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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2002
[ ] 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)
Registrant's telephone number, including area code (310) 765-2400
Securities registered pursuant Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $.001 per share)
Title of class
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
---- ------
The aggregate market value of the registrant's voting securities held by
non-affiliates of the registrant (based upon the closing price of such shares on
June 28, 2002) was approximately $243,000.
At April 24, 2003, 3,963,950 shares of common stock were outstanding.
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................................................................2
Item 2. Properties...................................................................................................10
Item 3. Legal Proceedings............................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders..........................................................11
PART II ...............................................................................................................12
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................12
Item 6. Selected Financial Data......................................................................................12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risks .................................................25
Item 8. Financial Statements and Supplementory Data..................................................................25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................25
PART III................................................................................................................26
Item 10. Directors and Executive Officers of the Registrant.............................................................26
Item 11. Executive Compensation.........................................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................30
Item 13. Certain Relationships and Related Transactions.................................................................31
Item 14. Controls and Procedures........................................................................................31
PART IV.................................................................................................................32
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K................................................32
3
PART I
Item 1. Business.
Headquartered in El Segundo, California, InterDent, Inc. ("InterDent" or the
"Company") is a leading provider of dental practice management services to
multi-specialty dental professional corporations and associations ("PAs") in the
United States. The dentists employed through our network of affiliated PAs
provide patients with affordable, comprehensive, convenient and high quality
dentistry services, which include general dentistry, endodontics, oral surgery,
orthodontics, pedodontics, periodontics and prosthodontics.
The Company was incorporated on October 13, 1998 as a Delaware corporation to
facilitate the business combination of Gentle Dental Service Corporation
("GDSC") and Dental Care Alliance ("DCA") that occurred in March 1999. Prior to
the combination, GDSC and DCA were each publicly traded dental practice
management companies. From 1996 through 2000, the Company (and its predecessors,
GDSC and DCA) primarily focused on the expansion of our affiliated dental
network through acquisitions, completing 45 transactions in 15 markets.
Through May 31, 2001, we provided management services to 224 dental practices in
Arizona, California, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas, Maryland,
Michigan, Nevada, Oklahoma, Oregon, Pennsylvania, Virginia and Washington.
Effective May 31, 2001, we completed the sale of all of the common stock of DCA
and certain other assets in Maryland, Virginia, and Indiana. Total consideration
was $36.0 million, less the assumption of related debt and operating
liabilities. The net sales proceeds were utilized to pay down existing
borrowings under our credit facility. We also retained an option to repurchase
the division through May 2003 and entered into a five-year collaboration
agreement and license agreement to provide our proprietary software. Subsequent
to the sale of DCA, we also disposed of certain under-performing locations and
combined several locations into other existing locations. As of December 31,
2002 we provided management services to 137 dental offices that employ 584
dentists, including 144 specialists. We currently operate in Arizona,
California, Hawaii, Idaho, Kansas, Nevada, Oklahoma, Oregon, and Washington.
We have historically affiliated with PAs by purchasing the operating assets of
those practices, including furniture and fixtures, equipment and instruments,
and entering into long-term (typically 40 years) management service agreements
with the PAs associated with the practice. Under the terms of these agreements,
we are the exclusive administrator of all non-clinical aspects of the dental
practices, whereas the affiliated PAs are exclusively in control of all aspects
of the practice and delivery of dental services. As compensation for services
provided under the management agreements, we receive a management fee typically
equal to the reimbursement of expenses incurred in operating the practice plus a
percentage of the net revenues of the affiliated dental practice.
The services we provide to our affiliated dental practices are part of our
clinically driven operating model designed to enhance our affiliated dental
practices, and includes:
- - Training and educating, enabling dentists to perform additional general and
specialty services; - Assistance in optimizing patient scheduling, staffing
ratios and other resource allocation; - Improving office administration,
including billing and collecting receivables; - Assistance in negotiating and
monitoring managed care and other contracts; and - Assistance in recruiting
dental professionals.
Our structure allows our affiliated dentists: (1) to focus on the practice of
dentistry by avoiding the burden of non-clinical administrative and management
responsibilities; (2) potentially improve their income; (3) gain access to
educational services and training programs, and (4) participate in our recently
implemented Dental Career Path program, which is designed to provide a
progressive career growth path for dentists.
Dental Services Industry
Centers for Medicare & Medicaid Services ("CMS") estimates that the annual
aggregate domestic market for dental services represents 5.1% of total health
care expenditures in the United States. Since 1996, the annual aggregate
domestic market for dental services has increased 40%, from approximately $46.8
billion to $65.6 billion for 2001. According to CMS, the dental services
industry is expected to reach nearly $105 billion by 2011. We believe that the
anticipated growth in the dental industry will be driven by several factors,
including:
- - Increase in the availability and types of dental insurance, including managed
care organizations; - Increasing demand for dental services from an aging
population; - Evolution of technology which makes dental care less traumatic
and, therefore, more attractive to patients; and - Increased focus on preventive
and cosmetic dentistry.
The market for dental services in the United States consists of both general and
specialty dentistry services. General dentistry services include preventive and
diagnostic procedures such as cleanings, examinations and x-rays and restorative
treatments such as fillings of cavities, gum therapy and crowns. Specialty
dentistry services include endodontics, oral surgery, orthodontics, pedodontics,
periodontics, and prosthodontics.
Dental care services in the United States are generally delivered through a
highly fragmented system of local providers, primarily individual or small group
practices. According to the American Dental Association, there are approximately
166,000 actively practicing dental professionals in the United States, with more
than two thirds working in one or two practitioner practices.
Operating Strategy
We believe that our current focus on operational improvements and
re-capitalization of the Company, which we expect will substantially reduce our
debt, will position both the Company and our affiliated practices for strong
growth in the future.
Our fundamental strategy is to develop dense, locally prominent multi-specialty
dental delivery networks that provide high quality, cost-effective dental care.
The key elements of this strategy and corresponding tactics are as follows:
Strategy Tactics
Provide Convenient, Comprehensive Dental Care + Offer extended hours
+ Have conveniently located offices
+ Provide flexible payment options for patients
+ Add specialists (orthodontists, oral surgeons,
etc.) within the Company's network to capture
incremental, higher margin revenue
Focus on Quality of Patient Care + Facilitate quality assurance and utilization
review programs
+ Provide access to continuing education and
training programs for dental professionals
+ Evaluate new techniques and technologies
Establish Dense Regional Dental Care Networks + Build geographically dense networks of dental
offices to achieve economies of scale
+ Affiliate with dental groups and practices in
selected markets that have a significant market
position
Enhance Operational Efficiencies and Revenue + Centralize management and administrative functions
+ Establish procedures designed to optimize staffing
ratios and patient scheduling
+ Negotiate with third-party payors and dental
supply vendors to receive favorable payment and
contract terms
+ Add specialists within the Company's network to
capture incremental, higher margin revenue
Integrate and Leverage our Propriety Management + Utilize the Company's proprietary management
Information Systems information system to: (1) optimize staffing and
patient scheduling; (2) identify and reduce unfinished
patient treatment; (3) maximize billing and collection
efforts; and (4) actively monitor the performance of
managed care and other third party contracts
Capitalize on Managed Care Expertise + Supplement fee-for-service business with selected
managed care contracts
+ Utilize proprietary MIS to actively monitor
utilization of patient groups covered by the managed
care plans
Dental Practice Network
As of December 31, 2002, our dental practice network employed 584 dentists,
including 144 specialists, practicing out of 137 dental offices with 1,330
operatories located in the following geographic markets:
Geographic Market Dentists Offices Operatories
----------------- -------- ------- -----------
Arizona 23 8 60
California - Northern 122 21 251
California - Southern 201 42 395
Hawaii 35 7 55
Idaho 19 2 53
Nevada 42 11 116
Oklahoma & Kansas 20 6 67
Oregon 87 30 241
Washington 35 10 92
---------------- ----------------- -----------------
Total 584 137 1,330
================ ================= =================
Services and Operations
As discussed above, the dental care services industry is highly fragmented and
because of their size limitations, most solo and small dental practices are run
inefficiently without the benefit of professional management, economies of
scale, and adequate information systems.
We provide such comprehensive management services with respect to all of the
operations of our network of affiliated dental practices, other than the
provision of dental treatment, and employ all non-clinical personnel at the
affiliated dental practices. Through economies of scale, we are able to provide
these services at a lower cost than could otherwise be obtained by any of the
affiliated dental practices individually. The benefits to our affiliated
dentists are compelling; by providing these services, dentists are able to
substantially reduce the amount of time they would otherwise be required to
devote to administrative matters, and are therefore enabled to dedicate more
time to patient care and the growth of their professional practices. Our
services can be grouped into three broad categories: administrative and
financial services, personnel services and operational services.
Administrative and Financial Services
Administrative. We provide administrative services to the affiliated dental
practices, including staffing, education and training, billing and collections,
patient scheduling, patient treatment follow-up, financial reporting and
analysis, productivity reporting and analysis, cash management, group
purchasing, inventory management, advertising promotion and other marketing
support. We also assist in human resources administration, professional
recruiting and provide support for dental practice operations, new site
development and other capital requirements. These services substantially reduce
the amount of time the dentists at our affiliated dental practices are required
to devote to administrative matters, thus enabling network dentists to dedicate
more time to the growth of their professional practices. In addition, because of
our size and purchasing power, we have been able to negotiate discounts on,
among other things, dental and office supplies, property, health and malpractice
insurance, and equipment.
Third-party Payor Management. We examine various factors to determine which
third-party payors' assignments we will recommend at each affiliated dental
practice. Factors considered by us in making this recommendation include:
- - Types of procedures that are generally performed; - Geographic area served by
the particular plan; and - Demographic characteristics of the typical plan
participants.
Some element of managed care is present at most affiliated dental practices,
although generally not as the primary source of revenues. We assist our
affiliated dental practices in the negotiation of contracts with third-party
payors. Due to our network volume, we often negotiate better terms for our
affiliated dental practices with third-party payors than available to solo
practitioners or small group dental practices.
Accounting Services. We provide affiliated dental practices with a full range of
accounting services, including preparation of financial statements, management
of accounts payable, accounts receivable, payroll administration and tax
services. In addition, we assist each affiliated dental practice in the
preparation of operating and financial budgets.
Third-party Financing. We have contracts with third-party financing companies
that enable our affiliated dental practices to offer various third-party
financing options to their patients on a non-recourse basis.
Personnel Services
Staffing and Scheduling. We provide management services that are designed to
optimize staffing ratios and patient scheduling at our affiliated dental
practices. We are responsible for the hiring, retention, salary and bonus
determination, job performance-related training and other similar matters
affecting our employees, which include non-dental professionals providing
services to the affiliated dental practices. Staffing and scheduling services
include:
- - Payroll administration;
- - Risk management;
- - Administering benefit plans;
- - Analysis and advice with respect to the optimal number of general
dentists, specialist dentists, dental assistants and hygienists at
each dental practice;
- - Assist with scheduling; and
- - Assist each affiliated dental practice with respect to expanding
office hours and assisting dentists in the more efficient
use of dental assistants and hygienists.
Training and Education. Staff and practice development programs are an integral
part of our operating strategy. Our programs are designed to motivate staff to
achieve optimum performance goals, increase the level of patient satisfaction,
and improve our ability to attract and retain qualified personnel. While we are
not engaged in the practice of dentistry, we facilitate the training and
educating of dental professional personnel.
Recruiting. We have a national recruiting program to assist our affiliated
dental practices in recruiting dentists to add to our network. Recruiting takes
place through our contacts at dental schools, presence at regional dental
seminars and conventions and through advertising in regional and national dental
publications.
Operational Services
Advertising and Marketing. We assist our affiliated dental practices in
developing and implementing advertising and marketing programs, including
patient educational and prevention programs at selected dental practices. We
also assist the practices in their external marketing programs such as direct
mail and yellow page advertising. Other marketing programs include the use of
local radio, television and print advertising, and other marketing promotions.
Quality Assurance. The clinical management procedures and treatment protocols
for our affiliated dental practices vary from region to region. Under the
guidance of our Dental Advisory Board, dental directors in each region review
and determine these procedures and treatment protocols and we work closely with
dentists and hygienists at the affiliated dental practices to assist them in
implementing such procedures and protocols. Areas included among the procedures
and protocols to be determined by the network of dental directors are treatment
planning, diagnostic screening, radiographic records, record keeping, specialty
referrals and dental hygiene protocols. As part of the affiliated dental
practices' clinical enhancement program, we assist in providing quality
assurance, peer review and utilization review programs. We also perform patient
surveys to monitor patient satisfaction, and periodically audit patient charts
and provide advice to the dentists employed by the affiliated dental practices.
Management Information Systems. Effective use of management information systems
and extensive management reporting are the key means by which we manage our
network of dental offices. Management information systems is critical to
successfully operating a large number of relatively small, widely dispersed
operating units and is also a major tool we use to add value to affiliated
practices. We utilize our extensive management information systems experience in
operating dental offices to determine optimal information technology at each
office, and that such information systems are uniformly implemented. Uniformity
ensures that each office is operated as efficiently as possible, that data from
each office is correctly compiled and integrated into meaningful management
information, and allows for the staff to be efficiently interchangeable between
offices.
Our proprietary web based Compass Management System ("Compass") provides various
financial and management reports to the dental offices and our divisional,
regional and corporate management. Compass receives data from the office
management system and consolidates the data into central data warehouses.
Interactive reporting is created from these databases and is made available via
either the intranet, the e-mail system or via printed reports.
