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INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K.--ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
---------------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
222 NO. SEPULVEDA BLVD., SUITE 740, EL SEGUNDO, CA 90245-4340
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (310) 765-2400
----------------------------
Securities registered pursuant Section 12(b) of the Act:
Title of each class Name of exchange on which registered
COMMON SHARES (PAR VALUE $.001 PER SHARE) NASDAQ NATIONAL MARKET
- ----------------------------------------- ------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has 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 X No .
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
At March 15, 2000, the aggregate market value of voting stock held by
non-affiliates was $74,475,240.
At March 15, 2000, 21,166,834 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which incorporated
- -------- ------------------------
Proxy Statement for 2000 Annual Meeting of Shareholders Part III
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I ................................................................................................................1
Item 1. Business......................................................................................................1
Item 2. Properties...................................................................................................13
Item 3. Legal Proceedings............................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders..........................................................14
PART II ...............................................................................................................15
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................15
Item 6. Selected Financial Data......................................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................16
Item 7A. Quantitative and Qualitative Disclosures About Market Risks .................................................22
Item 8. Financial Statements and Supplementory Data..................................................................23
Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure.........................51
PART III ...............................................................................................................52
Item 10. Directors and Executive Officers of the Registrant...........................................................52
Item 11. Executive Compensation.......................................................................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................................53
Item 13. Certain Relationships and Related Transactions...............................................................54
PART IV ...............................................................................................................55
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..............................................55
</TABLE>
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PART I
ITEM 1. BUSINESS.
We are the largest provider of dental practice management services to dental
professional corporations and associations in the United States. As of December
31, 1999, we provided management services to 226 dental offices that employed
677 dentists (including 148 specialists). We seek to establish dental practice
networks with a significant presence in selected markets and currently operate
in 14 states. Our network of dental groups provides comprehensive, convenient
and high quality general dentistry services including higher margin specialty
services such as orthodontics, periodontics, endodontics, pedodontics,
prosthodontics, oral surgery and oral pathology. Our network of affiliated
dentists is primarily reimbursed on a fee-for-service basis. In 1999, capitated
managed care payments represented less than 10% of our patient revenues.
The services we provide to our affiliated dental practices are part of our
clinically driven operating model that has historically resulted in significant
improvements in revenues, operating margins and cash flow. Our strategy to
enhance our affiliated dental practices include:
- - training and recruiting dentists to perform additional general and
specialty services;
- - optimizing patient scheduling, staffing ratios and other resource
allocation;
- - improving office administration including billing and collecting
receivables; and
- - negotiating and monitoring managed care and other contracts.
We also provide a proprietary management information system that enables us to
analyze key performance statistics on a real-time basis at each practice and
identify trends and opportunities for improvement. Currently, over 95% of our
affiliated practices use our proprietary management information system. We
believe our clinically driven operating model and proprietary management
information system, provide us with a unique advantage and serve as the
infrastructure to support continued profitable growth.
We provide our practice management services to affiliated dental practices
under long-term (typically at least 25 years) management service agreements. We
own the non-professional assets, including practice equipment and instruments,
of our affiliated practices and manage all the non-clinical aspects of these
affiliated practices. The practices employ the dentists and the hygienists
while we employ all administrative personnel. As part of our management
services, we bill and collect patient receivables and provide all
administrative support services. We believe dentists benefit from their
association with us through:
- - improved income potential;
- - the ability to focus on dentistry rather than practice administration;
- - flexible work schedules; and
- - access to educational services and training programs.
Dentists are typically compensated based on a percentage of revenues they
generate. We believe that due to our services dentists affiliated with us
generate average revenues significantly above the national dental industry
average.
InterDent was formed to effect the business combination of Gentle Dental
Service Corporation and Dental Care Alliance which was completed on March 12,
1999. Prior to the combination, both Gentle Dental and Dental Care Alliance
were publicly-traded providers of dental practice management services.
DENTAL SERVICES INDUSTRY
The Health Care Financing Administration, or HCFA, estimates that the annual
aggregate domestic market for dental services was approximately $57 billion for
1999, representing 4.6% of total health care expenditures in the United States.
Dental service expenditures grew at a compound annual growth rate of
approximately 7.9% from 1980 to 1999. According to HCFA, the dental services
industry is expected to experience this continued growth and is projected to
reach $93 billion by 2008. We believe that the anticipated growth in the dental
industry will be driven by several factors, including:
- - increase in the availability and types of dental insurance;
- - increasing demand for dental services from an aging population;
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- - evolution of technology which makes dental care less traumatic and,
therefore, more attractive to patients;
- - increased focus on preventive and cosmetic dentistry; and
- - growth of managed care organizations that offer dental coverage to
their members.
The market for dental services in the United States consists of both general
and specialty dentistry services. General dentistry services include preventive
and diagnostic procedures such as cleanings, examinations and x-rays and
restorative treatments such as fillings of cavities, gum therapy and crowns.
Specialty dentistry services include endodontics, oral pathology, oral surgery,
orthodontics, pedodontics, periodontics, and prosthodontics.
Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily individual or small group
practices. According to a 1996 survey conducted by the American Dental
Association, there were approximately 152,000 actively practicing dental
professionals in the United States, approximately 67% of whom practiced alone.
We estimate that approximately 2% of general and specialty practitioners are
affiliated with practice management companies.
Based upon recent estimates, according to industry sources, approximately 34%
of the estimated 147 million people covered by dental benefits in 1997 were
enrolled in managed dental care programs, including preferred provider
organizations ("PPO") and dental Health Maintenance Organizations ("HMOs").
Enrollment in dental HMOs, according to the National Association of Dental
Plans, is estimated to have grown from 7.8 million in 1990 to an estimated 31
million in 1998.
We believe that the trend toward consolidation in the dental services industry
will continue as dentists seek to affiliate with group practice managers, such
as us, due to the following:
- - desire of dentists to focus on clinical aspects rather than on
administrative and regulatory aspects of their practices;
- - increasing patient demands for more flexible evening and weekend hours;
- - increasing demand for competitively-priced, high quality dental care at
multiple locations;
- - increasing desire of recent dental school graduates to pursue alternatives
to the traditional solo practice of dentistry; and
- - need for certifiable standards of care for patients.
OPERATING STRATEGY
Our strategic objective is to maintain and expand our leadership position in
the dental practice management industry. To achieve this objective, we seek to
enter selected geographic markets and develop locally prominent,
multi-specialty dental delivery networks that provide gentle, high quality,
cost-effective dental care. The key elements of our strategy are as follows:
PROVIDE CONVENIENT, COMPREHENSIVE DENTAL CARE. Our affiliated dental practices
provide patients with customer-friendly, comprehensive and cost-effective
dental care which is made available at convenient times and locations. Because
our affiliated dental practices generally include both general practitioners
and on-staff specialists who can provide dental services (such as endodontics,
oral pathology, oral surgery, orthodontics, pedodontics, periodontics, and
prosthodontics), patients can rely on our affiliated dental practices to
provide comprehensive dental care needs. By offering extended office hours and
conveniently located offices, patients are offered a dental care environment
that makes it easier to schedule and keep appointments. We also provide
flexible payment options in an effort to reduce patient financial burdens.
FOCUS ON QUALITY OF PATIENT CARE. We have and continue to refine procedures,
training and systems designed to ensure optimum patient care. We seek to
improve clinical outcomes through our network of dental directors, which works
directly with our affiliated dental practices to institute quality assurance
and utilization review programs. Additional programs of the clinical services
council include the following:
- - the development and implementation of continuing education and training
programs for dental professionals;
- - the design and implementation of treatment protocols;
- - the evaluation of new techniques and technologies; and
- - the monitoring of treatment outcomes.
Additionally, we seek to affiliate with dentists and specialists who are
committed to delivering high quality dental care.
ESTABLISH A COMPREHENSIVE DENTAL CARE NETWORK. Our strategy is to increase the
number of affiliated dental practices by entering into management contracts
with, acquiring the non-professional assets of, and entering into license
agreements with dental groups and practices in selected markets. Our objective
is to affiliate with dental groups and practices that have a
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significant market position or, when combined with existing affiliated dental
practices, would result in a significant market position. We also intend to
selectively establish de novo dental offices in the markets in which we
operate, in order to augment our market presence. We believe that the
establishment of significant positions in the markets we serve will result in
economies of scale. Following each new affiliation with a dental practice, we
work closely with the professionals and staff in order to achieve network
integration and provide patients with convenient dental treatment.
ACHIEVE OPERATIONAL EFFICIENCIES AND ENHANCE REVENUE. We believe we achieve
operating efficiencies through the establishment of centralized management and
administrative functions (such as marketing, payroll, accounts payable, general
accounting and human resources services) for the affiliated dental practices.
At the same time, we maintain on-site functions (such as patient scheduling and
billing and collections) at each dental office or on a regional basis. We also
enhance dental practice revenues by providing services and establishing
procedures designed to optimize staff ratios and patient scheduling, and
utilizing our management information system to more effectively support our
affiliated dental practices. We believe that our network configuration provides
leverage in negotiating with third-party payors and dental supply vendors to
receive structured payments and contract terms that are more advantageous than
those typically available to individual and small group practitioners. The
addition of specialists such as orthodontists and oral surgeons who serve
multiple offices within our affiliated network also allows us to capture
incremental revenue from the higher fees commanded by specialty services.
INTEGRATE AND LEVERAGE MANAGEMENT INFORMATION SYSTEMS. Our management
information system utilizes commercially available software, which has been
enhanced by our proprietary software. This management information system allows
us to more effectively enhance the affiliated dental practices. The system is
designed to assist each affiliated dental practice in:
- - optimizing staffing ratios and patient scheduling;
- - identifying and reducing unfinished patient treatment programs;
- - maximizing billing and collection efforts; and
- - actively monitoring the performance of managed care and other third party
contracts.
We believe that our management information system provides a distinct
competitive advantage by allowing us to effectively service a diverse network
of dental practices from a centralized base.
EXPAND PATIENT VOLUME THROUGH PROACTIVE MARKETING. We seek to assist our
affiliated dental practices in increasing patient volume by focusing on patient
satisfaction and targeting existing and new patients through radio, direct
mail, print advertising and other retail marketing programs. We tailor our
advertising to local markets, based upon demographic characteristics of each
market and the brand name recognition of our affiliated dental practices in the
respective markets. The affiliated dental practices support this marketing
program by offering convenient hours and locations for the dental practices.
Additional support from the affiliated dental practices include:
- - providing comprehensive dental care services such as same-day emergency
care;
- - introducing or expanding specialty services at the dental practices; and
- - utilizing our management information system to identify and reduce
incomplete patient treatments.
Our objective is to leverage our existing advertising programs to generate
revenue as it expands within our selected markets.
CAPITALIZE ON MANAGED CARE EXPERTISE. We assist our affiliated dental practices
by supplementing their fee-for-service business with selected managed care
contracts. We believe that selected managed care contracts offer an attractive
and profitable source of incremental revenue for the affiliated dental
practices. We also believe that the financial and clinical data generated by
our management information system enables us to negotiate managed care
contracts under favorable terms. Additionally, we utilize our management
information system to actively monitor utilization of patient groups covered by
the managed care plans. We believe that our expertise in managed care
represents a competitive advantage.
DENTAL PRACTICE NETWORK
As of December 31, 1999, the Company provides comprehensive management services
to a dental practice network which employs 677 dentists, including 148
specialists, practicing out of 226 dental offices and 1,947 operatories located
in the geographic markets set forth below.
<TABLE>
<CAPTION>
Location Dentists Offices Operatories
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<S> <C> <C> <C>
Arizona 7 3 19
California - Northern 150 30 349
</TABLE>
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<TABLE>
<S> <C> <C> <C>
California - Southern 152 45 396
Florida 62 36 213
Georgia 29 8 106
Hawaii 41 7 55
Idaho 15 2 53
Indiana 3 3 20
Kansas 3 1 14
Michigan 26 13 98
Nevada 33 13 128
Oklahoma 18 5 53
Oregon 97 34 269
Pennsylvania 22 17 102
Washington 19 9 72
----------- ----------- ------------
Total 677 226 1,947
=========== =========== ============
</TABLE>
EXPANSION STRATEGY
As a part of our strategy, we are pursuing an aggressive network expansion
plan. We believe that we have significant opportunities to affiliate with
additional dental practices resulting from favorable industry characteristics
and the professional and business relationships of our senior management.
We believe that the use of dental practice management companies will continue
to grow rapidly, resulting in significant consolidation opportunities for us
and other practice management organizations. In order to capitalize on these
consolidation opportunities, we utilize the extensive dental industry
experience of our senior management and our significant relationships with
numerous practitioners and other industry leaders throughout the United States.
We believe that these extensive relationships provide a competitive advantage
to us as we seek additional affiliation opportunities to further our growth.
We intend to continue to offer numerous significant benefits and value-added
services to attract dentists and specialty practitioners to our affiliated
provider network. Specific value-added services provided by us include billing,
reimbursement and collections services, payroll and staffing, patient
scheduling, advertising and marketing, product supply management and equipment
maintenance, dentist recruitment and capital resources. Additional benefits to
practitioners include clinical leadership and excellence, quality of care
standards and continuing education, and financial benefits including
performance bonuses. We believe that we will continue to be successful in
attracting and recruiting dentists for the affiliated dental practices by
providing these services and benefits. Furthermore, we believe that our name
recognition and market presence is and will continue to be attractive to
practitioners from an affiliation standpoint. As a result, we believe we will
have greater consolidation opportunities.
We use a wide range of evaluation criteria in selecting affiliation candidates,
including: number of practitioners and compensation, patient base,
reimbursement rates, quality of care, operating statistics, including number of
operatories, patient visits and revenue per chair, historical operating results
and financial condition, general versus specialty revenue mix, payor mix,
location, market demographics and competition, advertising expenditures,
reputation within the local community, non-professional staffing requirements,
and condition of facilities and equipment including information systems. We
intend to target individual and group practitioners, as well as local and
regional consolidators. Consideration for future affiliations may include a
combination of cash and seller financing.
Our affiliation integration process may include: centralization and management
of certain administrative functions, integration of management information
systems, initiation of quality assurance and peer review programs, development
of advertising and marketing programs, reviewing quality of care and staff
utilization, and modification of patient scheduling procedures. Such
integration is intended to improve the operations of the dental practices and
to position them for increased patient revenue and profit growth. We will also
continue our strategy of establishing de novo dental offices in selected
markets to augment existing market presence.
SERVICES AND OPERATIONS
We provide comprehensive management services with respect to all of the
operations of our network of affiliated dental practices, other than the
provision of dental treatment. We employ all non-clinical personnel at the
affiliated dental
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practices. Our services can be grouped into three broad categories:
administrative and financial services, personnel services and operational
services.
ADMINISTRATIVE AND FINANCIAL SERVICES
ADMINSTRATIVE. We provide administrative services to the affiliated dental
practices, including staffing, education and training, billing and collections,
patient scheduling, patient treatment follow-up, financial reporting and
analysis, productivity reporting and analysis, cash management, group
purchasing, inventory management, payroll processing, employee benefits
administration, advertising promotion and other marketing support. We also
assist in professional recruiting and provide support for dental practice
operations, new site development and other capital requirements. We believe the
dentists at the affiliated dental practices benefit from the support we provide
and that these services substantially reduce the amount of time they are
otherwise required to devote to administrative matters, thus enabling network
dentists to dedicate more time to the growth of their professional practices.
Through economies of scale, we are able to provide these services at a lower
cost than could be obtained by any of the affiliated dental practices
individually. In addition, because of our size and purchasing power, we have
been able to negotiate discounts on, among other things, dental and office
supplies, health and malpractice insurance, and equipment.
THIRD-PARTY PAYOR MANAGEMENT. We examine various factors to determine which
third-party payors' assignments we will recommend at each affiliated dental
practice. Factors considered by us in making this recommendation include:
- - the types of procedures that are generally performed;
- - the geographic area served by the particular plan; and
- - the demographic characteristics of the typical plan participants.
Some element of managed care is present at most affiliated dental practices,
although generally not as the primary source of revenues. We assist our
affiliated dental practices in the negotiation of contracts with third-party
payors. As a result of our size, we are often able to negotiate better terms
for our affiliated dental practices with third-party payors than would be
available to solo practitioners or small group dental practices.
ACCOUNTING SERVICES. We provide affiliated dental practices with a full range
of accounting services, including preparation of financial statements,
management of accounts payable, oversight of accounts receivable, verification
of purchase orders, payroll administration and tax services. In addition, we
assist each affiliated dental practice in the preparation of operating and
financial budgets.
THIRD-PARTY FINANCING. We have contracts with multiple non-recourse third-party
financing companies that enable our affiliated dental practices to offer
various third-party financing options directly to their patients, but we are
not a party to the financing agreements. The financing company is responsible
for all billing to, and collection from, the patient and has no recourse for
payment against us or our affiliated dental practices.
PERSONNEL SERVICES
STAFFING AND SCHEDULING. We provide management services that are designed to
optimize staffing ratios and patient scheduling at our affiliated dental
practices. We are responsible for the hiring, retention, salary and bonus
determination, job performance-related training and other similar matters
affecting our employees, which include non-dental professionals providing
services to the affiliated dental practices. Services provided by us include:
- - payroll administration, including recordkeeping, payroll processing, making
payroll tax deposits, reporting payroll taxes and related matters;
- - risk management, including on-site safety inspections and monitoring,
training, and workers' compensation claim management and administration;
- - administering benefit plans;
- - human resource materials, consulting and expertise on other human resource
issues;
- - analysis and advice with respect to the optimal number of general dentists,
specialist dentists, dental assistants and hygienists at each dental
practice in an effort to provide high levels of quality care and patient
confidence while practicing at a heightened level of efficiency;
- - assist dental practices with their scheduling in order to maximize
efficiency and minimize delays in treatment; and
- - assist each affiliated dental practice, to the extent necessary, with
respect to expanding office hours, optimizing the flow of patients through
the offices and assisting dentists in the more efficient use of dental
assistants and hygienists.
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In some circumstances, a professional employer organization assists us in
providing these services.
TRAINING AND EDUCATION. Staff and practice development programs are an integral
part of our operating strategy. Our programs are designed to motivate staff to
achieve optimum performance goals, increase the level of patient satisfaction,
and improve our ability to attract and retain qualified personnel. We believe
that our programs collectively have increased referrals from patients, and have
increased treatment acceptance rates.
We provide our affiliated dental practices with consulting and educational
services. These services include a training program covering non-clinical
aspects of the practice, together with specific training designed for the
efficient and effective use of our management information system. Specifically,
our training programs provide dental practice personnel with:
- - guidelines for addressing patient concerns;
- - techniques for explaining treatment procedures and length of treatment;
- - parameters for establishing appropriate financial arrangements with
patients; and
- - a systematic approach to monitoring the success of each area of training.
While we are not engaged in the practice of dentistry, we assist in training
and educating professional personnel by providing analyses that allow them to
determine training needs. All personnel, other than dentists, dental hygienists
and other dental professionals, are supervised and trained by us or, in some
circumstances, our subcontractor. We also help to coordinate group meetings and
seminars. In addition, we encourage and facilitate team building of staff
through regularly scheduled staff meetings and social events.
RECRUITING. We continually assist our affiliated dental practices in recruiting
dentists to add to our network. Recruiting takes place at dental schools
through our contacts at schools, at regional dental seminars and conventions
and through advertising in regional and national dental publications.
