645 1,575 6,994 3,503
--------- --------- --------- ---------
Operating income .............................. 5,164 3,010 10,108 6,051
--------- --------- --------- ---------
Non-operating income (expense):
Interest expense, net ................................ (1,859) (656) (4,619) (1,309)
Other income (expense), net .......................... 9 (4) 1 (11)
--------- --------- --------- ---------
Non-operating expense, net .............. (1,850) (660) (4,618) (1,320)
--------- --------- --------- ---------
Income before income taxes .................... 3,314 2,350 5,490 4,731
Provision for income taxes ............................... 1,127 699 1,867 1,614
--------- --------- --------- ---------
Net income .................................... 2,187 1,651 3,623 3,117
Accretion of redeemable common stock ..................... (2) (3) (9) (15)
--------- --------- --------- ---------
Net income attributable to common stock ....... $ 2,185 $ 1,648 $ 3,614 $ 3,102
========= ========= ========= =========
Income per share attributable to common stock - basic .... $ 0.11 $ 0.08 $ 0.18 $ 0.16
========= ========= ========= =========
Income per share attributable to common stock - diluted .. $ 0.10 $ 0.07 $ 0.16 $ 0.15
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................................ $ 3,623 $ 3,117
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................... 6,994 3,503
Loss on disposal of assets ...................................................... -- 4
Loss on investment in joint venture ............................................. -- 4
Non-employee stock options granted and stock issued for fees and compensation ... 41 45
Interest accrued on shareholder notes receivables ............................... (15) (14)
Amortization of deferred financing costs ........................................ 231 7
Deferred income taxes ........................................................... 41 90
Changes in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net ........................................................ (3,032) 364
Management fee receivables from professional associations ....................... (1,035) (3,075)
Supplies inventory .............................................................. (82) (87)
Prepaid expenses and other current assets ....................................... (678) (1,230)
Other assets .................................................................... (316) (748)
Accounts payable ................................................................ (1,329) (838)
Accrued payroll and payroll related costs ....................................... 2,603 702
Accrued merger and restructure .................................................. (140) (1,199)
Other liabilities ............................................................... 1,183 251
-------- --------
Net cash provided by operating activities ............................. 8,089 896
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ................................................ (5,830) (5,378)
Net payments received (advances) on notes receivable from
professional associations ........................................................ 179 (365)
Advances to professional associations ............................................. (6,875) (2,532)
Cash paid for acquisitions, including direct costs, net of cash acquired .......... (31,263) (49,946)
Investment in joint venture ....................................................... (1,122) --
-------- --------
Net cash used in investing activities ................................. (44,911) (58,221)
-------- --------
Cash flows from financing activities:
Net proceeds from credit facilities ............................................... 34,252 1,400
Proceeds from issuance of long term debt .......................................... -- 32,299
Payments on long-term debt and obligations under capital leases ................... (3,938) (929)
Payments of deferred financing costs .............................................. (664) (368)
Proceeds from issuance of common and preferred stock .............................. 56 13,749
Payments to cancel warrants ....................................................... (55) --
Exercise of put rights ............................................................ (318) (50)
Exercise of stock options ......................................................... 7 28
-------- --------
Net cash provided by financing activities ............................. 29,340 46,129
-------- --------
Decrease in cash and cash equivalents ................................. (7,482) (11,196)
Cash and cash equivalents, beginning of period ........................................ 8,244 20,670
-------- --------
Cash and cash equivalents, end of period .............................................. $ 762 $ 9,474
======== ========
Cash paid for interest ................................................................ $ 4,610 $ 1,301
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
(1) ORGANIZATION
InterDent, Inc. ("InterDent" or the "Company"), 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 November 1, 1999, InterDent provides
management services to professional dental associations at 209 dental offices
with 625 dentists, including 141 specialists, and 1,787 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 endodontics, oral pathology, oral surgery,
orthodontics, pedodontics, periodontics, and prosthodontics. 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 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 has been accounted for using the pooling-of-interests method of
accounting, therefore the consolidated financial statements reflect 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 the Company 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 condensed consolidated statements of
operations include the net patient revenues and related expenses of those
PAs. As of September 30, 1999, there are 128 clinical locations included
within the condensed consolidated statements of operations, including the
related net patient revenues and related expenses of these 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, and include only the Company's net management fee revenue
generated from those MSAs and the Company's corresponding
5
<PAGE>
expenses associated with fulfilling its obligations under those MSAs. There are
78 clinical locations accounted for in this manner within the condensed
consolidated statements of operations as of September 30, 1999.