Compass allows us to mine the existing patient database. The software will,
proactively or on command, search out patients who have not visited the office
in a specified period of time. These patients can be targeted for telephone
calls or other marketing attempts to draw them back into the office. Compass
also focuses on treatment planning, case acceptance and case completion. The
software allows us to identify treatment plans that are either not started or
incomplete and target those patients for completion. We can use this data to
develop action plans to improve revenue and scheduling efficiency. It also
benefits the patient, whose health is certainly best served if the prescribed
treatment plan is completed.
A major benefit of Compass is that it enables dentists to improve their
productivity and incomes. The system provides the dentists with analyses such as
their production level, average diagnosis value and treatment acceptance rates.
Using this data, individual doctors can compare personal productivity levels to
a peer group and then set his or her own goals and track actual results relative
to established goals. The system also helps dentists and office managers better
manage the managed care patients.
The system also helps maximize collections by exception based reporting which
enables management to look at any time and from anywhere via the intranet and
quickly determine where additional collection effort may be needed. The system
captures and facilitates the analysis of encounter data, so that individual
insurance plans can be stratified from low to high profitability and informed
decisions can be made when it is time to consider renewing individual plans.
Management Agreements
Our affiliated dental practices are in exclusive control of all clinical aspects
of the practice of dentistry and the delivery of dental services. We have
entered into long-term management agreements with the affiliated dental
practices under which we are the exclusive administrator of all non-clinical
aspects of the dental practices. Under these agreements, we:
- - Provide facilities and equipment used by the affiliated dental practices;
- - Bill and collect receivables on behalf of the affiliated dental practices;
- - Purchase and provide supplies;
- - Provide clerical, accounting, payroll, human resources, computer and other
non-dental support personnel;
- - Provide management information systems and reports;
- - Negotiate contracts with managed care payors or other third parties; and
- - Assist in the recruitment of dentists.
We establish guidelines for hiring and compensating dentists and clinical
personnel, although such responsibility remains with the affiliated dental
practices. Specifically, the affiliated dental practices are responsible for:
- - Hiring and compensating dentists and other dental professionals;
- - Purchasing and maintaining malpractice insurance;
- - Maintaining patient records; and
- - Ensuring that dentists have the required licenses and other certifications.
As compensation for services provided under these agreements, we receive service
fees typically equal to the expenses incurred in the performance of our
obligations, plus an additional fee equal to a percentage of the net revenues of
each affiliated dental practice. We collect ongoing service fees out of the cash
collections of the affiliated dental practice, including the receivables
assigned to us by the affiliated dental practices.
The management agreements each have an initial term of 40 years, and unless
either party gives notice before the end of the term, automatic extensions
ranging from five years to ten years thereafter. The management agreements are
not subject to early termination, except for certain termination events such as
bankruptcy proceedings, a material breach of the terms of the management
agreement without curing the breach following notice, and other additional
termination events such as a material change in applicable federal or state law,
etc.
During the terms of the agreements, all parties agree not to disclose certain
confidential and proprietary information regarding the other. The affiliated
dental practices are required under the management agreements to use their best
efforts to enter into and enforce written employment agreements with each of
their professional employees containing covenants not to compete with the
affiliated dental practice in a specified geographic area for a specified period
of time. The employment agreements generally provide for injunctive relief in
the event of a breach of the covenant not to compete.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board reached a consensus on the accounting for transactions between physician
practice management companies and physician practices and the financial
reporting of such entities (EITF issue number 97-2). For financial reporting
purposes, EITF 97-2 mandates the consolidation of physician practice activities
with the practice management company when certain conditions have been met, even
though the practice management company does not have a direct equity investment
in the physician practice. Consequently, where appropriate under EITF 97-2, we
consolidate all the accounts of the affiliated dental practices in the
accompanying Consolidated Financial Statements, including revenues and expenses.
Accordingly, the consolidated statements of operations include the net patient
revenues and related expenses of certain affiliated dental practices and all
significant intercompany transactions have been eliminated. For those
affiliations that do not meet the criteria of consolidation under EITF 97-2, we
record net management fees on the services described above and the expenses
associated with providing those services under the management services
agreements. The accompanying Consolidated Financial Statements are prepared in
conformity with the consensus reached in EITF 97-2.
Government Regulation
General. The practice of dentistry is regulated extensively at both the state
and federal level. Regulatory oversight includes, but is not limited to,
considerations of fee splitting, corporate practice of dentistry, anti-kickback
and anti-referral legislation, privacy and security requirements, and state
insurance regulation. In addition, federal and state laws regulate HMOs and
other managed care organizations for which dentists may be providers. Dental
practices must also meet federal, state and local regulatory standards in the
areas of safety and health. We believe that we and our affiliated dental
practices comply with all material respects with the laws and regulations to
which we are subject.
There can be no assurance that a review of our business relationships by courts
or other regulatory authorities would not result in determinations that could
prohibit or otherwise adversely affect our operations. There can also be no
assurance that the regulatory environment will not change, requiring us to
reorganize, change our methods of reporting revenues and other financial results
or restrict existing or future operations. Also, our ability to operate
profitably will depend in part upon the ability of our affiliated dental
practices and us to continually obtain and maintain all necessary licenses,
certifications and other approvals and to operate in compliance with applicable
health care regulations.
Corporate Practice of Dentistry; Fee Splitting. The laws of many states
prohibit, by statute or under common law, dentists from splitting fees with
non-dentists and prohibit non-dental entities such as us from engaging in the
practice of dentistry or employing dentists to practice dentistry. The specific
restrictions against the corporate practice of dentistry as well as the
interpretation of those restrictions by state regulatory authorities vary from
state to state. The restrictions are generally designed to prohibit a non-dental
entity from:
- - Controlling the professional practice of a dentist;
- - Employing dentists to practice dentistry (or, in certain states, employing
dental hygienists or dental assistants); and
- - Controlling the content of a dentist's advertising or sharing professional
fees.
A number of states limit the ability of a person other than a licensed dentist
to own equipment or offices used in a dental practice. However, the states in
which we conduct our business do not currently impose such limitations. Some of
these states allow leasing of equipment and office space to a dental practice
under a bona fide lease. The laws of many states also prohibit dental
practitioners from paying any portion of fees received for dental services in
consideration for the referral of a patient. In addition, many states impose
limits on the tasks that may be delegated by dentists to dental assistants.
We provide management and administration services to dental practices and
believe that the fees we charge for those services are consistent with the laws
and regulations of the jurisdictions in which we operate. We do not control the
clinical aspects of the practice of dentistry or employ dentists to practice
dentistry, except as permitted by law. Moreover, we do not employ dental
hygienists. We believe that our operations comply in all material respects with
the above-described laws. However, there can be no assurance that a review of
our business relationships by courts or other regulatory authorities would not
result in determinations that could prohibit or otherwise adversely affect our
operations. Furthermore, there can be no assurance that the regulatory
environment will not change, requiring us to reorganize or restrict our existing
or future operations.
The laws regarding fee splitting and the corporate practice of dentistry and
their interpretation vary from state to state and are enforced by regulatory
authorities with broad discretion. There can be no assurance that the legality
of our business or our relationships with dentists or affiliated dental
practices will not be successfully challenged or that the enforceability of the
provisions of any management agreement will not be limited. The laws and
regulations of certain states in which we may seek to expand may require us to
change the form of our relationships with affiliated dental practices. Such a
change may restrict our operations or the way in which providers may be paid or
may prevent us from acquiring the non-dental assets of such practices or
managing dental practices in such states. Similarly, there can be no assurance
that the laws and regulations of the states in which we presently maintain
operations will not change or be interpreted in the future either to restrict or
adversely affect our existing or future relationships with our affiliated dental
practices. Any change in our relationships with our affiliated dental practices
resulting from the interpretation of corporate practice of dentistry and
fee-splitting statutes and regulations could have a material adverse effect on
our business and results of operations.
Anti-kickback and Anti-referral Legislation. Federal and many state laws
prohibit the offer, payment, solicitation or receipt of any form of remuneration
in return for, or in order to induce the referral of a person for services
reimbursable under Medicare, Medicaid or other federal and state health care
programs. Further restrictions include the reimbursement by such regulatory
agencies for the furnishing or arranging for the furnishing of items or
services, the purchase, lease, order, arranging or recommending purchasing,
leasing or ordering of any item. These provisions apply to dental services
covered under the Medicaid program in which we participate. The federal
government has increased scrutiny of joint ventures and other transactions among
health care providers in an effort to reduce potential fraud and abuse related
to Medicare and Medicaid costs. Many states have similar anti-kickback laws, and
in many cases these laws apply to all types of patients, not just Medicare and
Medicaid beneficiaries.
The applicability of these federal and state laws to transactions in the health
care industry such as those to which we are or may become a party has not been
the subject of judicial interpretation. There can be no assurance that judicial
or administrative authorities will not find these provisions applicable to our
operations, which could have a material adverse effect on our business. Under
current federal law, a physician or dentist or member of his or her immediate
family is prohibited from referring Medicare or Medicaid patients to any entity
providing "designated health services" in which the physician or dentist has an
ownership or investment interest, unless an applicable exception is available. A
number of states also have laws that prohibit referrals for certain services
such as x-rays by dentists if the dentist has certain enumerated financial
relationships with the entity receiving the referral, unless an exception
applies. Any future expansion of these prohibitions to other health services
could restrict our ability to integrate dental practices and carry out the
development of our network of affiliated dental practices.
Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals can result in exclusion from the Medicare and Medicaid
programs as well as civil and criminal penalties. Similar penalties apply for
violations of state law. While we make every effort to comply with the
anti-kickback and anti-referral laws, a determination of violation of these laws
by us or our affiliated dental practices could have a material adverse effect on
our business, financial condition and results of operations.
Health Insurance Portability and Accountability Act of 1996. To improve the
efficiency and effectiveness of the health care system, the Health Insurance
Portability and Accountability Act ("HIPAA") of 1996, Public Law 104-191,
included "Administrative Simplification" provisions that required the Department
of Health and Human Services ("HHS") to adopt national standards for electronic
health care transactions. At the same time, Congress recognized that advances in
electronic technology could erode the privacy of health information.
Consequently, Congress incorporated into HIPAA provisions that mandated the
adoption of Federal privacy protections for individually identifiable health
information.
In response to the HIPAA mandate, in December 2000, HHS published a final
regulation in the form of the Privacy Rule, which became effective on April 14,
2001. This Privacy Rule set national standards for the protection of health
information, as applied to the three types of covered entities: health plans,
health care clearinghouses, and health care providers who conduct certain health
care transactions electronically. By the compliance date of April 14, 2003
(April 14, 2004, for small health plans), covered entities must implement
standards to protect and guard against the misuse of individually identifiable
health information. Failure to timely implement these standards may, under
certain circumstances, trigger the imposition of civil or criminal penalties. In
March 2002, HHS published proposed modifications to the Privacy Rule, to improve
workability and avoid unintended consequences that could have impeded patient
access to delivery of quality health care. Following another round of public
comment, in August 2002, HHS adopted as a final Rule the modifications necessary
to ensure that the Privacy Rule worked as intended.
The Privacy Rule establishes, for the first time, a foundation of Federal
protections for the privacy of protected health information. The Privacy Rule
does not replace Federal, State, or other laws that grants individuals even
greater privacy protections, and covered entities are free to retain or adopt
more protective policies or practices.
We have evaluated the effect of the proposed and final Rules published to date
and have developed a task force to address and implement the standards set forth
in these rules. This includes the development of set policy and procedures that
are recommended by the American Dental Association. The implementation of the
rules is being accomplished by training at our regular monthly and quarterly
scheduled management meetings, therefore the cost of compliance is not expected
to be material.
State Insurance Laws and Regulations. There are also certain regulatory risks
associated with our role in negotiating and administering managed care and
capitation contracts. There are risks, particularly in instances where the
dental care provider typically is paid a pre-determined amount per-patient
per-month from the payor in exchange for providing all necessary dental care
services to patients covered under the contracts. The application of state
insurance laws to reimbursement arrangements other than various types of
fee-for-service arrangements is an unsettled area of law and is subject to
interpretation by regulators with broad discretion. As our affiliated dental
practices or we contract with third-party payors, including self-insured plans
and managed care arrangements, our affiliated dental practices or we may become
subject to state insurance laws. Revenues could be adversely affected in the
event our affiliated dental practices or we are determined to be subject to
licensure as an insurance company or required to change the form of their
relationships with third-party payors and become subject to regulatory
enforcement actions.
Health Care Reform Proposals. The United States Congress and state legislatures
have considered various types of health care reform, including comprehensive
revisions to the current health care system. It is uncertain what legislative
proposals will be adopted in the future, if any, or what actions federal or
state legislatures or third-party payors may take in anticipation of or in
response to any health care reform proposals or legislation. Health care reform
legislation adopted by Congress or the legislatures of states in which we do
business, as well as changes in federal and state regulations could have a
significant effect on the health care industry and, thus, potentially materially
adversely affect our operations and those of our network of affiliated dental
practices.
Regulatory Compliance. We regularly monitor developments in laws and regulations
relating to dentistry. We may be required to modify our agreements, operations
or marketing from time to time in response to changes in business, statutory and
regulatory environments. We structure all of our agreements, operations and
marketing in accordance with the then applicable law, although there can be no
assurance that our arrangements will not be successfully challenged or that the
required changes may not have a material adverse effect on operations or
profitability.
Competition
We compete with other dental practice management companies seeking to affiliate
with dental practices. We believe that the industry will become more competitive
as it continues to consolidate. We believe that we have a competitive advantage
to effectively compete in each of the following areas:
- - Reputations of the dental practices within dental care networks;
- - Scope of services provided by dental care networks;
- - Management experience and expertise;
- - Sophistication of management information, accounting, finance and
other systems;
- - Proprietary information system; and
- - Network operating methods.
