<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ______________________
COMMISSION FILE NUMBER: 000-25549
INTERDENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4710504
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
222 NO. SEPULVEDA BLVD., SUITE 740, EL SEGUNDO, CA 90245-4340
(Address of principal executive offices)
(310) 765-2400
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of October 31, 2000, 23,997,255 shares of the issuer's common stock were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,803 $ 539
Accounts receivable, net 25,316 20,935
Management fee receivables 5,314 6,691
Current portion of notes and advances receivable from professional associations, net 922 915
Supplies inventory 4,999 4,610
Prepaid and other current assets 4,899 4,742
-------------- -------------
Total current assets 43,253 38,432
-------------- -------------
Property and equipment, net 33,818 30,273
Intangible assets, net 178,905 153,032
Notes and advances receivable from professional associations, net of current portion 21,905 14,787
Notes receivable from related parties 11,305 --
Other assets 7,042 4,689
-------------- -------------
Total assets $ 296,228 $ 241,213
============== =============
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,758 $ 7,541
Accrued payroll and payroll related costs 8,965 7,516
Other current liabilities 26,788 18,573
Current portion of long-term debt and capital lease obligations 147,397 5,335
-------------- -------------
Total current liabilities 188,908 38,965
-------------- -------------
Long-term liabilities:
Obligations under capital leases, net of current portion 2,625 3,494
Long-term debt, net of current portion 6,254 87,269
Convertible senior subordinated debt -- 30,000
Deferred income taxes 4,350 3,700
Other long-term liabilities 113 94
-------------- -------------
Total long-term liabilities 13,342 124,557
-------------- -------------
Total liabilities 202,250 163,522
-------------- -------------
Redeemable common stock, $0.001 par value, 137,109 and 157,958 shares issued and
outstanding in 2000 and 1999, respectively 1,482 1,796
-------------- -------------
Shareholders' equity:
Preferred stock, $0.001 par value, 30,000,000 shares authorized:
Preferred stock - Series A, 100 shares authorized and outstanding 1 1
Convertible Preferred stock - Series B, 70,000 shares authorized, zero shares
issued and outstanding -- --
Preferred stock - Series C, 100 shares authorized, zero shares issued and
outstanding -- --
Convertible Preferred stock - Series D, 2,000,000 shares authorized, 1,628,663
shares issued and outstanding 12,089 12,089
Common stock, $0.001 par value, 50,000,000 shares authorized, 23,860,146 and
20,960,128 shares issued and outstanding in 2000 and 1999, respectively 24 21
Additional paid-in capital 76,244 62,831
Shareholder notes receivable (630) (615)
Retained earnings 4,768 1,568
-------------- -------------
Total shareholders' equity 92,496 75,895
-------------- -------------
Total liabilities, redeemable common stock and shareholders' equity $ 296,228 $ 241,213
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue $ 60,843 $ 50,071 $ 181,164 $ 134,487
Net management fees 10,382 10,297 32,221 31,798
Licensing and other fees 220 228 667 752
----------- ---------- ---------- -----------
Total revenues 71,445 60,596 214,052 167,037
----------- ---------- ---------- -----------
Operating expenses:
Clinical salaries, benefits, and provider costs 29,665 23,523 86,476 64,362
Practice non-clinical salaries and benefits 10,790 8,271 30,613 22,744
Dental supplies and lab expenses 9,124 7,454 26,792 20,739
Practice occupancy expenses 4,505 3,779 12,895 10,091
Practice selling, general and administrative expenses 7,311 5,924 21,350 17,339
Corporate selling, general and administrative expenses 3,282 2,735 10,149 8,530
Management merger and retention bonus -- -- 1,159 --
Corporate merger and restructure costs -- 1,101 1,730 6,130
Depreciation and amortization 3,173 2,645 9,003 6,994
----------- ---------- ---------- -----------
Total operating expenses 67,850 55,432 200,167 156,929
----------- ---------- ---------- -----------
Operating income 3,595 5,164 13,885 10,108
----------- ---------- ---------- -----------
Nonoperating expense:
Interest expense, net (3,437) (1,859) (8,816) (4,619)
Other, net (59) 9 (60) 1
----------- ---------- ---------- -----------
Nonoperating expense, net (3,496) (1,850) (8,876) (4,618)
----------- ---------- ---------- -----------
Income before income taxes 99 3,314 5,009 5,490
Provision (benefit) for income taxes (161) 1,127 1,803 1,867
----------- ---------- ---------- -----------
Net income 260 2,187 3,206 3,623
Accretion of redeemable common stock (1) (2) (6) (9)
----------- ---------- ---------- -----------
Net income attributable to common stock $ 259 $ 2,185 $ 3,200 $ 3,614
=========== ========== ========== ===========
Income per share attributable to common stock - basic $ 0.01 $ 0.11 $ 0.15 $ 0.18
=========== ========== ========== ===========
Income per share attributable to common stock - diluted $ 0.01 $ 0.10 $ 0.14 $ 0.16
=========== ========== ========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,206 $ 3,623
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,003 6,994
Loss on disposal of assets 107 --
Non-employee stock options granted and stock issued for fees and compensation 19 41
Interest accrued on convertible subordinated debt as payment-in-kind 1,665 --
Interest accrued on shareholder and related party notes receivable (307) (15)
Interest amortization on deferred financing costs and discounted debt 618 231
Deferred income taxes 650 41
Change in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net (3,043) (3,032)
Management fee receivables 1,105 (1,035)
Supplies inventory (191) (82)
Prepaid expenses and other current assets (96) (678)
Other assets (341) (316)
Accounts payable (1,995) (1,329)
Accrued payroll and payroll related costs 123 2,603
Accrued merger and restructure (766) (140)
Other liabilities (2,775) 1,183
-------------- ---------------
Net cash provided by operating activities 6,982 8,089
-------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (6,314) (5,830)
Net payments received on notes receivable from professional associations 185 179
Net advances to professional associations (7,597) (6,875)
Notes receivable from related parties (11,500) --
Cash paid for acquisitions, including direct costs, net of cash acquired (17,983) (31,263)
Investment in joint venture -- (1,122)
-------------- ---------------
Net cash used in investing activities (43,209) (44,911)
-------------- ---------------
Cash flows from financing activities:
Net proceeds (payments) from credit facilities 8,165 34,252
Proceeds from issuance of long-term debt 22,761 --
Payments on long-term debt and obligations under capital leases (4,043) (3,938)
Payments of deferred financing costs (2,334) (664)
Proceeds from issuance of common and preferred stock 11,145 56
Payments for common and preferred stock issuance costs (842) --
Proceeds (payments) from issuance/cancellation of common stock warrants 2,739 (55)
Exercise of put rights (120) (318)
Exercise of stock options 20 7
-------------- ---------------
Net cash provided by financing activities 37,491 29,340
-------------- ---------------
Increase (decrease) in cash and cash equivalents 1,264 (7,482)
Cash and cash equivalents, beginning of period 539 8,244
-------------- ---------------
Cash and cash equivalents, end of period $ 1,803 $ 762
============== ===============
Cash paid for interest $ 7,263 $ 4,610
============== ===============
Cash paid for income taxes $ 3,323 $ 759
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
(1) ORGANIZATION
InterDent, Inc. ("InterDent" or the "Company"), incorporated on October 13,
1998, is a Delaware corporation headquartered in El Segundo, California. The
Company is largest 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,
Maryland, Michigan, Nevada, Oklahoma, Oregon, Pennsylvania, Virginia, 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
BASIS OF PRESENTATION
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 Emerging Issues Task Force issue 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.