OPERATIONAL SERVICES
ADVERTISING AND MARKETING. We assist our affiliated dental practices in
developing and implementing targeted advertising and marketing programs. Our
marketing programs, which include patient educational and prevention programs
at selected dental practices, are focused on the retention and reactivation of
existing patients. In addition, we also use external marketing programs such as
direct mail and yellow page advertising that are designed to emphasize the
convenience of individual locations, payment plans and service hours, and
promote the high standards of care at the practices in an attempt to attract
new patients. Our marketing programs may include the use of local radio,
television and print advertising, and other marketing promotions. In some
instances, we seek to promote brand name recognition of our affiliated dental
practices through use of regional brand names. For example, in Florida, several
of our affiliated dental practices use the name "Advanced Dental Care."
Additionally, several of our affiliated dental practices use the name "Gentle
Dental." In some cases, affiliated dental practices are marketed under the
names used by the practices prior to their affiliation with us to take
advantage of the practices' existing market positions.
DENTIST AFFILIATION. In order to continue our growth, we seek to enter into
management agreements with dental practices that employ dentists who become
affiliated with us. We believe that our affiliation structure allows many
dentists to reduce the financial constraints associated with having a
significant portion of their net worth invested in their practices. Further, we
believe that the practice of dentistry within our network allows dentists to
focus almost exclusively on practicing dentistry by avoiding the burden of
non-clinical administrative and management responsibilities. An affiliation
with us offers dentists the additional advantages of benefits such as health
insurance and continuing education.
QUALITY ASSURANCE. The clinical management procedures and treatment protocols
for our affiliated dental practices vary from region to region. Under the
guidance of our network of dental directors, key dentists in each region review
and determine these procedures and treatment protocols. We work closely with
dentists and hygienists at the affiliated dental practices to assist them with
developing and implementing procedures and protocols. In addition, the network
of dental directors helps our affiliated dental practices establish business
and administrative standards under which dental services are provided, thereby
creating a heightened clinical environment for the affiliated dental practices
to enhance patient care and clinical outcomes. Areas included among the
procedures and protocols to be determined by the network of dental directors
are treatment planning, diagnostic screening, radiographic records, record
keeping, specialty referrals and dental hygiene protocols. As part of the
affiliated dental practices' clinical enhancement program, we intend to assist
in providing quality assurance, peer review and utilization review programs. We
also perform patient surveys to monitor patient satisfaction, and periodically
audit patient charts and provide advice to the general dentists and dental
specialists employed by the affiliated dental practices.
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MANAGEMENT INFORMATION SYSTEMS. Our management believes that access to
accurate, relevant and timely financial and operating information is a key
element of our practice management services. Our management information system
is a combination of commercially available software with proprietary
enhancements. It is designed to increase the efficiency and productivity of
dental practices by enabling us and our dental practices to cost-effectively
monitor the key business and professional operating aspects. We intend to
implement our basic management system at each dental practice with which we
affiliate. The system allows the affiliated dental practices to identify, track
and schedule each individual patient treatment process, thereby reducing
unfinished patient treatment programs which correspondingly increases practice
revenues. The system also contains features designed to maximize billing and
collection efforts, and to actively monitor the performance of managed care
contracts.
We utilize our information systems to track data related to each affiliated
dental practice's operations and financial performance. Billing and collection
information is compiled on a daily basis, enabling us to monitor financial
performance and operational efficiency. We generate reports for each affiliated
dental practice containing information as to every visit, charge and procedure.
These reports are analyzed with respect to performance and efficiencies. The
management information systems function to optimize the practitioner's time
through computerized scheduling.
We believe that our enhanced management information systems provide a critical
competitive advantage, in that it allows us to more effectively manage a
geographically diverse network of dental practices from a centralized base. Our
current proprietary software enhancements, together with our capacity to
develop future enhancements, uniquely positions us for future expansion of our
affiliated dental practice management network. We believe this system has
increased the productivity of the affiliated dental practices that have
implemented it.
SCHEDULING. We implement patient scheduling systems at each of our affiliated
dental practices. These systems enable us to devise daily patient schedules
that maximize the efficiency of dental professionals. Patient visits are
scheduled in small time increments based upon our knowledge of the time
required for each type of dental procedure. In addition, office hours of each
affiliated dental practice are tailored to meet the needs of its patient
population. We believe that our scheduling systems result in more efficient
patient flow, thereby increasing productivity and patient volume.
MANAGEMENT, LICENSING, AND COLLABORATION AGREEMENTS
As part of a delivery network of multi-specialty dental care, we provide
management and licensing services to our affiliated dental practices under
long-term management service and license agreements. Under the terms of the
management service agreements, we bill and collect patient receivables and
provide all administrative and management support services to our affiliated
dental practices. 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 are generally provided by Dental Care
Alliance and include marketing, advertising and purchasing. We have also
entered into a collaborative Internet arrangement with Dental X Change, Inc.
and Bessemer Venture Partners which is designed to create an integrated web
portal for both dentists and patients throughout the United States.
GENTLE DENTAL MANAGEMENT AGREEMENTS. Gentle Dental Service Corporation has
entered into long-term management agreements with affiliated dental practices
under which we are the exclusive administrator of all non-clinical aspects of
the dental practices conducted by the affiliated dental practices, providing
facilities, equipment, staffing, management support and other ancillary
services. Under these management agreements, we:
- - provide all facilities and equipment used by the affiliated dental
practices;
- - bill and collect all receivables on behalf of the affiliated dental
practices;
- - purchase and provide all supplies;
- - provide all clerical, accounting, payroll, human resources, computer and
other non-dental support personnel;
- - supervise and maintain custody of all business records;
- - provide management information reports;
- - assist with market research and plan and implement marketing and
advertising programs;
- - negotiate contracts on behalf of the affiliated dental practices with
managed care payors or other third parties; and
- - assist in the recruitment of dentists.
In addition, although we establish guidelines for hiring and compensating
dentist and clinical personnel, such responsibility remains with the affiliated
dental practices. Specifically, the affiliated dental practices are responsible
for:
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- - hiring and compensating dentists and other dental professionals;
- - purchasing and maintaining malpractice insurance;
- - maintaining patient records; and
- - ensuring that dentists have the required licenses and other certifications.
In addition, the affiliated dental practices are exclusively in control of all
aspects of the practice of dentistry and the delivery of dental services.
As compensation for all services provided under the management agreements, we
receive service fees from the affiliated dental practices, typically equal to
reimbursement of expenses incurred in the performance of our obligations under
the management agreement, plus an additional fee equal to a percentage of the
net revenues of each affiliated dental practice, as defined. However, in a few
instances, management agreements provide for a flat percentage of the net
revenues of the affiliated dental practice, as defined in those agreements. We
collect ongoing service fees out of the cash collections of the affiliated
dental practice, or, under certain management agreements, out of receivables
assigned to us by the affiliated dental practices. The management agreements
each have an initial term of 40 years with automatic extensions ranging from
five years to ten years thereafter, unless either party gives notice before the
end of the term.
The management agreements are not subject to early termination by the
affiliated dental practices unless we are the subject of bankruptcy proceedings
or materially breach the management agreement and do not cure the breach
following notice. Certain management agreements 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.
DENTAL CARE ALLIANCE MANAGEMENT AGREEMENTS. Dental Care Alliance has entered
into management agreements with affiliated dental practices under which we
provide comprehensive administrative and business services and support to the
affiliated dental practices. Under these management agreements we:
- - assist in the identification of areas in which the performance of
affiliated dental practices and their dental professionals can be improved
to increase revenues and operating income;
- - provide, maintain and repair all offices, equipment and furnishings;
- - employ all non-professional personnel necessary for the operation of the
affiliated dental practices;
- - provide payroll services;
- - implement standard business systems and procedures and provide or
facilitate systems and efficiencies training;
- - order all general business inventory and supplies required by the
affiliated dental practices and handle accounts payable;
- - establish and maintain information systems and provide accounting and
bookkeeping services;
- - monitor compliance with rules and regulations applicable to the affiliated
dental practices business;
- - provide marketing assistance; and
- - provide assistance in billing and collections, all to the extent permitted
by law.
The management agreements provide that the affiliated dental practices are
responsible for, among other things:
- - employing and supervising all affiliated dentists and dental hygienists;
- - complying with all laws, rules and regulations relating to affiliated
dentists and dental hygienists;
- - participating in quality assurance/utilization review programs;
- - maintaining proper dental patient records;
- - obtaining and maintaining professional liability insurance; and
- - any other requirements to carry out the practice of dentistry.
Under the terms of the management agreements, the affiliated dental practices
are required to indemnify, hold harmless and defend us from and against any and
all claims from negligent or intentional acts or omissions, including the
performance of dental services, by the affiliated dental practices and their
employees. We are required to indemnify, hold harmless and defend the
affiliated dental practices from and against any and all claims resulting from
our negligent or intentional acts or omissions.
As compensation for our management services under the management agreements, we
earn a management fee equal to 63% to 74% of the net collected revenues earned
by the affiliated dental practices. We pay all of the operating and
nonoperating expenses incurred by the affiliated dental practices except for:
- - salaries and benefits to the affiliated dentists and dental hygienists;
8
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- - licensing fees paid to us;
- - debt and asset carrying costs related to the acquisition of the dental
practice; and
- - any other direct cost to the affiliated dental practices not covered
under the management agreement.
The management agreements have 25-year terms, with automatic annual one-year
renewals, and are terminable by either party for cause or upon the insolvency
of the other party. In the event of a material default by the affiliated dental
practices or the owner of the affiliated dental practice, we have the option to
cause the sale of all of the stock or all of the assets of the affiliated
dental practices to a licensed dentist designated by us. In such an event, the
owner of the affiliated dental practice receives the proceeds of the sale,
subject in certain cases to preset formulas, less any amounts owed as a result
of the default. The affiliated dental practices or the owner of the affiliated
dental practice may terminate the management agreement without cause provided
the practice is sold to a dentist acceptable to us, who either assumes the old
agreement or mutually negotiates a new agreement. The management agreements
provide that they shall be amended by the parties in the event of any
regulatory matters affecting the validity of the management agreement in a
manner necessary to bring the management agreements into compliance.
During the terms of the management agreements, we and the affiliated dental
practices agree not to disclose certain confidential and proprietary
information regarding the other. The affiliated dental practices are required
under the management agreements to use their best efforts to enter into and
enforce written employment agreements with each of their professional employees
containing covenants not to compete with the affiliated dental practice in a
specified geographic area for a specified period of time, generally from one to
three years after termination of the employment agreement. The employment
agreements generally provide for injunctive relief in the event of a breach of
the covenant not to compete. However, the affiliated dental practices' ability
to enforce such covenants is uncertain.
DENTAL CARE ALLIANCE LICENSE AGREEMENTS. Dental Care Alliance has two forms of
license agreements. The long form license agreements generally have terms of
five years, with automatic five-year renewal terms, while the short form
license agreements have terms that are coterminous with the related management
agreements. In consideration for the payment of a monthly license fee, which
has generally ranged from $600 to $1,200, the licensee is entitled to identify
its affiliated dental practice as a member of our network, participate in our
marketing programs, utilize our discounted purchasing capabilities, and use one
or more of our service marks, logo types and commercial symbols. The long form
license agreements also provide for a monthly advertising fee of $1,000 which,
if collected, would be used for general marketing, advertising and promotion of
the Company's network and such licensed symbols. The manner in which the
licensee intends to use such licensed symbols must be approved by us in advance.
The short form license agreements terminate immediately upon the termination of
the related management agreement, and termination is governed by the provisions
thereof. We may terminate the long form license agreements upon cancellation
of, or failure to renew, the lease for the premises of the related affiliated
dental practice, the bankruptcy of the associated licensee or upon the
occurrence of certain other events set forth in the license agreement. The long
form licensees may terminate their license agreements for cause at any time or
without cause during the 30-day period commencing on the first anniversary of
the execution of the agreement. Any other termination by the long form licensee
constitutes a breach of the license agreement.
DENTAL X CHANGE, INC. COLLABORATION AGREEMENT
On September 3, 1999, we entered into a seven year collaborative Internet
strategy agreement with Dental X Change, Inc. Dental X Change is a commercial
Internet company servicing the professional dental market. Services provided by
Dental X Change include: web development, hosting, content, education,
e-commerce, practice management services in an application service provider
model, and dental oriented web services to dental practices and both the
professional and consumer dental markets through its various web sites,
intranets and other online technologies. The collaboration agreement will
assist us to utilize the Internet to:
- - increase interaction and the flow of information between InterDent and its
affiliated dental practices;
- - facilitate communication between InterDent's affiliated dental practices
and patients;
- - facilitate communication between InterDent and its investors; and
- - provide non-affiliated dental practices with access to business information
developed by InterDent.
In exchange for our cash contribution of $1,020,000, we received 1,000,000
shares of Series A Convertible Preferred Stock. Additionally, we received
1,949,990 shares of Dental X Change common stock and a warrant to purchase
4,054,010 additional shares of Dental X Change common stock at $.10 per share.
Currently, we have a less than 20% investment in Dental X Change. Under the
terms of the collaboration agreement, InterDent, among other things:
9
<PAGE>
- - will use all reasonable commercial efforts to cause the affiliated dental
practices to utilize Dental X Change's Internet based shopping system for
ordering and purchasing all their dental supplies, dental products and
training and educational materials;
- - granted an exclusive license to Dental X Change to use, modify and
create from InterDent's Compass System a web-enabled Compass System;
- - will use Dental X Change's listing and referral service on the Internet for
offices of our affiliated dental practices and their respective affiliated
dentists; and
- - will use Dental X Change's recruitment services and help wanted classifieds
as a primary source for recruitment on the Internet.
In exchange for InterDent's commitments and in addition to the issuance of
Dental X Change common stock and warrants, Dental X Change, among other things:
- - will develop a web-enabled Compass System within a commercially reasonable
time and market and license the system to third parties;
- - will host InterDent's internet website and provide web site development
services for InterDent;
- - grant InterDent a non-exclusive license, with a right to sublicense to
InterDent's affiliated dental practices, to use the web-enabled Compass
System for internal purposes free of charge.
GOVERNMENT REGULATION
GENERAL. The practice of dentistry is regulated extensively at both the state
and federal level. Regulatory oversight includes, but is not limited to,
considerations of fee-splitting, corporate practice of dentistry, anti-kickback
and anti-referral legislation and state insurance regulation. Although we
believe that our operations comply in all material respects with the laws to
which they are subject, there can be no assurance that a review of our business
relationships by courts or other regulatory authorities would not result in
determinations that could prohibit or otherwise adversely affect operations or
that the regulatory environment will not change, requiring us to reorganize,
change our methods of reporting revenues and other financial results or
restrict existing or future operations. Any such change could have a material
adverse effect on our business, financial condition and results of operations.
Every state imposes licensing and other requirements on individual dentists and
dental facilities and services. In addition, federal and state laws regulate
HMOs and other managed care organizations for which dentists may be providers.
In connection with our operations in existing markets and expansion into new
markets, we may become subject to compliance with additional laws, regulations
and interpretations or enforcement thereof. Our ability to operate profitably
will depend in part upon our and our affiliated dental practices obtaining and
maintaining all necessary licenses, certifications and other approvals and
operating in compliance with applicable health care regulations.
Dental practices must meet federal, state and local regulatory standards in the
areas of safety and health. Historically, these standards have not had any
material adverse effect on the operations of the affiliated dental practices.
We believe that we and our affiliated dental practices are in compliance in all
material respects with applicable federal, state and local laws and regulations
relating to safety and health.
CORPORATE PRACTICE OF DENTISTRY; FEE SPLITTING. The laws of many states
prohibit, by statute or under common law, dentists from splitting fees with
non-dentists and prohibit non-dental entities such as us from engaging in the
practice of dentistry or employing dentists to practice dentistry. The specific
restrictions against the corporate practice of dentistry as well as the
interpretation of those restrictions by state regulatory authorities vary from
state to state. The restrictions are generally designed to prohibit a
non-dental entity from:
- - controlling the professional practice of a dentist;
- - employing dentists to practice dentistry (or, in certain states,
employing dental hygienists or dental assistants); and
- - controlling the content of a dentist's advertising or sharing
professional fees.
A number of states limit the ability of a person other than a licensed dentist
to own equipment or offices used in a dental practice. However, the states in
which we conduct our business do not currently impose such limitations. Some of
these states allow leasing of equipment and office space to a dental practice
under a bona fide lease. Some states also prohibit a dentist from operating
more than two dental offices. The laws of many states also prohibit dental
practitioners from paying any portion of fees received for dental services in
consideration for the referral of a patient. In addition, many states impose
limits on the tasks that may be delegated by dentists to dental assistants.
10
<PAGE>
We provide management and administration services to dental practices, and
believe that the fees we charge for those services are consistent with the laws
and regulations of the jurisdictions in which we operate. We do not control the
clinical aspects of the practice of dentistry or employ dentists to practice
dentistry, except as permitted by law. Moreover, in states in which it is
prohibited, we do not employ dental hygienists or dental assistants. We believe
that our operations comply in all material respects with the above-described
laws to which we are subject. However, there can be no assurance that a review
of our business relationships by courts or other regulatory authorities would
not result in determinations that could prohibit or otherwise adversely affect
our operations. Furthermore, there can be no assurance that the regulatory
environment will not change, requiring us to reorganize or restrict our
existing or future operations.
The laws regarding fee-splitting and the corporate practice of dentistry and
their interpretation vary from state to state and are enforced by regulatory
authorities with broad discretion. There can be no assurance that the legality
of our business or our relationships with dentists or affiliated dental
practices will not be successfully challenged or that the enforceability of the
provisions of any management agreement will not be limited. The laws and
regulations of certain states in which we may seek to expand may require us to
change the form of our relationships with affiliated dental practices. Such a
change may restrict our operations or the way in which providers may be paid or
may prevent us from acquiring the non-dental assets of such practices or
managing dental practices in such states. Similarly, there can be no assurance
that the laws and regulations of the states in which we presently maintain
operations will not change or be interpreted in the future either to restrict
or adversely affect our existing or future relationships with our affiliated
dental practices. Any change in our relationships with our affiliated dental
practices resulting from the interpretation of corporate practice of dentistry
and fee-splitting statutes and regulations could have a material adverse effect
on our business and results of operations.
ANTI-KICKBACK AND ANTI-REFERRAL LEGISLATION. Federal and many state laws
prohibit the offer, payment, solicitation or receipt of any form of
remuneration in return for, or in order to induce the referral of a person for
services reimbursable under Medicare, Medicaid or other federal and state
health care programs. Further restrictions include the reimbursement by such
regulatory agencies for the furnishing or arranging for the furnishing of items
or services, the purchase, lease, order, arranging or recommending purchasing,
leasing or ordering of any item. These provisions apply to dental services
covered under the Medicaid program in which we participate. The federal
government has increased scrutiny of joint ventures and other transactions
among health care providers in an effort to reduce potential fraud and abuse
related to Medicare and Medicaid costs. Many states have similar anti-kickback
laws, and in many cases these laws apply to all types of patients, not just
Medicare and Medicaid beneficiaries.
The applicability of these federal and state laws to transactions in the health
care industry such as those to which we are or may be a party has not been the
subject of judicial interpretation. There can be no assurance that judicial or
administrative authorities will not find these provisions applicable to our
operations, which could have a material adverse effect on our business. Under
current federal law, a physician or dentist or member of his or her immediate
family is prohibited from referring Medicare or Medicaid patients to any entity
providing "designated health services" in which the physician or dentist has an
ownership or investment interest, unless such an applicable exception is
available. A number of states also have laws that prohibit referrals for
certain services such as x-rays by dentists if the dentist has certain
enumerated financial relationships with the entity receiving the referral,
unless an exception applies. Any future expansion of these prohibitions to
other health services could restrict our ability to integrate dental practices
and carry out the development of our network of affiliated dental practices.
Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals can result in exclusion from the Medicare and
Medicaid programs as well as civil and criminal penalties. Similar penalties
apply for violations of state law. While we make every effort to comply with
the anti-kickback and anti-referral laws, a determination of violation of these
laws by us or our affiliated dental practices could have a material adverse
effect on our business, financial condition and results of operations.
STATE INSURANCE LAWS AND REGULATIONS. There are also certain regulatory risks
associated with our role in negotiating and administering managed care and
capitation contracts. There are risks, particularly in instances where the
dental care provider typically is paid a pre-determined amount per-patient
per-month from the payor in exchange for providing all necessary covered dental
care services to patients covered under the contracts. The application of state
insurance laws to reimbursement arrangements other than various types of
fee-for-service arrangements is an unsettled area of law and is subject to
interpretation by regulators with broad discretion. As we or our affiliated
dental practices contract with third-party payors, including self-insured
plans, for certain non-fee-for-service arrangements, we or our affiliated
dental practices may become subject to state insurance laws. Revenues could be
adversely affected in the event we or our affiliated dental practices are
determined to be subject to licensure as an insurance company or required to
change the form of their relationships with third-party payors and become
subject to regulatory enforcement actions.
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HEALTH CARE REFORM PROPOSALS. The United States Congress and state legislatures
have considered various types of health care reform, including comprehensive
revisions to the current health care system. It is uncertain what legislative
proposals will be adopted in the future, if any, or what actions federal or
state legislatures or third-party payors may take in anticipation of or in
response to any health care reform proposals or legislation. Health care reform
legislation adopted by Congress or the legislatures of states in which we do
business, as well as changes in federal and state regulations could have a
significant effect on the health care industry and, thus, potentially
materially adversely affect our operations and those of our network of
affiliated dental practices.
REGULATORY COMPLIANCE. We regularly monitor developments in laws and
regulations relating to dentistry. We may be required to modify our agreements,
operations or marketing from time to time in response to changes in business,
statutory and regulatory environments. We plan to structure all of our
agreements, operations and marketing in accordance with applicable law,
although there can be no assurance that our arrangements will not be
successfully challenged or that the required changes may not have a material
adverse effect on operations or profitability.
COMPETITION
We compete with other dental practice management companies seeking to affiliate
with dental practices in the highly competitive dental practice management
industry. We believe that the industry will become more competitive as it
continues to develop. Key factors of competition currently include:
- - acquisition methods and models;
- - the reputations of the dental practices within dental care networks;
- - the scope of services provided by dental care networks;
- - management experience and expertise;
- - the sophistication of management information, accounting, finance and other
systems; and
- - network operating methods.
We believe that we have a competitive advantage to effectively compete in each
of these areas.
We currently compete with other dental practice management companies in our
existing markets. There are also a number of dental practice management
companies currently operating in other parts of the country which may enter our
existing markets in the future. Many of such competitors and potential
competitors have substantially greater financial resources than us, have
established large dental practice networks, or otherwise enjoy competitive
advantages which may make it difficult for us to compete against them or enter
into additional management agreements on terms acceptable to us. In addition,
as we seek to expand our operations into new markets, we are likely to face
competition from dental practice management companies which already have
established a strong presence in such markets.
The business of providing dental services is highly competitive in each of the
markets in which our affiliated dental practices operate or in which operations
are contemplated. The primary bases of such competition are quality of care and
reputation, marketing exposure, convenience and traffic flow of location,
relationships with managed care entities, appearance and usefulness of
facilities and equipment, price of services and hours of operation. The
affiliated dentist practices compete with other dentists who maintain single or
satellite offices, as well as with dentists who maintain group practices,
operate in multiple offices or are members of competing dental practice
management networks. Many of those dentists have established practices and
reputations in their markets. In addition to competing against established
practices for patients, the affiliated dental practices compete with such
practices in the retention and recruitment of general dentists, specialists and
hygienists. If the availability of dentists begins to decline in our existing
or targeted markets, it may become increasingly difficult to attract and retain
the dental professionals to staff the affiliated dental practices. There can be
no assurance that our affiliated dental practices will be able to compete
effectively with such other practices.
INSURANCE
We carry comprehensive liability and extended coverage insurance. Our
affiliated dental practices carry professional liability and general liability
insurance. Such insurance coverage's are expanded to include all additional
practices that we develop or affiliate, with policy specifications, insured
limits, and deductibles customarily carried for similar dental practices.
SERVICE MARK
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Our network of affiliated dental practices in Oregon and Washington are
operated and marketed under the name "Gentle Dental." Other affiliated
practices may or may not use such name depending upon each affiliated
practice's name recognition and other local market conditions. Gentle Dental is
a federally registered service mark owned by us. On April 19, 1989, the
Company's predecessor acquired title to the federal registration of this
service mark as originally issued on October 26, 1982. As part of the purchase,
the seller was granted an exclusive personal license to use the mark for the
sale of dental services in practices owned or controlled by the seller in the
Boston, Massachusetts, Baltimore, Maryland, and Washington, D.C. metropolitan
areas. Such license expired on April 19, 1999. As a result, we could not use
the mark in those markets until such license expired. We also recognize that
there are numerous other practices across the country using the name Gentle
Dental. Any entity that commenced use of our mark before October 26, 1982, may
have rights to the mark in its geographic market superior to our rights. Given
the costs and inherent uncertainties of service mark litigation, there can be
no assurance that we can successfully enforce our service mark rights in any
particular market.
EMPLOYEES
We have entered into an agreement with an unrelated third party co-employer
pursuant to which a significant number of our administrative and support staff
located in certain of our affiliated dental practices as well as certain of our
corporate office management and staff are co-employed. As of December 31, 1999,
we employed or co-employed approximately 3,520 persons, consisting of 1,324
dental assistants, 1,190 dental office staff, and 130 executive and
administrative staff.
In addition, a significant number of our affiliated dental practices have
entered into an agreement with the co-employer pursuant to which an affiliated
dental practice and the co-employer co-employ all professional staff. As of
December 31, 1999, such affiliated dental practices, in the aggregate, employed
or co-employed approximately 927 dental professionals, consisting of 628
dentists and 299 dental hygienists. We, or our affiliated dental practices, as
the case may be, are responsible for the hiring, retention, salary and bonus
determination, job performance-related training and other similar matters
affecting co-employees while the co-employer is responsible for:
- - payroll administration, including recordkeeping, payroll processing,
making payroll tax deposits, reporting payroll, taxes and related
matters;
- - risk management, including on-site safety inspections, monitoring,
training and workers' compensation claim management and administration;
- - administering benefit plans; and
- - human resource consulting and expertise on other human resource issues.
The agreements with the co-employer are terminable by either party without
cause on 30 days written notice, or for cause on 24 hours written notice.
Also, as of December 31, 1999, approximately 130 clerical personnel and dental
assistants employed by certain affiliated dental practices with us were subject
to collective bargaining agreements that expire in 2000. These agreements are
presently due for negotiation. In addition, we have assumed obligations under
collective bargaining agreements by and between certain labor unions and some
or all of the non-professional employees servicing six of our other affiliated
dental practices. We have entered into contracts with certain labor unions in
Michigan (where certain of our managed professional associations operate),
pursuant to which we have agreed that such managed professional associations in
Michigan will treat such unions' members at specified discounts. In addition,
the National Labor Relations Board has ruled that we must engage in collective
bargaining relating to certain of our non-dental professional employees working
at another of our affiliated dental practices. Finally, our non-management
employees at one other affiliated dental practice have voted in favor of
unionizing and entering into a collective bargaining agreement with us. We are
still in the process of negotiating this agreement.
ITEM 2. PROPERTIES.
The dental practice and business offices in our network are generally leased
from various parties pursuant to leases with remaining terms ranging through
2015. Several of the leases have options to renew, and we expect to renew or
replace leases as they expire. Our corporate headquarters is located in leased
office space in El Segundo, California. We also maintain executive offices in
leased office space in Vancouver, Washington, and in Sarasota, Florida. In
connection with the amendment of the management agreements with Oregon and
Washington professional corporations, we acquired an office building located in
Hazel Dell, Washington which is occupied by one of our clinical office
locations.
ITEM 3. LEGAL PROCEEDINGS.
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On October 22, 1999, we announced the signing of a definitive merger agreement
between InterDent and a group consisting of an affiliate of Leonard Green &
Partners, L.P., and certain members of InterDent's management, including
Michael Fiore, Co-chairman and CEO, and Steven Matzkin, DDS, Co-chairman,
President, and Chief Dental Officer. Additionally, existing investors in
InterDent, 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, InterDent 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
Between October 25 and December 28, 1999, certain of our officers and
directors, and Leonard Green & Partners were named as defendants in civil suits
filed on behalf of certain owners of our Common Stock relating to the merger.
Six suits were filed in the Court of Chancery in the State of Delaware, New
Castle County and two in the Los Angeles County Superior Court in the State of
California. The lawsuits purport to be brought on behalf of the holders of
Common Stock and allege claims of breach of fiduciary duty and aiding and
abetting such breach in connection with the merger. In general, the plaintiffs
allege that:
- - the merger consideration is unjust and inadequate in that the intrinsic
value of shares of Common Stock is allegedly greater than the merger
consideration, in view of our prospects;
- - the merger consideration includes an inadequate premium; and
- - the merger consideration is designed to cap the market price of the shares
of Common Stock before the trading price for the shares of Common Stock
could recover from an alleged temporary downturn in the market.
The lawsuits also generally seek an injunction of the merger (or, if it is
consummated, rescission thereof), compensatory and other damages, and an award
of attorneys' fees and expenses. The lawsuits seek certification of a
plaintiff's class. The five lawsuits in Delaware have been consolidated into
one action captioned IN RE INTERDENT, INC. STOCKHOLDERS LITIGATION,
consolidated C.A. 1796NC.
We have 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. There can be no assurance,
however, that such insurance coverage will be adequate to cover all potential
liabilities and costs that may be incurred. We intend to engage in a vigorous
defense in these matters. Nevertheless, due to the uncertainties in litigation,
the ultimate disposition of such litigation cannot be presently determined.
Accordingly, no provision for any loss or recovery that may result upon
resolution of the suits has been made in our consolidated financial statements.
An adverse outcome could be material to our financial position, results of
operations and liquidity and could prevent our ability to complete the merger.
To the knowledge of our management, neither we nor our affiliated dental
practices are currently subject to any other material litigation or threatened
litigation against us or affiliated dental practices other than routine
litigation arising in the ordinary course of business, some of which are
expected to be covered by liability insurance and all of which collectively are
not expected to have a material adverse effect on our business, financial
condition or results of operations. Nevertheless, due to the uncertainties in
litigation, the ultimate disposition of such litigation cannot be presently
determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is listed on the Nasdaq National Market under the symbol
"DENT." Our Common Stock began trading on March 12, 1999, upon the consummation
of the business combination between Dental Care Alliance and Gentle Dental
Service Corporation. Prior to that date, there was no established trading
market for the Common Stock. The following table sets forth, for the periods
indicated, the highest and lowest per share sales price for our Common Stock as
reported on the Nasdaq National Market. Stockholders are encouraged to obtain
current market quotations:
<TABLE>
<CAPTION>
High Low
1999 --------- --------
<S> <C> <C>
First Quarter (commencing March 12, 1999) $ 5.8250 $ 4.0000
Second Quarter 9.3125 4.5000
Third Quarter 9.1250 6.0750
Fourth Quarter 8.9375 7.1250
</TABLE>
As of March 15, 2000 there were approximately 184 holders of record of
InterDent, Inc. common stock.
The payment of dividends is within the discretion of the Board of Directors;
however, we intend to retain earnings from operations for use in the
operation and expansion of our business and do 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, our senior credit lender
currently prohibits the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables set forth selected historical financial data and other
operating information for InterDent and its predecessor corporations, Gentle
Dental Service Corporation ("GDSC") and Dental Care Alliance, Inc. ("DCA")
for each of the fiscal years in the five-year period ended December 31, 1999.
The selected financial information for each of the years in the four-year
period ended December 31, 1999 has been derived from the Consolidated
Financial Statements of InterDent. The selected financial information had
been presented on a combined basis for 1995 and has been derived from the
separate financial statements of GDSC and DCA, as independently audited. This
selected financial information should be read in conjunction with the
Consolidated Financial Statements of InterDent and the related notes thereto
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total Revenues $ 231,610 $ 134,658 $ 51,282 $ 16,051 $ 10,557
Restructure and merger costs 8,816 3,994 1,809 -- --
Operating income (loss) 13,973 5,993 (2,110) (1,321) 864
Net income (loss) attributable to
common stock 5,222 1,248 (3,827) (2,013) 332
Net income (loss) per share
attributable to common stock -
Basic 0.26 0.06 (0.31) (0.25) 0.04
Net income (loss) per share
attributable to common stock -
diluted $ 0.23 $ 0.06 $ (0.31) $ (0.25)$ 0.04
============== ============== ============== ============== ============
BALANCE SHEET DATA:
Total Assets $ 241,213 $ 165,134 $ 72,972 $ 26,396 $ 10,949
Long-term debt and capital lease
obligations 120,763 67,097 15,240 2,394 2,897
Total redeemable common and
preferred stock 1,796 2,102 2,130 13,254 711
Total shareholders' equity $ 75,895 $ 68,990 $ 43,949 $ 3,086 $ 4,109
============== ============== ============== ============== ============
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
As of December 31, 1999, we provided comprehensive management services to a
dental practice network which employed 677 dentists, including 148 specialists,
practicing out of 226 dental offices and 1,947 operatories in selected markets
in Arizona, California, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas,
Michigan, Nevada, Oklahoma, Oregon, Pennsylvania and Washington.
Our 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 our network of affiliated dental
practices provide comprehensive general dentistry services and offer specialty
dental services, which include endodontics, oral pathology, oral surgery,
orthodontics, pedodontics, periodontics, and prosthodontics. Our strategic
objective is to maintain and expand our leadership position in the dental
practice management industry. To achieve this objective, we seek to enter
selected geographic markets and develop locally prominent, multi-specialty
dental delivery networks. The key elements of our 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; and
- - capitalize on managed care expertise.
As part of a delivery network of multi-specialty dental care, we provide
management and licensing services to our affiliated dental practices under
long-term management service agreements. Under the terms of the management
service agreements, we bill and collect patient receivables and provide all
administrative and management support services to our affiliated dental
practices. 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 management service agreements, we
receive management fees from our affiliated dental practices. Depending upon
the individual management service agreement 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 our
obligations under the management service agreements, plus an additional fee
equal to a percentage of the net revenues of the affiliated dental practices.
Under the other method, the management fee is a set percentage of the net
revenues of the affiliated dental practices.
The management service agreements have initial terms ranging from 25 to 40
years with automatic extensions, unless either party gives notice before the
end of the term. The management service agreements are not subject to early
termination by the affiliated dental practices unless we are the subject of
bankruptcy proceedings or we materially breach the management service
agreements and do not cure the breach following notice. Certain management
service agreements 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. Our consolidated financial statements, included
elsewhere herein, are prepared in conformity with the consensus reached in EITF
97-2.
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Under those circumstances where the management service agreements meet the
criteria for consolidation as outlined in EITF 97-2, all the accounts of those
affiliated dental practices are included in our consolidated financial
statements included elsewhere herein. Accordingly, our consolidated statements
of operations include the dental practice net patient revenue and related
expenses of those affiliated dental practices. In instances where the
management service agreements have not met the criteria for consolidation, we
do not consolidate the accounts of the affiliated dental practices.
Accordingly, our consolidated statements of operations exclude the dental
practice net patient revenues and expenses of these affiliated dental
practices. Rather, our consolidated statements of operations include only our
net management fees generated from those management service agreements and our
expenses incurred in the performance of our obligations under those management
service agreements. The following discussion highlights changes in historical
revenues and expense levels for the three-year period ended December 31, 1999,
as reported in our consolidated financial statements and the related notes
thereto appearing elsewhere herein.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue
represents the clinical patient revenues at 146 current clinical locations
through December 31, 1999 where the consolidation requirements of EITF 97-2
have been met. Dental practice net patient revenue was $188.1 million for 1999
compared to $103.1 million for 1998, representing an 82.4% increase of $84.9
million. We are pursuing an aggressive expansion strategy through the addition
of affiliated dental practices. As a result, the majority of this revenue
growth is due to the addition of 30 affiliated dental practices during 1998 and
1999, representing 104 current clinical locations. These affiliated dental
practices have management service agreements that meet the EITF's consolidation
requirements.
We were also effectively able to increase total dental practice net patient
revenue at existing facilities. We worked with affiliated dental practices 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 December 31, 1998,
where the management service agreements meet the EITF criteria for
consolidation, same-store dental practice net patient revenue for 1999
increased by approximately 10% when compared to revenue for 1998.
NET MANAGEMENT FEES. Net management fees consist of revenue earned in the
performance of our obligations under management service agreements at 80
current unconsolidated affiliated dental practice clinical locations through
December 31,1999. Net management fees were $42.5 million for 1999 compared to
$30.8 million for 1998, representing a 38.0% increase of $11.7 million. We are
pursuing an aggressive expansion strategy through the addition of affiliated
dental practices. As a result, the majority of this growth is related to the
addition of 51 affiliated dental practice clinical locations during 1998 and
1999.
LICENSING AND OTHER FEES. We earn certain fees from unconsolidated affiliated
dental practices for various licensing and consulting services. Licensing and
other fees were $1.0 million for 1999 compared to $0.7 million for 1998,
representing a 41.2% increase of $0.3 million. This increase is entirely
attributed to the addition of 48 unconsolidated affiliated dental practice
clinical locations during 1998 and 1999.
PRACTICE OPERATING EXPENSES. Practice operating expenses represent 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 affiliated dental practices, including dentists, hygienists
and dental assistants, and dental assistants for the unconsolidated
affiliated dental practices;
- - PRACTICE NON-CLINICAL 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, repairs and maintenance; and
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- - 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 1999 compared
to 1998. Practice operating expenses were $186.9 million for 1999 compared to
$110.7 million for 1998, representing a 68.9% increase of $76.2 million. The
majority of this increase in practice operating expenses is due to the addition
of 53 affiliated dental practices (representing 155 current clinical locations)
during 1998 and 1999, as a result of our aggressive expansion strategy. Of the
53 affiliated dental practice clinical locations added in 1998 and 1999, 30
have management services agreements that meet the EITF's consolidation
requirements.
During 1999, most categories of practice operating expenses varied slightly as
a percentage of net revenues when compared to 1998, and as a result, we have
reported improvements in the reduction of total practice operating expenses as
a percentage of net revenues. As a percentage of net revenues, practice
operating expenses for 1999 were 80.7% compared to 82.2% for 1998. This overall
reduction in practice operating expenses is a result of the successful
implementation of our operating model at existing facilities and the proven
strong operational and financial track records of our current affiliated dental
practices. As a result, the overall practice operating margin for 1999 was
19.3% compared to 17.8% for 1998.