We currently compete with other dental practice management companies in our
existing markets. There are also a number of dental practice management
companies currently operating in other parts of the country that may enter our
existing markets in the future. Many of these competitors and potential
competitors have substantially greater financial resources, or otherwise enjoy
competitive advantages that may make it difficult for us to compete against them
or enter into additional management agreements on terms acceptable to us. In
addition, we are likely to face competition from established dental practice
management companies with a strong presence in the markets in which we operate.
The business of providing dental services is highly competitive in each of the
markets in which our affiliated dental practices operate or in which operations
are contemplated. The primary bases of such competition are quality of care and
reputation, marketing exposure, convenience and traffic flow of location,
relationships with managed care entities, appearance and usefulness of
facilities and equipment, price of services and hours of operation. The
affiliated dental practices compete with other dentists who maintain single or
satellite offices, as well as with dentists who maintain group practices,
operate in multiple offices or are members of competing dental practice
management networks. Many of those dentists have established practices and
reputations in their markets. In addition to competing against established
practices for patients, the affiliated dental practices compete with established
practices in the retention and recruitment of general dentists, specialists and
hygienists. If the availability of dentists begins to decline in our existing or
targeted markets, it may become increasingly difficult to attract and retain the
dental professionals to staff the affiliated dental practices. There can be no
assurance that our affiliated dental practices will be able to compete
effectively with such other practices.
Insurance
We carry comprehensive liability and extended coverage insurance. Our affiliated
dental practices carry professional liability and general liability insurance.
Our insurance coverage is expanded to include all additional practices that we
affiliate with or develop, with policy specifications, insured limits, and
deductibles customarily carried for similar dental practices.
Service Mark
Certain of our affiliated dental practices in Oregon and Washington are operated
and marketed under the name "Gentle Dental." Gentle Dental is a federally
registered service mark owned by us. On April 19, 1989, the Company's
predecessor acquired title to the federal registration of this service mark as
originally issued on October 26, 1982. We recognize that there are numerous
other practices across the country using the name Gentle Dental. Any entity that
commenced use of our mark before October 26, 1982 may have rights to the mark in
its geographic market superior to our rights. Given the costs and inherent
uncertainties of service mark litigation, there can be no assurance that we can
successfully enforce our service mark rights in any particular market.
Employees
As of December 31, 2002, we employed 2,123 full and part-time persons,
consisting of 1,058 dental assistants, 1,008 dental office and regional staff,
and 57 executive and administrative staff, including 114 dental assistants and
clerical personnel subject to collective bargaining agreements.
In addition, our affiliated dental practices employed 860 dental professionals,
consisting of 584 dentists and 276 dental hygienists. Dentists employed by the
professional associations typically enter into evergreen employment agreements,
which contain non-competition and non-solicitation provisions that survive the
termination of the agreement for 24 months. The non-competition provision
generally prohibits a dentist from competing within a five-mile radius of any of
our affiliated practices.
Item 2. Properties.
The dental practice and business offices in our network are generally leased
from various parties pursuant to leases with remaining terms expiring through
2016. Several of the leases have options to renew, and we expect to renew or
replace leases as they expire. Our corporate headquarters is located in leased
office space in El Segundo, California. Our ownership in facilities is limited
to only one office building and land located in Hazel Dell, Washington that is
occupied by one of our clinical office locations. The Company's annual lease
payments were approximately $11 million for the year ended December 31, 2002.
Item 3. Legal Proceedings.
In July 2002, InterDent's claims against Amerident of approximately $3.0 million
for breach of contract, breach of the implied covenant of good faith and fair
dealing, intentional misrepresentation and negligent misrepresentation (Los
Angeles Superior Court Case No. BC237600) proceeded to trial, as did the claims
by Amerident for damages ranging from $8.0 million to $11.0 million against
InterDent and Gentle Dental Management, Inc. related to the July 21, 1999 sale
of substantially all of the assets of ten dental practices in California and
Nevada and breach of a promissory note. In August 2002 a mistrial was declared
because there were insufficient jurors to proceed. The cases are expected to be
retried in the second quarter of 2003. Management believes the Amerident claims
against the Company are without merit or will not have a material adverse effect
on the Company's consolidated operating results, liquidity or financial
position, or cash flows.
The Company has been named as a defendant in various other lawsuits in the
normal course of business, primarily for malpractice claims. The Company and
affiliated dental practices, and associated dentists are insured with respect to
dentistry malpractice risks on a claims-made basis. Management believes all of
these pending lawsuits, claims, and proceedings against the Company are without
merit or will not have a material adverse effect on the Company's consolidated
operating results, liquidity or financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Nasdaq in a letter dated May 16, 2002, notified the Company that it failed to
comply with the minimum bid price and the minimum market value of publicly held
shares requirements for continued listing set forth in Market Place Rules
4450(b)(3) and 4450(b)(4), and that its securities were, therefore, subject to
delisting from the Nasdaq National Market. In June, the Company was also
notified that it also did not meet the minimum market value of publicly held
shares requirement for transfer to the Nasdaq SmallCap Market and, as a result,
the Company's common stock began trading on the OTC Bulletin Board on June 13,
2002. The Interdent, Inc. common stock symbol was also changed to DENT.OB to
reflect the change in market listings
The following table sets forth, for the periods indicated, the highest and
lowest per share sales price for our Common Stock as reported on the Nasdaq
National Market and the OTC Bulletin Board as of June 13, 2002. Stockholders are
encouraged to obtain current market quotations. All amounts in the table have
been adjusted to reflect the 1-for-6 reverse split of our common stock effective
August 7, 2001.
High Low
2001
First Quarter $ 9.38 $ 2.25
Second Quarter 3.66 1.92
Third Quarter 3.00 0.73
Fourth Quarter 1.99 0.32
2002
First Quarter $1.45 $ 0.36
Second Quarter 0.75 0.10
Third Quarter 0.45 0.07
Fourth Quarter 0.50 0.12
As of April 11, 2003 there were approximately 171 holders of record of
InterDent, Inc. common stock.
We intend to retain earnings from operations for use in the operation and
expansion of our business and do not expect to pay cash dividends in the
foreseeable future. In addition, our senior credit lender currently prohibits
the payment of cash dividends. Any future decision with respect to dividends
will depend on future earnings, operations, capital requirements and
availability, restrictions in future financing agreements and other business and
financial considerations.
Wachovia Bank is the Transfer Agent and Registrar for the stock of InterDent,
Inc. Shareholder matters, such as a transfer of shares, stock transfer
requirements, missing stock certificates and changes of address, should be
directed to Wachovia Bank at the following address and telephone number:
Wachovia Bank
1525 West W. T. Harris, Blvd.
Building 3C3
Charlotte, NC 28262-1153
Telephone Numbers: 704/590-0394, or toll-free 800/829-8432
Item 6. Selected Financial Data.
The following tables set forth selected historical financial data and other
operating information for each of the fiscal years in the five-year period ended
December 31, 2002. The selected financial information for each of the years in
the five-year period ended December 31, 2002 has been derived from the audited
Consolidated Financial Statements of InterDent. Our historical results are not
necessarily indicative of future results. This selected financial information
should be read in conjunction with the Consolidated Financial Statements of
InterDent and the related notes thereto and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Years Ended December 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- ---------------
(dollars in thousands, except per share amounts)
OPERATING RESULTS:
Total Revenues $ 250,064 $ 282,631 $ 293,166 $ 231,610 $ 134,658
Operating income (loss) 17,464 (4,476) (37,101) 13,973 5,993
Net income (loss) before
extraordinary item and
cumulative effect of a change in
accounting principle (5,492) (29,478) (48,704) 5,234 1,270
Extraordinary loss on debt
extinguishments, net of taxes (2,604) (5,601) -- -- --
Cumulative effect of a change in
accounting principle, net of
taxes (89,000) -- -- -- --
Net income (loss) attributable to
common stock (97,096) (35,080) (48,712) 5,222 1,248
Net income (loss) per share
attributable to common stock -
Basic (a) (1.44) (7.64) (13.19) 1.53 0.38
Net income (loss) per share
attributable to common stock -
Diluted (a) $ (1.44) $ (7.64) $ (13.19) $ 1.39 $ 0.35
BALANCE SHEET DATA:
Total assets $ 114,867 $ 210,004 $ 244,229 $ 241,213 $ 165,134
Total short and long-term debt
and capital lease obligations 175,981 169,713 174,884 126,098 71,098
Total redeemable common and
preferred stock 51 1,047 1,484 1,796 2,102
Total shareholders' equity
(deficit) $ (89,980) $ 6,188 $ 30,452 $ 75,895 $ 68,990
- -------------------------------------
(a) Excludes a non-cash impairment charge of $89,000 ($23.23 per share - basic
and diluted) in 2002 related to the cumulative effect of a change in
accounting principle in connection with adoption of the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" and extraordinary losses on debt
estinguishment of $2,604 in 2002 and $5,601 in 2001 (per share - basic and
diluted of $0.68 and $1.45 for 2002 and 2001, respectively).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-looking and Cautionary Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. Certain information included in this
Form 10-K and other materials filed with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made by the Company) contain statements that are forward looking,
such as statements relating to business strategies, plans for future development
and upgrading, capital spending, financing sources, changes in interest rates,
and the effects of regulations. Such forward-looking statements involve
important known and unknown risks and uncertainties that could cause actual
results and liquidity to differ materially from those expressed or anticipated
in any forward-looking statements. Such risks and uncertainties include, but are
not limited to: those related to the effects of competition; leverage and debt
service; financing needs or efforts; actions taken or omitted to be taken by
third parties, including the Company's customers, suppliers, competitors, and
stockholders, as well as legislative, regulatory, judicial, and other
governmental authorities; changes in business strategy; general economic
conditions; changes in health care laws, regulations or taxes; risks related to
development and upgrading systems; and other factors described from time to time
in the Company's reports filed with the Securities and Exchange Commission.
Accordingly, actual results may differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company. Any
forward-looking statements are made pursuant to the Private Securities
Litigation Reform Act of 1995, and, as such, speak only as of the date made. The
Company undertakes no obligation to revise publicly these forward-looking
statements to reflect subsequent events or circumstances.
Overview
We are a leading provider of dental practice management services to
multi-specialty dental professional corporations and associations ("PAs") in the
United States. The dentists employed through our network of affiliated PAs
provide patients with affordable, comprehensive, convenient and high quality
dentistry services, which include general dentistry, endodontics, oral surgery,
orthodontics, pedodontics, periodontics and prosthodontics.
Through May 31, 2001, we provided management services to dental practices in
Arizona, California, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas, Maryland,
Michigan, Nevada, Oklahoma, Oregon, Pennsylvania, Virginia and Washington.
Effective May 31, 2001, we completed the sale of all of the common stock of
Dental Care Alliance, Inc. ("DCA"), a wholly-owned subsidiary, and certain other
assets in Maryland, Virginia, and Indiana. Total consideration was $36.0
million, less the assumption of related debt and operating liabilities. The net
sales proceeds were utilized to pay down existing borrowings under our credit
facility. We also have retained an option to repurchase the division at a future
date and entered into an ongoing collaboration agreement and license agreement
to provide our proprietary software. As of December 31, 2002 we provided
management services to 137 dental offices that employ 584 dentists, including
144 specialists. We currently operate in Arizona, California, Hawaii, Idaho,
Kansas, Nevada, Oklahoma, Oregon, and Washington.
We have historically affiliated with PAs by purchasing the operating assets of
those practices, including furniture and fixtures, equipment and instruments,
and entering into long-term (typically 40 years) management service agreements
("MSAs") with the PAs associated with the practice. Under the terms of these
agreements, we are the exclusive administrator of all non-clinical aspects of
the dental practices, whereas the affiliated PAs are exclusively in control of
all aspects of the practice and delivery of dental services. As compensation for
services provided under the MSAs, we receive a management fee typically equal to
the reimbursement of expenses incurred in operating the practice plus a
percentage of the net revenues of the affiliated dental practice.
As compensation for services provided under the MSAs, we receive management fees
from our affiliated dental practices. Depending upon the individual MSA
provisions, the management fee is calculated based upon one of two methods.
Under one method, the management fee is equal to reimbursement of expenses
incurred in the performance of 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 Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board reached a consensus on the accounting for transactions between physician
practice management companies and physician practices and the financial
reporting of such entities (EITF issue number 97-2). For financial reporting,
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 a direct equity investment in the
physician practice. The accompanying Consolidated Financial Statements are
prepared in conformity with the consensus reached in EITF 97-2.
Simultaneous to the execution of an MSA with each PA, we also entered into a
shares acquisition agreement ("SAA"). Subsequent to the sale of DCA, under all
of the SAAs entered into except for one, we have the right to designate the
purchaser (successor dentist) to purchase from the PA shareholders all the
shares of the PA for a nominal price of $1,000 or less. Under these SAAs, we
have the unilateral right to establish or effect a change in the PA shareholder,
at will, and without consent of the PA shareholder, on an unlimited basis. Under
the provisions of EITF 97-2, the agreements with the PA shareholders qualify as
a friendly doctor arrangement. Consequently, under EITF 97-2, we consolidate all
the accounts of those PAs in the accompanying Consolidated Financial Statements.
Accordingly, the consolidated statements of operations include the net patient
revenues and related expenses of these PAs and all significant intercompany
transactions have been eliminated.
