<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 JUNE 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 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)
(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 July 31, 2000, 24,003,346 shares of the issuer's common stock were
outstanding.
1
<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>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
--------- ---------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 786 $ 539
Accounts receivable, net 23,298 20,935
Management fee receivables 5,595 6,691
Current portion of notes and advances receivable from professional associations, net 920 915
Supplies inventory 4,674 4,610
Prepaid and other current assets 4,422 4,742
--------- ---------
Total current assets 39,695 38,432
--------- ---------
Property and equipment, net 32,596 30,273
Intangible assets, net 158,912 153,032
Notes and advances receivable from professional associations, net of current portion 20,390 14,787
Notes receivable from related parties 10,549 --
Other assets 6,663 4,689
--------- ---------
Total assets $ 268,805 $ 241,213
========= =========
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,753 $ 7,541
Accrued payroll and payroll related costs 7,876 7,516
Other current liabilities 17,698 18,573
Current portion of long-term debt and capital lease obligations 5,048 5,335
--------- ---------
Total current liabilities 36,375 38,965
--------- ---------
Long-term liabilities:
Obligations under capital leases, net of current portion 2,895 3,494
Long-term debt, net of current portion 100,142 87,269
Convertible senior subordinated debt 31,611 30,000
Deferred income taxes 3,700 3,700
Other long-term liabilities 110 94
--------- ---------
Total long-term liabilities 138,458 124,557
--------- ---------
Total liabilities 174,833 163,522
--------- ---------
Redeemable common stock, $0.001 par value, 157,958 shares issued and outstanding in 2000
and 1999, respectively 1,801 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, 23,845,378 and
20,960,128 shares issued and outstanding in 2000 and 1999, respectively 24 21
Additional paid-in capital 76,173 62,831
Shareholder notes receivable (625) (615)
Retained earnings 4,509 1,568
--------- ---------
Total shareholders' equity 92,171 75,895
--------- ---------
Total liabilities, redeemable common stock and shareholders' equity $ 268,805 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue $ 60,151 $ 44,019 $ 120,321 $ 84,416
Net management fees 11,034 10,785 21,839 21,501
Licensing and other fees 222 259 447 524
--------- --------- --------- ---------
Total revenues 71,407 55,063 142,607 106,441
Operating expenses:
Clinical salaries, benefits, and provider costs 28,428 21,188 56,811 40,839
Practice non-clinical salaries and benefits 9,739 7,481 19,823 14,473
Dental supplies and lab expenses 8,915 6,870 17,668 13,285
Practice occupancy expenses 4,238 3,189 8,390 6,312
Practice selling, general and administrative expenses 7,196 5,633 14,039 11,415
Corporate selling, general and administrative expenses 3,523 2,999 6,867 5,795
Management merger and retention bonus -- -- 1,159 --
Corporate merger and restructure costs -- 1,348 1,730 5,029
Depreciation and amortization 2,969 2,232 5,840 4,349
--------- --------- --------- ---------
Total operating expenses 65,008 50,940 132,327 101,497
--------- --------- --------- ---------
Operating income 6,399 4,123 10,280 4,944
--------- --------- --------- ---------
Nonoperating expense:
Interest expense, net (2,878) (1,409) (5,369) (2,760)
Other, net -- (30) (1) (8)
--------- --------- --------- ---------
Nonoperating expense, net (2,878) (1,439) (5,370) (2,768)
--------- --------- --------- ---------
Income before income taxes 3,521 2,684 4,910 2,176
Provision for income taxes 1,408 549 1,964 740
--------- --------- --------- ---------
Net income 2,113 2,135 2,946 1,436
Accretion of redeemable common stock (3) (3) (5) (7)
--------- --------- --------- ---------
Net income attributable to common stock $ 2,110 $ 2,132 $ 2,941 $ 1,429
========= ========= ========= =========
Income per share attributable to common stock - basic $ 0.10 $ 0.10 $ 0.14 $ 0.07
========= ========= ========= =========
Income per share attributable to common stock - diluted $ 0.09 $ 0.09 $ 0.13 $ 0.06