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 Form 8-K/A filed on May 28, 1999. The results of operations
for the three and nine months ended September 30, 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 at normal and customary rates 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.
RECEIVABLES FROM PAS
Management fee receivables represent 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 receivable of the PAs and adjusts its management fee receivables
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. Notes receivable 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 the 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 condensed consolidated balance sheets and are recorded net of a
provision for estimated uncollectible amounts.
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 affiliated 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.
6
<PAGE>
NET INCOME PER SHARE
The Company has adopted 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 subordinated
debt have been excluded from the computation of diluted income per share for the
three and nine months ended September 30, 1999 and 1998, as their effect is
anti-dilutive. Such excluded issuable shares were 3,257,328. The following table
summarizes the computation of income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income attributable to common stock ........ $ 2,185 $ 1,648 $ 3,614 $ 3,102
============ ============ ============ ============
Basic Shares Reconciliation:
Weighted average common shares outstanding ... 21,072,786 20,390,485 20,968,155 19,769,522
Contingently issuable common shares .......... -- 57,564 -- 91,396
Contingently repurchasable common shares ..... (569,937) (284,334) (567,193) (286,040)
------------ ------------ ------------ ------------
Basic shares ............................ 20,502,849 20,163,715 20,400,962 19,574,878
============ ============ ============ ============
Income per share attributable to common stock -
basic ........................................ $ 0.11 $ 0.08 $ 0.18 $ 0.16
============ ============ ============ ============
Diluted Shares Reconciliation:
Basic shares ................................. 20,502,849 20,163,715 20,400,962 19,574,878
Effects of dilutive potential common shares:
Convertible preferred stock ................ 1,628,665 1,628,665 1,628,665 813,139
Warrants ................................... 114,021 138,493 93,107 206,686
Stock options .............................. 412,733 242,408 260,071 299,050
Put rights ................................. 51,655 79,965 78,217 58,044
Contingent shares, non-issuable ............ 49,573 -- 48,646 --
------------ ------------ ------------ ------------
Diluted shares .......................... 22,759,496 22,253,246 22,509,668 20,951,797
============ ============ ============ ============
Income per share attributable to common stock -
diluted ...................................... $ 0.10 $ 0.07 $ 0.16 $ 0.15
============ ============ ============ ============
</TABLE>
INVESTMENT IN JOINT VENTURE
On August 10, 1999, the Company announced involvement in a new collaborative
Internet strategy designed to create an integrated web portal for dentists
and patients throughout the United States. The Company and Bessemer Venture
Partners (an existing investor of the Company), have agreed to invest in
Dental X Change, a leading web site for dental professionals. Dental X Change
offers an extensive array of information, including continuing education
courses, dental product information, manufacturer directories, classifieds,
dental industry news, and on-line insurance eligibility verification through
a partnership with Dental Connect. The Company contributed $1,020 to the
joint venture and no gain or loss was recognized as result of the
transaction. As the Company is not able to exercise control in the joint
venture and the Company's ownership is less than 20%, the investment is
accounted for using the cost basis method of accounting.
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 affiliated practices of the Company do not meet the SFAS 131 criteria for
separate reporting, and therefore have not been separately reported on the
condensed consolidated financial statements.
USE OF ESTIMATES
In preparing the financial statements conforming to Generally Accepted
Accounting Principles ("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.
(3) NET REVENUE
Revenues consist primarily of PA net patient service revenue and Company net
management fees. Net patient revenue represents the consolidated revenue of the
PAs at normal and customary rates 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.