Each of the DCA SAAs entered into with the PAs did not have the nominal price
provision and were sold as part of the DCA sale transaction in May 2001. The
Company currently has entered into two SAA with PAs, representing three
locations that do not have the nominal price provision. Rather, the SAA purchase
price is based upon a multiple of earnings, as defined. As a result, the
agreements do not meet the criteria of consolidation under EITF 97-2 and the
condensed consolidated statements of operations exclude the net patient service
revenues and expenses of these PAs. The Company only includes net management fee
revenues generated and expenses associated with providing services under the
MSAs.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities and revenues and expenses. On an on-going basis we evaluate these
estimates, including but not limited to those related to carrying value of
accounts receivables, goodwill, intangible, long-lived assets, income taxes and
any potential future impairment of such assets. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and
the understanding of our results of operations.
Valuation of accounts receivables. The carrying amount of accounts receivables
requires management to assess the future collectibility of our accounts
receivable and establish an allowance for patients covered by third-party payor
contracts, anticipated discounts and doubtful accounts. Our established
allowance is determined based upon historical realization rates, the current
economic environment and the age of accounts. Changes in our estimated
collection rates are recorded as a change in estimate in the period the change
is made.
Goodwill, intangibles and long-lived assets. Our business acquisitions typically
result in goodwill, intangible and long-lived assets. Management performs an
impairment test on goodwill, intangible and long-lived assets annually, or more
frequently when events occur such as loss of key personnel, change in legal
factors, operating results, etc., which would suggest that such assets may be
impaired. The determination of the value and possible impairment of such
goodwill, intangible and long-lived assets requires management to make estimates
and assumptions that affect our Consolidated Financial Statements, including
estimating the fair value of Company assets, determining the carrying value of
the balance sheet, performing a comparison of fair value to carrying value, and
calculating an implied value of goodwill, intangibles and long-lived assets. If
impairment is determined, we make the appropriate adjustment to the goodwill,
intangible or long-lived assets to reduce the asset's carrying value.
Income taxes. We record a valuation allowance to reduce our deferred income tax
assets to the amount that is more likely than not to be realized. Our assessment
of the realization of deferred income tax assets requires that estimates and
assumptions be made as to taxable income of future periods. Projection of future
period earnings is inherently difficult as it involves consideration of numerous
factors such as our overall strategies, market growth rates, responses by
competitors, assumptions as to operating expenses and other industry specific
factors.
Results of Operations
The following discussion highlights changes in historical revenues and expense
levels for the three-year period ended December 31, 2002, as reported in our
Consolidated Financial Statements and the related notes appearing elsewhere in
this Form 10-K.
Year Ended December 31, 2002 Statement of Operations Compared to Year Ended
December 31, 2001
Dental Practice Net Patient Revenue. Dental practice net patient revenue
represents the clinical patient revenues at affiliated dental practices where
the consolidation requirements of EITF 97-2 have been met. There were 166 such
clinical locations through May 31, 2001 and 146 such locations immediately
subsequent to the DCA sale transaction. Since June 1, 2001 we have sold an
additional 7 under performing locations and merged 5 practice locations into
other existing facilities. At December 31, 2002, of our total 137 locations
under management, 134 locations meet the consolidation requirements of EITF
97-2. Dental practice net patient revenue was $248.6 million for 2002 compared
to $262.1 million for 2001, representing a 5.2% decrease.
For those locations affiliated as of January 1, 2001, where the management
service agreements meet the EITF 97-2 criteria for consolidation, same-store
daily dental practice net patient service revenue for 2002 decreased by
approximately 0.3% when compared to revenue for 2001. While there are still some
under performing locations, the major factor contributing to the shift from a
growth in same-store revenue in previous years to the decline in 2002 is a very
poor economy and high unemployment rate in several of our markets.
Net Management Fees. Net management fees consist of revenue earned in the
performance of our obligations under management service agreements at affiliated
dental practices where the consolidation requirements of EITF 97-2 are not met.
There were 78 such clinical locations through May 31, 2001. At December 31,
2002, we have 3 locations that do not meet the consolidation requirements of
EITF 97-2. Net management fees were $0.78 million for 2002 and $19.8 million for
2001, of which $19.2 million related to DCA related practices through May 31,
2001. The decrease in these revenues is entirely related to the DCA sale
transaction as essentially all of our management fees revenues were earned by
our DCA subsidiary.
Licensing and Other Fees. We earn certain fees from unconsolidated affiliated
dental practices for various licensing and consulting services. These revenues
were approximately $0.70 million for 2002 and 2001.
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 $218.0 million for 2002 compared to $244.5
million for 2001, representing a 10.8% decrease. The decrease in practice
operating expenses is primarily due to the sale of the DCA subsidiary on May 31,
2001 and certain other clinical locations disposed of throughout 2001.
Excluding all revenues and expenses of the offices disposed of during 2001,
practice operating expenses at the remaining offices (the "Remaining Offices")
for 2002 were 87.2% of total revenue compared to 86.8% for 2001. The practice
operating margin at the Remaining Offices for 2002 was 12.8% compared to 13.2%
for 2001. The decrease in practice operating margin was attributed an overall
increase in accounts receivable allowance reserves, including advances made in
prior years to unconsolidated PAs. We continue to seek reductions in practice
operating expenses as a percentage of revenue by a combination of revenue
enhancement and cost cutting initiatives. Such costs are expected to decline as
a percent of revenue and reflect costs in line with our better practices once
our various operational initiatives are completed.
Corporate Selling, General and Administrative Expenses. Corporate selling,
general and administrative expenses include: corporate salaries, general office
costs, investor relations expenses, 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 decreased to $11.4 million for 2002 from $13.2 million
for 2001. This decrease is primarily attributed to the elimination of our
Florida corporate facility upon the sale of DCA. As a percentage of revenues,
such costs decreased to 4.6% for 2002 compared from 4.7% for 2001.
Stock Compensation Expense. During 2000, we advanced $11.5 million under notes,
which became non-recourse after two years to certain officers in order to retain
and provide incentives to such officers, where shares of our stock owned by each
officer served as collateral for the advances. The entire balance was recorded
as deferred compensation in shareholders' equity in the Consolidated Balance
Sheets. The deferred compensation was being amortized over the life of the
advances as stock compensation expense, representing the difference in the
amount of the advances and the value of the collateral at the date of the loans.
During the third quarter of 2001, the entire remaining non-amortized balance of
deferred compensation was written off as a result of the acceleration of the
non-recourse provision of the advance due from the former CEO and the
significant decline in the underlying value of the pledged collateral, which is
considered to be other than temporary.
In connection with the execution of an officer's amended employment agreement, a
note receivable and related accrued interest of $0.2 million were to be
forgiven, subject to provisions of the agreement. The note and accrued interest
were being expensed over the twenty-four month service period ending May 2002.
During the third quarter of 2001, the remaining balance on the note was written
off as compensation expense based on the note being converted to non-recourse
pursuant to the severance agreement with the officer. In 2000, we also provided
a stock based incentive program to certain employees that matured in 2002, the
cost of which was amortized as a stock compensation expense.
For 2002, we recorded total stock compensation expense of $0.15 million compared
to $6.2 million for 2001. The decrease in expense from 2001 is attributed to the
completion of the programs noted above. No future stock compensation expense is
anticipated.
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. During 2001, we reevaluated
our level of accrued corporate merger and restructure cost, and as a result of
our analysis, a reduction in the reserve was recorded, resulting in a reduction
to expenses of $1.2 million.
Dental Location Dispositions and Impairment of Long-lived Assets. During 2002,
we disposed of a dental office location and a fifty percent equity investment in
a joint venture of another dental practice location. We were also reimbursed
from an insurance carrier for a claim of loss on the sale of certain disposed
locations that occurred in 2001. In connection with these events, we wrote off
$0.37 million in total assets and recorded a gain on dental locations
dispositions of $1.0 million.
The completion of the stock sale of DCA during 2001, a wholly-owned subsidiary,
and certain other assets in Maryland, Virginia, and Indiana represented total
consideration of $36 million, including cash of $26.5 million and the assumption
of related debt and operating liabilities, and a license fee of $2.6 million,
payable in future installments. The loss of $5.8 million recorded in 2001
includes a provision for transaction related closing costs. Additionally, during
2001 we disposed or identified several under performing dental locations for
disposition and recorded a charge of $6.5 million, representing the excess of
the carrying value of the underlying assets to be disposed of, including
intangibles, property and equipment, and other assets over the sale price. Total
net proceeds of $21.4 million from the disposition of subsidiary and dental
locations were primarily utilized to pay down the outstanding balance under our
credit facility, as required by the credit facility agreement.
Depreciation and Amortization. Depreciation and amortization was $4.0 million
for 2002 compared to $12.0 million for 2001. Of this decrease of $8.0 million,
$0.92 million is due to depreciation and amortization associated with the sale
of DCA and $6.9 million as a result of the implementation of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
which eliminated the amortization of our intangible assets as discussed in note
7 to the accompanying Consolidated Financial Statements.
Interest Expense. Interest expense, net of interest income, was $22.4 million
for 2002 compared to $19.7 million for 2001. During 2002 and 2001, we paid
interest due of $10.1 million and $7.4 million, respectively, as interest
payment-in-kind ("PIK"), in the form of additional notes. Because of our ability
to PIK a significant level of our current interest due under the terms of
various debt arrangements, we had sufficient cash flows to meet our other
interest and operating expense requirements during 2002 and 2001.
In April 2002 and 2001, we entered into various amendments to our outstanding
Credit Facility and Levine Notes, as further described in note 9 to the
Consolidated financial Statements. These amendments increased our borrowing
costs due to escalations in interest rates and the amortization of deferred
closing costs over the life of the loans. These increases were partially offset
by a reduction in borrowings under the credit facility (the "Credit Facility")
as a result of the principal payments made in 2001 in connection with the sale
of DCA.
Debt and equity financing costs. In April and May 2001, we entered into various
amendments to our existing Credit Facility and convertible senior subordinated
debt as described in the notes to the Consolidated Financial Statements. As a
result, we recorded a charge of $3.9 million for the write-off of certain
prepaid debt costs related to previously entered credit facility agreements,
loan amendment fees, warrant issuance and associated professional fees incurred
in connection with the execution of the various loan amendments.
Provision for Income Taxes. Our statutory tax rate for federal and state
purposes is approximately 40%. For 2002, no income taxes are due as a result of
the recorded loss for the period. Income tax expense of $0.12 million recorded
for 2001 represented our state tax payable. We did not recognize a tax benefit
for the losses incurred in 2002 and 2001 as our tax loss carryforwards are fully
reserved by a valuation allowance, due to their uncertainty in realization.
Extraordinary loss on debt extinguishments. In April 2002, we entered into an
additional amendment to the Credit Facility. The amendment meets the criteria of
substantial modification as outlined in EITF 96-19. As such, the original Credit
Facility is considered extinguished, with a new Credit Facility issued in its
place. Accordingly, we recorded an extraordinary charge of $2.6 million related
to the early extinguishment of debt for 2002. No tax benefit was recorded as a
result of the charge as the realization of available deferred tax assets is not
assured. The extraordinary loss represents the amendment fees of $2.0 million
incurred and $0.60 million for the write-off of the non-amortized portions of
previously recorded deferred financing costs associated with the original
facility agreement.
We entered into an agreement to amend our senior subordinated debt ("Levine
Note") in April 2001. The amendment to the Levine Note has met the criteria of
substantial modification as outlined in EITF 96-19. As such, the Levine Note is
considered extinguished, with a new note issued in its place. Accordingly, we
recorded an extraordinary charge of $5.6 million for 2001 related to the early
extinguishment of debt. No tax benefit was recorded as a result of the charge as
the realization of available deferred tax assets is not assured. The
extraordinary loss represents the amendment fee of $2.2 million incurred to
extinguish the original note and $3.4 million for the write-off of the
non-amortized portions of the warrant discount and deferred financing costs
associated with the original note agreement.
Cumulative Effect of a Change in Accounting Principle. In January 2002 we
adopted the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 requires us to stop amortizing goodwill and certain intangible
assets with an indefinite useful life. Instead, goodwill and intangible assets
deemed to have an indefinite useful life are subject to an annual review for
impairment. We performed the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and recorded a non-cash
impairment charge of $89.0 million to reduce the carrying value of our
intangibles. Such non-cash impairment is reflected as a cumulative effect of
change in accounting principle in the accompanying consolidated statements of
operations. For additional discussion on the impact of adopting SFAS 142, see
Note 7 to the accompanying Consolidated Financial Statements.
Year Ended December 31, 2001 Statement of Operations Compared to Year Ended
December 31, 2000
Dental Practice Net Patient Revenue. Dental practice net patient revenue
represents the clinical patient revenues at affiliated dental practices where
the consolidation requirements of EITF 97-2 have been met. There were 166 such
clinical locations through May 31, 2001 and 146 consolidated locations
immediately subsequent to the DCA sale transaction, and 139 consolidated
locations at December 31, 2001. Dental practice net patient revenue was $262.1
million for 2001 compared to $249.3 million for 2000, representing a 5.1%
increase.
This revenue growth is partially due to the addition of 4 affiliated dental
practices at the end of August 2000, representing 21 locations, although 15 of
these offices were subsequently sold as part of the DCA sale on May 31, 2001.
Included in dental practice net patient revenue for 2001 and 2000 was $11.4
million and $9.0 million, respectively, of revenues from clinical locations
included in the DCA sale transaction. Also, $3.7 million of the increase is
associated with an acquisition of six clinical locations effective September
2000 that were not sold as part of the DCA transaction. These increases in
revenues were offset by the disposition of six clinical locations during 2001,
representing $4.4 million.
We were also able to effectively increase total dental practice net patient
revenue at existing facilities. For those locations affiliated as of January 1,
2000, where the management service agreements meet the EITF 97-2 criteria for
consolidation, same-store dental practice net patient revenue for 2001 increased
by approximately 7.4% when compared to revenue for 2000.