CORPORATE SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Corporate selling,
general and administrative expenses include: corporate salaries, general office
costs, investor relations expense, legal and audit fees, general insurance,
director and officer liability insurance, corporate office supplies, and other
miscellaneous costs at our corporate facilities. Corporate selling, general and
administrative expenses were $11.9 million for 1999 compared to $8.6 million
for 1998, representing a 38.4% increase of $3.3 million.
The rise in total corporate selling, general and administrative expenses is the
result of increasing corporate staffing levels in our marketing, human
resource, finance, and operations departments to accommodate the addition of
affiliated dental practices. Additionally, resources have been added to respond
to the increasing needs of our affiliated dental practices for information
systems implementation, clinical management and mentoring programs, and to
appropriately develop our support infrastructure. At the same time, we seek to
maximize the effectiveness of corporate infrastructure costs. As a result,
corporate selling, general and administrative expenses as a percentage of net
revenues have steadily declined. Corporate selling, general and administrative
expenses for 1999 were 5.1% of net revenues as compared to 6.4% for 1998.
CORPORATE RESTRUCTURE AND MERGER COSTS. We recorded corporate restructure and
merger costs associated with the business combinations between Gentle Dental
Service Corporation and Dental Care Alliance, each of which became a
wholly-owned subsidiary of InterDent in March 1999. The business combination
has been accounted for as a pooling-of-interests. As a result of the business
combination, we recorded corporate restructuring and merger costs of $7.2
million for 1999. Approximately $3.3 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 $3.9 million relates to our restructuring plan, including
charges for employee related costs and the redirection of certain duplicative
operations and systems costs. No additional costs are anticipated as a result
of the business combination.
On October 22, 1999, we announced the signing of a definitive merger agreement
between InterDent and a group consisting of an affiliate of Leonard Green &
Partners, L.P., and certain members of InterDent management. We recorded direct
merger expenses of $1.6 million associated with this agreement. These expenses
consist primarily of investment banking, accounting, legal, and other advisory
fees. Additional costs as a result of the anticipated merger will be expensed
in 2000, as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $10.0 million
for 1999 compared to $5.4 million for 1998. This increase of 85.7% is primarily
due to additional property and equipment, intangible costs assigned to
management services agreements and goodwill associated with dental practice
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 future periods.
INTEREST EXPENSE. Interest expense was $6.9 million for 1999 compared to $2.4
million for 1998, representing a 185.6% increase of $4.5 million. This increase
in interest expense was due to additional debt incurred under our credit
facility and private placement to complete the rapid expansion of additional
affiliated dental practices throughout 1998 and 1999. It is anticipated that
future acquisitions will require additional borrowings under our existing
credit facility but may be offset by any future raising of equity capital.
Accordingly, we anticipate that interest expense will increase throughout
future periods.
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PROVISION FOR INCOME TAXES. We recorded a net tax expense of $2.0 million in
1999 on income before income taxes of $7.2 million, compared to income tax
expense of $2.3 million on income before income taxes of $3.6 million in 1998.
Our effective tax rate for federal and state income taxes during 1999 was 27.8%
compared to our statutory rate of approximately 40%. Our effective tax rate was
substantially lower primarily due to operating loss carryforwards utilized
during 1999, partially offset by certain acquisition and merger related
expenses that are not deductible for income tax purposes. For 2000, we expect
the annual effective tax rate to approximate our statutory rate of
approximately 40%.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue was
$103.1 million for 1998 compared to $29.3 million for 1997, representing a 252%
increase of $73.8 million. Of this growth, $49.2 million is primarily due to
the addition of six affiliated dental practices in 1997 and the addition of 13
affiliated dental practices in 1998, representing 63 current affiliated dental
practice clinical locations. These affiliated dental practices have management
service agreements that meet the EITF consolidation requirements. The remaining
growth of $24.6 million is due to the consolidation of the operating results of
certain Oregon and Washington affiliated dental practices during 1998 as a
result of their new management service agreements dated January 1, 1998. These
contracts met the EITF criteria for consolidation.
NET MANAGEMENT FEES. Net management fees were $30.8 million for 1998 compared
to $21.7 million for 1997, representing a 42.3% increase of $9.2 million.
Management fees increased by $21.1 million due to our aggressive expansion
strategy, resulting in the addition of 49 unconsolidated affiliated dental
practice clinical locations during 1998. However, such fees were offset by a
reduction of $11.9 million in management fees associated with the revision of
certain management service agreements of certain Oregon and Washington
affiliated dental practices.
LICENSING AND OTHER FEES. Licensing and other fees were $0.7 million for 1998
compared to $0.3 million for 1997, representing a 139% increase of $0.4
million. The increase is attributable to the addition of 49 unconsolidated
affiliated dental practice clinical locations during 1998.
PRACTICE AND OPERATING EXPENSES. Practice operating expenses have increased
significantly during 1998 when compared to 1997. Practice operating expenses
were $110.7 million for 1998 compared to $43.0 million for 1997, representing
a 158% increase of $67.7 million. Most categories of practice operating
expenses varied only slightly as a percentage of net revenues when comparing
1998 to 1997. During 1998, we reported improvements in the reduction of total
practice operating expenses as a percentage of net revenues. As a percentage
of net revenues, practice operating expenses for 1998 were 82.2% compared to
83.8% for 1997. The overall reduction in practice operating expenses is a
result of the successful implementation of our operating model at existing
facilities and the improvement of current affiliated dental practices. As a
result, the overall practice operating margin for 1998 was 17.8% compared to
16.2% for 1997.
CORPORATE SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Corporate selling,
general and administrative expenses were $8.6 million for 1998 compared to $6.6
million for 1997, representing a 30.7% increase of $2.0 million. The rise in
total corporate selling, general and administrative expenses is the result of
increasing corporate staffing levels in our marketing, human resource, finance,
and operations departments to accommodate the addition of affiliated dental
practices. Additionally, resources have been added to respond to the increasing
needs of our affiliated dental practices for information systems
implementation, clinical management and mentoring programs, and to
appropriately develop our support infrastructure. At the same time, we seek to
maximize the effectiveness of corporate infrastructure costs. As a result,
corporate selling, general and administrative expenses as a percentage of net
revenues have steadily declined. Corporate selling, general and administrative
expenses for 1998 were 6.4% of net revenues as compared to 12.9% for 1997.
CORPORATE RESTRUCTURE AND MERGER COSTS. We recorded $4.0 million in corporate
restructure and merger costs in 1998. Of such costs, $0.3 million relates to
corporate restructure and merger costs resulting from the business combination
between Gentle Dental Service Corporation and GMS Dental Group, Inc.
consummated in November 1997. The remaining $3.7 million relates to merger and
severance costs associated with the business combination between Gentle Dental
Service Corporation and Dental Care Alliance consummated in March 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $5.4 million
for 1998 compared to $2.0 million for 1997, representing a 168% increase of
$3.4 million. This increase was primarily due to the addition of property and
equipment, intangible costs assigned to management service agreements and
goodwill associated with the addition of affiliated dental practices in 1998
and 1997.
INTEREST EXPENSE. Interest expense was $2.4 million for 1998 compared to $0.4
million for 1997, representing a 517% increase of $2.0 million. This increase
in interest expense was due to the additional debt we incurred in connection
with the
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addition of affiliated dental practices in 1998 and 1997. We also completed a
private placement of debt and preferred stock in 1998 and increased our credit
facility to enable us to continue the addition of affiliated dental practices.
PROVISION FOR INCOME TAXES. We recorded a net tax expense of $2.3 million in
1998 on income before income taxes of $3.6 million, compared to income tax
expense of $0.2 million on a loss before income taxes of $2.6 million in
1997. In 1998, the difference in the effective tax rate from the statutory
rate for the year is related to certain merger related expenses which are not
deductible for income tax purposes, and the carryforward of net operating
losses from certain of our subsidiaries and affiliates, for which realization
was not reasonably assured. In 1997, we incurred income tax expense due to
earnings in certain states, and did not recognize the benefit of net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, cash and cash equivalents were $0.5 million, representing
a $7.7 million decrease in cash and cash equivalents of $8.2 million available
at December 31, 1998. This decline is due to the amendment to our credit
facility, which allowed us to consolidate cash balances between subsidiaries
and pay down the credit facility balances. Our negative working capital at
December 31, 1999 of $0.5 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 $2.7 million (excluding amounts paid
during 1999), payment of earn-out consideration, and utilization of cash to pay
down borrowings under our credit facility.
Net cash provided by operations amounted to $8.3 million for 1999 compared to
net cash provided by operations of $2.3 million for 1998, including merger and
restructure expenses of $8.8 million and $4.0 million, respectively. The
increase of net cash provided by operations during 1999 is attributed to
improvements in our results of operations. Excluding such merger and
restructure costs, operating income for 1999 and 1998 was $22.8 million and
$10.0 million, respectively.
Net cash used in investing activities was $58.7 million for 1999. Included in
the investing activities is cash paid for affiliated dental practices of $40.3
million and $7.9 million cash paid for property and equipment. Additionally,
advances to unconsolidated affiliated practices of $9.7 million were performed.
Advances consist primarily of receivables from PAs due in connection with cash
advances for working capital and operating purposes to certain unconsolidated
PAs. The Company typically advances funds to the PAs during the initial years
of operations, until the PA owner repays the seller debt, and the operations
improve. These uses of cash in investing activities were primarily funded
through borrowing under our existing credit facility. As a result, cash
provided from the credit facility amounted to $49.3 million for 1999.
During 1999, we acquired substantially all of the assets of 61 affiliated
dental practice clinical locations, including cash, accounts receivable,
supplies and fixed assets. The addition of these affiliated dental practices
has been accounted for using the purchase method of accounting. The aggregate
dental practice acquisition purchase price recorded during the year ended
December 31, 1999, representing the fair value of the assets acquired,
including intangible assets, was $66.2 million. Approximately $53.3 million of
the purchase price has been allocated to intangible assets. The total purchase
price included $41.0 million in cash (including $.7 million on deposit at
December 31, 1998), $1.4 million in common stock and warrants issued or to be
issued under earn-out agreements, and $23.8 million in liabilities incurred and
assumed.
In connection with certain completed affiliation transactions, the Company has
agreed to pay to the sellers possible future consideration in the form of cash
and Company capital stock. The amount of future consideration payable by the
Company under earn-outs is generally computed based upon financial performance
of the affiliated dental practices during certain specified periods. The
Company accrues for earn-out payments with respect to prior practice
acquisitions when such amounts are probable and reasonably estimable. During
the year ended December 31, 1999, we paid $6.3 million in additional earn-out
consideration.
As of December 31, 1999, the Company had accrued $8.2 million for future
earn-out payments, of which $.4 million is included in additional paid-in
capital for anticipated stock issuances while the remaining accrual for
anticipated cash payments is included in other current liabilities. For those
acquisitions with earn-out provisions, the Company estimates the total maximum
earn-out that could be paid, including amounts already accrued, is between $33
million and $38 million from January 2000 to December 2003, 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 $1.3 million
to $1.5 million annually.
We have made loans to various unconsolidated affiliated dental practices in
connection with their acquisition of assets of dental practices and have made
working capital advances to certain unconsolidated affiliated dental practices
for their operations. Advance and note amounts to be collected within the next
year are classified as current in the accompanying consolidated balance sheets.
Advances to PAs bear interest at a rate of 8.5%. The notes receivable from PAs
generally
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have terms of 2 to 10 years and are interest bearing with rates between 8.5%
and 18.5%. Both advance and note amounts are secured by the assets of the PAs
and are personally guaranteed by the PA owners.
We currently have 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%), based on the level of InterDent's
leverage ratio. Our credit facility requires us 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.
Our credit facility contains several covenants including restrictions on our
ability to incur indebtedness; repurchase, or make dividends with respect to,
our capital stock; and requirements relating to maintenance of a specified net
worth and compliance with specified financial ratios. In addition, the credit
facility requires us 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 a certain amount of cash and purchase price. Our
obligations under the credit facility and our 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.
We have outstanding $30 million of 7% Subordinated Convertible Notes and $12
million of convertible Preferred Stock. The 7% Subordinated Convertible Notes
have eight-year terms and are convertible into shares of our Common Stock at
$9.21 for each share of Common Stock issuable upon conversion of outstanding
principal and accrued but unpaid interest on such 7% Subordinated Convertible
Notes. If certain events of default occur, the 7% Subordinated Convertible
Notes then outstanding will automatically convert into shares of our Series B
Preferred Stock at a rate of one share of Series B Preferred Stock for each
$1,000 in outstanding principal and accrued but unpaid interest on the 7%
Subordinated Convertible Notes, subject to adjustment for stock splits, reverse
splits, stock dividends, reorganizations and the like. The 7% Subordinated
Convertible Notes and all outstanding shares of our Preferred Stock shall be
automatically converted into our 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 our Common Stock on 20 out of
any 30 consecutive trading days is more than $16.85 on or prior to May 18,
2000, or more than $17.98 at any time thereafter.
We are authorized to issue 30,000,000 shares of Preferred Stock. Presently
authorized series of our 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; and
- - 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 our
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 our 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 similar events. 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, we announced the signing of a merger agreement with
Leonard Green and Associates. Under the terms of the agreement, our
stockholders (other than certain members of our management) 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 $325
million.
The agreement with Leonard Green and Associates contemplates the purchase of
all public stock to enable the company to be private. In order to complete
this transaction we need to raise capital which would enable the company to
pay off its old credit facility and to buy the outstanding stock of the
company. We would also obtain an expanded credit facility to enable the
company to be liquid enough to continue with its rapid expansion. We are
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continually exploring alternatives to assure that the company has enough
capital to continue its rapid growth. We currently anticipate completing the
transaction in the second calendar quarter of 2000. However, there can be no
assurance that the financing will be obtained to complete the transaction.
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,
we 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
We have not experienced any significant disruptions to our financial or
operating activities due to failure of our computerized systems, resulting from
Year 2000 issues. Furthermore, we have no information that indicates a
significant vendor or service provider may be unable to sell goods or provide
services to us or that any significant customer may be unable to purchase from
us or provide timely payment of services rendered because of Year 2000 issues.
Also, we have not received any notifications from regulatory agencies
indicating that significant regulatory action is being or may be taken against
InterDent, as a result of Year 2000 issues. Accordingly, management does not
expect Year 2000 issues to have a material adverse effect on InterDent's
operations or financial results in 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments which could expose us to significant market
risk. Our interest expense is sensitive to changes in the general level of
interest rates as our credit facility has interest rates based upon market
LIBOR or prime rates, as discussed in Note 8 to the consolidated financial
statements. To mitigate the impact of fluctuations in market rates, we lock
fixed interest rates for periods of up to 180 days on portions of the
outstanding credit facility balance.
At December 31, 1999, we had $79.3 million in floating rate debt under the
credit facility. The detrimental effect on our pre-tax earnings of a
hypothetical 100 basis point increase in the interest rate under the credit
facility would be approximately $.8 million. This sensitivity analysis does not
consider any actions we might take to mitigate our exposure to such a change in
the credit facility rate. The hypothetical change used in this analysis may be
different from what actually occurs in the future. Our remaining subordinated
notes and long-term debt obligations of $41.9 million are at fixed rates of
interest.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
------------------------------- -------
<S> <C>
Independent Auditors' Reports........................................................................................... 24-25
Consolidated Balance Sheets at December 31, 1999 and 1998............................................................... 26-27
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.............................. 28
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997.................... 29-30
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................. 31-32
Notes to Consolidated Financial Statements.............................................................................. 33-50
</TABLE>
23
<PAGE>
Independent Auditors' Report
The Board of Directors
Interdent, Inc.:
We have audited the accompanying consolidated balance sheets of Interdent,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule described in Item 14 (a)(27.01).