The following represents amounts included in the determination of dental
practice net patient service revenue and net management fees:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue-all PAs $ 65,595 $ 41,112 $ 181,598 $ 98,190
LESS:
Dental practice net patient service revenue-
unconsolidated PAs ........................... (15,524) (12,081) (47,109) (30,656)
--------- --------- --------- ---------
Reported practice net patient service revenue ..... $ 50,071 $ 29,031 $ 134,487 $ 67,534
--------- --------- --------- ---------
</TABLE>
7
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<TABLE>
<S> <C> <C> <C> <C>
Dental practice net patient service revenue-
unconsolidated PAs ........................... $ 15,524 $ 12,252 $ 47,109 $ 31,121
LESS:
Amounts retained by dentists ...................... (5,227) (3,920) (15,311) (10,052)
========= ========= ========= =========
Net management fees ............................... $ 10,297 $ 8,332 $ 31,798 $ 21,069
========= ========= ========= =========
</TABLE>
(4) 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
represented 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:
GDSC DCA
------- ------
PA net patient service revenue ........... $26,048 $ --
Management, consulting, and
licensing fees .......................... 532 6,441
Net income ............................... 1,129 595
As a result of the mergers the Company recorded direct merger expenses of
$3,246 during the nine months ended September 30, 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 $2,884 relating to the Company's
restructuring plan, including charges for employee related costs, redirection
of certain duplicative operations and programs, and other costs. Total
restructure costs paid during the nine months ended September 30, 1999 were
$2,814. During the three months ended September 30, 1999, the Company
recorded direct merger expenses of $386 thousand and a restructuring charge
of $715 thousand. Total restructure costs paid during the three months ended
September 30, 1999 and were $909 thousand. Included in accounts payable and
other current liabilities at September 30, 1999 is $2,879 in accrued merger
and restructure costs, of which $1,678 relates to accrued restructure costs.
At December 31, 1998 these liabilities were $3,142.
DENTAL PRACTICE AFFILIATIONS
During the nine months ended September 30, 1999, the Company acquired
substantially all of the assets of 41 dental office locations, including cash,
accounts receivable, supplies and fixed assets. The aggregate dental practice
acquisition purchase price recorded during the nine months ended September 30,
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 $48,517. Approximately $39,097 of the
purchase price has been allocated to intangible assets. The total purchase
consideration included $31,963 in cash (including $700 thousand on deposit at
December 31, 1998), $11,293 in liabilities incurred and assumed, and $5,261
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 and is generally recorded as additional
goodwill when earned. The Company accrues earn-out payments with respect to
practice acquisitions when such amounts are probable and reasonably
estimable. During the nine months ended September 30, 1999 the Company paid
$4,959 in additional earn-out consideration.
8
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As of September 30, 1999, the Company has accrued $7,010 for future earn-out
payments, of which $339 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
September 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.
(5) DEBT
Through June 15, 1999, the Company had two credit facilities providing for a
maximum borrowing of $60,000. Effective June 15, 1999, the Company amended and
restated one of the existing agreements, increasing the revolving credit
commitment from $45,000 to $90,000, with the syndication of banks led by Chase
Manhattan Bank. Proceeds from the amended credit agreement were used to pay-down
the outstanding $15,000 credit facility which has been terminated. The amended
and restated credit agreement 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. All amounts due under the credit facility
are included in long-term debt. The financial institution in which the $15,000
credit facility was terminated has elected to participate in the syndication of
the $90,000 facility amendment.
The credit facility requires the Company to pay unused commitment fees and
contains several covenants including restrictions on the ability of the Company
to incur indebtedness, prohibitions on dividends without prior approval, and
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 acquisitions 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, inventories, 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 6 for
discussion on the conversion of the Notes.
(6) SHAREHOLDERS' EQUITY
The Company completed a $45,000 private placement on June 30, 1998, 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.
The Company is authorized to issue 30,000,000 shares of preferred stock.
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 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
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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.
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.
(7) CONTINGENCIES
The Company has been named as a defendant in various lawsuits in the normal
course of business. In the opinion of management any liabilities resulting
from these matters will not have a material impact on the Company's
consolidated financial position or results of operations.
(8) SUBSEQUENT EVENTS
Subsequent to September 30, 1999, the Company completed the acquisition of 3
PAs, representing three clinical office locations. The purchase price for these
affiliations totaled $2,114. The total purchase price included cash paid of
$1,228 and liabilities issued or assumed of $886, plus contingent payments to be
made based on future performance. These affiliations were accounted for using
the purchase method of accounting. Funds for the acquisitions were provided
under borrowings on the credit facility.