Net Management Fees. Net management fees consist of revenue earned in the
performance of our obligations under management service agreements at affiliated
dental practices where the consolidation requirements of EITF 97-2 are not met.
There were 78 such clinical locations through May 31, 2001 and 2 such locations
subsequent to the DCA sale transaction. Net management fees were $19.8 million
for 2001, of which $19.2 million related to DCA related practices through May
31, 2001. Net management fees were $43.0 million for 2000. The decrease in these
revenues is entirely related to the DCA sale transaction as essentially all of
our management fees revenues were earned by our DCA subsidiary.
Licensing and Other Fees. Prior to the DCA sale transaction, we earned fees from
certain unconsolidated affiliated dental practices for various licensing and
consulting services performed by our DCA subsidiary. This revenue was $0.70
million for 2001 and $0.90 million for 2000.
Simultaneous to the sale of DCA, we entered into a $2.6 million five-year
license agreement with DCA for use of our proprietary practice management
system, subject to negotiations for additional term extensions. Such amount has
been recorded as deferred license revenues and is being amortized to revenue
over the life of the agreement, with $0.30 million earned in 2001.
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 $244.5 million for 2001 compared to $249.3
million for 2000, representing a 1.9% decrease. The decrease in practice
operating expenses is due to the sale of the DCA subsidiary on May 31, 2001 and
six clinical locations disposed of throughout 2001.
Excluding all revenues and expenses of the offices disposed of during 2001,
practice operating expenses at the remaining offices (the "Remaining Offices")
for 2001 were 86.8% of total revenue compared to 86.0% for 2000. The practice
operating margin at the Remaining Offices for 2001 was 13.2% compared to 14.0%
for 2000. The decrease in operating margin resulted from increased clinical
salaries, benefits and provider costs at the Remaining Offices, partially offset
by decreased nonclinical salaries and benefits, dental and lab supplies,
occupancy, and SG&A costs as a percent of revenues. Clinical salaries, benefits,
and provider costs at the Remaining Offices as a percentage of revenues was
approximately 2.7 percentage points higher for 2001 than 2000.
Corporate Selling, General and Administrative Expenses. Corporate selling,
general and administrative expenses include: corporate salaries, general office
costs, investor relations expenses, 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 decreased to $13.2 million for 2001 from $14.3 million
for 2000. This decrease is primarily attributed to the elimination of our
Florida corporate facility upon the sale of DCA. As a percentage of revenues,
such costs decreased to 4.7% for 2001 compared from 4.9% for 2000.
Stock Compensation Expense. During 2000, we advanced $11.5 million under notes
which became non-recourse after two years to certain officers in order to retain
and provide incentives to such officers, where shares of our stock owned by each
officer served as collateral for the advances. The entire balance was recorded
as deferred compensation in shareholders' equity in the Consolidated Balance
Sheets. The deferred compensation was being amortized over the life of the
advances as stock compensation expense, representing the difference in the
amount of the advances and the value of the collateral at the date of the loans.
The total original advance included advances of $5.9 million to DCA officers.
These advances were sold in connection with the sale of DCA. The remaining
non-amortized outstanding balance of deferred compensation associated with the
advances to DCA officers at the time of the sale transaction of $4.6 million was
included in the determination of impairment of long-lived assets recorded in the
fourth quarter of 2000. During the third quarter of 2001, the entire remaining
non-amortized balance of deferred compensation was written off as a result of
the acceleration of the non-recourse provision of the advance due from the
former CEO and the significant decline in the underlying value of the pledged
collateral, which is considered to be other than temporary.
In connection with the execution of an officer's amended employment agreement, a
note receivable and related accrued interest of $0.2 million were to be
forgiven, subject to provisions of the agreement. The note and accrued interest
were being expensed over the twenty-four month service period ending May 2002.
During the third quarter of 2001, the remaining balance on the note was written
off as compensation expense based on the note being converted to non-recourse
pursuant to the severance agreement with the officer. In 2000, we also provided
a stock based incentive program to certain employees, the cost of which was
amortized as a stock compensation expense.
For 2001, we recorded total stock compensation expense of $6.2 million as
compared to $1.4 million for 2000.
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. As a result of the business
combination, we recorded a restructuring charge of $1.2 million during 2000, all
of which was recorded during the first quarter of 2000, relating to our
restructuring plan, including charges for system conversions, redirection of
certain duplicative operations and programs, and other costs. We also recorded
direct merger expenses of $0.5 million during the first quarter of 2000 for the
proposed merger with Leonard Green & Partners, L.P. that was terminated in the
second quarter of 2000. These expenses consisted primarily of investment
banking, accounting, legal and other advisory fees.
During 2001, we reevaluated our level of accrued corporate merger and
restructure cost, and as a result of our analysis, a reduction in the reserve
was recorded, resulting in a reduction to expenses of $1.2 million.
Dental Location Dispositions and Impairment of Long-lived Assets. The completion
of the stock sale of DCA, a wholly-owned subsidiary, and certain other assets in
Maryland, Virginia, and Indiana represented total consideration of $36 million,
including cash of $26.5 million and the assumption of related debt and operating
liabilities, and a license fee of $2.6 million, payable in future installments.
The loss of $5.8 million recorded in 2001 includes a provision for transaction
related closing costs. Additionally, during 2001 we disposed or identified
several under performing dental locations for disposition and recorded a charge
of $6.5 million, representing the excess of the carrying value of the underlying
assets to be disposed of, including intangibles, property and equipment, and
other assets over the sale price. Total net proceeds of $21.4 million from the
disposition of subsidiary and dental locations were primarily utilized to pay
down the outstanding balance under our credit facility, as required by the
credit facility agreement.
Depreciation and Amortization. Depreciation and amortization was $12.0 million
for 2001 compared to $12.6 million for 2000. This decrease is primarily due to a
reduction of $2.0 million resulting from the sale of the DCA subsidiary on May
31, 2001, offset by additional property and equipment and intangible costs
assigned to management services agreements associated with dental practice
affiliations completed and earn-out payments made or converted to notes in 2001
and 2000.
Interest Expense. Interest expense, net of interest income, was $19.7 million
for 2001 compared to $15.3 million for 2000. During 2001 and 2000, we paid
interest of $7.4 million and $2.2 million, respectively, as interest
payment-in-kind ("PIK"), in the form of additional notes.
This increase in interest expense was due to additional debt incurred under our
credit facility (the "Credit Facility") to complete additional dental practice
affiliations and make earn-out payments associated with past affiliations. For
the two-years ended December 31, 2001, combined we paid total cash consideration
paid for practice affiliations was $30.3 million. In addition, we experienced an
overall increase in market rates of interest during 2000. The easing of interest
rates by the Federal Reserve, along with our pay down on the Credit Facility
resulting from the sale of DCA, mitigated our increased borrowing amounts
associated with our Credit Facility.
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 terms of
the Credit Facility. The interest rate on the senior subordinated note is 12.5%,
subject to incremental charges as outlined in the agreement. In April and May
2001, the notes were amended to waive the non-compliance as of December 31,
2000, reset all covenants for 2001 and subsequent years, and increased the PIK
note interest rate to 16.5%, as discussed in the notes to the Consolidated
Financial Statements.
Debt and equity financing costs. In April and May 2001, we entered into various
amendments to our existing Credit Facility and convertible senior subordinated
debt as described in the notes to the Consolidated Financial Statements. As a
result, we recorded a charge of $3.9 million for the write-off of certain
prepaid debt costs related to previously entered credit facility agreements,
loan amendment fees, warrant issuance and associated professional fees incurred
in connection with the execution of the various loan amendments.
Provision for Income Taxes. Our statutory tax rate for federal and state
purposes is approximately 40%. Income tax expense of $0.12 million recorded for
2001 represents our state tax payable. We did not recognize a tax benefit for
the losses incurred in 2001 as our tax loss carryforwards are fully reserved by
a valuation allowance. We recorded a net tax benefit of $4.0 million for 2000 on
a loss before income taxes of $52.7 million. Our effective tax rate benefit was
substantially lower primarily due to the valuation allowance on certain deferred
tax assets of $17.0 million.
Extraordinary loss on debt extinguishments. We entered into an agreement to
amend our senior subordinated debt ("Levine Note") in April 2001. The amendment
to the Levine Note has met the criteria of substantial modification as outlined
in EITF 96-19. As such, the Levine Note is considered extinguished, with a new
note issued in its place. Accordingly, we recorded an extraordinary charge of
$5.6 million for 2001. No tax benefit was recorded as a result of the charge as
the realization of available deferred tax assets is not assured. The
extraordinary loss represents the amendment fee of $2.2 million incurred to
extinguish the original note and $3.4 million for the write-off of the
non-amortized portions of the warrant discount and deferred financing costs
associated with the original note agreement.
Liquidity and Capital Resources
Proposed Restructuring
On April 30, 2003, we reached an agreement on the terms of a financial
restructuring with our senior lenders and the holders our Senior Subordinated
Debt. If implemented, the restructuring will extinguish all of our existing
common and preferred equity.
If the restructuring is confirmed as currently proposed, our outstanding senior
and senior subordinated debt as of April 1, 2003 will be reduced from
approximately $128 million to approximately $38 million by conversion of $90
million of the debt into equity. The restructuring will also eliminate our $39
million convertible subordinated debt. Two of our existing lenders have agreed
to provide us with a $7.5 million debtor-in-possession credit facility.
It is expected that the restructuring will be completed through a pre-arranged
filing under Chapter 11 of the United States Bankruptcy Code (the "Code") by the
Company and the subsequent judicial confirmation of a plan of reorganization
under the Code. Because the terms of the proposed reorganization plan have been
agreed upon by the holders of 100% of the $128 million of Senior Secured Debt
and Senior Subordinated Debt, we believe there is a strong likelihood that the
proposed restructuring will be confirmed. The principal effects of the
restructuring on our debt will be as follows.
Senior Secured Debt and Senior Subordinated Debt. There was approximately $84
million of Senior Secured Debt outstanding under the Credit Facility as of April
1, 2003. Of this amount, approximately $38 million was held by JP Morgan Chase
Bank, Fleet Capital Corporation and U.S. Bank National Association
(collectively, the "Bank Lenders") and $47 million was held by funds managed by
DDJ Capital Management, LLC and Pleasant Street Investors, LLC (the "Other
Senior Lenders"). In addition, Levine Leichtman Capital Partners II, L.P.
("LLCP") held approximately $44 million of Senior Subordinated Debt.
The full amount of the $38 million of Senior Secured debt held by the Bank
Lenders will be assumed by us following the reorganization and restructured as
follows (the "Restructured Bank Debt"):
The Restructured Bank Debt will have a three-year term and bear interest at
prime plus 2.5% or, at our option, LIBOR plus 4.0%. The principal will be
payable as follows: $400,000 during 2003, $5 million in equal quarterly
installments during 2004, $6 million in equal quarterly installments during
2005, and $2 million payable each quarter during 2006 until maturity, when the
total unpaid balance will be due.
The $90 million of Senior Secured Debt and Senior Subordinated Debt held by the
Other Senior Lenders and LLCP will be converted into equity, consisting of
common stock, a new issue of 5% convertible preferred stock and warrants to
purchase additional common stock constituting 16.5% of the Company's common
stock assuming conversion of the new convertible preferred stock.
Convertible Subordinated Debt. While the restructuring will eliminate the
approximately $39 million of Convertible Subordinated Debt outstanding as of
April 1, 2003, under certain circumstances the holders of this debt might
receive the right to purchase an aggregate of 3% of the fully diluted common
stock of the Company.
Debtor-in-Possession Credit Facility. Certain of our Senior Secured Lenders have
agreed to provide a $7.5 million debtor-in-possession credit facility (the "DIP
Facility") to pay certain post-petition expenses. The DIP Facility will become
available on the first day following its approval by the Bankruptcy Court and
will have a 180-day term, subject to earlier termination upon the occurrence of
certain events. Amounts borrowed under the DIP Facility will have super-priority
status and will be secured by a first priority security interest in, and lien
on, all assets of the Company.
The DIP Facility will bear interest at an annual rate ranging from 10% to 13%
over the life of the facility, and will require payment of additional interest
in the event of a default. On the closing date, a commitment fee equal to 2.5%
of the commitment will be due the lenders, and upon termination an additional
fee equal to 2.5% of the commitment will be due. In exchange for the
termination fee, the lenders have agreed that if a plan of reorganization
described herein is confirmed, we will have the right to convert the DIP
Facility into a revolving credit facility.
Liquidity
The Company's independent public accountants have included a "going concern"
emphasis paragraph in their audit report accompanying the 2002 financial
statements. The paragraph states that the Company has accumulated losses for the
last three years, expects to incur additional losses in the foreseeable future,
has debt due in 2003 which it cannot pay from cash flows generated from
operations, and needs to obtain additional capital, restructure its balance
sheet, or a combination of both to sustain future operations and continue as a
going concern. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern.
The Company experienced losses attributed to common stock of approximately $97.1
million for 2002, $35.1 million for 2001, and $48.7 million for 2000.
Contributing to these significant losses are certain charges for asset
impairments, the disposition of DCA and several other dental locations, debt
restructuring and debt extinguishments, and stock compensation retention
programs. The Company does not anticipate future significant non-reoccurring
charges; however, net losses are expected to continue until a long-term debt and
equity restructuring plan is implemented.