These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits. We did not audit the financial
statements of Dental Care Alliance, Inc. and subsidiaries, which financial
statements reflect total assets constituting 25% as of December 31, 1998, and
total revenues constituting 15% and 22% for each of the years in the two-year
period ended December 31, 1998, respectively, of the related consolidated
totals. Those financial statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Dental Care Alliance, Inc. and subsidiaries, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Interdent, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the years in the three-year period ended
December 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ KPMG LLP
Orange County, California
February 14, 2000
24
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of Dental Care Alliance, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of stockholders' equity and of cash flows (not
included herein) present fairly, in all material respects, the financial
position of Dental Care Alliance, Inc. (the "Company") successor to Golden Care
Holdings, Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 24, 1999
25
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS (NOTE 8) 1999 1998
-------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 539 $ 8,244
Accounts receivable, net of allowances of $8,548 and $6,855 in 1999
and 1998, respectively 20,935 10,616
Management fee receivables 6,691 4,536
Current portion of notes and advances receivable from professional
associations, net 915 1,157
Supplies inventory 4,610 2,887
Prepaid expenses and other current assets 4,742 3,164
-------------------- -------------------
Total current assets 38,432 30,604
Property and equipment, net (note 5) 30,273 21,379
Intangible assets, net (note 6) 153,032 105,111
Notes and advances receivable from professional associations, net of
current portion 14,787 4,062
Other assets 4,689 3,978
-------------------- -------------------
Total assets $ 241,213 $ 165,134
==================== ===================
LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,541 $ 4,223
Accrued payroll and payroll related costs 7,516 4,862
Other current liabilities (note 7) 18,573 10,809
Current portion of long-term debt and capital lease obligations
(notes 8 and 14) 5,335 4,001
-------------------- -------------------
Total current liabilities 38,965 23,895
Long-term liabilities:
Capital lease obligations, net of current portion (note 14) 3,494 1,243
Long-term debt, net of current portion (note 8) 87,269 35,854
Convertible senior subordinated debt (note 9) 30,000 30,000
Deferred income taxes (note 13) 3,700 2,914
Other long-term liabilities 94 136
-------------------- -------------------
Total long-term liabilities 124,557 70,147
-------------------- -------------------
Total liabilities $ 163,522 $ 94,042
-------------------- -------------------
</TABLE>
(Continued)
26
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> <C>
Redeemable common stock, no par value, 157,958 and 180,712 shares issued
and outstanding in 1999 and 1998, respectively (note 10) $ 1,796 $ 2,102
-------------------- -------------------
Shareholders' equity (notes 9 and 11):
Preferred stock, 30,000,000 shares authorized:
Preferred stock - Series A, no par value, 100 shares authorized; 100
shares issued and outstanding in 1999 and 1998, respectively 1 1
Convertible preferred stock - Series B, no par value, 70,000 shares
authorized, zero shares issued and outstanding in 1999 and 1998,
respectively -- --
Preferred stock - Series C, no par value, 100 shares authorized; zero
shares issued and outstanding in 1999 and 1998, respectively -- --
Convertible preferred stock - Series D, no par value, 2,000,000
shares authorized; 1,628,663 shares issued and outstanding in 1999
and 1998, respectively 12,089 12,089
Common stock, no par value, 100,000,000 shares authorized; 20,960,128
and 20,584,426 shares issued and outstanding in 1999 and 1998,
respectively 21 21
Additional paid-in capital 62,831 61,129
Shareholder notes receivable (615) (596)
Retained earnings (deficit) 1,568 (3,654)
-------------------- -------------------
Total shareholders' equity 75,895 68,990
Commitments and contingencies (notes 4 and 14) -- --
-------------------- -------------------
Total liabilities, redeemable common stock and
shareholders' equity $ 241,213 $ 165,134
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Revenues:
Dental practice net patient service revenue $ 188,078 $ 103,136 $ 29,327
Net management fees 42,551 30,827 21,664
Licensing and other fees 981 695 291
----------------- ----------------- ------------------
Total revenues (note 3) 231,610 134,658 51,282
----------------- ----------------- ------------------
Operating expenses:
Clinical salaries, benefits and provider costs 89,925 50,894 14,712
Practice non-clinical salaries and benefits 31,729 19,418 9,683
Dental supplies and lab expenses 27,822 17,267 7,892
Practice occupancy expenses 14,078 8,884 4,525
Practice selling, general and administrative expenses 23,390 14,234 6,178
Corporate selling, general and administrative expenses 11,921 8,613 6,592
Corporate restructure and merger costs (note 4) 8,816 3,994 1,809
Depreciation and amortization 9,956 5,361 2,001
----------------- ----------------- ------------------
Total operating expenses 217,637 128,665 53,392
----------------- ----------------- ------------------
Operating income (loss) 13,973 5,993 (2,110)
----------------- ----------------- ------------------
Nonoperating income (expense):
Interest expenses, net (6,874) (2,407) (390)
Other expense, net 150 (14) (74)
----------------- ----------------- ------------------
Nonoperating expense, net (6,724) (2,421) (464)
----------------- ----------------- ------------------
Income (loss) before income taxes 7,249 3,572 (2,574)
Provision for income taxes (note 13) 2,015 2,302 187
----------------- ----------------- ------------------
Net income (loss) 5,234 1,270 (2,761)
Dividends on redeemable convertible preferred stock -- -- (1,032)
Accretion of redeemable common stock (12) (22) (34)
----------------- ----------------- ------------------
Net income (loss) attributable to common stock $ 5,222 $ 1,248 $ (3,827)
================= ================= ==================
Net income (loss) per share attributable to common stock:
Basic $ 0.26 $ 0.06 $ (0.31)
Diluted 0.23 0.06 (0.31)
================= ================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDER
PREFERRED COMMON PAID-IN NOTES ACCUMULATED
STOCK STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
------------ -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 2 $ 9 $ 4,919 $ (136) $ (1,075) $ 3,719
Convertible preferred stock -
Series C issued for
acquisitions -- -- 1,156 -- -- 1,156
Common stock issued in
connection with:
Purchase of dental assets
from new PA affiliations -- -- 475 -- -- 475
Initial public offerings, net
of issuance costs -- 5 27,307 -- -- 27,312
Other -- 1 676 -- -- 677
Stock subscription receivable -- -- -- (273) -- (273)
Employee purchase plan -- -- 17 -- -- 17
Pursuant to options for
shareholder notes
receivable -- -- 151 (150) -- 1
Exercise of stock options -- -- 520 -- -- 520
Stock options granted to
nonemployees -- -- 56 -- -- 56
Conversion of convertible
preferred stock -
Series A, B and C into (2) 3 12,173 -- -- 12,174
common stock
Adjustment to redemption
value of mandatorily
redeemable preferred stock -- -- -- -- (11) (11)
Conversion of mandatorily
redeemable preferred stock -- 1 1,784 -- 11 1,796
Accrued dividends on
mandatorily redeemable
preferred stock -- -- -- -- (1,032) (1,032)
Accretion of redeemable
common stock -- -- -- -- (34) (34)
Elimination of put rights on
common stock -- -- (191) -- -- (191)
Interest accrued on
shareholder notes -- -- -- (18) -- (18)
receivable
Common stock issued and
shares to be issued under
earn-out agreements, net -- -- 356 -- -- 356
Net loss -- -- -- -- (2,761) (2,761)
------------ -------------- -------------- -------------- -------------- ------------
Balance, December 31, 1997 $ -- $ 19 $ 49,399 $ (577) $ (4,902) $ 43,939
------------ -------------- -------------- -------------- -------------- ------------
</TABLE>
(Continued)
29
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK ADDITIONAL SHAREHOLDER RETAINED
STOCK PAID-IN NOTES EARNINGS
CAPITAL RECEIVABLE (DEFICIT) TOTAL
-------------- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock - Series A
issued for private
placement $ 1 $ -- $ -- $ -- $ -- $ 1
Convertible preferred stock
- Series D issued for
private placement, net of
issuance costs 12,089 -- -- -- -- 12,089
Common stock issued in
connection with:
Purchase of dental assets
from new PA affiliations -- 2 9,447 -- -- 9,449
Employee purchase plan -- -- 172 -- -- 172
Exercise of stock options -- -- 126 -- -- 126
Stock options granted to
non-employees -- -- 196 -- -- 196
Accretion of redeemable
common stock -- -- -- -- (22) (22)
Interest accrued on
shareholder notes
receivable -- -- -- (19) -- (19)
Issuance of common stock
warrants for financing -- -- 92 -- -- 92
Common stock issued and
shares to be issued under
earn-out agreements, net -- -- 1,697 -- -- 1,697
Net income -- -- -- -- 1,270 1,270
-------------- -------------- -------------- -------------- --------------- --------------
Balance, December 31, 1998 12,090 21 61,129 (596) (3,654) 68,990
-------------- -------------- -------------- -------------- --------------- --------------
Common stock issued in
connection with:
Employee purchase plan -- -- 266 -- -- 266
Exercise of stock options -- -- 64 -- -- 64
Repurchase of warrants -- -- (55) -- -- (55)
Stock options granted to
non-employees -- -- 55 -- -- 55
Accretion of redeemable
common stock -- -- -- -- (12) (12)
Interest accrued on
shareholder notes
receivable -- -- -- (19) -- (19)
Warrants issued under
earn-out agreements -- -- 58 -- -- 58
Common stock issued and
shares to be issued under
earn-out agreements, net -- -- 1,314 -- -- 1,314
Net income -- -- -- -- 5,234 5,234
-------------- -------------- -------------- -------------- --------------- --------------
Balance, December 31, 1999 $ 12,090 $ 21 $ 62,831 $ (615) $ 1,568 $ 75,895
============== ============== ============== ============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,234 $ 1,270 $ (2,761)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 9,956 5,361 2,001
Loss on disposal of assets -- 4 31
Loss on investment in joint venture -- 4 135
Non-employee stock options granted and stock
issued for fees and compensation 55 59 56
Interest accrued on shareholder notes
receivable (19) (19) (18)
Amortization of deferred financing costs 304 204 25
Deferred income taxes (504) 169 91
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net (5,846) (614) (6)
Management fee receivables from Professional
Associations (1,641) (3,610) (1,138)
Supplies inventory (610) (335) (399)
Prepaid expenses and other current assets (506) (661) (1,155)
Other assets (492) (922) 266
Accounts payable 757 (800) 354
Accrued payroll and payroll related costs 1,198 539 423
Accrued merger and restructure 288 1,534 853
Other liabilities 155 152 846
------------------- ------------------ --------------------
Net cash provided by (used in)
operating activities 8,329 2,335 (396)
------------------- ------------------ --------------------
Cash flows from investing activities:
Purchase of property and equipment (7,936) (8,348) (3,413)
Net payments received (advances) on notes
receivable from Professional Associations 260 (336) (370)
Cash paid for investment in joint venture (1,020) -- --
Advances to Professional Associations (9,685) (3,860) (467)
Cash paid for acquisitions, including direct
costs, net of cash acquired (40,285) (62,959) (10,729)
------------------- ------------------ --------------------
Net cash used in investing activities $ (58,666) $ (75,503) $ (14,979)
------------------- ------------------ --------------------
</TABLE>
(Continued)
31
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ --------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds (payments) on short-term borrowings $ -- $ -- $ (2,097)
Net borrowings from credit facilities 49,348 13,518 10,000
Proceeds from issuance of long-term debt -- 37,901 327
Payments of long-term debt and obligations under
capital leases (6,084) (1,319) (3,617)
Payments of deferred financing costs (589) (1,784) (30)
Proceeds from issuance of common and preferred
stock 266 15,265 28,490
Common and preferred stock issuance costs -- (2,818) (918)
Net payments related to warrants, options, and
put rights (309) (21) 417
------------------- ------------------ --------------------
Net cash provided by financing
activities 42,632 60,742 32,572
------------------- ------------------ --------------------
Increase (decrease) in cash and cash
equivalents (7,705) (12,426) 17,197
Cash and cash equivalents, beginning of year 8,244 20,670 3,473
------------------- ------------------ --------------------
Cash and cash equivalents, end of year $ 539 $ 8,244 $ 20,670
=================== ================== ====================
Supplemental disclosures of cash flow information:
Cash paid (received) during period, net:
Interest paid $ 6,996 $ 2,567 $ 654
Income taxes (5) 1,899 128
Purchase of property and equipment under capital
leases -- -- 278
Issuance of shareholder notes receivable -- -- 150
Interest accrued on shareholder notes receivable 19 19 18
Accretion of redeemable common stock 12 22 34
Conversion of convertible preferred stock Series, A,
B, and C into shares of common stock -- -- 12,174
Conversion of mandatory redeemable preferred stock -- -- 1,796
Warrants issued in connection with public and private
offerings -- 92 150
Elimination of put rights on common stock -- -- 191
Effect of acquisitions:
Liabilities assumed or issued 23,830 16,353 8,887
Common, convertible preferred stock and warrants
issued in connection with purchase of dental
assets from new PA affiliations -- 9,449 1,635
Common stock and warrants issued and shares to be
issued under earn-out agreements, net $ 1,372 $ 1,697 $ 356
=================== ================= ===================
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) ORGANIZATION
InterDent, Inc. ("InterDent" or the "Company"), incorporated on October 13,
1998, is a Delaware corporation headquartered in El Segundo, California. The
Company is a provider of dental practice management services to multi-specialty
dental professional corporations and associations ("PAs") in the United States.
Each PA employs and directs the professional dental staff and provides all of
the clinical services to the patients. The Company provides management services
to dental practices in selected markets in Arizona, California, Florida,
Georgia, Hawaii, Idaho, Indiana, Kansas, Michigan, Nevada, Oklahoma, Oregon,
Pennsylvania and Washington.
As part of a delivery network of multi-specialty dental care, the Company
provides management services to affiliated PAs under long-term management
service agreements. Under the terms of the management service agreements, the
Company bills and collects patient receivables and provides all administrative
support services to the PAs. The dentists employed through the Company's network
of affiliated dental associations 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 affiliating with existing dental practices and/or selectively
developing new offices.
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
On March 12, 1999, Gentle Dental Service Corporation ("GDSC") and Dental Care
Alliance, Inc. ("DCA") completed mergers in which each entity became a wholly
owned subsidiary of InterDent, Inc. a newly formed company. These consolidated
financial statements have been prepared following the pooling-of-interest method
of accounting and reflect the combined financial position and operating results
of GDSC and DCA (and certain PAs as discussed below) for all periods presented.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board reached a consensus on the accounting for transactions between physician
practice management companies and physician practices and the financial
reporting of such entities (EITF issue number 97-2). For financial reporting
purposes, EITF 97-2 mandates the consolidation of physician practice activities
with the practice management company when certain conditions have been met, even
though the practice management company does not have an equity investment in the
physician practice. The accompanying financial statements are prepared in
conformity with the consensus reached in EITF 97-2.
Corporate practice of medicine laws in the states in which Interdent currently
operates prohibit it from owning dental practices. In response to these laws the
Company has executed management services agreements ("MSAs") with various PAs.
Under those circumstances where the MSAs meet the criteria for consolidation as
outlined in EITF 97-2, all the accounts of those PAs are included in the
accompanying consolidated financial statements. Accordingly, the consolidated
statements of operations include the net patient revenues and related expenses
of these PAs.
In instances where the MSAs have not met the criteria for consolidation, the
Company does not consolidate the accounts of the PAs. Accordingly, the
consolidated statements of operations exclude the net patient revenues and
expenses of these PAs. Rather, the consolidated statements of operations include
only the Company's net management fee revenues generated from those MSAs and the
Company's expenses associated with those MSAs.
DEPENDENCE ON PAS
The Company receives fees for services provided to the PAs under MSAs. The
Company's revenue is dependent on revenue generated by the PAs and, therefore,
effective and continued performance of the managed dental offices during the
term of the MSAs is essential to the Company's long-term success.
NET REVENUES
Revenues consist primarily of PA net patient service revenue ("net patient
revenue") and Company net management fees. Net patient revenue represents the
consolidated revenue of the PAs reported at the estimated net realizable amounts
from patients, third party payors and others for services rendered, net of
contractual adjustments. Net management fees represent amounts charged to the
unconsolidated PAs in accordance with the MSA as a percentage of the PAs net
patient service revenue under MSAs, net of provisions for contractual
adjustments and doubtful accounts. Such revenues are recognized as services are
performed.
33
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from patients and
insurance carriers for dental services provided by the related PAs at
established billing rates, less allowances and discounts for patients covered by
third party payors contracts. Payments under these programs are primarily based
on predetermined rates. Settlements for retrospectively determined rates are
estimated in the period the related services are rendered and are adjusted in
future periods, as final settlements are determined. Management believes that
adequate provision has been made for adjustments that may result from final
determination of amounts earned under these contracts. In addition, a provision
for doubtful accounts is provided based upon expected collections and is
included in practice selling, general and administrative expenses. These
contractual allowances and discounts and provision for doubtful accounts are
deducted from accounts receivable in the accompanying consolidated balance
sheets
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
receivables of the PAs and adjusts its management fee receivable accordingly.
Advances consist primarily of receivables from PAs due in connection with cash
advances for working capital and operating purposes to certain unconsolidated
PAs. The Company typically advances funds to the PAs during the initial years of
operations, until the PA owner repays existing debt, and the operations improve.
The Company has an established reserve policy for advances to PAs. Based upon
such factors as operational performance history and initial acquisition funding,
the Company reserves against management fees and advances made to individual PAs
for those practices which do not meet expectations after a certain period of
time. Such reserves are increased or decreased as appropriate according to
performance trends of the individual practices. The Company has established a
reserve of $152 and $149 as of December 31, 1999 and 1998, respectively.
Notes receivable from PAs relate to financing of certain medical and
non-medical capital additions made by certain unconsolidated PAs.
Advance and note amounts to be collected within the next year are classified as
current in the accompanying consolidated balance sheets. Advances to PAs bear
interest at a rate of 8.5%. The notes receivable from PAs generally have terms
of 2 to 10 years and are interest bearing with rates between 8.5% and 18.5%.
Both advance and note amounts are secured by the assets of the PAs and are
personally guaranteed by the PA owners.
SUPPLIES INVENTORY
Supplies consist primarily of disposable dental supplies and instruments stored
at the dental practices. Supplies are stated at the lower of cost (first-in,
first-out basis) or market (net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged to expense as
incurred and expenditures for additions and improvements are capitalized.
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the lease. Leasehold improvements are
amortized over their estimated useful life or the remaining lease period,
whichever is less. Depreciation of property and equipment is recorded using the
straight-line method over the shorter of the related lease term or the estimated
useful lives, which are as follows:
<TABLE>
<CAPTION>
RANGE OF LIVES
(IN YEARS)
--------------------
<S> <C>
Dental equipment 3-15
Computer equipment 3
Furniture, fixtures, & equipment 3-15
34
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Leasehold improvements 3-20
Vehicles 5
Buildings 25
</TABLE>
INTANGIBLE ASSETS
Intangible assets result primarily from the excess of cost over the fair value
of net tangible assets purchased. Such intangibles relate primarily to
noncompetition covenants, MSAs, and goodwill associated with dental practice
acquisitions. Intangibles relating to MSAs consist of the costs of purchasing
the rights to provide management support services to PAs over the initial
noncancelable terms of the related agreements, usually 25 to 40 years. Under
these agreements, the PAs have agreed to provide dental services on an exclusive
basis only through facilities provided by the Company, which is the exclusive
administrator of all non-dental aspects of the acquired PAs, providing
facilities, equipment, support staffing, management and other ancillary
services. The agreements are noncancelable except for performance defaults.
Intangible assets are amortized on the straight-line method, ranging from 5
years for other intangibles to 25 years for MSAs and goodwill.
INVESTMENT
On September 3, 1999, the Company entered into a seven year collaborative
Internet strategy agreement with Dental X Change, Inc. ("DXC"). DXC is a
commercial Internet company servicing the professional dental market. Services
provided by DXC include: web development, hosting, content, education,
e-commerce, practice management services in an application service provider
model, and dental oriented web services to dental practices and both the
professional and consumer dental markets through its various web sites,
intranets and other online technologies. In exchange for a cash contribution of
$1,020,000, the Company received 1,000,000 shares of DXC Series A Convertible
Preferred Stock, 1,949,990 shares of DXC common stock, and a warrant to purchase
4,054,010 additional shares of DXC common stock at $.10 per share. The
investment is carried at cost in the absence of an other than temporary decline
in value as the Company is not able to exercise control over DXC, and the
Company's ownership is less than 20%.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate that the carrying amount of assets may not be
recoverable. To perform that review, the Company estimates the sum of expected
future undiscounted net cash flows from assets. If the estimated net cash flows
are less than the carrying amount of the asset, the Company recognizes an
impairment loss in an amount necessary to write-down the asset to its fair value
as determined from expected future discounted cash flows. No write-down of
assets was recorded in the three-year period ended December 31, 1999.
FAIR VALUE OF FINANCIAL ASSETS, LIABILITIES, AND REDEEMABLE COMMON STOCK
The Company estimates the fair value of its monetary assets, liabilities, and
redeemable common stock based upon the existing interest rates related to such
assets, liabilities, and redeemable common stock compared to current market
rates of interest for instruments with a similar nature and degree of risk. The
Company estimates that the carrying value of all of its monetary assets,
liabilities, and redeemable common stock approximates fair value as of December
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
35
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
For the years ended December 31, 1999 and 1998, dilutive potential common shares
of 3,257,328 comprising of convertible subordinated debt have been excluded from
the computation of diluted income per share, as their effect is anti-dilutive.
For the year ended December 31, 1997, dilutive potential common shares of
589,242, consisting 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 as
their effect is also anti-dilutive.
The following table summarizes the computation of net income (loss) per share:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- -------------------- --------------------
<S> <C> <C> <C>
Net income (loss) attributable to common stock -
basic and diluted $ 5,222 $ 1,248 $ (3,827)
=================== ==================== ====================
Basic shares reconciliation:
Weighted average common shares outstanding 21,005,702 20,087,462 12,258,393
Contingently repurchaseable common shares (568,279) (570,890) --
------------------- -------------------- --------------------
Basic shares 20,437,423 19,516,572 12,258,393
------------------- -------------------- --------------------
Convertible preferred stock 1,628,665 1,023,159 --
Warrants 100,731 108,888 --
Put rights 68,665 64,862 --
Contingent shares 6,595 68,329 --
Assumed conversion of options 306,305 440,425 --
------------------- -------------------- --------------------
Diluted shares 22,548,384 21,222,235 12,258,393
------------------- -------------------- --------------------
Net income (loss) attributable to common stock:
Basic $ 0.26 $ 0.06 $ (0.31)
Diluted 0.23 0.06 (0.31)
=================== ==================== ====================
</TABLE>
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses). The adoption of SFAS 130 did not have an effect on
the Company's financial position or results of operations as the Company does
not have components of other comprehensive income.
INCOME TAXES
Income taxes are accounted for under the asset and liability method in
accordance with Statement of Financial and Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"). Under the asset and liability approach
of SFAS 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). Under SFAS 123, the Company may elect to recognize stock-based
compensation expense based on the fair value of the awards or continue to
account for stock-based compensation under Accounting Principles Board Opinion
No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and disclose in the
notes to the financial statements the effects of SFAS 123 as if the recognition
provisions were adopted. The Company has elected to account for stock-based
compensation under APB 25.