========= ========= ========= =========
</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>
SIX MONTHS ENDED JUNE 30,
2000 1999
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,946 $ 1,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,840 4,349
Loss on disposal of assets 22 --
Non-employee stock options granted and stock issued for fees and compensation 12 28
Interest accrued on convertible subordinated debt as payment-in-kind 1,108 --
Interest accrued on shareholder and related party notes receivables (59) (10)
Interest amortization on deferred financing costs and discounted debt 247 134
Deferred income taxes -- 33
Change in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net (2,643) (1,129)
Management fee receivables 825 (484)
Supplies inventory (64) 3
Prepaid expenses and other current assets (51) (207)
Other assets (206) (38)
Accounts payable (1,871) (1,217)
Accrued payroll and payroll related costs 250 2,836
Accrued merger and restructure (129) (82)
Other liabilities (2,265) (885)
-------- --------
Net cash provided by operating activities 3,962 4,767
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (4,786) (3,804)
Net payments received (advances) on notes receivable from professional associations 119 (509)
Advances to professional associations (5,673) (3,948)
Notes receivable from related parties (10,500) --
Cash paid for acquisitions, including direct costs, net of cash acquired (5,092) (17,981)
-------- --------
Net cash used in investing activities (25,932) (26,242)
-------- --------
Cash flows from financing activities:
Net proceeds (payments) from credit facilities (8,559) 18,745
Proceeds from issuance of long-term debt 22,761 --
Payments on long-term debt and obligations under capital leases (3,229) (2,627)
Payments of deferred financing costs (1,954) (217)
Proceeds from issuance of common and preferred stock 11,145 56
Payments for common and preferred stock issuance costs (706) --
Proceeds from issuance of common stock warrants 2,739 --
Exercise of stock options 20 2
-------- --------
Net cash provided by financing activities 22,217 15,959
-------- --------
Increase (Decrease) in cash and cash equivalents 247 (5,516)
Cash and cash equivalents, beginning of period 539 8,244
-------- --------
Cash and cash equivalents, end of period $ 786 $ 2,728
======== ========
Cash paid for interest $ 4,047 $ 3,128
======== ========
Cash paid for income taxes $ 2,932 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
June 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 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
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 six months ended June 30, 2000 are not necessarily
indicative of the results of operations for the entire year.
5
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
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.
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 crossed-collateralized by the PAs under common ownership.
6
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
INTANGIBLE ASSETS
Intangible assets result primarily from the excess of cost over the fair value
of net tangible assets purchased. Such intangibles relate primarily to
non-competition covenants, management services agreements, and goodwill
associated with dental practice acquisition asset and stock purchase
transactions. Intangibles relating to management service agreements consist of
the costs of purchasing the rights to provide management support services to PAs
over the initial non-cancelable terms of the related agreements. Under these
agreements, the PAs have agreed to provide dental services on an exclusive basis
only through facilities provided by the Company, which is the exclusive
administrator of all non-dental aspects of the affiliated PAs, providing
facilities, equipment, support staffing, management and other ancillary
services. The agreements, which are generally for 25 to 40 year terms, are
non-cancelable except for performance defaults, as defined. Intangible assets
are amortized on the straight-line method, ranging from 5 years for other
intangible assets to 25 years for MSAs and goodwill.
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 certain other assets 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.