INTERIM REPORTING
The accompanying unaudited interim condensed consolidated financial
statements of InterDent have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and note disclosures normally included in annual consolidated
financial statements have been condensed or omitted as permitted under those
rules and regulations. We believe all adjustments, consisting only of normal,
recurring adjustments considered necessary for a fair presentation, have been
included and that the disclosures made are adequate to insure that the
information presented is not misleading. To obtain a more detailed
understanding of our results, it is suggested that these financial statements
be read in conjunction with the consolidated financial statements and related
notes for the year ended December 31, 1999 included in Form 10-K filed on
March 30, 2000. The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results of
operations for the entire year.
DEPENDENCE ON PAS
5
<PAGE>
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.
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
condensed 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.
Notes receivable from PAs relates 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 the Company's borrowing rate. 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 generally personally guaranteed by the PA owners
and cross-collateralized by the PAs under common ownership.
INTANGIBLE ASSETS
6
<PAGE>
Intangible assets result primarily from the excess of cost over the fair
value of net tangible assets purchased. Such intangibles relate primarily to
non-competition covenants, management services agreements, and goodwill
associated with dental practice acquisition asset and stock purchase
transactions. Intangibles relating to management service agreements consist
of the costs of purchasing the rights to provide management support services
to PAs over the initial non-cancelable terms of the related agreements. Under
these agreements, the PAs have agreed to provide dental services on an
exclusive basis only through facilities provided by the Company, which is the
exclusive administrator of all non-dental aspects of the affiliated PAs,
providing facilities, equipment, support staffing, management and other
ancillary services. The agreements, which are generally for 25 to 40 year
terms, are non-cancelable except for performance defaults, as defined.
Intangible assets are amortized on the straight-line method, ranging from 5
years for other intangible assets to 25 years for MSAs and goodwill.
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, 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 $0.10 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 significant influence
over DXC, and the Company's ownership is less than 20%. The investment is
included within other assets in the accompanying condensed consolidated
balance sheets.
NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivables from related parties represent amounts advanced to certain
officers of the Company. In connection with these advances, such officers
issued interest-bearing notes receivables to the Company. Shares of the
Company's common stock and options owned by such officers have been pledged
to secure the notes. Interest on the notes accrues at rates ranging from 6.4%
to 10.2%. The Company discounts the notes at the market interest rate. The
notes and accrued interest are due June 2004, payable in cash or Company
common stock and options with varying minimum values.
NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). In accordance with SFAS 128, the Company
presents "basic" earnings per share, which is net income divided by the
average weighted common shares outstanding during the period, and "diluted"
earnings per share, which considers the impact of common share equivalents.
Dilutive potential common shares represent shares issuable using the treasury
stock method. For the three and nine months ended September 30, 2000,
dilutive potential common shares of 10,898,983 and 8,454,228 respectively,
consisting of convertible subordinated debt, options, and warrants have been
excluded from the computation of diluted income per share, as their effect is
anti-dilutive.
7
<PAGE>
The following table summarizes the computation of net income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income attributable to common stock $ 259 2,185 3,200 3,614
============= ============= ============= =============
Basic Shares Reconciliation:
Weighted average common shares outstanding 23,998,106 21,072,786 22,284,035 20,968,155
Contingently repurchasable common shares (546,031) (569,937) (557,271) (567,193)
------------- ------------- ------------- -------------
Basic shares 23,452,075 20,502,849 21,726,764 20,400,962
============= ============= ============= =============
Income per share attributable to common stock -
basic $ 0.01 $ 0.11 $ 0.15 $ 0.18
============= ============= ============= =============
Diluted Shares Reconciliation:
Basic shares 23,452,075 20,502,849 21,726,764 20,400,962
Effects of dilutive potential common shares:
Convertible preferred stock 1,628,665 1,628,665 1,628,665 1,628,665
Warrants -- 114,021 45,046 93,107
Stock options 105,480 412,733 100,867 260,071
Put rights 96,845 51,655 77,293 78,217
Contingent shares, non-issuable -- 49,573 -- 48,646
------------- ------------- ------------- -------------
Diluted shares 25,283,065 22,759,496 23,578,635 22,509,668
============= ============= ============= =============
Income per share attributable to common stock -
diluted $ 0.01 $ 0.10 $ 0.14 $ 0.16
============= ============= ============= =============
</TABLE>
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.
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.
8
<PAGE>
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the United States Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101 - "Revenue Recognition in Financial
Statements," as amended, which for the Company is effective October 1, 2000.
SAB No. 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company believes that implementation of SAB No. 101 will have
no material impact on its financial statements.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998 or January 12, 2000. The adoption of FIN
44 did not have a material effect on the Company's financial position or
results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.