On October 22, 1999, the Company announced the signing of a definitive merger
agreement between the Company and a group consisting of an affiliate of
Leonard Green & Partners, L.P., and certain members of Company management,
including Michael Fiore, Co-chairman and CEO, and Steven Matzkin, DDS,
Co-chairman, President, and Chief Dental Officer. Additionally, existing
investors in the Company, the Sprout Group and Chase Capital Partners, intend
to participate in the transaction by maintaining ownership of the Company.
Under the terms of the agreement, the Company's stockholders at the date of
the transaction will receive $9.50 per share in cash. Completion of the
transaction is subject to stockholder approval, receipt of regulatory
approvals, and completion of debt financing required to fund the transaction,
valued at approximately $325 million. The Company currently anticipates
completing the transaction in the first calendar quarter of the year 2000.
Subsequent to the October 22, 1999 announcement, certain Company officers and
directors, and Leonard Green & Partners, L.P., were named as defendants in civil
suits filed in the State of Delaware on behalf of certain owners of the
Company's common stock. The lawsuits claim breach of fiduciary duty and aiding
and abetting such breach in connection with the merger. The lawsuits generally
seek injunctive relief, an injunction of the merger (or, if consummated, a
rescission of the merger), compensatory and other damages, and an award of
attorneys' fees and expenses. The complaints seek certification of a plaintiff's
class and the Company expects that the suits will be consolidated into one suit.
The Company has sought coverage under existing directors and officers insurance
policies for any settlements, judgments, and costs of defense in connection with
these cases, within outstanding policy limits. The Company believes the suits
are without merit and intends to engage in a vigorous defense in these matters.
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 November 1, 1999, InterDent provides management
and licensing services to dental practices at 209 dental offices with 625
dentists, including 141 specialists, and 1,787 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 endodontics, oral pathology, oral
surgery, orthodontics, pedodontics, periodontics, and prosthodontics. 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:
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- - 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.
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 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 condensed consolidated 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 condensed consolidated financial statements. Accordingly, the
condensed 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 condensed 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 incurred in the performance of its obligations under those
MSAs. The following discussion highlights changes in historical revenues and
expense levels for the three and nine months ended September 30, 1999 and
1998 as reported in the accompanying condensed consolidated financial
statements.
1999 STATEMENT OF OPERATIONS COMPARED TO 1998
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue
represents the clinical patient revenues at 128 current clinical locations
through September 30, 1999 where the consolidation requirements of EITF 97-2
have been met. Dental practice net patient revenue increased to $50.1 million
for the third quarter of 1999 compared to $29.0 million for the third quarter of
1998, representing a 73% increase of $21.1 million. Revenues also increased to
$134.5 million for the first nine months of 1999 compared to the first nine
months of 1998 of $67.5 million, representing a 99% increase of $67.0 million.
The Company is pursuing an aggressive expansion strategy through additional PA
affiliations. As a result, the majority of this revenue growth is due to 22
affiliations completed during 1998 and the first nine months of 1999,
representing 85 current clinical locations. These affiliations have management
services agreements that meet the Emerging Issues Task Force's consolidation
requirements.
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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 new dentists to meet increased demand, negotiated
additional contracts with managed care organizations and third party-payors,
leveraged additional specialty dental services, and increased the number of
patients successfully completing their treatment programs with the use of
internally developed proprietary software. For those locations affiliated as
of June 30, 1998 where the MSAs meet the criteria for consolidation,
same-store dental practice net patient revenue for the third quarter 1999
increased by over 10% when compared to revenues for the third quarter of 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 as of September 30, 1999. Net management
fees increased to $10.3 million for the third quarter of 1999 compared to
$8.3 million for the third quarter of 1998, representing a 23.6% increase of
$2.0 million. Net management fee revenues also increased to $31.8 million for
the first nine months of 1999 compared to the first nine months of 1998 of
$21.1 million, representing a 50.9% increase of $10.7 million. 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 49
clinical locations during 1998 and 1999.
LICENSING AND OTHER FEES. The Company earns certain fees from unconsolidated
PAs for various licensing and consulting services. The increase is entirely
attributable to the addition of 47 unconsolidated clinical locations during
1998 and 1999.