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. As of June 30, 2000, dilutive potential common shares of 8,084,225
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>
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
The following table summarizes the computation of net income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income attributable to common stock $ 2,110 2,132 2,941 1,429
============ ============ ============ ============
Basic Shares Reconciliation:
Weighted average common shares outstanding 21,661,051 20,924,400 21,411,994 20,912,843
Contingently repurchasable common shares (547,968) (566,422) (561,344) (565,504)
------------ ------------ ------------ ------------
Basic shares 21,113,083 20,357,978 20,850,650 20,347,339
============ ============ ============ ============
Income per share attributable to common stock -
basic $ 0.10 $ 0.10 $ 0.14 $ 0.07
============ ============ ============ ============
Diluted Shares Reconciliation:
Basic shares 21,113,083 20,357,978 20,850,650 20,347,339
Effects of dilutive potential common shares:
Convertible preferred stock 1,628,665 1,628,665 1,628,665 1,628,665
Warrants 64,418 90,591 65,744 136,684
Stock options 83,285 227,770 215,362 195,760
Put rights 149,781 90,121 89,613 95,775
Contingent shares, non-issuable -- 110,165 -- 98,380
------------ ------------ ------------ ------------
Diluted shares 23,039,232 22,505,290 22,850,034 22,502,603
============ ============ ============ ============
Income per share attributable to common stock -
diluted $ 0.09 $ 0.09 $ 0.13 $ 0.06
============ ============ ============ ============
</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>
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
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 Company does not expect that the
adoption of FIN 44 will have a material effect on its 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue-all PAs $ 76,728 $ 59,929 $ 153,614 $ 116,001
LESS:
Dental practice net patient service revenue-unconsolidated
PAs (16,577) (15,910) (33,293) (31,585)
--------- --------- --------- ---------
Reported practice net patient service revenue $ 60,151 $ 44,019 $ 120,321 $ 84,416
========= ========= ========= =========
Dental practice net patient service revenue-unconsolidated
PAs $ 16,577 $ 15,910 $ 33,293 $ 31,585
LESS:
Amounts retained by dentists (5,543) (5,125) (11,454) (10,084)
--------- --------- --------- ---------
Net management fees $ 11,034 $ 10,785 $ 21,839 $ 21,501
========= ========= ========= =========
</TABLE>
9
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
(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
$3,333 during the six months ended June 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
six months ended June 30, 1999 of $1,696 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
six months ended June 30, 2000, the Company recorded an additional
restructuring charge of $1,207 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 June 30, 2000 is $2,446 in
accrued merger and restructure costs, of which $1,374 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. The Company has recorded direct merger expenses of $523 associated
with this agreement during the six months ended June 30, 2000 consisting of
investment banker fees, advisors fees, legal fees, accounting fees, printing
expense, and other costs. Included in other current liabilities at June 30, 2000
is $350 in accrued merger costs. In May 2000, InterDent and Leonard Green
mutually agreed to terminate the merger agreement and the related
recapitalization transaction.
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 June 30, 2000:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 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 1,121 2,069 --
Costs to acquire InterDent name -- 264 --
Redirection of duplicative operations, programs and
other costs -- 580 55
------ ------ ------
Total 1,207 7,192 3,831
------ ------ ------
INTERDENT AND LEONARD GREEN PROPOSED MERGER:
Direct investment banking, accounting, legal and other
advisory fees and direct costs 523 1,624 --
------ ------ ------
Total corporate merger and restructure costs $1,730 $8,816 $3,831
====== ====== ======
</TABLE>
10
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
<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 six-months ended
June 30, 2000 $ 2,925 $ 1,730 $(1,859) $ 2,796
======== ======= ======= =======
</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.
In connection with certain completed affiliation transactions, the Company has
agreed to pay to the sellers' 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 June 30, 2000, the
Company had accrued $10,153 for future earn-out payments, of which $201 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.
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>
2000 1999
--------- ---------
<S> <C> <C>
Management Services Agreements $ 132,691 $ 122,699
Goodwill 38,600 39,483
Other 55 55
--------- ---------
Total intangible assets 171,346 162,237
Less accumulated amortization (12,434) (9,205)
--------- ---------
$ 158,912 $ 153,032
========= =========
</TABLE>
(5) DEBT AND EQUITY FINANCING
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
11
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
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. The Company was in compliance with such
covenants at June 30, 2000. 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 June 2000 the Company raised approximately $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 assets sales, or excess cash flows.
The Levine Note bears interest at 12.5%, payable monthly, with an
option to pay the interest in a payment-in-kind ("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 $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.
(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 Practice and
is in addition to collateral provided by the PA as of June 30, 2000. The
amount of PA debt guaranteed by the Company is approximately $4,457.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
As of June 30, 2000, we provided comprehensive management services to a dental
practice network which employed 751 dentists, including 174 specialists,
practicing out of 224 dental offices and 1,982 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.
13
<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 months ended June 30, 2000 and 1999 as reported in the
accompanying condensed consolidated financial statements.