36
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEGMENT REPORTING
The Company has adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS"
131"). SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing the
performance as the source of the Company's reportable segments. The adoption of
SFAS 131 did not have an impact for the reporting and display of segment
information as each of the affiliated dental practices is evaluated individually
by the chief operating decision maker and considered to have similar economic
characteristics, as defined in the pronouncement, and therefore are aggregated.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
(3) REVENUES
The following represents amounts included in the determination of dental
practice net patient service revenue and net management fees:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
Dental practice net patient service revenues -
all PAs $ 251,310 $ 147,948 $ 67,649
Less: Dental practice net patient service
revenues - unconsolidated PAs (63,232) (44,812) (38,322)
------------------ ------------------ -----------------
Reported practice net patient service revenue $ 188,078 $ 103,136 $ 29,327
================== ================== =================
Dental practice net patient service revenues -
unconsolidated PAs $ 63,232 $ 44,812 $ 38,322
Less: Amounts retained by dentists (20,681) (13,985) (16,658)
------------------ ------------------ -----------------
Reported management fees $ 42,551 $ 30,827 $ 21,664
================== ================== =================
</TABLE>
(4) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
BUSINESS COMBINATIONS
On November 4, 1997, GMS Dental Group, Inc. merged into GDSC. In connection
with the merger transaction, all of the issued and outstanding shares of GMS
common stock were converted into 4,548,161 shares of common stock of GDSC.
The merger has been accounted for as a pooling of interest. As a result of
the merger, GDSC recorded direct merger expenses of $677. These expenses
consist primarily of investment banking, accounting, legal and other advisory
fees. Also, GDSC recorded a restructuring charge of $1,295, of which $1,132
was recorded in 1997 and an additional $163 was recorded when incurred in
1998. These restructure activities were completed as of December 31, 1999.
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.
37
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 used in computing depreciation of equipment.
The results of operations of GDSC and DCA for the years ended December 31, 1998
and 1997 and through the date of the merger in 1999 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ------------------ ------------------
<S> <C> <C> <C>
Dental practice net patient revenue:
GDSC $ 26,048 $ 103,136 $ 29,327
DCA -- -- --
---------------- ------------------ ------------------
Total $ 26,048 $ 103,136 $ 29,327
================ ================== ==================
Net management fees:
GDSC $ 532 $ 2,186 $ 14,076
DCA 6,441 28,641 7,588
---------------- ------------------ ------------------
Total $ 6,973 $ 30,827 $ 21,664
================ ================== ==================
Net income (loss):
GDSC $ 1,129 $ (1,800) $ (3,187)
DCA 595 3,098 420
Adjustment to conform accounting methods -- (28) 6
---------------- ------------------ ------------------
Total $ 1,724 $ 1,270 $ (2,761)
================ ================== ==================
</TABLE>
In connection with the GDSC and DCA mergers, the Company recorded direct merger
expenses of $2,241 in the fourth quarter of 1998. These expenses consisted
primarily of investment banking, accounting, legal and other advisory fees.
Also, the Company recorded a restructuring charge in 1998 of $1,590. During 1999
the Company recorded additional direct merger expenses of $3,260 and additional
restructuring charges of $3,932.
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. ("Leonard Green"), and certain members of Company
management. The Company has recorded direct merger expenses of $1,624 associated
with this agreement. These expenses consist primarily of investment banking,
accounting, legal, and other advisory fees. Included in other current
liabilities at December 31, 1999 is $250 in accrued merger costs incurred in the
course of completing tasks associated with the merger transaction. See
additional discussion at note 14.
The following summarizes the merger and restructure activities and remaining
accrued merger and restructure liability for the GMS and GDSC and the GDSC
and DCA business combinations, and Interdent and Leonard Green proposed
transaction for the three-year period ended December 31, 1999:
38
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summarizes the merger and restructure activities and accrued
merger and restructure liability for the GMS and GDSC, GDSC and DCA, and
InterDent and Leonard Green business combinations for the three-year period
ended December 31, 1999:
<TABLE>
<CAPTION>
CORPORATE RESTRUCTURE AND MERGER COSTS:
EXPENSE DURING YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
GMS AND GDSC COMBINATION:
Direct investment banking, accounting, legal
and other advisory fees $ -- $ -- $ 677
Employee retention, severance and training costs -- -- 289
Facility consolidation -- 163 148
Redirection of duplicative operations,
programs and other costs -- -- 695
------------ ------------ ------------
Total -- 163 1,809
------------ ------------ ------------
GDSC AND DCA COMBINATION:
Direct investment banking, accounting, legal
and other advisory fees 3,260 2,241 --
Employee retention, severance and training costs 1,019 1,535 --
Systems integration and conversion 2,069 -- --
Costs to acquire InterDent name 264 -- --
Redirection of duplicative operations,
programs and other costs 580 55 --
------------ ------------ ------------
Total 7,192 3,831 --
------------ ------------ ------------
INTERDENT AND LEONARD GREEN COMBINATION:
Direct investment banking, accounting, legal
and other advisory fees 1,624 -- --
------------ ------------ ------------
Total corporate restructure and merger costs $ 8,816 $ 3,994 $ 1,809
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCRUED RESTRUCTURE AND MERGER LIABILITY:
BEGINNING ENDING
BALANCE EXPENSE PAYMENTS BALANCE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Restructure and merger activity for the year
ended December 31, 1997 $ -- $ 1,809 $ (956) $ 853
========== ========== ========== ==========
Restructure and merger activity for the year
ended December 31, 1998 $ 853 $ 3,994 $ (2,460) $ 2,387
========== ========== ========== ==========
Restructure and merger activity for the year
ended December 31, 1999 $ 2,387 $ 8,816 $ (8,278) $ 2,925
========== ========== ========== ==========
</TABLE>
The merger and restructure liability at December 31, 1999 and 1998 is
included in other current liabilities in the accompanying financial
statements.
DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
The Company and its related Washington and Oregon PAs entered into asset
purchase and management service agreements (collectively, the "Agreements") on
January 1, 1998. The new Agreements meet the criteria for consolidation of the
PA accounts with the Company for financial reporting purposes. Under the terms
of the Agreements, the Company acquired all of the fixed assets and assumed
certain liabilities of the PAs.
During 1998, the Company entered into twenty-one MSAs representing 44 office
locations. The MSAs have not met the EITF consolidation requirements.
Accordingly, the consolidated statements of operations exclude the net patient
revenues and expenses of the PAs associated with these MSAs. Rather, the
consolidated statements of operations include only the management fees revenues
from those MSAs and the Company's expense associated with those MSAs.
During 1998, the Company also acquired substantially all of the assets of 41
dental office locations, including cash, accounts receivable, supplies and fixed
assets and entered into MSAs with the PAs that met the EITF consolidation
requirements. Accordingly, the consolidated statements of operations include the
net patient revenues and related expenses of these MSAs. Additionally, the
Company acquired all of the outstanding capital stock of the following entities:
- - Capitol Dental Care, Inc., ("CDC") an Oregon corporation. CDC provides
capitated dental services under the Oregon Health Plan pursuant to a
contract with the State of Oregon Office of Medical Assistance Programs.
- - Managed Dental Care of Oregon, Inc., ("MDCO"). MDCO is a dental care entity
that contracts with the Oregon Health Plan pursuant to a contract with the
State of Oregon Office of Medical Assistance Programs.
- - Dedicated Dental Systems, Inc. ("Dedicated Dental"), a Bakersfield,
California company. Dedicated Dental owns and operates 11 staff model
dental offices pursuant to a license granted under the California
Knox-Keene Health Care Service Plan Act of 1975.
- - Dental One Associates, Inc., a Georgia corporation ("Dental One").
The aggregate dental practice acquisition purchase price recorded by the Company
during the year ended December 31, 1998, representing the fair value of the
assets acquired in the above affiliations and earnout consideration accrued or
paid for transactions completed in current and prior periods was $90,458.
Approximately $80,357 of the purchase price has been allocated to intangible
assets. The total purchase consideration included $62,959 in cash, $11,144 in
common stock issued, or to be issued under earn-out agreements and $16,353 in
liabilities incurred and assumed.
During 1999, the Company entered into 6 MSAs representing 12 office locations.
The MSAs have not met the EITF consolidation requirements. Accordingly, the
consolidated statements of operations exclude the net patient revenues and
expenses of the PAs
39
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
associated with these MSAs. Rather, the consolidated statements of operations
include only the management fees revenues from those MSAs and the Company's
expense associated with those MSAs.
During 1999, the Company also acquired substantially all of the assets of 49
dental office locations, including cash, accounts receivable, supplies and fixed
assets and entered into MSAs with the PAs that met the EITF consolidation
requirements. Accordingly, the consolidated statements of operations include the
net patient revenues and related expenses of these.
The aggregate dental practice acquisition purchase price recorded by the Company
during the year ended December 31, 1999, representing the fair value of the
assets acquired in the above affiliations and earnout consideration accrued or
paid for transactions completed in current and prior periods was $66,187.
Approximately $53,319 of the purchase price has been allocated to intangible
assets. The total purchase consideration included $40,985 in cash (including
$700 on deposit at December 31, 1998), $1,372 for common stock and warrants
issued, or to be issued under earn-out agreements and $23,830 in liabilities
incurred and assumed.
In connection with certain completed affiliation transactions, the Company has
agreed to pay to the seller's future consideration in the form of cash and
Company capital stock. The amount of future consideration payable by the Company
under earn-outs is generally computed based upon financial performance of the
affiliated dental practices during certain specified periods. The Company
accrues for earn-out payments with respect to prior practice acquisitions when
such amounts are probable and reasonably estimable. As of December 31, 1999, the
Company had accrued $8,168 for future earn-out payments, of which $386 is
included in additional paid-in capital for anticipated stock issuances while the
remaining accrual for anticipated cash payments is included in other current
liabilities. For those acquisitions with earn-out provisions, the Company
estimates the total maximum earn-out that could be paid, including amounts
already accrued, is between $33,000 and $38,000 from January 2000 to December
2003, 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 $1,300 to $1,500 annually.
The above transactions have been accounted for using the purchase method of
accounting. The excess of the total purchase price over the fair value of the
net tangible and identifiable intangible assets acquired are being amortized
over the lesser of the term of the related MSAs or 25 years using the
straight-line method. The results of operations for these practices have been
included in the consolidated financial statements of the Company since the dates
of their affiliation.
The following unaudited pro forma information presents the condensed
consolidated results of operations as if the acquisition and related financing
activities for the three-years ended December 31,1999 had occurred as of January
1, 1997. The pro forma information has been prepared for comparative purposes
only, and includes only those MSAs that meet the criteria for consolidation in
the Company's consolidated statements of operations. The pro forma information
is not necessarily indicative of what the actual results of operations would
have been had the practices been affiliated as of that date, nor does it purport
to represent future operations of the Company:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
As Reported:
DP net patient service revenue $ 188,078 $ 103,136 $ 29,327
Net management fees 42,551 30,827 21,664
Net income (loss) attributable to common stock 5,222 1,248 (3,827)
Net income (loss) per share attributed to common
stock - Diluted $ 0.23 $ 0.06 $ (0.31)
================= ================== ==================
Pro forma:
DP net patient service revenue $ 223,446 $ 204,046 $ 196,816
Net management fees 43,854 33,667 16,631
Net income attributable to common stock 6,614 7,662 6,266
Net income per share attributed to common
stock - Diluted $ 0.29 $ 0.35 $ 0.35
================= ================== ==================
</TABLE>
Income (loss) amounts reflected above include the effect of merger and
restructure costs of $8,816, $3,994 and $1,809 during the years ended December
31, 1999, 1998 and 1997, respectively, as outlined in the business combination
discussion above.
(5) PROPERTY AND EQUIPMENT
40
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Dental equipment $ 18,775 $ 12,401
Computer equipment 6,366 3,411
Furniture, fixtures and equipment 3,399 3,075
Leasehold improvements 10,172 6,646
Vehicles 81 70
Land and buildings 1,187 1,187
------------------ -----------------
Total property and equipment 39,980 26,790
Less accumulated depreciation and amortization (9,707) (5,411)
------------------ -----------------
$ 30,273 $ 21,379
================== =================
</TABLE>
(6) INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Management Services Agreements $ 122,699 $ 70,581
Goodwill 39,483 38,166
Other 55 205
------------------ -----------------
Total intangible assets 162,237 108,952
Less accumulated amortization (9,205) (3,841)
------------------ -----------------
$ 153,032 $ 105,111
================== =================
</TABLE>
(7) OTHER CURRENT LIABILITIES
Other current liabilities consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Accrued earn-outs $ 7,782 $ 2,980
Merger and restructure costs 2,925 2,387
Accrued federal and state income taxes 1,816 428
Other operating liabilities 6,050 5,014
------------------ -----------------
$ 18,573 $ 10,809
================== =================
</TABLE>
(8) DEBT
At December 31, 1999 the Company has a credit facility providing for a maximum
borrowing of $90,000. The revolving feature of the credit facility expires on
September 30, 2001, at which time it will convert into a four-year term loan to
be repaid in 16 equal quarterly installments. Principal amounts owed under the
credit facility bear interest (8.78% at December 31, 1999), at varying amounts
over LIBOR (2.25% - 3.00%) or the prime rate (0.50% - 1.25%), at the Company's
option, based on the level of its leverage ratio. The credit facility requires
the Company to pay an unused commitment fee in an amount ranging from 0.375% to
0.750% per annum of the average daily amount by which the bank commitment under
the credit facility exceeds the aggregate amount of all loans then outstanding.
The credit facility contains several covenants including restrictions on the
ability of the Company to incur indebtedness and repurchase of shares, prohibits
dividends without prior approval; and requirements relating to maintenance of a
specified net worth
41
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and compliance with specified financial ratios. In addition, the credit facility
requires the Company to notify the lenders prior to making any acquisition and
to obtain the consent of the lenders prior to making acquisitions over a
specified purchase price. The obligations of the Company under the credit
facility and the subsidiaries under the guarantees are secured by a security
interest in the equipment, fixtures, inventory, receivables, subsidiary stock,
certain debt instruments, accounts and general intangibles of each of such
entities.
In 1998 the Company issued $30,000 of subordinated convertible notes ("Notes").
The Notes have an eight-year term and bear interest at 7.0%. See note 9 for
discussion of the conversion terms of the Notes.
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Credit facility, interest at 8.78% at December 31,1999 $ 79,255 $ 23,518
Revolving note, interest at 1.75% over the Eurodollar rate payable
monthly; repaid and terminated during 1999 -- 6,356
Senior subordinated note payable, face value of $2,083 discounted interest
at 8%; due July 2002 1,698 1,568
Subordinated note payable, interest at 8%, interest payable annually
through January 2002; due January 2002 696 696
Senior subordinated note payable, interest at 8%; due in monthly
installments of principal and interest of $14; due July 2002 382 515
Senior subordinated note payable, face value of $500 discounted interest
at 8%; paid July 1999 -- 478
Note payable, interest at 9.375%; payable in monthly installments of $4,
secured by land and building; paid April 1999 -- 381
Note payable to seller, interest at 8.5%, principal and interest payable
quarterly, maturing in March 2003, secured by stock in subsidiary 729 917
Various unsecured acquisition notes payable, due in monthly and quarterly
installments of principal and interest at rates ranging from 8.0% to
10.0%; due through May 2005 8,438 4,696
------------------ -----------------
91,198 39,125
Less current portion (3,929) (3,271)
------------------ -----------------
$ 87,269 $ 35,854
================== =================
</TABLE>
At December 31, 1999, the aggregate maturities of long-term debt for each of the
next five years are as follows:
<TABLE>
<S> <C>
2000 $ 3,929
2001 8,378
2002 23,764
2003 20,155
2004 20,101
Thereafter 14,871
-------------------
$ 91,198
===================
</TABLE>
(9) SHAREHOLDERS' EQUITY
In 1997 GMS merged into GDSC. GMS had preferred stock outstanding consisting of
convertible preferred stock Series A, redeemable convertible preferred stock -
Series B and convertible preferred stock - Series C. The redeemable convertible
preferred stock - Series B, including dividends, and the convertible preferred
stock Series A and C, were converted into 7,603,677 shares (3,384,302 shares of
GDSC common stock) of GMS common stock on November 4, 1997 prior to the GMS
merger. Upon closing of the merger between GMS and the GDSC, all 10,218,578
outstanding GMS common shares were converted into 4,548,161 shares
42
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
of GDSC's common stock. A reconciliation of the total shares of preferred and
common stock outstanding during the years ended December 31, 1999, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK - STOCK - STOCK - STOCK - STOCK - COMMON
SERIES A SERIES A SERIES C SERIES C SERIES D STOCK
------------- ----------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 395 -- 1,777 -- -- 8,854,040
Convertible preferred stock -
Series C issued for
acquisitions -- -- 1,156 -- -- --
Common stock issued in connection with:
Acquisitions -- -- -- -- -- 109,039
Initial public offering -- -- -- -- -- 4,840,000
Employee purchase plan -- -- -- -- -- 1,902
Other -- -- -- -- -- 133,600
Pursuant to options on
shareholder notes receivable -- -- -- -- -- 333,816
Exercise of stock options -- -- -- -- -- 434,063
Conversion of preferred stock -- -- -- -- -- 1,092,778
Conversion of preferred stock -
Series A, B and C into common
stock (395) -- (2,933) -- -- 3,384,302
------------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1997 -- -- -- -- -- 19,183,540
Preferred stock - Series A
issued for private placement -- 100 -- -- -- --
Convertible preferred stock -
Series C issued for private
placement -- -- -- -- -- 10
Convertible preferred stock -
Series D for private placement -- -- -- -- 1,628,663 --
Common stock issued in
connection with:
Acquisitions -- -- -- -- -- 1,264,361
Employee purchase plan -- -- -- -- -- 23,497
Other -- -- -- -- -- 811
Exercise of warrants -- -- -- -- -- 1,961
Exercise of options -- -- -- -- -- 110,246
------------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1998 -- 100 -- -- 1,628,663 20,584,426
Common stock issued in connection with:
Acquisitions -- -- -- -- -- 270,474
Employee purchase plan -- -- -- -- -- 40,088
Exercise of warrants -- -- -- -- -- 37,523
Exercise of options -- -- -- -- -- 60,617
Common shares cancelled (33,000)
------------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1999 -- 100 -- -- 1,628,663 20,960,128
============= =========== ============= ============ ============= ============
</TABLE>
COMMON STOCK
An aggregate of 608,524 shares of common stock were issued in 1996 at a purchase
price of $.225 per share. 269,278 of these shares are subject to a four-year
vesting schedule whereby one-quarter of the shares vested upon issuance and
one-quarter of the shares vested in October 1997. The remaining shares vest on a
monthly basis during the remaining thirty-six months.
A total of 254,904 and 339,247 outstanding shares of the Company common stock,
issued at a price of $.45 and $.225 per share, respectively are subject to
repurchase at cost as a result of the Company's failure to achieve certain
specified performance targets through December 31, 1999. These shares are
expected to be repurchased in the future.
PREFERRED STOCK
In 1998 the Company completed a $45,000 private placement, consisting of $30,000
of subordinated notes and $15,000 of preferred stock. The subordinated notes
have eight year terms and are convertible into shares of the common stock at
$9.21 for each share of common stock issuable upon conversion of outstanding
principal and accrued but unpaid interest on such subordinated notes. If certain
events of default occur, the subordinated notes then outstanding will
automatically convert into shares of Series B preferred stock at a rate of one
share of Series B preferred stock for each thousand dollars in outstanding
principal and accrued but unpaid interest on the subordinated notes, subject to
adjustment for stock splits, reverse splits, stock dividends, reorganizations
and the like.