(3) NET REVENUE
Revenues consist primarily of PA net patient service revenue and Company net
management fees. Net patient revenue represents the consolidated revenue of
the PAs at normal and customary rates from patients, third party payors and
others for services rendered, net of contractual adjustments. Net management
fees represent amounts charged under MSAs to the unconsolidated PAs on an
agreed-upon percentage of the PAs net patient service revenue, net of
provisions for contractual adjustments and doubtful accounts.
The following represents amounts included in the determination of dental
practice net patient service revenue and net management fees:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue-all PAs $ 77,030 $ 65,595 $ 230,644 $ 181,595
LESS:
Dental practice net patient service revenue-
unconsolidated PAs (16,187) (15,524) (49,480) (47,108)
============ =========== =========== ============
Reported practice net patient service revenue $ 60,843 $ 50,071 $ 181,164 $ 134,487
============ =========== =========== ============
Dental practice net patient service revenue-
unconsolidated PAs $ 16,187 $ 15,524 $ 49,480 $ 47,108
LESS:
Amounts retained by dentists (5,802) (5,227) (17,259) (15,310)
============ =========== =========== ============
Net management fees $ 10,382 $ 10,297 $ 32,221 $ 31,798
============ =========== =========== ============
</TABLE>
9
<PAGE>
(4) BUSINESS COMBINATIONS, PROPOSED MERGER AND DENTAL PRACTICE ACQUISITIONS
BUSINESS COMBINATIONS
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 for all periods presented.
As a result of the mergers the Company recorded direct merger expenses of
$3,246 during the nine months ended September 30, 1999, consisting of
investment banker fees, advisors fees, legal fees, accounting fees, printing
expense, and other costs. The Company also recorded a restructure charge
during the nine months ended September 30, 1999 of $2,884 relating to the
Company's restructuring plan, including charges for employee related costs,
redirection of certain duplicative operations and programs, and other costs.
During the nine months ended September 30, 2000, the Company recorded an
additional restructuring charge of $1,183 relating to the Company's
restructuring plan. The Company's restructuring plan is substantially
complete and management does not anticipate additional restructuring charges
as a result of the mergers. Included in other current liabilities at
September 30, 2000 is $2,159 in accrued merger and restructure costs, of
which $1,087 relates to accrued restructure costs.
PROPOSED MERGER
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. In May 2000, InterDent and Leonard Green mutually agreed
to terminate the merger agreement and the related recapitalization
transaction. The Company has recorded direct merger expenses of $547
associated with this agreement during the nine months ended September 30,
2000, consisting of investment banker fees, advisors fees, legal fees,
accounting fees, printing expense, and other costs. All costs incurred as a
result of the proposed merger have been paid as of September 30, 2000.
The following summarizes the merger and restructure activities and accrued
merger and restructure liability for the GDSC and DCA business combinations,
and InterDent and Leonard Green proposed merger through September 30, 2000:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
CORPORATE MERGER AND RESTRUCTURE COSTS: 2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
GDSC AND DCA COMBINATION:
Direct investment banking, accounting, legal and other
advisory fees $ 47 $ 3,260 $ 2,241
Employee retention, severance and training costs 39 1,019 1,535
Systems integration and conversion 1,097 2,069 --
Costs to acquire InterDent name -- 264 --
Redirection of duplicative operations, programs and
other costs -- 580 55
------------- ------------- --------------
Total 1,183 7,192 3,831
------------- ------------- --------------
INTERDENT AND LEONARD GREEN PROPOSED MERGER:
Direct investment banking, accounting, legal and other
advisory fees and direct costs 547 1,624 --
============= ============= ==============
Total corporate merger and restructure costs $ 1,730 $ 8,816 $ 3,831
============= ============= ==============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
BEGINNING ENDING
ACCRUED MERGER AND RESTRUCTURE LIABILITY: BALANCE EXPENSE PAYMENTS BALANCE
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Merger and restructure activity for the year ended
December 31, 1998 $ -- $ 3,831 $ (1,444) $ 2,387
============== ============= ============= ==============
Merger and restructure activity for the year ended
December 31, 1999 $ 2,387 $ 8,816 $ (8,278) $ 2,925
============== ============= ============= ==============
Merger and restructure activity for the nine-months
ended September 30, 2000 $ 2,925 $ 1,730 $ (2,496) $ 2,159
============== ============= ============= ==============
</TABLE>
DENTAL PRACTICE AFFILIATIONS
The Company and an existing affiliated PA entered into a new management
service agreement ("MSA") effective January 1, 2000. Whereas the former MSA
did not meet the criteria for consolidation as outlined in EITF 97-2, the new
MSA meets the criteria for consolidation of the PA accounts with the Company
for financial reporting purposes. As consideration for entering into the new
MSA, the Company paid $309 in cash of which $271 was offset by amounts due
from the PA, and assumed net liabilities of $110.
During the nine months ended September 30, 2000, the Company acquired
substantially all of the assets of 21 dental facilities, including, accounts
receivable, supplies and fixed assets. Also, in connection with certain
completed affiliation transactions, the Company has agreed to pay to the
sellers' additional 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.
The aggregate dental practice acquisition purchase price recorded during the
nine months ended September 30, 2000, representing the fair value of the
assets acquired in the above and earn-out consideration paid for transactions
completed in current and prior periods included $17,983 in cash.
Additionally, the Company incurred or assumed $3,571 in liabilities, and
recorded an additional earn-out liability of $11,625 for the aggregate value
of payments to be paid in future periods. Approximately $30,853 of the total
purchase price has been allocated to intangible assets.
As of September 30, 2000, the Company had accrued $19,307 for future earn-out
payments, of which $201 is included in additional paid-in capital for
anticipated stock issuance's 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 $27,000 and
$33,000 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 $1,080 to $1,320 annually.
Intangible assets included in the condensed consolidated balance sheets
primarily represents the value assigned to management service agreements and
goodwill in connection with certain completed dental practice affiliations.