THREE MONTHS ENDED JUNE 30, 2000 STATEMENT OF OPERATIONS COMPARED TO THREE
MONTHS ENDED JUNE 30, 1999
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue
represents the clinical patient revenues at 147 current clinical locations
through June 30, 2000 where the consolidation requirements of EITF 97-2 have
been met. Dental practice net patient revenue was $60.2 million for 2000
compared to $44.0 million for 1999, representing a 36.6% increase of $16.1
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 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 6% when compared to revenue for 1999.
NET MANAGEMENT FEES. Net management fees consist of revenue earned in the
performance of our obligations under management service agreements at 75 current
unconsolidated affiliated dental practice clinical locations through June 30,
2000. At January 1, 1999 we were affiliated with 70 unconsolidated clinical
locations. Net management fees were $11.0 million for 2000 compared to $10.8
million for 1999, representing a 2.3% increase of $.25 million. 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.
LICENSING AND OTHER FEES. We earn certain fees from unconsolidated affiliated
dental practices for various licensing and consulting services. Licensing and
other fees were $.22 million for 2000 compared to $.26 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
14
<PAGE>
- 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 2000 compared to
1999. Practice operating expenses were $58.5 million for 2000 compared to $44.4
million for 1999, representing a 31.9% increase of $14.1 million. The majority
of this increase in practice operating expenses is due to the addition of 21
affiliated dental practices (representing 61 current clinical locations) during
1999, as a result of our aggressive expansion strategy. Of the 21 affiliated
dental practices added in 1999, 16 have management services agreements that meet
the EITF's consolidation requirements. During 2000, most categories of practice
operating expenses varied slightly as a percentage of net revenues when compared
to 1999. As a result, as a percentage of net revenues, overall practice
operating expenses for 2000 were 81.9% compared to 80.6% for 1999. The overall
practice operating margin for 2000 was 18.1% compared to 19.4% for 1999.
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 $3.5 million for 2000 compared to $3.0 million for
1999, representing a 17.5% increase of $.5 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
2000 were 4.9% of net revenues as compared to 5.4% for 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $3.0 million
for 2000 compared to $2.2 million for 1999. This increase of 32.6% is primarily
due to additional property and equipment, intangible costs assigned to
management services agreements and goodwill associated with dental practice
affiliations completed in 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 $2.9 million for 2000 compared to $1.4
million for 1999, representing a 104% increase of $1.5 million. 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 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 a 2.5 percentage point higher than the interest rate on the
Credit Facility. 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.
PROVISION FOR INCOME TAXES. We recorded a net tax expense of $1.4 million for
2000 on income before income taxes of $3.5 million as we expect our federal and
state income tax effective rate for annual fiscal 2000 to approximate the
current statutory rate of 40%. 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. The effective tax rate in the second quarter of
1999 was adjusted to reflect the year to date rate of 34%.
SIX MONTHS ENDED JUNE 30, 2000 STATEMENT OF OPERATIONS COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
DENTAL PRACTICE NET PATIENT REVENUE. Dental practice net patient revenue
represents the clinical patient revenues at 147 current clinical locations
through June 30, 2000 where the consolidation requirements of EITF 97-2 have
been met. Dental practice net patient revenue was $120.3 million for 2000
compared to $84.4 million for 1999, representing a 42.5% increase of $35.9
million. We are pursuing an aggressive expansion strategy through the addition
of affiliated dental practices. As a
15
<PAGE>
result, the majority of this revenue growth is due to the addition of 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 6% when compared to revenue for 1999.
NET MANAGEMENT FEES. Net management fees consist of revenue earned in the
performance of our obligations under management service agreements at 75 current
unconsolidated affiliated dental practice clinical locations through June 30,
2000. As January 1, 1999 we were affiliated with 70 unconsolidated clinical
locations. Net management fees were $21.8 million for 2000 compared to $21.5
million for 1999, representing a 1.6% increase of $.34 million. 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.