PRACTICE OPERATING EXPENSES. Practice operating expenses represents the
direct costs associated with operating and managing the practice facility
locations, including regional support departments. These costs are comprised
of the following expenses:
- - 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.
- - PRACTICE NONCLINICAL SALARIES AND BENEFITS COSTS include all staff
compensation and related payroll costs at all dental and regional
facilities other than dentists, hygienists, and dental assistants.
- - DENTAL SUPPLIES AND LAB COSTS include all direct supply costs in the
performance of patient treatment programs.
- - PRACTICE OCCUPANCY EXPENSES include facility leases, property taxes,
utilities, janitorial services, and repairs and maintenance.
- - PRACTICE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES include general
office, advertising, professional services (excluding dentistry), office
supplies, bank processing fees, local taxes, insurance, bad debt expense,
and other miscellaneous costs at the dental facilities and regional
centers.
Practice operating expenses have increased significantly during the third
quarter and first nine months of 1999 when compared to the same periods in 1998.
Third quarter practice operating expenses increased to $49.0 million for the
third quarter of 1999 compared to $30.6 million for the third quarter of 1998,
representing a 60.2% increase of $18.4 million. These expenses also increased to
$135.3 million for the first nine months of 1999 compared to the first nine
months of 1998 of $73.3 million, an increase of 84.4% or $61.9 million. The
majority of the increase in practice operating expenses is due to the 42
affiliations (representing 134 current clinical locations) completed during 1998
and first nine months of 1999, as a result of the Company's aggressive expansion
strategy. Of the total clinical locations affiliated in 1998 through September
30, 1999, 22 of the 42 affiliations have management services agreements that
meet the Emerging Issues Task Force's consolidation requirements.
During the third quarter and first nine months of 1999, most categories of
practice operating expenses varied slightly as a percentage of net revenues
when compared to the third quarter and first nine months of 1998. During
1999, the Company has shown improvements in the reduction of total practice
operating expenses as a percent of patient revenue. As a percentage of net
revenues, practice operating expenses for the third quarter of 1999 were
80.8% compared to 81.4% for the third quarter of 1998 and 81.0% for the first
nine months of 1999 compared to 82.3% for the first nine months of 1998. The
overall reduction in practice operating expenses is a result of the
successful implementation of the Company's operating model at existing
facilities and the proven strong operational and financial track records of
current affiliated practices. As a result, the overall practice facility
operating margin for the third quarter of 1999 was 19.2% compared to 18.6%
for the third quarter of 1998 and 19.0% for the first nine months of 1999
compared to 17.7% for the first nine months of 1998.
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CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Corporate selling,
general and administrative expenses ("Corporate G&A expense") include: corporate
salaries, general office costs, investor relations expense, legal and audit,
general and director & officer insurance, corporate office supplies, and other
miscellaneous costs at the corporate facilities. Corporate G&A expense was $2.7
million for the third quarter of 1999 compared to $2.4 million for the third
quarter of 1998, an increase of 14.6%. These expenses also increased to $8.5
million for the first nine months of 1999 compared to $6.2 million for the first
nine months of 1998, an increase of 38.2%.
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. Additionally,
resources have been added to respond to the increasing affiliated dental
practice needs for information systems implementation, clinical management and
mentoring programs, and to appropriately develop the support infrastructure of
the Company. At the same time, management seeks to maximize the effectiveness of
corporate infrastructure costs. As a result, Corporate G&A expense as a
percentage of net revenues has steadily declined. Corporate G&A expense for the
third quarter of 1999 was 4.5% of net revenues as compared to 6.4% for the third
quarter of 1998. G&A expense for the first nine months of 1999 was 5.1% of net
revenues as compared to 6.9% for the first nine months of 1998.