Intangible assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
2000 1999
------------------ -----------------
<S> <C> <C>
Management Services Agreements $ 148,106 $ 122,699
Goodwill 44,929 39,483
Other 55 55
------------------ -----------------
Total intangible assets 193,090 162,237
Less accumulated amortization (14,185) (9,205)
------------------ -----------------
$ 178,905 $ 153,032
================== =================
</TABLE>
11
<PAGE>
(5) DEBT AND EQUITY FINANCING
In 1998 the Company issued $30,000 of subordinated convertible notes
("Notes"). The Notes have an eight-year term and also bear interest at 7.0%,
payable semi-annually with an option to pay the interest in a payment-in-kind
("PIK") note. The PIK notes bear interest at 7%. During the nine months ended
September 30, 2000, the Company issued a total of $2,168 in PIK notes. The
Notes 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.
In March 2000 the Company entered into an agreement to increase its existing
senior revolving credit facility (the "Credit Facility") from $90,000 to
$120,000, with immediate funding available of $101,000. The revolving feature
of the Credit Facility expires on September 30, 2001, at which time it will
convert into a term loan to be repaid in equal quarterly installments and
maturing on March 31, 2005. Principal amounts owed under the Credit Facility
bear interest at varying amounts over LIBOR (3.00% - 3.50%) or the prime rate
(1.25% - 1.75%), 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 of 0.50% 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 but not limited to,
restrictions on the ability of the Company to incur indebtedness or
repurchase shares, a prohibition on dividends without prior approval; and
requirements relating to maintenance of a specified net worth and compliance
with specified financial ratios. In addition, the Credit Facility requires
the Company to notify the lenders prior to making any 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. The Company was not in compliance with certain covenants at
September 30, 2000, as discussed below.
In June 2000 the Company raised $36,500 from the sale of debt and equity to
Levine Leichtman Capital Partners II, L.P. ("Levine") under a securities
purchase agreement (the "Securities Purchase Agreement"). The equity portion
of the transaction is comprised of 2,750,000 shares of common stock valued at
$11,000. The debt portion of the transaction is comprised of a senior
subordinated note with a face value of $25,500 (the "Levine Note"). The net
proceeds from the transaction were primarily utilized to pay down existing
balances outstanding under the Credit Facility, as required under the Credit
Facility.
The entire principal of the Levine Note is due September 2005 but may be paid
earlier at the Company's election, subject to a prepayment penalty.
Additionally, the Levine Note has mandatory principal prepayments based upon
a change in ownership, certain asset sales, or excess cash flows. The Levine
Note bears interest at 12.5%, payable monthly, with an option to pay the
interest in a PIK note. PIK notes bear interest at 15%. The Securities
Purchase Agreement contains covenants, including but not limited to,
restricting the Company's ability to incur certain indebtedness, liens or
investments, restrictions relating to agreements affecting capital stock,
maintenance of a specified net worth, and compliance with specified financial
ratios. The Company was not in compliance with certain covenants at September
30, 2000, as discussed below.
As part of the transaction with Levine, the Company also issued a warrant to
purchase 2,125,000 shares of the Company's common stock at an initial price
of $6.84 per share. The initial exercise price per share may be adjusted,
ranging from $4.45 to $6.19, subject to certain conditions as outlined in the
warrant. The issuance of the warrant was valued at $2,739 and reflected as a
discount to the face value of the Levine Note. The discount is being
amortized to interest expense over the remaining life of the Levine Note.
At September 30, 2000, the Company did not meet its minimum leverage ratio
covenant of its existing Credit Facility. In addition, due to cross default
provisions, the Company was also not in compliance with the terms of the
Company's 7% Subordinated Convertible Notes and Levine Note Agreements.
Although no lenders have taken any collection action, the lenders have the
right under the debt agreements to accelerate the outstanding indebtedness
due to this non-compliance. Accordingly, the Company has classified its
Credit Facility, 7% Subordinated Convertible Notes, and Levine Note totaling
$142,509 as current portion of long-term debt in the Condensed Consolidated
Balance Sheet. The Company is currently in the process of discussing the
violations of the covenant with the lenders under the Credit Facility to
develop a revised lending arrangement and believes that a resolution of the
matter will be satisfactorily concluded during the fourth quarter of 2000.
Management believes that the Credit Facility will continue to be available on
a long-term basis after resolving the covenant violation, however, there are
no assurances that such a resolution can be accomplished. Additionally, the
rectification of the Credit Facility covenant non-compliance, if achieved,
will eliminate the current violations under the 7% Subordinated Convertible
Notes and Levine Note agreements. If the resolution of the matter is not
accomplished, the Company plans to pursue other possible financing sources.
If the Company cannot resolve the Credit Facility covenant violation, it
would have a material and adverse effect on the Company's financial position.
Management believes that the Credit Facility, together with the cash expected
to be generated from operations, will be adequate to meet the Company's
operating requirements for the next fiscal year.
12
<PAGE>
(6) CONTINGENCIES
The Company has been named as a defendant in various lawsuits in the normal
course of business. In the opinion of management any liabilities resulting
from these matters will not have a material impact on the Company's
consolidated financial position or results of operations.
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 September 30,
2000, the amount of PA debt guaranteed by the Company is approximately $4,784.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
As of September 30, 2000, we provided comprehensive management services to a
dental practice network. The network employs 813 dentists, including 197
specialists, practicing out of 246 dental offices and 2,229 operatories in
selected markets in Arizona, California, Florida, Georgia, Hawaii, Idaho,
Indiana, Kansas, Maryland, Michigan, Nevada, Oklahoma, Oregon, Pennsylvania,
Virginia 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.
14
<PAGE>
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 and nine months ended
September 30, 2000 and 1999 as reported in the accompanying condensed
consolidated financial statements.
THREE MONTHS ENDED SEPTEMBER 30, 2000 STATEMENT OF OPERATIONS COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue
represents the clinical patient revenues at 168 current clinical locations
through September 30, 2000 where the consolidation requirements of EITF 97-2
have been met. Dental practice net patient revenue was $60.8 million for 2000
compared to $50.1 million for 1999, representing a 21.5% increase.
The majority of this revenue growth is due to the addition of 4 affiliated
dental practices in 2000, representing 21 location and 16 affiliated dental
practices during 1999, representing 51 current clinical locations. These
affiliated dental practices have management service agreements that meet the
EITF's consolidation requirements. In addition, during 2000, we entered into
a new management service agreement with an existing single location
affiliation. Whereas the former management service agreement did not meet the
criteria for consolidation as outlined in EITF 97-2, the new agreement meets
the criteria for consolidation.