LICENSING AND OTHER FEES. We earn certain fees from unconsolidated affiliated
dental practices for various licensing and consulting services. Licensing and
other fees were $.45 million for 2000 compared to $.52 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 have increased significantly during 2000 compared to
1999. Practice operating expenses were $116.7 million for 2000 compared to $86.3
million for 1999, representing a 35.2% increase of $30.4 million. The majority
of this increase in practice operating expenses is due to the addition of 21
affiliated dental practices (representing 61 current clinical locations) during
1999, as a result of our aggressive expansion strategy. Of the 21 affiliated
dental practices added in 1999, 16 have management services agreements that meet
the EITF's consolidation requirements. During 2000, most categories of practice
operating expenses varied slightly as a percentage of net revenues when compared
to 1999. As a result, as a percentage of net revenues, overall practice
operating expenses for 2000 were 81.9% compared to 81.1% for 1999. The overall
practice operating margin for 2000 was 18.1% compared to 18.9% for 1999.
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,
16
<PAGE>
general and administrative expenses were $6.9 million for 2000 compared to $5.8
million for 1999, representing a 18.5% increase of $1.1 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
2000 were 4.8% of net revenues as compared to 5.4% 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 have mutually
agreed with Leonard Green & Partners, L.P., to terminate the merger agreement
and the related recapitalization transaction.
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 $2.2 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 $1.5 million relating to our restructuring plan. As of June 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 $5.8 million
for 2000 compared to $4.3 million for 1999. This increase of 34.3% is primarily
due to additional property and equipment, intangible costs assigned to
management services agreements and goodwill associated with dental practice
affiliations completed in 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 $5.4 million for 2000 compared to $2.8
million for 1999, representing a 94.5% increase of $2.6 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 1999. In June 2000 we
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 a 2.5 percentage point higher than the interest rate on the
Credit Facility. 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.
PROVISION FOR INCOME TAXES. We recorded a net tax expense of $2.0 million for
2000 on income before income taxes of $4.9 million as we expect our federal and
state income tax effective rate for annual fiscal 2000 to approximate the
current statutory rate of 40%. We recognized a tax expense of $.8 million in
1999, or an effective rate of 34%, 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 June 30, 2000, cash and cash equivalents were $.79 million, representing a
$0.25 million increase in cash and cash equivalents of $0.54 million available
at December 31, 1999. Our working capital at June 30, 2000 of $3.3 million
represents
17
<PAGE>
an increase from our negative working capital of $.53 million at December 31,
1999. The increase in working capital is primarily attributable to payments made
in 2000 to reduce acquisition earn-out liabilities, merger and restructure
payables, and accounts payable of $3.5 million, which was funded from our Credit
Facility. Generally, we plan and anticipate relatively small or negative working
capital positions as all excess cash is immediately utilized to pay down the
outstanding Credit Facility.
Net cash provided by operations amounted to $3.9 million for 2000 compared to
net cash provided by operations of $4.8 million for 1999, including
management merger and retention bonus of $1.2 million for 2000 and merger and
restructure expenses of $1.7 million for 2000 and $5.0 million for 1999,
respectively. The decrease of net cash provided by operations during 2000 is
primarily attributed to additional income tax payments in 2000 as loss
carryforwards were utilized in 1999.
Net cash used in investing activities was $25.9 million for 2000. Included in
the investing activities is cash paid for affiliated dental practices of $5.1
million (primarily earnout payments) and $4.8 million cash paid for property
and equipment. We also advanced funds 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 certain other assets
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 rate. The notes
and accrued interest are due June 2004. Additionally, we made advances to
unconsolidated affiliated practices of $5.7 million. Advances consist
primarily of receivables from PAs due in connection with cash advances for
working capital and operating purposes to 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 $22.2 million during 2000.
In connection with certain completed affiliation transactions, we have agreed to
pay to the sellers' possible future consideration in the form of cash and
Company capital stock. The amount of future consideration payable under
earn-outs is generally computed based upon financial performance of the
affiliated dental practices during certain specified periods. We accrue for
earn-out payments with respect to prior practice acquisitions when such amounts
are probable and reasonably estimable and account for such payments as
additional cost of intangible assets acquired. For 2000, we paid $4.6 million in
additional earn-out consideration.
As of June 30, 2000, we have accrued $10.2 million for future earn-out payments,
of which $0.2 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, we estimate 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 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 crossed-collateralized by the PAs
under common ownership.