While the Company experienced losses for each of the three years in the period
ended December 31, 2002, the Company's dental facilities continue to generate
positive cash flow, as reflected in cash flows from operations of $12.2 million
for 2002, $19.4 million for 2001 and $9.5 million for 2000. This ability to
generate positive cash flow from operations was instrumental in the Company's
negotiation for modifications to its existing credit agreement in April 2002. As
more fully described in Note 9 to the accompanying Consolidated Financial
Statements, these modifications resulted in a permanent waiver of past covenant
violations, reset covenant levels, and the principal amortization schedule was
significantly modified such that approximately $20.7 million of payments were
deferred until April 1, 2003. These modifications were designed to temporarily
relieve the Company from its short-term debt service obligations until a
long-term debt and restructuring plan can be implemented. Under modifications of
the credit agreement, a principal payment of $6.8 million is due on April 1,
2003 and $7.2 million is due on July 1, 2003. The remaining $67.7 million
outstanding at December 31, 2002 is due on September 30, 2003.
On March 31, 2003, the banks agreed to an amendment to postpone substantially
all of the April payment due until April 30, 2003. Based upon the proposed
long-term financial restructuring plan discussed above, management anticipates
an additional postponement from the banks through May 9, 2003. Due to the number
of uncertainties, many out of our control, there can be no assurance that we
will be able to consummate any financial restructuring or continue as a going
concern.
Current Financial Condition and Cashflows
At December 31, 2002, cash and cash equivalents were $3.0 million, representing
a $4.2 million decrease in cash and cash equivalents from $7.2 million at
December 31, 2001. The decrease in cash was primarily due to $2.5 million in
additional disbursements related to the timing of our weekly accounts payable
check processing runs.
Our working capital deficit at December 31, 2002 of $164.6 million represents an
increase in the working capital deficit from December 31, 2001 of $6.3 million.
This significant increase in the working capital deficit is directly attributed
to the $161.4 million in our Credit Facility, senior subordinate notes, and
subordinated convertible notes included in the current portion of long-term
debt, as discussed in note 9 to the accompanying Consolidated Financial
Statements.
Net cash provided by operations amounted to $12.2 million for 2002 compared to
$19.4 million for 2001, a decrease of $7.2 million. The total decrease in cash
provided by operations is primarily attributed to $3.9 million generated by DCA
prior to its sale in May 2001 and federal income tax refunds received in 2001 of
$2.2 million.
Net cash used in investing activities was $1.8 million for 2002, comprised of
cash used of $1.6 million for property and equipment expenditures and $1.6
million for earn-outs and trailing costs on acquisitions that closed in prior
years, offset by $1.4 million in cash received from the disposition of certain
dental locations. For 2001 cash provided by investing activities was $9.4
million. Included in the investing activities for 2001 is cash paid of $4.2
million for earn-out payments and $1.0 million of trailing closing costs on
affiliated dental practice acquisitions, which closed in prior years. We also
paid $3.7 million for property and equipment for 2001. Advances to
unconsolidated affiliated practices of $3.2 million for 2001 were also made.
Advances consisted primarily of receivables from PAs due in connection with cash
advances for working capital and operating purposes to certain unconsolidated
PAs. We advanced funds to these certain PAs during the initial years of
operations, until the PA owner could repay the seller debt, and the operations
improve. Such advances entirely related to our DCA division facilities, which
were eliminated upon consummation of the DCA stock sale transaction in May 2001.
Net proceeds from the DCA sale and other dental location dispositions of $21.4
million for 2001 were utilized to pay down the outstanding credit facility
balance.
Cash used in financing activities for 2002 was $14.6 million, comprised of $13.2
million for debt and lease obligations and $1.4 million for debt amendment fees
and related direct closing costs. Net cash used in financing activities was
$26.8 million for 2001, of which $18.7 million represents the pay down of the
credit facility from the DCA sale proceeds partially offset by subsequent
borrowings. During 2001 we paid $2.4 million in debt amendment fees and related
closing costs. The remainder of cash used in financing activities during 2001
primarily represents scheduled payments on long-term debt and capital leases.
In connection with certain completed affiliation transactions, we have agreed to
pay to the sellers' future consideration in the form of cash. 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 these
acquisitions when such amounts are probable and reasonably estimable. As of
December 31, 2002, future anticipated earn-out payments of $1.0 million are
accrued and 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 $2.0 million and $3.0 million
through December 2004, which is expected to be paid in a combination of cash and
notes.
Outstanding Debt and Other Financing Arrangements
Credit Facility Term Note
In April 2001, we entered into amendments to our existing Credit Facility to
amend certain covenants. In connection with the execution of the amendments, the
banks waived the defaults under the Credit Facility that existed at December 31,
2000 due to failure to meet certain financial ratio covenants and reset all
covenants for 2001 and subsequent years. Additionally, the banks agreed to
certain other changes including a revised term and provisions regarding asset
sales and new financing. As consideration for these modifications, we agreed to
an amendment fee of $1.0 million, which was paid during the three months ended
June 30, 2001, and an additional fee of $1.0 million payable at maturity of the
term loan if certain conditions were not met. The additional fee was paid in
connection with an additional amendment to the Credit Facility consummated in
April 2002, as discussed below. We also issued warrants to the banks to purchase
an aggregate of 166,667 shares of the Company's common stock at a strike price
of $3.66 per share. During the year ended December 31, 2001, we recorded a
charge of $3.9 million for the write-off of certain prepaid debt costs related
to previously entered into credit facility agreements, loan amendment fees,
warrant issuance and associated professional fees incurred in connection with
the execution of the amended credit facility agreement.
On October 1, 2001, the Credit Facility converted into a term loan, with
required quarterly payments. On April 15, 2002, we entered into an amendment to
the existing Credit Facility. In connection with the execution of the amendment,
the bank agreed, among other things, to reset certain covenants and reduce the
required future quarterly principal payments of $7.2 million, which were to
begin on October 1, 2001. In connection with these modifications, the Company
accrued as principal the remaining $1.0 million due as a result of the amendment
in 2001 as discussed above, which is payable upon maturity. We also agreed to an
additional amendment fee of $1.0 million, with cash of $0.50 million and the
remaining $0.50 million accrued as principal, payable upon final maturity of the
Credit Facility on September 30, 2003.
Principal amounts owed under the Credit Facility bear interest at LIBOR plus
7.50% or the prime rate plus 5.75%, at our option. In addition to the cash
interest charges outlined above, we are to pay an incremental payment-in-kind
("PIK") interest on the outstanding principal balance of 1.0% from April 15,
2002 though March 31, 2003, increasing to 2.0% from April 1, 2003 through
maturity. The incremental PIK interest is payable upon maturity. We also paid a
PIK fee equal to 1.0% of the outstanding principal balance on April 15, 2002,
2.0% on October 1, 2002, and 3.0% on April 1, 2003. PIK fees are payable upon
maturity.
The entire outstanding Credit Facility balance at December 31, 2002 of $81.6
million is included in the current portion of long-term debt and capital leases
in the accompanying Consolidated Balance Sheets. Required principal installments
due are $6.8 million on April 1, 2003, $7.2 million on July 1, 2003 and the
remaining balance due at maturity on September 30, 2003. The Credit Facility
also has mandatory prepayment provisions for certain asset sale transactions and
excess cash flows, as defined. These prepayment provisions are applied to future
required quarterly installments.
The Credit Facility contains several covenants, including but not limited to,
restrictions on our ability to incur indebtedness or repurchase shares, a
prohibition on dividends without prior approval, prohibition on acquisitions,
and fees for excess earn-out and debt payments, as defined. There are also
financial covenant requirements relating to compliance with specified cash flow,
liquidity, and leverage ratios. Our obligations under the Credit Facility,
including the applicable subsidiaries in the guarantees, are secured by a
security interest in substantially all assets of each of such entities.
The 2002 amendment to the Credit Facility met the criteria of substantial
modification as outlined under the provisions of EITF 96-19 and is accounted for
as an extinguishment of debt. Accordingly, in the second quarter of 2002 we
recorded an extraordinary loss of approximately $2.6 million. The extraordinary
loss represents amendment fees of $2.0 million incurred to extinguish the
original Credit Facility and $0.60 million for the write-off of the
non-amortized portion of deferred financing costs associated with the original
note agreement. Professional fees and bank PIK fees paid, or anticipated to be
paid, of $6.2 million for the execution of the amended Credit Facility have been
capitalized and are being amortized over the remaining life of the Credit
Facility. At December 31, 2002, $2.3 million in anticipated future PIK fees is
included in other current liabilities.
Senior Subordinated Notes
In June 2000, we raised $36.5 million from the sale of debt and equity to Levine
Leichtman Capital Partners II, L.P. under a securities purchase agreement. The
equity portion of the transaction comprised 458,333 shares of common stock
valued at $11.0 million. The debt portion of the transaction comprised a senior
subordinated note with a face value of $25.5 million (the "Levine Note"). We
also issued a warrant to purchase 354,167 shares of the InterDent's common stock
at an initial price of $41.04 per share, which as described below, was
subsequently reduced to $20.88 per share. The warrant was valued at $2.7
million. The warrant value was reflected as a discount to the face value of the
Levine Note and has been subsequently written off as discussed below.
In April 2001, we entered into an amendment to the Levine Note. In connection
with the amendment, the lender waived the defaults under the Levine Note that
existed at December 31, 2000 due to failure to meet certain financial ratio
covenants and reset all covenants for 2001 and subsequent years, in addition to
certain other modifications. The Amendment met the criteria of substantial
modification as outlined in EITF 96-19. As such, the Levine Note was considered
extinguished, with a new note issued in its place. The extinguishment was
recorded as an extraordinary charge of $5.6 million. No tax benefit was recorded
as a result of the charge as the realization of available deferred tax assets is
not assured. The extraordinary loss represents $3.3 million for write-off of the
non-amortized portion of the warrant discount and deferred financing costs
associated with the original note and an amendment fee of $2.3 million incurred
to extinguish the original note. In addition to the amendment fee, the PIK
interest rate was increased to 16.5% and price of the warrants was reduced from
an initial strike price of $41.04 per share to $20.88 per share. Professional
fees incurred for the execution of the amended note agreement have been
capitalized and are being amortized over the remaining life of the Levine Note.
In April 2002, we entered into an additional amendment to the Levine Note. In
connection with the amendment, the lender reset all covenants for 2002 and
subsequent years, in addition to certain other modifications. As consideration
for the amendment, we agreed to pay an amendment fee of $2.0 million, payable in
additional notes and increase the PIK interest rate by one-half percentage
point. The amendment fee has been capitalized and is being amortized over the
remaining life of the Levine Note.
Additionally, the Levine Note has mandatory principal prepayments based upon a
change in ownership, certain asset sales, or defined excess cash flows. The
Levine Note bears interest at 12.5%, payable monthly, with an option to pay the
interest in a PIK note. We are currently issuing PIK notes at 17.0% for payment
of current interest amounts owed. 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 entire principal of the Levine Note is due September 2005 but may be paid
earlier at our election, subject to a prepayment penalty. For financial
reporting purposes, the Levine Note has been accelerated to current portion of
long-term debt as discussed in note 9 to the accompanying Consolidated Financial
Statements.
Subordinated Convertible Notes
In 1998, we issued $30.0 million of subordinated convertible notes ("Convertible
Notes"). The Convertible Notes mature June 2006 and bear interest at 7.0%,
payable semi-annually with an option to pay the interest in a PIK note, which we
are currently exercising for payment of current interest amounts due. As
outlined the note agreement, the interest rate on the Convertible Notes has
increased to 8.0% as a result of our election to pay the current interest due in
a PIK note. In April 2001, we entered into an amendment to the Convertible Notes
and the lender waived the cross-default provision that existed at December 31,
2000 due to the covenant violations under the Credit Facility and agreed to
reset all covenants for 2001 and subsequent years, in addition to certain other
modifications. As consideration for the amendment, we agreed to reduce the
conversion price of the notes. The Convertible Notes are convertible into shares
of the common stock at $39.00 for each share of common stock issuable upon
conversion of outstanding principal and accrued but unpaid interest on such
subordinated notes and shall be automatically converted into common stock if the
rolling 21-day average closing market price of the common stock on 20 out of any
30 consecutive trading days is more than $107.40.
For financial reporting purposes, the Convertible Notes have been accelerated to
current portion of long-term debt as discussed in note 9 to the accompanying
Consolidated Financial Statements.
Preferred and Common Stock
We are authorized to issue 30,000,000 shares of Preferred Stock. Presently
authorized series of our Preferred Stock include the following series:
o Series A--100 shares authorized, issued and outstanding;
o Series B--70,000 shares authorized, zero issued or outstanding;
o Series C--100 shares authorized, zero shares issued or outstanding; and
o Series D--2,000,000 shares authorized, 1,574,608 shares are issued and
outstanding.
Our presently authorized Preferred Stock rank senior to outstanding Common
Stock. The shares of Series B Preferred Stock were authorized in connection with
issuance of the Convertible Notes as discussed in note 9 to the Consolidated
Financial Statements. The Series B Preferred Stock conversion provision of the
Convertible Notes has expired. Accordingly, although the Series B Preferred
Stock is authorized, we do not expect any such shares to ever be issued.
Similarly, 100 shares of Series C Preferred Stock were authorized and issued in
connection with the Convertible Note issuance, but then converted into 10 shares
of common stock in the March 1999 merger transaction. We do not expect any
shares of Series C Preferred Stock to be issued. The shares of Series D
Preferred Stock are convertible into shares of our Common Stock at the rate of
one-sixth of a share of Common Stock for each share of Series D Preferred Stock
(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 anti-dilutive provisions. The
Series D Preferred Stock holders are entitled to vote on all matters as to which
the Common Stock shareholders are entitled to vote, based upon the number of
shares Common Stock the Series D Preferred Stock is convertible into. The Series
A Preferred Stock is not convertible, is entitled to elect a director, and is
otherwise non-voting.
A total of 36,920 and 56,541 outstanding shares of Common Stock issued at a
price of $2.70 and $1.35 per share, respectively, are subject to repurchase by
us at the original issue price at our election.