43
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 $16.85 on or prior to May 18,
2000, or more than $17.98 at any time thereafter.
The presently authorized Series of preferred stock include the following series:
100 shares of Series A preferred stock, all of which is issued and outstanding;
70,000 shares of Series B preferred stock, none of which is presently
outstanding but which will be issued automatically upon conversion of the then
outstanding subordinated notes; 100 shares of Series C preferred stock, all of
which is issued and outstanding; and 2,000,000 shares of Series D preferred
stock of which 1,628,663 shares are issued and outstanding. The shares of
convertible Series B preferred stock are convertible into shares of common stock
at the rate of 108.58 shares of common stock for each share of Series B
preferred stock, and the shares of Series D preferred stock are convertible into
shares of common stock on a share for share basis, in each case subject to
adjustment for stock splits, reverse splits, stock dividends, reorganizations
and the like. The Series A and Series C preferred stock are not convertible.
STOCK WARRANTS
In connection with certain financing and acquisition activities, the Company has
granted warrants to purchase shares of the Company's common stock. At December
31, 1999 there are a total of 588,282 outstanding warrants at an exercise price
ranging from $6.00 to $9.44 per share. These warrants have been recorded at
their estimated fair value at the date of grant and expire at various dates
through 2005.
(10) REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
The following summary presents the changes in the redeemable preferred and
common stock:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
MANDATORILY REDEEMABLE REDEEMABLE REDEEMABLE
REDEEMABLE PREFERRED PREFERRED PREFERRED SHARES OF
PREFERRED STOCK - STOCK - STOCK - REDEEMABLE REDEEMABLE
STOCK SERIES B SERIES B SERIES B COMMON STOCK COMMON STOCK
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 15,000 $ 1,402 6,180,000 $ 11,055 190,302 $ 2,199
Issued in connection with
private placement -- -- 107,142 188 -- --
Dividends on redeemable
convertible preferred
stock - Series B -- -- -- 932 -- --
Accretion of put rights -- -- -- -- -- 34
Exercise of put rights -- -- -- -- (6,616) (103)
Conversion into common stock (15,000) (1,402) (6,287,142) (12,175) -- --
------------- -------------- ------------- -------------- ------------- --------------
Balance, December 31, 1997 -- -- -- -- 183,686 2,130
Accretion of put rights -- -- -- -- -- 22
Exercise of put rights -- -- -- -- (2,974) (50)
------------- -------------- ------------- -------------- ------------- --------------
Balance, December 31, 1998 -- -- -- -- 180,712 2,102
Accretion of put rights -- -- -- -- -- 12
Exercise of put rights -- -- -- -- (22,754) (318)
------------- -------------- ------------- -------------- ------------- --------------
Balance, December 31, 1999 -- $ -- -- $ -- 157,958 $ 1,796
============= ============== ============= ============== ============= ==============
</TABLE>
REDEEMABLE COMMON STOCK
In connection with certain acquisitions, the Company granted put rights to
certain shareholders that may require the Company to redeem up to 57,958 shares
of its common stock, at a redemption price ranging from $13.60 to $19.62 per
share. If all shareholders with such outstanding put rights exercise their
options, the Company would be required to repurchase the above shares of common
stock for an aggregate of $848. The redemption periods continue through January
4, 2003. If the shareholder does not place a redemption request during the
redemption period, the put right will expire on the stated expiration date. The
Company redeemed 22,754 shares of redeemable common stock for $318 during 1999,
2,974 shares were redeemed for $50 during 1998, and 6,616 shares were redeemed
for $103 during 1997.
44
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The shares of common stock subject to the put rights are reported on the balance
sheet as redeemable common stock. Such shares have been recorded at their fair
value as of date of acquisition, inclusive of accretion during each of the three
years in the period ended December 31, 1999. The Company records accretion on a
ratable basis over the redemption period of the respective stock. Such accretion
was $12, $22, and $34 for the years ended December 31, 1999, 1998, and 1997,
respectively. Such common stock at December 31, 1999 is redeemable as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT PRICE RANGE
----------------------------------------- ------------------- -------------------
<S> <C> <C> <C>
2000 20,849 $ 308 $ 13.60 - 19.62
2001 29,681 438 13.60 - 18.80
2002 3,714 51 13.60
2003 3,714 51 13.60
------------------- -------------------
57,958 $ 848
=================== ===================
</TABLE>
PRIVATE PLACEMENT OF REDEEMABLE COMMON STOCK AND WARRANTS
The Company completed a private placement offering (the "Placement Offering")
of 100,000 shares of the Company's redeemable common stock, which include
warrants to purchase 100,000 additional shares of the Company's common stock at
an exercise price of $7.50 per share. The stock warrants expire in June 2001; no
stock warrants have been exercised to date. In connection with the Placement
Offering, the shareholder received certain put rights which are exercisable
after June 21, 2001 but not later than June 21, 2003 if the Company has not
completed a public offering of its common stock by June 21, 2001 at a price of
at least $22.00 per share and with net proceeds to the Company of at least
$10,000. The per share price applicable to the put rights is 20 times the
Company's average adjusted net income per share for the two most recent fiscal
years preceding the exercise of the rights. As of December 31, 1999, the Company
has not recorded any accretion related to the above put rights.
(11) STOCK OPTIONS
The Company adopted the InterDent, Inc. 1999 Stock Incentive Plan (the
"Incentive Plan"). Benefits under the Incentive Plan include the granting of
incentive stock options, non-qualified stock options, stock appreciation rights,
and stock awards to employees and non-employees of the Company. The Incentive
Plan provides for the issuance of up to 2,500,000 shares of Company common
stock. The Incentive Plan is administered by the Compensation Committee of the
Company's Board of Directors (the "Committee"). The Committee has the authority
to determine the persons or entities to whom awards will be made, the amounts,
and other terms and conditions of the awards. Shares grants issued under the
Incentive Plan generally expire ten to fifteen years from the original grant
date, depending upon that nature of the share grant.
Under GDSC's stock incentive plan, DCA's 1997 executive incentive compensation
plan and, DCA's 1997 non-qualified stock option plan (collectively the "Former
Plans"), incentive stock options, non-statutory stock options, stock
appreciation rights or bonus rights, award of stock bonuses, and/or sale of
restricted stock of the Company have been granted to employees and
non-employees. The Former Plans provided for the issuance of up to 3,127,000
shares of Company common stock and were frozen during 1999. Shares issued under
the Former Plans are generally subject to a three to five-year vesting schedule
from the date of grant and expire ten years from the original grant date.
Concurrent with its initial public offering, GDSC repriced all employee stock
options then outstanding to the offering price of $5.00 per share (except for
certain stock options held by a principal shareholder, which were repriced at
110% of the offering price). All other terms with respect to such options were
maintained. No compensation expense related to the repricing of the employee
stock options was recorded as the adjusted exercise price was not below the fair
value of the common stock as of the repricing date.
Prior to the merger of GDSC and GMS, GMS had two stock-based option plans
("Previous Plans") which offered essentially the same awards and stock option
terms as the GDSC's stock incentive plan. Upon consummation of the merger of GMS
with GDSC, the Previous Plans were frozen to allow no additional option grants
under those plans. The number of options and option price for the options
granted under the Previous Plans were converted to GDSC share (and subsequently
Company share) and share price equivalent utilizing the same conversion ratio of
GMS common stock to GDSC common stock.
Stock options issued to non-employees have been recorded at their estimated fair
market value and are being expensed over their respective vesting lives of up to
five years. Total compensation expense recorded for the years ended December 31,
1999, 1998 and 1997 was $55, $59 and $56, respectively.
45
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 199, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the fair value of all options granted during the years ended
December 31, 1999, 1998 and 1997. The options have been valued using the
Black-Scholes pricing model as prescribed by SFAS 123. The following weighted
average assumptions have been used for grants of stock options:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Risk free interest rate 5.8% 4.6%-5.7% 5.8%-6.4%
Expected dividend yield -- -- --
Expected lives 5 years 3-6 years 4-5 years
Expected volatility 74% 6%-74% 11%-60%
</TABLE>
Options were assumed to be exercised over their expected lives for the
purpose of this valuation. Adjustments are made for options forfeited prior
to vesting. The total estimated value of options granted which would be
amortized over the vesting period of the options is $2,167, $4,047, and
$1,262 for the years ended December 31, 1999, 1998 and 1997, respectively.
The options granted during three-year year period ended December 31, 1999
were valued at a per share amount of $3.88 in 1999, $2.96 in 1998, and $1.19
in 1997, respectively. If the Company had accounted for stock options issued
to employees in accordance with SFAS 123, the Company's net income (loss)
attributable to common stock and pro forma net income (loss) per share would
have been reported as follows:
Net income (loss) attributable to common stock:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
As reported $ 5,222 $ 1,248 $ (3,827)
Pro forma 2,932 (1,035) (4,532)
================== ================== =================
</TABLE>
Pro forma net income (loss) per share attributable to common stock:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
As reported - basic $ 0.26 $ 0.06 $ (0.31)
Pro forma - basic 0.14 (0.05) (0.31)
As reported - diluted 0.23 0.06 (0.31)
Pro forma - diluted 0.13 (0.05) (0.35)
================== ================== =================
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1999, 1998 and 1997 are not likely to be representative of the effects on
reported net income (loss) and net income (loss) per common equivalent share
for future years. This is not likely to be representative because options
vest over several years and additional awards generally are made each year.
The following summary presents the options granted and outstanding under the
various plans as of December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVE.
EMPLOYEE NON-EMPLOYEE TOTAL EXERCISE PRICE
---------------------------------------------------- ---------------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1997 580,907 330,753 911,660 $ 2.20
Granted 849,009 208,280 1,057,289 4.25
Exercised (626,260) (141,619) (767,879) 0.87
Canceled (142,100) (1,200) (143,300) 4.78
---------------------------------------------------- ---------------------
Outstanding, December 31, 1997 661,556 396,214 1,057,770 5.22
</TABLE>
46
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 199, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C> <C>
Granted 757,015 611,433 1,368,448 7.41
Exercised (6,484) (103,762) (110,246) 1.10
Canceled (112,238) (69,955) (182,193) 6.60
---------------------------------------------------- ---------------------
Outstanding, December 31, 1998 1,299,849 833,930 2,133,779 6.81
Granted 440,318 117,558 557,876 6.28
Exercised (47,557) (13,060) (60,617) 4.05
Canceled (162,911) (87,425) (250,336) 6.64
---------------------------------------------------- ---------------------
Outstanding, December 31, 1999 1,529,699 851,003 2,380,702 $ 6.68
==================================================== =====================
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options granted under the various plans at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS
------------------------------------------
EXERCISE CONTRACTUAL LIFE
PRICE OUTSTANDING EXERCISABLE REMAINING
----------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
$ 0.45 - 0.67 66,858 53,039 6.9
4.13 - 6.07 963,204 252,631 8.4
6.13 - 8.75 1,318,140 800,768 8.4
10.00 32,500 30,500 5.4
----------------------- -------------------- ------------------- -------------------
$ 6.68 2,380,702 1,136,938 8.3
======================= ==================== =================== ===================
</TABLE>
At December 31, 1997 there were a total of 757,770 shares outstanding of
which 192,287 shares were exercisable under the various plans. At December
31, 1998 there were a total of 2,133,779 shares outstanding of which 320,964
shares were exercisable under the various plans. As of December 31, 1999,
there are 1,995,729 shares available for future option grants under the
Incentive Plan.
(12) EMPLOYEE BENEFITS
The Company participated in two defined contribution retirement plans in
accordance with Section 401(k) of the Internal Revenue Code ("IRS"). The
plans covered substantially all employees of GDSC. Contributions to the plans
by the Company are discretionary. Effective December 31, 1998, one plan was
terminated while the other is currently frozen awaiting approval for
termination from the IRS. Effective January 1, 1999 a new plan was
established in accordance with Section 401(k) of the Internal Revenue Code.
The assets of the terminated plans are to be transferred into the new plan.
There were no Company contributions to the plans during the three-year period
ended December 31, 1999.
(13) INCOME TAXES
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------
CURRENT DEFERRED TOTAL
--------------------- -------------------- -------------------
<S> <C> <C> <C>
U.S. Federal income taxes $ 1,137 $ 220 $ 1,357
State and local income taxes 374 284 658
--------------------- -------------------- -------------------
$ 1,511 $ 504 $ 2,015
===================== ==================== ===================
1998
------------------------------------------------------------------
CURRENT DEFERRED TOTAL
--------------------- -------------------- -------------------
U.S. Federal income taxes $ 1,836 $ 62 $ 1,898
State and local income taxes 398 6 404
--------------------- -------------------- -------------------
</TABLE>
47
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 199, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C>
$ 2,234 $ 68 $ 2,302
===================== ==================== ===================
1997
------------------------------------------------------------------
CURRENT DEFERRED TOTAL
--------------------- -------------------- -------------------
U.S. Federal income taxes $ 136 $ (2) $ 134
State and local income taxes 59 (6) 53
--------------------- -------------------- -------------------
$ 195 $ (8) $ 187
===================== ==================== ===================
</TABLE>
The effective tax rate differed from the U.S. statutory Federal rate of 34%
due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- -------------------- -------------------
<S> <C> <C> <C>
U.S. Federal taxes at statutory rate $ 2,465 $ 1,215 $ (880)
Increase (decrease):
State income taxes, net of federal tax benefit 434 178 27
Valuation allowance for deferred tax assets (778) 776 691
Permanent change in accounts receivable basis (1,138) -- --
Non-deductible transaction costs 909 200 --
Amortization of nondeductible goodwill and other
nondeductible items 290 19 85
Other (167) (86) 264
------------------- -------------------- -------------------
Income tax provision $ 2,015 $ 2,302 $ 187
=================== ==================== ===================
</TABLE>
Deferred income tax assets (liabilities) are comprised of the following
components:
<TABLE>
<CAPTION>
-------------------- -------------------
1999 1998
-------------------- -------------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $ 1,263 $ 846
Allowance for doubtful accounts 655 1,423
Intangible assets, principally due to differences in amortization and
capitalized costs -- 226
Accrued payroll and related costs 175 85
Compensated absences, principally due to accrual for financial reporting
purposes -- 246
Cash versus accrual reporting for tax purposes 201 --
Restructure and severance accrual 628 832
Other accruals 487 315
Other 244 195
-------------------- -------------------
Total gross deferred income tax assets 3,653 4,168
Less valuation allowance (764) (1,542)
-------------------- -------------------
Deferred income tax assets, net of valuation allowance 2,889 2,626
-------------------- -------------------
Deferred income tax liabilities:
Accounts receivable -- (1,038)
Property and equipment, principally due to differences in depreciation
and capitalized costs (4,520) (3,310)
</TABLE>
48
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 199, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C>
Intangible assets, principally due to accrual for financial reporting
purposes (1,087) (1,030)
Cash versus accrual reporting for tax purposes -- (11)
Pre-acquisition payables -- (39)
Other (643) (55)
-------------------- -------------------
Deferred income tax liabilities (6,250) (5,483)
-------------------- -------------------
Net deferred income tax liability $ (3,361) $ (2,857)
==================== ===================
Reconciliation of net deferred income tax liability:
Current deferred income tax assets $ 339 $ 57
Long-term deferred income tax liabilities (3,700) (2,914)
-------------------- -------------------
$ (3,361) $ (2,857)
==================== ===================
</TABLE>
The increase in the Company's loss carryforwards during 1999 is attributed to
the effects of acquisitions accounted for under the stock purchase method of
accounting which had existing loss carryforwards for income tax purposes. At
December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $3,270, which are available to
offset future taxable income, if any, through 2014. The Company also has
certain state net operating loss carryforwards, which are available to offset
future taxable income. In accordance with the Internal Revenue Code, the
annual utilization of net operating loss carryforwards and credits that
existed in certain corporations prior to affiliation with InterDent may be
limited.
(14) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into various operating leases, primarily for
commercial property. Commercial properties under operating leases mostly
include space required to perform dental services and space for
administrative facilities. Lease expense, including month-to-month rentals,
for the years ended December 31, 1999, 1998 and 1997 was $ 11,711, $7,317 and
$3,130, respectively.
The future minimum lease payments under capital and noncancelable operating
leases with remaining terms of one or more years consist of the following at
December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------------------------ --------------------------
<S> <C> <C>
2000 $ 1,924 $ 13,427
2001 1,543 12,452
2002 1,268 11,385
2003 720 9,421
2004 278 7,496
Thereafter 502 16,796
------------------------ --------------------------
Total minimum lease obligations 6,235 $ 70,977
==========================
Less portion attributable to
interest (1,335)
------------------------
Obligations under capital lease 4,900
Less current portion (1,406)
------------------------
$ 3,494
========================
</TABLE>
CONTINGENCIES
The Company was named as a defendant in a malpractice case filed in superior
court in Clark County, Washington against one of the PAs and an orthodontist
employed thereby. Following an orthodontic examination, the plaintiff was
referred by the orthodontist to an ear, nose and throat specialist who then
removed plaintiff's tonsils. Several days after the operation, plaintiff
suffered complications
49
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
resulting in permanent physical damage. The plaintiff alleged damages in
excess of $10 million due to the alleged negligence on the part of the
orthodontist and alleged that the orthodontist acted as an employee of the
Company. The case went to a jury trial in February 2000. See note 15 for
further discussion.
The Company has been named as a defendant in various other lawsuits in the
normal course of business, primarily for malpractice claims. The Company and
affiliated dental practices, and associated dentists are insured with respect
to dentistry malpractice risks on a claims-made basis. Management believes
these pending lawsuits, claims, and proceedings against the Company are
without merit or will not have a material adverse effect on the Company's
consolidated operating results, liquidity or financial position.
On October 22, 1999, the Company signed 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 completing the transaction in the
second calendar quarter of the year 2000.
Subsequent to the signing of the agreement, 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 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.
The Company has guaranteed a portion of the PAs' debt. The guarantees relate
primarily to debt incurred related to the acquisition of dental practices and
is in addition to collateral already provided by the PA. As of December 31,
1999, the amount of PA debt guaranteed by the Company is approximately $5,382.
(15) SUBSEQUENT EVENTS
The Company has signed Letters of Intents related to the anticipated
completion of various PA affiliations, representing seven dental office
locations. The total purchase consideration is expected to approximate $3,300
in cash and will be provided under borrowings on the credit facility. These
affiliations will be accounted for using the purchase method of accounting.
The Company was named as a defendant in a malpractice case filed in superior
court in Clark County, Washington against one of the PAs and an orthodontist
employed thereby. The plaintiff alleged damages in excess of $10 million due
to the alleged negligence on the part of the orthodontist and alleged that
the orthodontist acted as an employee of the Company. The case was brought
before a jury in February 2000 in which the jury returned a verdict in favor
of the orthodontist, and consequently the PA and the Company.
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Prior to the March 12, 1999 mergers with InterDent, Inc., Gentle Dental
Service Corporation retained KPMG LLP as its independent accountants while
Dental Care Alliance, Inc. ("DCA"), retained PricewaterhouseCoopers LLP as
its independent accountants. Effective with the mergers, the Board of
Directors of InterDent, Inc. engaged KPMG LLP as its principal independent
accountants.