Our Credit Facility of $120 million, has an immediate funding available of
$101 million. Borrowings at June 30, 2000 under the Credit Facility were
$70.7 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 equal quarterly installments and maturing on June 30, 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.
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<PAGE>
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 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 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.
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 six months ended June 30, 2000, we issued $1.1
million in additional notes. As of June 30, 2000, we have issued a total of
$31.1 in outstanding 7% Subordinated Convertible Notes. In addition, we have
accrued $.5 million in interest which is included in long-term debt, as we
expect to PIK the interest on its due date.
In June 2000 the Company raised approximately $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 in a payment-in-kind ("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.
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.
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<PAGE>
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 these
shares will be repurchased in the future.
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.
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,
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 purchase
fixed interest rates for periods of up to 180 days on portions of the
outstanding Credit Facility balance.
At June 30, 2000, we had $70.7 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 have
been approximately $0.35 million for the six-months ended June 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 $69 million
are at fixed rates of interest.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 15, 2000, as part of an equity and debt financing agreement with
Levine Leichtman Capital Partners II, L.P. ("Levine"), a private investment
fund based in Beverly Hills, CA, the Company issued to Levine a senior
subordinated note with a face value of $25.5 million, 2,750,000 shares of
common stock for $11 million, and 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 of the warrant may be adjusted, ranging from
$4.45 to $6.19, subject to certain conditions as outlined in the warrant. The
warrant can be exercised at any time during the 10-year period following the
issue date. The issuance of the warrant was valued at approximately $2.7
million. The issuance of the note, the shares and the warrant 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 Credit Facility currently prohibits the payment of cash dividends.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Shareholders of the Company was held on April 20,
2000.
At the meeting, Eric Green, Paul H. Keckley, and Curtis Lee Smith, Jr. were
each re-elected as directors for a three-year term. The terms of directors
Michael T. Fiore, Steven R. Matzkin, D.D.S., Robert Finzi, H. Wayne Posey,
and Robert F. Raucci continued after the meeting. The directors elected at
the meeting were elected by the following votes:
<TABLE>
<CAPTION>
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD ABSTENTIONS
<S> <C> <C> <C>
Eric Green 10,865,946 3,911 6,091
Paul H. Keckley 10,865,946 3,911 6,091
Curtis Lee Smith Jr. 10,868,946 911 6,091
</TABLE>
During the meeting, the shareholders also approved proposals to: (a) approve the
InterDent, Inc. 1999 Stock Incentive Plan as amended and restated; (b) approve
the InterDent, Inc. Employee Stock Purchase Plan of 1999; (c) approve the
InterDent, Inc. Dental Professional Stock Purchase Plan of 1999; and (d) to
ratify the selection of KPMG LLP as the Company's independent auditors for 2000.
These proposals were approved by the following votes:
<TABLE>
<CAPTION>
PROPOSAL VOTES FOR VOTES AGAINST ABSTENTIONS
<S> <C> <C> <C>
Stock Incentive Plan 10,865,946 3,911 6,091
Employee Stock Purchase Plan 10,869,857 - 6,091
Dental Professional Stock
Purchase Plan 10,869,046 811 6,091
Ratification of Auditors 10,869,857 - 6,091
</TABLE>
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Form of Secured Promissory Note
10.2 Form of Pledge and Security Agreement
10.3 First Amendment to Employment Agreement, dated May 16, 2000,
by and between InterDent, Inc. and Michael T. Fiore
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
On June 27, 2000, the Company filed a Current Report on Form 8-K to
report under Item 5 the completion of a $36.5 million private
placement with Levine Leichtman Capital Partners II, L.P.,
consisting of 2,750,000 shares of common stock for $11 million,
senior subordinated debt of $25.5 million, and a warrant to purchase
an additional 2,125,000 shares of common stock. No financial
statements were included in the report.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERDENT, INC.
---------------------
(Registrant)
Date: August 12, 2000 By: /s/ NORMAN R. HUFFAKER
------------------- ----------------------------------
Norman R. Huffaker
Chief Financial Officer
23