CORPORATE RESTRUCTURE AND MERGER COSTS. The Company recorded merger and
restructure related 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 in March 1999. The combination has been
accounted for as a pooling-of-interests. As a result of the combination, the
Company recorded expense of $1.1 million during the third quarter of 1999 and
$6.1 million of expense for the first nine months of 1999. Approximately $3.2
million of the total expense relates to merger costs consisting of investment
banker fees, advisors fees, investor relations expense, legal fees, accounting
fees, printing costs, and other costs. The remaining $2.9 million relates to the
Company's restructuring plan, including charges for employee related costs and
the redirection of certain duplicative operations and systems costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
third quarter of 1999 increased by 67.9% over the third quarter of 1998,
while expense for the first nine months of 1999 increased in excess of 100%
over the first nine months 1998. These increases are primarily due to
additional property and equipment depreciation and amortization of intangible
costs assigned to management services agreements and goodwill associated with
affiliations completed in 1998 and 1999. It is anticipated that future
acquisitions and earn-out payments on completed acquisitions will result in
additional depreciation and amortization throughout the year.
INTEREST EXPENSE. Interest expense was $1.9 million for the third quarter of
1999 compared to $656 thousand for the third quarter of 1998. These expenses
also increased to $4.6 million for the first nine months of 1999 compared to
$1.3 million for the first nine months of 1998. This increase in interest
expense was due to additional debt incurred under the Company's credit facility
and private placement to complete the rapid expansion of additional dental
practice affiliations throughout 1998 and 1999 (See note 4 of Notes to the
Condensed Consolidated Financial Statements). It is anticipated that future
acquisitions will require additional borrowings under the existing credit
facility. Accordingly, management anticipates that interest expense will
increase throughout the year.
PROVISION FOR INCOME TAXES. The current expected tax rate approximates the
statutory rate as certain merger related expenses are not deductible for income
tax purposes, which are offset by the carry forward of net operating losses from
Company subsidiaries and affiliates. The Company expects to fully utilize the
net operating loss carryforwards in 1999. For the nine months ended September
30, 1999, the Company has recorded an expected annual effective tax rate of
approximately 34% as compared to the effective rate of 38% recorded during the
same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, cash and cash equivalents were $762 thousand,
representing a $7.5 million decrease in cash and cash equivalents available
at December 31, 1998. This decline is due to the amendment to the credit
facility, which allowed the Company to consolidate cash balances between
subsidiaries and pay down the credit facility balances. The negative working
capital at September 30, 1999 of $1.9 million represents a decrease from
working capital of $6.7 million at December 31, 1998. This decrease in
working capital is primarily attributable to acquisition earn-out and merger
and restructure payables and accruals of approximately $2.9 million
(excluding amounts paid during 1999), payment of earn-out consideration, and
utilization of cash to pay down borrowings under the Company's credit
facility.
Net cash provided by operations (which includes merger and restructure expenses)
amounted to $8.1 million for the nine months ended September 30, 1999 compared
to net cash provided of $896 thousand for the nine months ended September 30,
1998. The increase of net cash provided by operations during the nine months
ended September 30, 1999 is attributed to improvements in the Company's results
of operations and increases in accrued payroll and payroll related costs.
Excluding merger and restructure costs, operating income for the nine months
ended September 30, 1999 and 1998 was $16.2 million
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and $6.1 million, respectively. As a result, excluding merger and restructure
costs, net cash provided by operations amounted to $14.2 million for the nine
months ended September 30, 1999 compared to $2.1 million for the nine months
ended September 30, 1998.
Net cash used in investing activities was $44.9 million for the nine months
ended September 30, 1999. Included in the investing activities is cash paid for
PA affiliations of $30.6 million and $5.8 million paid for property and
equipment. These uses of cash were primarily funded through borrowings under the
Company's existing credit facility. As a result, cash provided from the credit
facility amounted to $34.3 million for the nine months ended September 30, 1999.
During the nine months ended September 30, 1999, the Company acquired
substantially all of the assets of 41 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 nine months ended September 30,
1999, representing the fair value of the assets acquired, including intangible
assets was $48.5 million. Approximately $39.1 million of the purchase price has
been allocated to intangible assets. The total purchase consideration included
$31.9 million in cash, $11.3 million in liabilities incurred and assumed, and
$5.3 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.
During the nine months ended September 30, 1999, the Company paid $5.0 million
in additional earn-out consideration.