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 January
1, 1999, where the management service agreements meet the EITF criteria for
consolidation, same-store dental practice net patient revenue for 2000
increased by approximately 7.5% when compared to revenue for 1999.
In 1999 we converted over 140 dental locations onto our revenue and
receivable software system, primarily due to the individual dental practice
systems not being Y2000 compliant. As standard protocol for the conversion
process, the implementation team conducts post audits of established
insurance fee schedules and performs any required changes to the system
configuration within 60 days of the conversion. Due to the time constraints
involved to comply with the Y2000 issues, a complete post conversion audit of
the fee schedules wasn't conducted at all locations. In the third quarter of
2000 we discovered that all of the fee schedules were not completely entered
during the conversion. This resulted in revenues being misstated subsequent
to the conversions. As a result, the accumulated receivables were not
collectible on this revenue difference. Therefore, during the third quarter
of 2000, we recorded a contractual revenues allowance adjustment to increase
the reserve for doubtful accounts by $1.5 million, $1.2 million relating to
patent revenue and $0.3 million relating to management fee revenue. We
estimate the adjustment amount pertaining to 1999 reported revenues is
immaterial. However, management is currently analyzing the impact of this
adjustment to determine the actual impact on prior quarters for possible
restatement and expects to complete this analysis in the fourth quarter.
NET MANAGEMENT FEES. Net management fees consist of revenue earned in the
performance of our obligations under management service agreements at 78
current unconsolidated affiliated dental practice clinical locations through
September 30, 2000. At January 1, 1999 we were affiliated with 70
unconsolidated clinical locations. Net management fees were $10.4 million for
2000 and $10.3 million for 1999.
LICENSING AND OTHER FEES. We earn certain fees from unconsolidated affiliated
dental practices for various licensing and consulting services, which
remained constant at approximately $.22 million.
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:
15
<PAGE>
- CLINICAL SALARIES, 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 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 EXPENSES 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
- 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 were $61.4 million for 2000 compared to $49.0
million for 1999, representing a 25.4% increase. The majority of this
increase in practice operating expenses is due to the addition of 20
affiliated dental practices (representing 72 current clinical locations)
during 2000 and 1999. During 2000, most categories of practice operating
expenses varied slightly as a percentage of net revenues when compared to
1999. Practice operating expenses for 2000 were 85.9% of total revenue
compared to 80.8% for 1999. The practice operating margin for 2000 was 14.1%
compared to 19.2% for 1999.
The overall decrease in operating margin is comprised of several factors. Of
the total decline in margin of 5.1%, approximately 1.7% of the decrease
represents the $1.5 million contractual revenue adjustment discussed above.
Also there was 62 days of dental services for 2000 compared to 64 days for
1999. Our average daily reported revenue for 2000 was $1,152 compared to $947
for 1999, or a 21.6% improvement. The two fewer days of dental services in
the third quarter of 2000 resulted in an overall reduction of revenue of
approximately $2.3 million and with our practice cost structure, a
corresponding reduction in operating margin of approximately $1.0 million for
2000. The remaining decrease in margin percentage represents a higher salary
cost structure at certain dental practices affiliated within the last year.
At these affiliations we are in the process or have completed negotiation of
new provider contracts, changed dental providers and/or altered provider mix,
established mentoring programs, and introduced our proprietary software to
enhance revenue management. These costs are expected to decline and reflect
costs in line with our established practices once the company's operating
model is fully operational at these locations.
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 $3.3 million for
2000 compared to $2.7 million for 1999, representing a 20.0% increase. 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 such, these corporate costs as a percentage of revenues is
essentially constant in 2000 and 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $3.2
million for 2000 compared to $2.6 million for 1999. This increase of 20.0% is
primarily due to additional property and equipment and intangible costs
assigned to management services agreements associated with dental practice
affiliations completed in 2000 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 $3.4 million for 2000 compared to $1.9
million for 1999, representing an 84.9% increase. This increase in interest
expense was due to additional debt incurred under our credit facility (the
"Credit Facility") and private placement to complete the rapid expansion of
additional affiliated dental practices throughout 2000 and 1999. In June 2000
we also issued a $25.5 million senior subordinated note. The proceeds from
the transaction were primarily utilized to pay down a portion of the
outstanding balance on the Credit Facility, as required under the Credit
Facility. The interest
16
<PAGE>
rate on the senior subordinated note is 12.5%, which is approximately 2.2%
percentage points higher than the interest rate on the Credit Facility,
resulting in an incremental interest charge of approximately of $.4 million
for 2000. It is anticipated that future acquisitions will require additional
borrowings under our existing Credit Facility. Accordingly, we anticipate
that interest expense will increase throughout future periods, reduced by any
equity financing used to pay down the Credit Facility.
PROVISION FOR INCOME TAXES. We recorded a net tax benefit of $.16 million for
2000 on income before income taxes of $.10 million. This benefit was recorded
during the quarter due to a change in the estimated effective tax rate. We
expect our effective federal and state income tax rate for annual fiscal 2000
to approximate 36% as opposed to the 40% effective rate recorded during the
six months ended June 30, 2000. The effective annual rate of 36% was recorded
in 2000 due to the expected utilization of available net operating loss
carryforwards. In 1999, an effective rate of 34% for the year was recorded as
a result of certain merger expenses which are not deductible for income tax
purposes which were offset by the utilization of available net operating loss
carryforwards.
NINE MONTHS ENDED SEPTEMBER 30, 2000 STATEMENT OF OPERATIONS COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue
represents the clinical patient revenues at 168 current clinical locations
through September 30, 2000 where the consolidation requirements of EITF 97-2
have been met. Dental practice net patient revenue was $181.2 million for
2000 compared to $134.5 million for 1999, representing a 34.7% increase.
The majority of this revenue growth is due to the addition of 4 affiliated
dental practices in 2000, representing 21 location and 16 affiliated dental
practices during 1999, representing 51 current clinical locations. These
affiliated dental practices have management service agreements that meet the
EITF's consolidation requirements. In addition, during 2000, we entered into
a new management service agreement with an existing single location
affiliation. Whereas the former management service agreement did not meet the
criteria for consolidation as outlined in EITF 97-2, the new agreement meets
the criteria for consolidation.