Dental Location Dispositions
Effective May 31, 2001, we completed the stock sale of DCA, a wholly-owned
subsidiary, and certain other assets in Maryland, Virginia and Indiana. The
transaction also includes the assets associated with the notes receivable made
to officers of DCA as discussed in the notes to the Consolidated Financial
Statements. Total consideration was $36.0 million, less the assumption of
related debt and operating liabilities. Upon the two-year anniversary of the
transaction close, we shall have the right to repurchase the assets of DCA,
subject to a minimum price, as defined in the agreement. In connection with the
sale of assets, we entered into a five-year license agreement totaling $2.6
million, for the use of our proprietary practice management system, subject to
negotiations for additional term extensions. The $2.6 million paid to us is
recorded as deferred revenues and amortized over the life of the agreement. The
parties also entered into a transition services agreement and a business
collaboration agreement delineating the use of the practice management system,
the joint purchase of supplies, the joint negotiation for managed care
contracts, training systems, and other similar operational matters.
During 2001, we also disposed or identified under performing dental locations
for disposition ("Disposed Locations"). In connection with the sale of DCA and
Disposed Locations the Company wrote off $40.2 million in total assets, yielded
proceeds of $21.4 million, net of closing costs and recorded a total loss of
$12.3 million for the year ended December 31, 2001. The total recorded loss
includes $1.7 million for the provision of direct transaction closing costs.
During 2002, we disposed of a dental office location and a fifty percent equity
investment in a joint venture of another dental practice location. We were also
reimbursed from an insurance carrier for a claim of loss on the sale of certain
disposed locations that occurred in 2001. In connection with these events, we
wrote off $0.4 million in total assets, yielded proceeds of $1.4 million, net of
closing costs and recorded a total gain on dental locations dispositions of $1.0
million.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments, which could expose us to significant market
risk. Our interest expense is sensitive to changes in the general level of
interest rates as our credit facility has interest rates based upon LIBOR or the
prime rate, as discussed in the notes to Consolidated Financial Statements.
At December 31, 2002, we had $84.8 million in floating rate debt under the
Credit Facility and other long-term debt. The detrimental effect on our pre-tax
earnings of a hypothetical 100 basis point increase in the average interest rate
under the credit facility would have an impact of approximately $0.85 million
for the year ended December 31, 2002. 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, convertible subordinated dent, long-term debt and capital lease
obligations of $91.2 million are at fixed rates of interest.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data of the Company and
the report of independent auditors thereon set forth beginning at pages F-1
herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the executive officers and directors of InterDent is
set forth below.
Name Age Position
H. Wayne Posey.......................64 Chairman of the Board, President and
Chief Executive Officer
Ivar Chinna .........................40 Chief Operations Officer
Robert Hill .........................40 Vice President of Finance& Accounting
Paul Keckley, Ph.D. (1)(2)...........52 Director (term expires in 2003)
Steven Hartman (1)(2)................36 Director (term expires in 2004)
Gerald R. Aaron, D.D.S...............57 Director (term expires in 2005)
.........
(1) Member of Compensation Committee
(2) Member of the Audit Committee
H. Wayne Posey. Mr. Posey has been a director of InterDent since March 12, 1999
and has served as Chairman, President, and Chief Executive Officer since
September 2001. Mr. Posey was a director of Gentle Dental Service Corporation
since November 1997 and served as a director of GMS Dental Group, Inc. from
December 1996 until the merger of GMS Dental Group, Inc. with Gentle Dental
Service Corporation in November 1997. Mr. Posey was a founder of ProMedCo
Management Company and served as its President, Chief Executive Officer,
director and a member of the executive committee from its inception in 1994, and
Chairman from December 1998 until his retirement in February 2001. Mr. Posey was
also a healthcare consultant from 1975 until 1994, and prior to that was
employed by Hospital Affiliates International from 1970 until 1975, holding the
positions of Controller, Vice President and Controller, Senior Vice President of
Operations, director and member of the executive committee.
Ivar Chhina. Mr. Chhina was appointed Interim Chief Operating Officer on January
1, 2003. Prior to his appointment to Interim Chief Operating Officer, Mr. Chinna
served as the Special Assistant to the CEO since October 8, 2000. Previously,
Mr. Chhina was President & COO of ChartOne, Inc., a private, healthcare
technology and service provider to over 1,400 U.S. hospitals. Mr. Chhina led its
spin-off and LBO from QuadraMed Corp., a public healthcare technology company
for which Mr. Chhina was a Division President. Prior to QuadraMed, Mr. Chinna
was the CFO for PHG, Inc., a national litigation support and healthcare
technology/services company that merged with QuadraMed. Prior to this, Mr.
Chhina was a Principal for Mehta & Co., Inc., a private equity merchant bank,
where he assumed senior operating and consulting roles with portfolio companies.
Robert Hill. Mr. Hill joined InterDent in April 2002 as Vice President of
Finance & Accounting. Effective October 1, 2002, Mr. Hill was appointed an
executive officer. Previously, Mr. Hill served as Vice President - Finance for
Gruma Corporation, the parent company of Mission Foods where he was employed
since 1992. In addition to serving on Gruma's management committee, Mr. Hill was
responsible for numerous financial and planning functions including managing the
company's external relationships with the financial community. Prior to Gruma,
Mr. Hill held various positions at ARCO and AmSouth Bank.
Paul Keckley, Ph.D. Dr. Keckley has been a director of InterDent since March 12,
1999. Prior to that time, Dr. Keckley was a director of Gentle Dental Service
Corporation beginning in December 1996. Since 1999, Dr. Keckley has been
President and CEO of EBM Solutions, Inc., a clinical decision support company
based in Nashville, TN. From 1994 to 1999, Dr. Keckley was Vice President
Strategic Development at PhyCor, Inc. Dr. Keckley previously served as a
director of PhyCor, Inc., and from 1985 to 1994 he was President of The Keckley
Group, a market research and strategic planning firm for hospitals, health
systems, medical practices and health maintenance organizations.
Steven Hartman. Mr. Hartman has been a director of InterDent since October 8,
2002. Mr. Hartman joined Levine Leichtman Capital Partners in 1996 and is
currently a vice president of the firm and participates in investment due
diligence, negotiation of definitive documents and monitoring of portfolio
companies. Prior to joining Levine Leichtman Capital Partners, Mr. Hartman
worked in the Corporate Finance Department at Financiere Indosuez in Paris,
France, originating and structuring mergers and acquisitions. From 1988 to 1990,
Mr. Hartman was a financial analyst at Lehman Brothers in the Corporate Finance
Department specializing in middle-market transactions.
Gerald Aaron, D.D.S. Dr. Aaron is a Board certified Pediatric Dentist. Dr. Aaron
has been employed by one of InterDent's affiliated dental practices, Gentle
Dental of Oregon, P.C. since 1991. Dr. Aaron was appointed a member of the Board
of Directors of InterDent in October 2001 and is Chair of the InterDent Dental
Advisory Board. Prior to joining Gentle Dental, Dr. Aaron achieved the rank of
Colonel in the United States Army and was the consultant to the Office of the
Surgeon General of the Army on Pediatric Dentistry from 1987-1991.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons. Based solely on the Company's
review of such forms and amendments thereto furnished to the Company and written
representations from certain reporting persons, the Company believes that all
executive officers, directors and greater than 10% stockholders complied with
all filing requirements applicable to them during fiscal year 2002, except as
follows: Robert Hill and Steven Hartman was each late in filing initial report
of beneficial ownership.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the compensation earned, by the Company's Chief
Executive Officer and other executive officer whose salary and bonus for fiscal
2002 was in excess of $100,000, for services rendered in all capacities to the
Company and its subsidiaries for each of the last three fiscal years. No
executive officer who would have otherwise been includable in such table on the
basis of salary and bonus earned for fiscal 2002 has been excluded by reason of
his or her termination of employment or change in executive status during that
fiscal year. The individuals included in the table collectively will be referred
to as the "Named Officers."
Long-Term
Compensation
Annual Compensation Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (1) Compensation ($)
--------------------------- ---- ---------- --------- ----------- ----------------
H. Wayne Posey - Chairman of the Board, 2002 416,346 503,542 - -
President and Chief Executive Officer (2) 2001 127,615 - 200,000 -
L. Theodore Van Eerden - Executive Vice 2002 184,615 15,916 - 197,500(4)
President and Chief Financial Officer (3) 2001 196,153 - 50,000 -
2000 182,917 60,000 50,000 -
(1) All share amounts have been adjusted to reflect the 1-for- 6 reverse split
on August 7, 2001.
(2) Mr. Posey was appointed Chairman of the Board, President and Chief
Executive Officer effective September 5, 2001. Mr. Posey's current annual
base salary is $450,000.
(3) Mr. Van Eerden resigned as Chief Financial Officer effective September 30,
2002. Mr. Van Eerden's annual base salary was $240,000.
(4) The Company entered into an Employee Retention Incentive Agreement with Mr.
Van Eerden, as approved by the Board in June 2000, to grant him rights with
respect to a previously granted option ("Option"). Subject to the terms and
conditions of the agreement, the Company granted to Mr. Van Eerden the
right (the "Cash-out Right"), commencing on June 16, 2002, to surrender a
15,000-share portion of the Option for a maximum cash payment of $197,500,
subject to applicable tax withholding. In June 2002, Mr. Van Eerden
exercised the maximum Cash-out Right.
Option Grants in Last Fiscal Year
No stock options or stock appreciation rights were granted to the Named
Executive Officers during the fiscal year 2002.
Aggregate Option Exercises and Fiscal Year End Values
None of the Named Executive Officers exercised any options during 2002. The
table below sets forth information with respect to option exercises and the
unexercised options held by the Named Executive Officers as of the end of 2002.
No stock appreciation rights were exercised during such fiscal year, and no
stock appreciation rights were outstanding at the end of such fiscal year.
Number of Securities Value Of Unexercised
Underlying Unexercised "In-the-Money" Options
Shares Options at Fiscal At Fiscal Year End ($) (1)
--------------------------
Year End (#) (1) (2)
---------------- ---
Acquired
Name on exercise Value
(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
H. Wayne Posey - - 127,161 81,695 - -
L. Theodore Van Eerden (3) - - - - - -
-----------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the option. Options are
"out-of-the-money" if the exercise price of the option exceeds the fair
market value of the underlying securities.
(2) Calculated by determining the difference between the fair market value of
the securities underlying the in-the-money options at December 31, 2002
(based on the closing price of $0.27 for the Company's common stock on the
OTC Bulletin Board for December 31, 2002) and the exercise price of the
options.
(3) All of Mr. Van Eerden's outstanding options were cancelled 90 days
subsequent to his resignation as Chief Financial Officer effective
September 30, 2002.
Equity Compensation Plan Information
The Company currently maintains five equity compensation plans that provide for
the issuance of common stock to officers and other employees, directors and
consultants. The Company's shareholders approved each of these compensation
plans. The following table sets forth information regarding outstanding options
and shares available for future issuance under these plans as of December 31,
2002:
Number of securities
remaining available
for future issuance
Number of securities under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column
warrants and rights warrants and rights (a))
Plan category (a) (b) (c)
---------------------- ---------------------- -----------------------
Equity compensation plans approved by
security holders 339,211(1) $11.01 711,152(2)
Equity compensation plans not
approved by security holders None None None
---------------------- ---------------------- -----------------------
Total 339,211 $11.01 711,152
====================== ====================== =======================
(1) Includes 25,362 outstanding options granted by three plans that have
been frozen ("Frozen Plans").
(2) Excludes the Frozen Plans, as no additional grants are available under
these plans.
Compensation of Directors
In fiscal 2002, non-employee members of the Board received no annual fees for
service, except for Mr. Keckley, who received fees of $35,250. Non-employee
members of the Board are reimbursed for their reasonable expenses incurred in
connection with attending Board meetings.
Employment Contracts and Termination of Employment Arrangements
The Company entered into a new employment agreement with H. Wayne Posey as of
January 1, 2003, which expires on December 31, 2003. During the term of the
agreement, Mr. Posey shall serve as the Chairman and Chief Executive Officer of
the Company, and in such capacity shall hold the most senior positions in the
Company and shall be responsible to the Board of Directors of the Company (the
"Board"). The agreement sets the annual base salary for Mr. Posey at $450,000,
increasing to $500,000 on June 1, 2003. The agreement outlines Mr. Posey's
benefits as an employee, including the right to participate in the Company
performance based incentive bonus plan. The agreement also outlines the granting
of 100,000 incentive stock options to Mr. Posey, with 75,000 such options
immediately vested and provides that all option grants shall represent a
specific minimum percentage ownership of the Company or its successors
immediately following a restructuring event. The employment agreement provides
that if Mr. Posey is terminated by the Company for any reason other than "cause"
or by Mr. Posey for "good reason", he is entitled to receive certain severance
payments. The severance payments are in cash or Company Common Stock, at Mr.
Posey's election, in an amount equal to his annual base salary in effect at the
time of his termination.
The Company entered into an amended employment agreement with Ivar S. Chhina as
of December 31, 2002 effective January 1, 2003, which expires on March 31, 2004.
During the term of the agreement, Mr. Chhina shall serve as Interim Chief
Operating Officer. The agreement sets the annual base salary for Mr. Chhina at
$280,000 and the payment of retention bonuses of $75,000 on March 31, 2003 and
2004, if Mr. Chinna is employed on such dates. The agreement also outlines the
granting of 225,000 incentive stock options to Mr. Chinna, with 90,000 such
options immediately vested and provides that all option grants shall represent a
specific minimum percentage ownership of the Company or its successors
immediately following a qualified restructuring event. The employment agreement
provides that if Mr. Chinna is terminated by the Company for any reason other
than "cause" or by Mr. Chinna for "good reason", he is entitled to receive
certain severance payments equal to his annual base salary in effect at the time
of his termination.