There were no adverse opinions, disclaimers of opinion or qualifications as
to uncertainty, audit scope or accounting principles in the reports of
PricewaterhouseCoopers LLP on the financial statements for the DCA subsidiary
for the two most recent years preceding their dismissal. Through the date of
the change in accountants, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of such accountants,
would have caused them to make reference to the subject matter of the
disagreements in connection with their reports.
51
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of InterDent
is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Mr. Michael T. Fiore ................45 Co-Chairman of the Board and Chief Executive Officer
Dr. Steven R. Matzkin................41 Co-Chairman of the Board, President, and Chief Dental Officer
Mr. Ranold P. Henry..................49 Chief Operating Officer
Mr. L. Theodore Van Eerden ..........44 Chief Development Officer, Executive Vice President and Secretary
Mr. Norman R. Huffaker ..............53 Chief Financial Officer
Mr. Grant M. Sadler .................53 Senior Vice President/Development and Co-Founder
Mr. Robert Finzi ....................46 Director
Mr. H. Wayne Posey ..................60 Director
Mr. Robert F. Raucci.................44 Director
Mr. Eric Green ......................38 Director
Dr. Paul H. Keckley .................49 Director
Mr. Curtis Lee Smith, Jr.............72 Director
</TABLE>
MICHAEL T. FIORE. Mr. Fiore has served as the Co-chairman of the Board and
Chief Executive Officer of InterDent since its inception on March 12, 1999.
Prior to the March 12, 1999 merger, Mr. Fiore served as Co-Chairman of the
Board, Chief Executive Officer and President of Gentle Dental Service
Corporation since November 1997. Before joining the Gentle Dental Service
Corporation, Mr. Fiore was the Chief Executive Officer, President and a
director of GMS Dental Group, Inc. from April 1997 to October 1997. From 1986
to March 1996, Mr. Fiore served in various management positions at Salick
Health Care, Inc., a provider of diagnostic and therapeutic services to
patients with catastrophic illness, principally in the areas of cancer and
kidney failure, including serving as a director, Executive Vice President and
Chief Operating Officer, and as President of its principal subsidiary,
Comprehensive Cancer Centers, Inc.
STEVEN R. MATZKIN, D.D.S. Dr. Matzkin has served as InterDent's Co-chairman,
President, and Chief Dental Officer since March 12, 1999. Subsequent to the
formation of InterDent, Dr. Matzkin served full-time as Chairman of the
Board, Chief Executive Officer and President of Dental Care Alliance as well
as founding Dental Care Alliance's predecessors in 1992 and 1993. Dr. Matzkin
has over 14 years of experience in the administration and management of
dental practices. He practiced dentistry in Michigan for six years, during
which time he owned five dental practices and managed over 25 dental
practices through an affiliate management company. Dr. Matzkin has also been
featured as a guest speaker at regional Practice Management conferences,
including the national meeting for the National Association of Dental Plans.
Dr. Matzkin earned his BA degree in 1980 from the Indiana School of Biology
and his DDS degree in 1984 from Northwestern University.
RANOLD P. HENRY. Mr. Henry has served as Chief Operating Officer since
InterDent's inception. Previously, he served in the same capacity for Gentle
Dental Service Corporation since joining the Company in June 1998. Before
joining the Gentle Dental Service Corporation, Mr. Henry served several
senior executive positions in operations and marketing for Pearle Vision,
Inc., including Senior Vice President of Marketing, President of Pearle
Canada, Vice President of European Operations, President of Q2001, a
technology subsidiary of Pearle Vision, and Senior Vice President of
Manufacturing. Prior to Pearle Vision, Mr. Henry served several key
management positions with Fotomat Corporation and Fox Stanley Photo, Inc.
L. THEODORE VAN EERDEN. Mr. Van Eerden has served as Chief Development
Officer, Executive Vice President and Secretary for Interdent since March 12,
1999. Previously, Mr. Van Eerden served as Executive Vice President, Chief
Development Officer and as a director of Gentle Dental Service Corporation
since November 1997. He served as Chief Financial Officer from March 1996
until November 1997. Before joining Gentle Dental Service Corporation as
Chief Financial Officer in March 1996, Mr. Van Eerden was Vice
President-Administration for HOSTS Corporation, a Vancouver, Washington
company that provides proprietary educational software products and
instructional delivery systems to schools throughout the United States. From
April 1993 to April 1994, Mr. Van Eerden was Director of Development for The
ServiceMaster Company where he focused on mergers and acquisitions and new
business development. Before that, Mr. Van Eerden was Vice President and
Chief Financial Officer of Medical SafeTec, Inc., a manufacturer of medical
waste destruction equipment. Prior to Medical SafeTec, Inc., Mr. Van Eerden
served in various positions with ServiceMaster focusing on mergers and
acquisitions.
NORMAN R. HUFFAKER. Mr. Huffaker has served as the Chief Financial Officer
since InterDent's inception. Previously, Mr. Huffaker served in the same
capacity for Gentle Dental Service Corporation since November 1997. Prior to
joining Gentle Dental Service Corporation in November 1997, Mr. Huffaker
served as Chief Financial Officer of GMS Dental Group, Inc. from December
1996 to November 1997. Mr. Huffaker previously served as Vice President of
Finance for Community Dental Services, Inc. (SmileCare
52
<PAGE>
Dental Group), an Irvine, California based dental HMO and staff model
practice company. Prior to employment at SmileCare Dental Group, Mr. Huffaker
was Senior Vice President of Finance at Abbey/Foster, a national home health
care business.
GRANT M. SADLER. Mr. Sadler has served as InterDent's Senior Vice
President/Development and Co-Founder since InterDent's inception. Prior to
joining Gentle Dental Service Corporation in November 1997, Mr. Sadler
founded and served as the Chief Executive Officer, President and Secretary of
GMS Dental Group, Inc. from its inception in October 1996 to April 1997. In
April 1997 he vacated those positions and assumed the position of Chairman of
the Board and served in that capacity until November 1997. Prior to GMS
Dental Group, Inc. Mr. Sadler served as President of Group Management
Services, Inc., a dental group consulting practice formed by Mr. Sadler in
1991.
ROBERT FINZI. Mr. Finzi has been a director of InterDent since March 12,
1999. Prior to that time, Mr. Finzi was a director of Gentle Dental Service
Corporation since November 1997 and served as a director of GMS Dental Group,
Inc. from October 1996 until the Company's merger with Gentle Dental Service
Corporation in November 1997. Since May 1991, Mr. Finzi has been a Vice
President of the Sprout Group, a division of DLJ Capital Corporation, which
is the managing general partner of Sprout Capital VII, L.P and Sprout Growth
II, L.P., and an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Mr. Finzi is also a general partner of the general partner of a
series of investment funds managed by the Sprout Group and a limited partner
of the general partner of ML Venture Partners II, L.P. From 1984 to 1991, Mr.
Finzi was a Vice President of Merrill Lynch Venture Capital. Mr. Finzi serves
on the board of directors of six privately held companies.
H. WAYNE POSEY. Mr. Posey has been a director of InterDent since March 12,
1999. Mr. Posey was a director of Gentle Dental Service Corporation since
November 1997 and served as a director of GMS Dental Group, Inc. from
December 1996 until the merger of GMS Dental Group, Inc. with Gentle Dental
Service Corporation in November 1997. Since its inception in 1994, Mr. Posey
has served as President, Chief Executive Officer, director, and a member of
the executive committee of ProMedCo. Mr. Posey was a healthcare consultant
from 1975 until 1994, most recently as the principal in charge of the
healthcare services division of McCaslin & Company, PC., a public accounting
and consulting company in Fort Worth, Texas.
ROBERT F. RAUCCI. Mr. Raucci has been a director of InterDent since its
inception. Previously, Mr. Raucci was a director of the Dental Care Alliance
since 1996. Mr. Raucci has been a managing member of Newlight Management,
LLC, a technology oriented venture capital fund, since July 1997. Mr. Raucci
also has served as president of RAM Investment Corporation, a venture capital
investment and advisory company, since 1994. Between 1985 and 1994 Mr. Raucci
served as a private equity investment manager for Alliance Capital Management
Corporation, a global investment management company.
ERIC GREEN. Mr. Green has been a director of InterDent since March 12, 1999.
Previously, Mr. Green was a director of the Gentle Dental Service Corporation
since June 4, 1998. Mr. Green has been a Managing Director of Chase Capital
Partners since February 1998. From 1990 to 1997, he was a member of the
merchant banking group of Banque Paribas in various capacities, including
managing director responsible for mezzanine investments. Previously, Mr.
Green was employed at GE Capital and the General Electric Company.
PAUL H. KECKLEY, PH.D. Dr. Keckley has been a director of InterDent since
March 12, 1999. Prior to that time, Dr. Keckley was a director of Gentle
Dental Service Corporation since December 1996. Since 1999, Dr. Keckley has
been President of CareMaps, Inc.. From 1994 to 1999, he was Vice President
Strategic Development at PhyCor, Inc. Dr. Keckley previously served as a
director of PhyCor, Inc., and from 1985 to 1994 he was President of The
Keckley Group, a market research and strategic planning firm for hospitals,
health systems, medical practices and health maintenance organizations.
CURTIS LEE SMITH, JR. Mr. Smith has been a director of InterDent since March
12, 1999. Prior to that time, Mr. Smith was a director of Dental Care
Alliance since 1996. Beginning in 1986, Mr. Smith served as Chairman of the
Board and Chief Executive Officer of Handex Corporation ("Handex"), an
environmental consulting and remediation company which became a public
company in 1989. Handex acquired New Horizons Computer Learning Centers, a
software training company, in 1994. Handex sold its environmental division in
1996 and now operates as New Horizons Worldwide, of which Mr. Smith serves as
Chairman of the Board and Chief Executive Officer.
ITEM 11 EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included under
"Executive Compensation" in InterDent's definitive proxy statement for its
2000 Annual Meeting of Shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this Report and is incorporated herein
by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management will be included under "Voting Securities and Principal
Shareholders" in InterDent's definitive proxy statement for its 2000 Annual
Meeting of Shareholders
53
<PAGE>
to be filed not later than 120 days after the end of the fiscal year covered
by this Report and is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management will be included under "Certain Relationships and Related
Transactions" in InterDent's definitive proxy statement for its 2000 Annual
Meeting of Shareholders to be filed not later than 120 days after the end of
the fiscal year covered by this Report and is incorporated herein by
reference.
54
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE, 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.
2.3 Agreement and Plan of Merger, by and between ID Recap, Inc. and
InterDent, Inc., dated October 22, 1999. Incorporated by reference to
Exhibit 2.1 of InterDent's Current Form 8-K, filed on October 25, 1999.
3.1 Restated Certificate of Incorporation. Incorporated by reference to
Exhibit 3.1 of InterDent's Registration Statement on Form S-4,
Registration No. 333-66475, filed on October 30, 1998.
3.2 Bylaws, as amended. Incorporated by reference to Exhibit 3.3 of
InterDent's Registration Statement on Form S-4, Registration No.
333-66475, filed on October 30, 1998.
3.3 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.
3.4 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.
3.5 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 Certificate of Incorporation (filed as Exhibit 3.1).
4.2 Bylaws, as amended (filed as Exhibit 3.2).
4.3 Restated Articles of Incorporation (filed as Exhibit 3.3).
4.4 Articles of Amendment of Gentle Dental's Restated Articles of
Incorporation (filed as Exhibit 3.4).
4.5 Bylaws, as amended (filed as Exhibit 3.5).
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).
10.3 Amended and Restated Credit Agreement, dated as of June 15, 1999 (the
"Amended and Restated Credit Agreement"), by and among Gentle Dental
Service Corporation, Dental Care Alliance, Inc. and Gentle Dental
Management, Inc., as borrowers (the "Borrowers"), certain InterDents's
subsidiaries, as guarantors (the "Guarantors"), the financial
institutions signatory thereto, as lenders, Union Bank of California,
N.A., as administrative agent (the "Administrative Agent"), and The
Chase Manhattan Bank, as syndication agent (the "Syndication Agent").
Incorporated by reference to InterDent's Form 10-Q, filed on August 13,
1999.
</TABLE>
55
<PAGE>
<TABLE>
<S> <C>
10.4 Amended and Restated Credit Agreement, dated as of June 15, 1999 (the
"Amended and Restated Credit Agreement"), by and among Gentle Dental
Service Corporation, Dental Care Alliance, Inc. and Gentle Dental
Management, Inc., as borrowers (the "Borrowers"), certain InterDents's
subsidiaries, as guarantors (the "Guarantors"), the financial
institutions signatory thereto, as lenders, Union Bank of California,
N.A., as administrative agent (the "Administrative Agent"), and The
Chase Manhattan Bank, as syndication agent (the "Syndication Agent").
Incorporated by reference to InterDent's Form 10-Q, filed on August 13,
1999.
10.5 Amendment Agreement No. 1 to the Amended and Restated Credit Agreement,
dated as of July 30, 1999, by and among the Borrowers, the Guarantors,
the financial institutions signatory thereto, as lenders, the
Administrative Agent and the Syndication Agent. Incorporated by
reference to InterDent's Form 10-Q, filed on August 13, 1999.
10.6 Amendment Agreement No. 2 to the Amended and Restated Credit Agreement,
dated as of August 9, 1999, by and among the Borrowers, the Guarantors,
the financial institutions signatory thereto, as lenders, the
Administrative Agent and the Syndication Agent. Incorporated by
reference to InterDent's Form 10-Q, filed on August 13, 1999.
10.7 Guaranty, dated as of March 12, 1999, by InterDent in favor of the
Administrative Agent. Incorporated by reference to InterDent's Form
10-Q, filed on August 13, 1999.
10.8 Confirmation of Guaranty, dated as of June 15, 1999, by InterDent in
favor of the Administrative Agent. Incorporated by reference to
InterDent's Form 10-Q, filed on August 13, 1999.
10.9 Agreement and Plan of Merger, by and between ID Recap, Inc. and
InterDent, Inc., dated October 22, 1999 (filed as exhibit 2.3).
23.1 Consent of Independent Accountants, KPMG LLP
23.2 Consent of Independent Accountants, PricewaterhouseCoopers LLP
27.1 Financial Data Schedule.
99.1 InterDent, Inc. 1999 Stock Incentive Plan. Incorporated by reference to
InterDent's Form 10-Q, filed on August 13, 1999.
99.2 InterDent, Inc. Employee Stock Purchase Plan of 1999. Incorporated by
reference to InterDent's Form 10-Q, filed on August 13, 1999.
99.3 InterDent, Inc. Dental Professional Stock Purchase Plan of 1999.
Incorporated by reference to InterDent's Form 10-Q, filed on August 13,
1999.
</TABLE>
(b) Reports on Form 8-K.
On October 25, 1999, InterDent filed a Current Report on Form 8-K to
report that the Company has entered into an Agreement and Plan of
Merger pursuant to which a newly formed entity, to be owned by an
acquiring group which includes Green Equity Investors III, L.P.,
certain of the Company's significant noteholders and stockholders and
members of the Company's management, will merge with and into the
Company, with the Company as the surviving corporation. No financial
statements were included in the report.
56
<PAGE>
SCHEDULE II - VALAUTION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
ADDITIONS
------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
YEAR EXPENSES (1) (2) (3) (4) END OF YEAR
-------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Reserves:
1999 $ 6,855,000 $ 6,539,000 $ 3,629,000 $ 8,475,000 $ 8,548,000
1998 4,159,000 3,446,000 4,697,000 5,447,000 6,855,000
1997 $ 1,706,000 $ 3,255,000 $ 2,458,000 $ 3,260,000 $ 4,159,000
============== ============== ============= ============== ===============
Advances to PA Reserves:
1999 $ 149,000 $ -- $ 3,000 $ -- $ 152,000
1998 86,000 -- 63,000 -- 149,000
1997 $ -- $ -- $ 86,000 $ -- $ 86,000
============== ============== ============= ============== ===============
</TABLE>
(1) Before considering recoveries on accounts or notes previously written off.
(2) On accounts receivable reserves, charged to allocation of acquisition
purchase accounting entry.
(3) On advances to PA reserves, charged to management fees revenue.
(4) Accounts written off, net of recoveries.
57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 27, 2000.
INTERDENT, INC.
By: MICHAEL T. FIORE
-------------------------------------
Michael T. Fiore
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities indicated on March 27, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
Principal Executive Officer:
MICHAEL T. FIORE Co-Chairman of the Board and Chief Executive
- --------------------------------------- Officer
Michael T. Fiore
Principal Financial and
Accounting Officer:
NORMAN R. HUFFAKER Chief Financial Officer
- ---------------------------------------
Norman R. Huffaker
Directors:
STEVEN R. MATZKIN, DDS Co-Chairman of the Board, President, and Chief
- --------------------------------------- Dental Officer
Steven R. Matzkin, DDS
ROBERT FINZI Director
- ---------------------------------------
Robert Finzi
WAYNE POSEY Director
- ---------------------------------------
Wayne Posey
ROBERT F. RAUCCI Director
- ---------------------------------------
Robert F. Raucci
ERIC GREEN Director
- ---------------------------------------
Eric Green
PAUL H. KECKLEY Director
- ---------------------------------------
Paul H. Keckley
CURTIS LEE SMITH, JR Director
- ---------------------------------------
Curtis Lee Smith, Jr
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
The Board of Directors,
InterDent, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-78511, 333-78509, 333-75491) on Form S-8 of InterDent, Inc. of our report
dated February 14, 2000, relating to the consolidated balance sheets of
InterDent, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999, and the related
schedule, which report appears in the December 31, 1999 annual report on Form
10-K of InterDent Inc. Our report refers to the report of other auditors for
the separate financial statements of Dental Care Alliance, Inc. as of
December 31, 1998 and for each of the years in the two-year period ended
December 31, 1998 included in the 1998 and 1997 financial statements restated
for the 1999 pooling of interests between InterDent, Inc., Gentle Dental
Service Corporation, and Dental Care Alliance, Inc.
/s/ KPMG LLP
Orange County, California
March 27, 2000
59
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-78511, 333-78509, 333-75491) of InterDent,
Inc. of our report dated March 24, 1999 relating to the Dental Care Alliance,
Inc. financial statements, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 27, 2000
60
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERDENT, INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 539 8,244 0
<SECURITIES> 0 0 0
<RECEIVABLES> 20,935 10,616 0
<ALLOWANCES> 0 0 0
<INVENTORY> 4,610 2,887 0
<CURRENT-ASSETS> 38,432 30,604 0
<PP&E> 30,273 21,379 0
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 241,213 165,134 0
<CURRENT-LIABILITIES> 38,965 23,895 0
<BONDS> 0 0 0
1,796 2,102 0
12,090 12,090 0
<COMMON> 21 21 0
<OTHER-SE> 63,784 56,879 0
<TOTAL-LIABILITY-AND-EQUITY> 241,213 241,213 0
<SALES> 231,610 134,658 51,282
<TOTAL-REVENUES> 231,610 134,658 51,282
<CGS> 0 0 0
<TOTAL-COSTS> 217,637 128,665 53,392
<OTHER-EXPENSES> 150 (14) (74)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (6,874) (2,407) (390)
<INCOME-PRETAX> 7,249 3,572 (2,574)
<INCOME-TAX> 2,015 2,302 187
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,234 1,270 (2,761)
<EPS-BASIC> 0.26 0.06 (0.31)
<EPS-DILUTED> 0.23 0.06 (0.31)
</TABLE>