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 January
1, 1999, where the management service agreements meet the EITF criteria for
consolidation, same-store dental practice net patient revenue for 2000
increased by approximately 7.5% when compared to revenue for 1999.
In 1999 we converted over 140 dental locations onto our revenue and
receivable software system, primarily due to the individual dental practice
systems not being Y2000 compliant. As standard protocol for the conversion
process, the implementation team conducts post audits of established
insurance fee schedules and performs any required changes to the system
configuration within 60 days of the conversion. Due to the time constraints
involved to comply with the Y2000 issues, a complete post conversion audit of
the fee schedules wasn't conducted at all locations. In the third quarter of
2000 we discovered that all of the fee schedules were not completely entered
during the conversion. This resulted in revenues being misstated subsequent
to the conversions. As a result, the accumulated receivables were not
collectible on this revenue difference. Therefore, during the third quarter
of 2000, we recorded a contractual revenues allowance adjustment to increase
the reserve for doubtful accounts by $1.5 million, $1.2 million relating to
patent revenue and $0.3 million relating to management fee revenue. We
estimate the adjustment pertaining to 1999 reported revenues is immaterial.
However, management is currently analyzing the impact of this adjustment to
determine the actual impact on prior quarters for possible restatement and
expects to complete this analysis in the fourth quarter.
NET MANAGEMENT FEES. Net management fees consist of revenue earned in the
performance of our obligations under management service agreements at 78
current unconsolidated affiliated dental practice clinical locations through
September 30, 2000. At January 1, 1999 we were affiliated with 70
unconsolidated clinical locations. Net management fees were $32.2 million for
2000 and $31.8 million for 1999. Although total dental practice net patient
revenue increased at these locations, management fee revenues remained
relatively flat as we have reduced management fees with certain affiliations
as specialty provider revenues were added. These measures are expected to
increase our future operating margins and long-term growth rates at these
locations.
17
<PAGE>
LICENSING AND OTHER FEES. We earn certain fees from unconsolidated affiliated
dental practices for various licensing and consulting services. These
revenues were $.7 million for 2000 and $.8 million for 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, 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 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 EXPENSES 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
- 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 were $178.1 million for 2000 compared to $135.3
million for 1999, representing a 31.7% increase. The majority of this
increase in practice operating expenses is due to the addition of 20
affiliated dental practices (representing 72 current clinical locations)
during 2000 and 1999. During 2000, most categories of practice operating
expenses varied slightly as a percentage of net revenues when compared to
1999. Practice operating expenses for 2000 were 83.2% of total revenue
compared to 81.0% for 1999. The practice operating margin for 2000 was 16.8%
compared to 19.0% for 1999.
The overall decrease in operating margin is comprised of several factors. Of
the total decline in margion of 2.2%, approximately .6% represents the $1.5
million contractual revenue adjustment discussed above. The remaining
decrease in margin percentage represents a higher salary cost structure at
certain dental practices affiliated within the last year. At these
affiliations we are in the process or have completed negotiation of new
provider contracts, changed dental providers and/or altered provider mix,
established mentoring programs, and introduced our proprietary software to
enhance revenue management. These costs are expected to decline and reflect
costs in line with our established practices once the company's operating
model is fully operational at these locations.
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 $10.1 million for
2000 compared to $8.5 million for 1999, representing a 19.0% crease. 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 such,
these corporate costs as a percentage of revenues has decreased to 4.7% for
2000 compared to 5.1% for 1999.
MANAGEMENT MERGER AND RETENTION BONUS. On October 22, 1999, we announced the
signing of a definitive merger agreement between us and a group consisting of
an affiliate of Leonard Green & Partners, L.P., and certain members of our
management. The board of directors approved a bonus plan in the first quarter
2000 to help motivate and retain management to implement our plan for a
changed strategic direction. We recorded a charge for 2000 of $1.2 million
relating to our management merger and retention bonus plan. In May 2000, we
mutually agreed with Leonard Green & Partners, L.P., to terminate the merger
agreement and the related recapitalization transaction.
18
<PAGE>
CORPORATE MERGER AND RESTRUCTURE 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 a restructuring charge of $1.2 million for 2000
relating to our restructuring plan, including charges for system conversions,
redirection of certain duplicative operations and programs, and other costs.
In 1999 we recorded direct merger expenses of $2.9 million, consisting of
investment banker fees, advisors fees, investor relations expense, legal
fees, accounting fees, printing expense, and other costs. We also recorded a
restructure charge for 1999 of $3.2 million relating to our restructuring
plan. As of September 30, 2000, our restructuring plan is substantially
complete and we do not anticipate additional restructuring charges as a
result of the business combination.
We also recorded direct merger expenses for 2000 of $.5 million associated
with the proposed merger with Leonard Green & Partners, L.P. These expenses
consist primarily of investment banking, accounting, legal, and other
advisory fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $9.0
million for 2000 compared to $7.0 million for 1999. This increase of 28.7% is
primarily due to additional property and equipment and intangible costs
assigned to management services agreements associated with dental practice
affiliations completed in 2000 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 $8.8 million for 2000 compared to $4.6
million for 1999, representing an 90.9% increase. This increase in interest
expense was due to additional debt incurred under our credit facility (the
"Credit Facility") and private placement to complete the rapid expansion of
additional affiliated dental practices throughout 2000 and 1999. In June 2000
we also issued a $25.5 million senior subordinated note. The proceeds from
the transaction were primarily utilized to pay down a portion of the
outstanding balance on the Credit Facility, as required under the Credit
Facility. The interest rate on the senior subordinated note is 12.5%, which
is approximately 2.2 percentage points higher than the interest rate on the
Credit Facility, resulting in an incremental interest charge of approximately
of $.4 million for 2000. It is anticipated that future acquisitions will
require additional borrowings under our existing Credit Facility.
Accordingly, we anticipate that interest expense will increase throughout
future periods, reduced by any equity financing used to pay down the Credit
Facility.