As of September 30, 1999, the Company has accrued $7.0 million for future
earn-out payments, of which $339 thousand is included in additional paid-in
capital for anticipated stock to be issued and the remaining 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 $.4 million to $.8 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 currently has a credit facility providing a maximum credit line of
$90 million. The credit facility has a revolving feature expiring 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, 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 InterDent's leverage ratio. The credit facility requires the
Company to pay an unused commitment fee (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 credit facility contains several covenants including restrictions on the
ability of the Company to incur indebtedness; 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 facility requires the Company to notify certain lenders
prior to making any acquisitions and to obtain the consent of the lenders
prior to making acquisitions with purchase prices exceeding certain
consideration thresholds. The obligations of the Company under the credit
facility and its subsidiaries under the guarantees are secured by a security
interest in certain equipment, fixtures, inventories, receivables, subsidiary
stock, certain debt instruments, accounts and general intangibles of each of
such entities.
The Company has $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
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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 Company is authorized to issue 30,000,000 shares of preferred stock.
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.
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.
On October 22, 1999, the Company announced the signing of a definitive merger
agreement between the Company and a group consisting of an affiliate of
Leonard Green & Partners, L.P., and certain members of Company management,
including Michael Fiore, Co-chairman and CEO and Steven Matzkin, DDS,
Co-chairman, President, and Chief Dental Officer. Additionally, existing
investors in the Company, the Sprout Group and Chase Capital Partners, intend
to participate in the transaction by maintaining ownership in the Company.
Under the terms of the agreement, the Company's stockholders at the date of
the transaction will receive $9.50 per share in cash. Completion of the
transaction is subject to stockholder approval, receipt of regulatory
approvals, and completion of debt financing required to fund the transaction,
valued at approximately $325 million. The Company currently anticipates
completng the transaction in the first calendar quarter of the year 2000.
We believe that proceeds from our existing credit facility and cash flow from
operations will be sufficient to fund our operations through 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.
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:
APPROXIMATE
PHASE PERCENTAGE COMPLETED
Awareness .............................................. 100%
Assessment ............................................. 100%
Renovation ............................................. 95%
Validation ............................................. 95%
Implementation ......................................... 90%
The Company expects to complete all phases of our Year 2000 plan by December
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.
15
<PAGE>
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. Contingency plans the Company has prepared are system and
application specific and are intended to ensure that in the event that certain
systems and/or applications fail 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
No disclosure required.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to the October 22, 1999 merger announcement, certain Company
officers and directors, and Leonard Green & Partners, L.P., were named as
defendants in civil suits filed in the State of Delaware on behalf of certain
owners of the Company's common stock. The lawsuits claim breach of fiduciary
duty and aiding and abetting such breach in connection with the merger. The
lawsuits generally seek injunctive relief, an injunction of the merger (or,
if consummated, a rescission of the merger), compensatory and other damages,
and an award of attorneys' fees and expenses. The complaints seek
certification of a plaintiff's class and the Company expects that the suits
will be consolidated into one suit. The Company has sought coverage under
existing directors and officers insurance policies for any settlements,
judgments, and costs of defense in connection with these cases, within
outstanding policy limits. The Company believes the suits are without merit
and intends to engage in a vigorous defense in these matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 27, 1999, the Company issued 100,172 shares of common stock as
additional earn-out consideration for the acquisition of assets of a dental
practice. The issuance of the shares was exempt from registration under
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder because the purchaser was an accredited investor within the
meaning of Rule 501.
On September 28, 1999, the Company issued 61,033 shares of common stock as
additional consideration for the acquisition of assets of a dental practice. The
issuance of the shares was exempt from registration under Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D thereunder because the
purchaser was an accredited investor within the meaning of Rule 501.
16
<PAGE>
The Company's senior lender currently prohibits the payment of cash dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b)
On May 28, 1999, the Company filed an amendment to a Current Report on Form
8-K/A to provide consolidated financial statements in connection with the
March 12, 1999 mergers of Gentle Dental Service Corporation ("GDSC") and
Dental Care Alliance ("DCA") with and into acquisition subsidiaries of the
Company, pursuant to which GDSC and DCA each became a wholly-owned subsidiary
of the Company.
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: NOVEMBER 12, 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> SEP-30-1999 SEP-30-1998
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<SECURITIES> 0 0
<RECEIVABLES> 16,852 10,616
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<INVENTORY> 3,690 2,887
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1,794 2,102
12,090 12,090
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