PROVISION FOR INCOME TAXES. We recorded a net tax expense of $1.8 million for
2000 on income before income taxes of $5.0 million. We expect our effective
federal and state income tax rate for annual fiscal 2000 to approximate 36%
due to the expected utilization of available net operating loss
carryforwards. In 1999, an effective rate of 34% for the year was recorded as
a result of certain merger expenses which are not deductible for income tax
purposes which were offset by the utilization of available net operating loss
carryforwards
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, cash and cash equivalents were $1.8 million,
representing a $1.3 million increase in cash and cash equivalents available
at December 31, 1999. We have a negative working capital at September 30,
2000 of $146 million. The negative working capital resulted from the
utilization of excess cash to pay down the outstanding revolving Credit
Facility, which is used to fund working capital necessities, as well as the
classification of our Credit Facility, 7% Subordinated Convertible Notes, and
Levine Note totaling $143 million as current portion of long-term debt due to
a covenant and cross default violations as discussed below. Excluding the
impact of certain debt covenants we have negative working capital at
September 30, 2000 of $3.0 million. The negative working capital resulted
from utilizing non-required excess cash to pay down the outstanding revolving
Credit Facility. Concurrently, any working capital necessities are funded by
the Credit Facility, as required.
Net cash provided by operations amounted to $7.0 million for 2000 compared to
net cash provided by operations of $8.1 million for 1999. This includes
management merger and retention bonus paid of $1.2 million for 2000 and
merger and restructure costs paid of $2.5 million for 2000 and $5.6 million
for 1999, respectively. The decrease of net cash provided by operations
during 2000 is primarily attributed to income tax payments of $3.3 million in
2000 compared to $.8 million in 1999.
Net cash used in investing activities was $43.2 million for 2000. Included in
the investing activities is cash paid of $18.0 million for current year
dental practice affiliations and earnout payments for affiliations occurring
in prior years. Additionally, we paid $6.3 million cash paid for property and
equipment. We also advanced $11.5 million to certain officers of the Company.
In connection with these advances, the Company issued interest-bearing notes
receivables. Shares of the Company's common stock and options owned by
such officers secure the notes, which accrue at rates ranging from 6.4% to
10.2%. The Company discounts the notes at the market interest rate. The notes
and accrued interest are due June 2004, payable in cash or Company common
stock and options with varying minimum values. Additionally, we made advances
to unconsolidated affiliated practices of $7.6 million. Advances consist
primarily of receivables from PAs due in connection with cash advances for
working capital and operating purposes to
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certain unconsolidated PAs. We typically advance 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. Also, during June 2000 we
raised approximately $36.5 million from the sale of debt and equity. The
equity portion of the transaction is comprised of 2,750,000 shares of common
stock valued at $11 million. The debt portion of the transaction is comprised
of a senior subordinated note with a face value of $25.5 million. The net
proceeds from the transaction were primarily utilized to pay down existing
balances outstanding under the Credit Facility, as required under the Credit
Facility agreement. Net cash provided from financing activities was $37.5
million during 2000.
During the nine months ended September 30, 2000, the Company acquired
substantially all of the assets of 21 dental facilities, including, accounts
receivable, supplies and fixed assets. Also, in connection with certain
completed affiliation transactions, the Company has agreed to pay to the
sellers' additional 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.
The aggregate dental practice acquisition purchase price recorded during the
nine months ended September 30, 2000, representing the fair value of the
assets acquired in the above and earn-out consideration paid for transactions
completed in current and prior periods included $18.0 million in cash.
Additionally, the Company incurred or assumed $3.6 million in liabilities,
and recorded an additional earn-out liability of $11.6 million for the
aggregate value of payments to be paid in future periods. Approximately $30.9
million of the total purchase price has been allocated to intangible assets.
As of September 30, 2000, the Company had accrued $19.3 million for future
earn-out payments, of which $.2 million is included in additional paid-in
capital for anticipated stock issuance's 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 $27.0 million and $33.0 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
$1.1 million to $1.3 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 the Company's
borrowing rate. 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 and cross-collateralized by the PAs
under common ownership.
Our Credit Facility of $120 million has an immediate funding available of
$101 million. Borrowings at September 30, 2000 under the Credit Facility were
$87.4 million. The revolving feature of the Credit Facility expires on
September 30, 2001, at which time it will convert into a term loan to be
repaid in 14 equal quarterly installments and maturing on March 31, 2005.
Principal amounts owed under the Credit Facility bear interest at varying
amounts over LIBOR (3.00% -3.50%) or the prime rate (1.25% - 1.75%), at our
option, based on the level of its leverage ratio. The Credit Facility
requires us to pay an unused commitment fee in an amount of 0.50% 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.
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. The Company was not in compliance with certain covenants at
September 30, 2000, as discussed below.
We have outstanding an original $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
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on such 7% Subordinated Convertible Notes. 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 $17.98.
At our option, on any interest payment date, in lieu of an interest payment
in cash, we may pay a portion of the interest due by issuing additional 7%
Subordinated Convertible Notes as payment-in-kind ("PIK"). The additional
notes issued by us as payment-in-kind are subject to the same terms as the
$30 million originally issued. Through December 31, 1999 no additional notes
were issued as payment-in-kind. During the nine months ended September 30,
2000, we issued $2.2 million in additional notes. As of September 30, 2000,
we have issued a total of $32.2 million in outstanding 7% Subordinated
Convertible Notes.
In June 2000 the Company raised $36.5 million from the sale of debt and
equity to Levine Leichtman Capital Partners II, L.P. ("Levine") under a
securities purchase agreement (the "Securities Purchase Agreement"). The
equity portion of the transaction is comprised of 2,750,000 shares of common
stock valued at $11 million. The debt portion of the transaction is comprised
of a senior subordinated note with a face value of $25.5 million (the "Levine
Note"). The net proceeds from the transaction were primarily utilized to pay
down existing balances outstanding under the Credit Facility, as required
under the Credit Facility.
The entire principal of the Levine Note is due September 2005 but may be paid
earlier at the Company's election, subject to a prepayment penalty.
Additionally, the Levine Note has mandatory principal prepayments based upon
a change in ownership, certain assets sales, or excess cash flows. The Levine
Note bears interest at 12.5%, payable monthly, with an option to pay the
interest PIK note. PIK notes bear interest at 15%. The Securities Purchase
Agreement contains covenants, including but not limited to, restricting the
Company's ability to incur certain indebtedness, liens or investments,
restrictions relating to agreements affecting capital stock, maintenance of a
specified net worth, and compliance with specified financial ratios.
As part of the transaction with Levine, the Company also issued a warrant to
purchase 2,125,000 shares of the Company's common stock at an initial price
of $6.84 per share. The initial exercise price per share may be adjusted,
ranging from $4.45 to $6.19, subject to certain conditions as outlined in the
warrant. The issuance of the warrant was valued at approximately $2.7 million
and reflected as a discount to the face value of the Levine Note. The
discount is being amortized to interest expense over the remaining life of
the Levine Note.
At September 30, 2000, the Company did not meet its minimum leverage ratio
covenant of its existing Credit Facility. In addition, due to cross default
provisions, the Company was also not in compliance with the terms of the
Company's 7% Subordinated Convertible Notes and Levine Note Agreements.
Although no lenders have taken any collection action, the lenders have the
right under the debt agreements to accelerate the outstanding indebtedness
due to this non-compliance. Accordingly, the Company has classified its
Credit Facility, 7% Subordinated Convertible Notes, and Levine Note totaling
$143 million as current portion of long-term debt in the Condensed
Consolidated Balance Sheet. The Company is currently in the process of
discussing the violations of the covenant with the lenders under the Credit
Facility to develop a revised lending arrangement and believes that a
resolution of the matter will be satifactorily concluded during the fourth
quarter of 2000. Management believes that the Credit Facility will continue
to be available on a long-term basis after resolving the covenant violation,
however, there are no assurances that such a resolution can be accomplished.
Additionally, the rectification of the Credit Facility covenant
non-compliance, if achieved, will eliminate the current violations under the
7% Subordinated Convertible Notes and Levine Note agreements. If the
resolution of the matter is not accomplished, the Company plans to pursue
other possible financing sources. If the Company cannot resolve the Credit
Facility covenant violation, it would have a material and adverse effect on
the Company's financial position. Management believes that the Credit
Facility, together with the cash expected to be generated from operations,
will be adequate to meet the Company's operating requirements for the next
fiscal year.
We are authorized to issue 30,000,000 shares of $.001 par value 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
- Series D - 2,000,000 shares authorized, 1,628,663 shares issued and
outstanding.
The shares of Series B Preferred Stock are convertible into shares of 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 339,247 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, 1999. It is anticipated that the
majority of these shares will be repurchased in the future.
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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. However, to execute our long term business strategy and to fund future
consideration to be paid under certain earn-outs and seller notes and
amortize the senior credit facility, we will require additional funding
through long-term or short-term borrowing arrangements or through the public
or private issuance of additional debt or equity securities. 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. 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.
* * * *
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21B OF
THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, AMONG OTHERS, THE
PACE OF DEVELOPMENT AND ACQUISITION ACTIVITY, THE DEPENDENCE ON MANAGEMENT
AGREEMENTS, THE PAs AND AFFILIATED DENTISTS, THE REIMBURSEMENT RATES FOR
DENTAL SERVICES, REGULATORY ENVIRONMENT, FUTURE INCREASES IN REVENUES AND
OPERATING MARGINS OR DECREASES IN COSTS AND EXPENSES AS PRACTICES MATURE,
AVAILABILITY UNDER THE CREDIT FACILITY AND CASH FLOW TO MEET OPERATING NEEDS,
ABILITY TO RECTIFY NON-COMPLIANCE UNDER THE CREDIT FACILITY, 7% SUBORDINATED
CONVERTIBLE NOTES, LEVINE NOTE, ABILITY TO OBTAIN ADDITIONAL FUNDING THROUGH
ISSUANCE OF DEBT OR EQUITY ON FAVORABLE TERMS, INCREASES IN SPECIALTY PROVIDER
REVENUES, CONTINUED COMPLIANCE WITH CREDIT FACILITY COVENANTS AND ABILITY TO
OBTAIN WAIVERS FOR NON-COMPLIANCE, GOVERNMENT REGULATION, AND OTHER RISKS
DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 5 to the condensed consolidated
financial statements. To mitigate the impact of fluctuations in market rates,
we enter into fixed interest rates for periods of up to 180 days on portions
of the outstanding Credit Facility balance.
At September 30, 2000, we had $87.4 million in floating rate debt under the
Credit Facility. Based upon the average outstanding Credit Facility balance
during the period, the detrimental effect on our pre-tax earnings of a
hypothetical 100 basis point increase in the interest rate under the Credit
Facility would have been approximately $.63 million for the nine-months ended
September 30, 2000. 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 $65 million are at fixed rates of interest.
At September 30, 2000, the Company did not meet certain minimum leverage ratio
covenants of its existing credit facility as discussed in Note 5 of the
condensed consolidated financial statements.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 27, 2000, the Company issued 82,792 shares of common stock in
connection with the exercise of outstanding warrants. The issuance of the
shares was exempt from registration under Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D thereunder because the purchaser was an
accredited investor within the meaning of Rule 501.
The Company's senior lender currently prohibits the payment of cash dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Addendum #2 to the First Amendment to Employment Agreement,
dated as of May 16, 2000, between the Company and
Michael T. Fiore
10.2 2000 Key Executive Stock Incentive Plan
10.3 Form of Option Agreement
10.4 Promissory Note, dated May 16, 2000, by Michael T. Fiore
10.5 Promissory Note, dated June 15, 2000, by Michael T. Fiore
10.6 Pledge and Security Agreement, dated May 16, 2000,
by and between Michael T. Fiore and Gentle Dental Management,
Inc.
10.7 Promissory Note, dated June 15, 2000, by Steven R. Matzkin
10.8 Pledge and Security Agreement, dated June 15, 2000,
by and between Steven R. Matzkin and Gentle Dental Management,
Inc.
10.9 Promissory Note, dated June 16, 2000, by Grant Sadler
10.10 Pledge and Security Agreement, dated May 16, 2000,
by and between Grant Sadler and Gentle Dental Management,
Inc.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
INTERDENT, INC.
------------------------------
(Registrant)
Date: November 20, 2000 By: /s/ Norman R. Huffaker
------------------------------- ------------------------------
Norman R. Huffaker
Chief Financial Officer
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