The Company entered into an employment agreement with Robert W. Hill as of April
8, 2002. The agreement sets the annual base salary for Mr. Hill at $140,000. The
agreement also outlines a minimum bonus of $10,000 for fiscal year 2002, payable
the earlier of within 30 days of completion of the Company's annual audit or a
Change in Control, as defined. The employment agreement provides that if the
Company for any reason other than "cause" terminates Mr. Hill, he is entitled to
receive certain severance payments equal to one-half of his annual base salary
in effect at the time of his termination.
The Company entered into an employment agreement, effective as of March 11,
1999, with L. Theodore Van Eerden, as amended on October 11, 2001 (collectively
the "Amended Agreement"). Pursuant to his Amended Agreement, Mr. Van Eerden
served as the Company's Executive Vice President, Chief Financial Officer, and
Secretary at an annual base salary of $240,000. The Amended Agreement provided
that if Mr. Van Eerden was terminated by the Company for any reason other than
"cause" or by Mr. Van Eerden for "good reason," as such terms are described in
the agreement, he is entitled to receive certain severance payments equal to
twelve monthly payments in an aggregate amount equal to his annual base salary.
Mr. Van Eerden resigned as Chief Financial Officer effective September 30, 2002.
Compensation Committee Interlocks and Insider Participation
During 2002, the following members of the Board of Directors served on the
Compensation Committee: Steven Hartman, Paul Keckley, Robert Finzi, and Robert
Raucci. Current members of the Compensation Committee consist of Steven Hartman
and Paul Keckley. No other compensation committee member was an officer or
employee of the Company at any time during fiscal 2002.
No executive officer of the Company served on the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board or Compensation Committee.
For a description of transactions between the Company and members of the
Compensation Committee or their affiliates, see "Item 13. Certain Relationships
and Related Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 2002 for (i) all
persons who are beneficial owners of five percent (5%) or more of the
outstanding shares of the Company's Common Stock, (ii) each director of the
Company, (iii) each of the Named Officers, and (iv) all current executive
officers and directors of the Company as a group. Unless otherwise indicated,
the address of each person listed in the table is 222 North Sepulveda Boulevard,
Suite 740, El Segundo, California 90245.
Name Number of Percent
Shares (#)(1) (%)(2)
H. Wayne Posey (3).............................................. 148,379 3.77%
Ivar Chinna .................................................... - *
Robert Hill .................................................... - *
L. Theodore Van Eerden ......................................... 246 *
Gerald Aaron ................................................... 430 *
Paul Keckley ................................................... - *
Steven Hartman (4)............................................. 829,002 19.86%
Levine Leichtman Capital Partners II, L.P. (9).................. 829,002 19.86%
335 North Maple Drive, Suite 240
Beverly Hills, CA 90210
Sprout Capital VII L.P. and certain related Entities (7)(8)..... 673,704 16.03%
11 Madison Ave., 26th Floor
New York, NY 10010
Attention: Craig Slutzkin
J.P. Morgan Partners (23A SBIC), LLC (5)(6)..................... 660,159 14.79%
1221 Avenue of the Americas
40th Floor
New York, NY 10020
Attention: Eric Green
SRM Trust....................................................... 425,613 11.19%
Dr. Steven Matzkin (10) ........................................ 333,130 8.68%
All executive officers and directors as a group - 7 persons (11) 961,555 22.44%
- -----------
* Less than one percent (1%)
(1) To the Company's knowledge, except as indicated in the footnotes to this
table and subject to applicable community property laws, each of the
persons named in this table has sole voting and investment power with
respect to all shares of Common Stock indicated opposite such person's
name.
(2) Percentage calculated based on 3,963,950 shares of Common Stock outstanding
at December 31, 2002, less 160,544 shares transferred to Interdent, Inc.
pursuant to the sale of Dental Care Alliance. Such 160,544 shares will be
cancelled once cleared through escrow. Shares of Common Stock subject to
options, warrants and convertible notes and other purchase rights currently
exercisable or convertible, or exercisable or convertible within 60 days of
December 31, 2002 are deemed outstanding for computing the percentage of
the person or entity holding such securities but are not deemed outstanding
for computing the percentage of any other person or entity.
(3) Includes options to purchase 127,341 shares of Common Stock that are
presently vested or will vest within 60 days of December 31, 2002.
(4) Includes 829,502 shares beneficially owned by Levine Leichtman Capital
Partners II, L.P. Mr. Hartman is a vice president of Levine Leichtman
Capital Partners, Inc. ("LLCP"). LLCP is the general partner of the general
partner of Levine Leichtman Capital Partners II, L.P. Mr. Hartman disclaims
beneficial ownership of these shares.
(5) Includes 660,159 shares beneficially owned by J.P. Morgan Partners (23A
SBIC), LLC, which was formerly known as CB Capital Investors, L.P., ("JPM
23A SBIC"). Mr. Eric Green, was a former director of InterDent and, as a
Managing Director of J.P. Morgan Partners (23A SBIC Manager), Inc., ("JPM
23A SBIC Manager"), the managing member of JPM 23A SBIC, may have been
deemed to share voting and dispositive power with respect to such shares.
Mr. Green disclaims beneficial ownership of those shares to the extent they
exceed his pecuniary interest in the non-managing member of JPM 23A SBIC.
(6) Consists of 660,159 shares of Common Stock issuable upon conversion of
convertible notes and preferred stock. The managing member of JPM 23A SBIC
is JPM 23A SBIC Manager, a wholly-owned subsidiary of JPMorgan Chase Bank.
(7) Includes 590,970 shares beneficially owned by Sprout Growth II, L.P. and
Sprout Capital VII, L.P. Includes 82,734 beneficially owned by Sprout CEO
Fund, L.P., DLJ Capital Corporation, and DLJ First ESC LP, each of which is
affiliated with Sprout Growth II, L.P. and Sprout Capital VII, L.P., as
discussed in footnote 8 below. Mr. Robert Finzi was a director of InterDent
and, as general partner of certain related entities within the Sprout
group, Mr. Finzi may have deemed to share voting and dispositive power with
respect to these shares. Mr. Finzi disclaims beneficial ownership of these
shares. Includes 7,010 shares of Common Stock subject to repurchase by the
Company at $2.70, expiring in 2006.
(8) Includes 398,778 shares of Common Stock issuable upon conversion of
convertible notes and preferred stock. DLJ Capital Corporation is the
Managing General Partner of each of the Sprout CEO Fund, L.P., Sprout
Growth II, L.P. and Sprout Capital VII, L.P. and has voting and investment
control over the shares held by each of these three stockholders. DLJ
Capital Corporation is a wholly-owned subsidiary of Credit Suisse First
Boston (USA), Inc., which has voting and investment control over DLJ
Capital Corporation. DLJ LBO Plans Management Corporation is the manager of
DLJ First ESC. DLJ LBO Plans Management Corporation is an indirect
wholly-owned subsidiary of Credit Suisse First Boston (USA), Inc., which
has voting and investment control over DLJ LBO Plans Management
Corporation.
(9) Includes 354,167 and 16,502 shares of Common Stock issuable upon conversion
of warrants at a price of $20.88 and $3.66, respectively, per share.
(10) Includes options to purchase 33,297 shares of Common Stock that are
presently vested or will vest within 60 days of December 31, 2002.
(11) Includes 354,167 and 127,341 shares issuable upon exercise of warrants and
options, respectively, to purchase shares of Common Stock that are
presently vested or will vest within 60 days of December 31, 2002
Item 13. Certain Relationships and Related Transactions.
Mr. Steven Hartman, a member of the Board since October 8, 2002, is a vice
president of Leichtman Capital Partners, Inc., which is the general partner of
the general partner of Levine Leichtman Capital Partners II, L.P. ("Levine"). At
December 31, 2002, Levine was the holder of approximately $41,671,000 in
subordinated notes ("Levine Note") issued by the Company. In April 2002, the
Company entered into an amendment to the Levine Note. In connection with the
amendment, Levine reset all covenants for 2002 and subsequent years, in addition
to certain other modifications. As consideration for the amendment, the Company
has agreed to pay an amendment fee of $2,000,000, payable in additional notes
and increase the PIK interest rate by one-half percentage point.
On March 26, 2002, Pleasant Street Investors, LLC, an affiliate of Levine,
purchased from Sovereign Bank its positions in both the 1999 and 2001 credit
agreements. Pleasant Street Investors, LLC was the holder of approximately
$8,082,000 of the total credit facility balance outstanding at December 31,
2002.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a -14 (c)) as of a date within 90 days prior
to the filing of this Annual Report on Form 10-K, have concluded that the
Company's disclosure controls and procedures are adequate and effective for the
purposes set forth in the definition in Exchange Act rules.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) Financial Statements and Schedules:
1 & 2 The list of consolidated financial statements and schedule set forth in
the accompanying Index to Consolidated Financial Statements and Other
Financial Information at page F-1 herein is incorporated herein by
reference. Such consolidated financial statements and schedule are filed as
part of this report.
All other financial statement schedules are omitted because the
required information is not applicable, or because the information
required is included in the consolidated financial statements and notes
thereto.
Exhibits
3.1 Certificate of Incorporation of InterDent, Inc. (formerly known as
Wisdom Holdings, Inc.), including all amendments thereto. Incorporated
by reference to 3.1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
3.2 Bylaws of the InterDent. Incorporated by reference to Exhibit 3.1 of
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
4.1 1999 Credit Facility, Related Documents and Amendments Thereto.
4.1.1 Amended and Restated Credit Agreement, dated as of June 15, 1999 (the
"Amended and Restated Credit Agreement"), by and among Gentle Dental
Service Corporation, Dental Care Alliance, Inc. and Gentle Dental
Management, Inc., as borrowers (the "Borrowers"), certain of the
Company's subsidiaries, as guarantors (the "Guarantors"), the financial
institutions signatory thereto, as lenders, Union Bank of California,
N.A., as administrative agent (the "Administrative Agent"), and The
Chase Manhattan Bank, as syndication agent (the "Syndication Agent").
Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999.
4.1.2 Amended and Restated Guaranty, dated as of March 31, 2000, by the
Company in favor of the Administrative Agent. Incorporated by reference
to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
4.1.3 Amendment Agreement No. 1 to the Amended and Restated Credit Agreement,
dated as of July 30, 1999, by and among the Borrowers, the Guarantors,
the financial institutions signatory thereto, as lenders, the
Administrative Agent and the Syndication Agent. Incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
4.1.4 Amendment Agreement No. 2 to the Amended and Restated Credit Agreement,
dated as of August 9, 1999, by and among the Borrowers, the Guarantors,
the financial institutions signatory thereto, as lenders, the
Administrative Agent and the Syndication Agent. Incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
4.1.5 Amendment Agreement No. 3 to the Amended and Restated Credit Agreement,
dated as of March 31, 2000, by and among the Borrowers, the Guarantors,
the financial institutions signatory thereto, as lenders, the
Administrative Agent and the Syndication Agent. Incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000.
4.1.6 Amendment Agreement No. 4 to the Amended and Restated Credit Agreement,
dated as of June 15, 2000, by and among the Borrowers, the Guarantors,
the financial institutions signatory thereto, as lenders, the
Administrative Agent and the Syndication Agent. Incorporated by
reference to 4.1.6 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
4.1.7 Amendment Agreement No. 5 to the Amended and Restated Credit Agreement,
dated as of August 15, 2000, by and among the Borrowers, the
Guarantors, the financial institutions signatory thereto, as lenders,
the Administrative Agent and the Syndication Agent. Incorporated by
reference to 4.1.7 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
4.1.8 Amendment Agreement No. 6 and Waiver, effective as of April 13, 2001,
to the Amended and Restated Credit Agreement, dated as of June 15,
1999, by and among the Borrowers, the Guarantors, the financial
institutions signatory thereto, as lenders, the Administrative Agent
and the Syndication Agent. Incorporated by reference to Exhibit 10.3 of
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001.
4.1.9 Amendment Agreement No. 7 and Consent, effective as of May 31, 2001, to
the Amended and Restated Credit Agreement, dated as of June 15, 1999,
by and among the Borrowers, the Guarantors, the financial institutions
signatory thereto, as lenders, the Administrative Agent and the
Syndication Agent. Incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
4.1.10 Amendment Agreement No. 8, effective as of April 15, 2002, to the
Amended and Restated Credit Agreement, dated as of June 15, 1999, by
and among the Borrowers, the Guarantors, the financial institutions
signatory thereto, as lenders, the Administrative Agent and the
Syndication Agent. Incorporated by reference to 4.1.10 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
4.1.11 Amendment Agreement No. 9 and Consent, effective as of December 31,
2002, to the Amended and Restated Credit Agreement, dated as of June
15, 1999, by and among the Borrowers, the Guarantors, the financial
institutions signatory thereto, as lenders, the Administrative Agent
and the Syndication Agent.
4.1.12 Amendment Agreement No. 10, effective as of March 31, 2003, to the
Amended and Restated Credit Agreement, dated as of June 15, 1999, by
and among the Borrowers, the Guarantors, the financial institutions
signatory thereto, as lenders, the Administrative Agent and the
Syndication Agent.
4.2 2000 Credit Facility, Related Documents and Amendments Thereto.
4.2.1 Credit Agreement, dated as of March 31, 2000 (the "Credit Agreement"),
by and among the Borrowers, the Guarantors, the financial institutions
signatory thereto, as lenders, the Administrative Agent, and the
Syndication Agent. Incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
4.2.2 Amendment Agreement No. 1 and Waiver, effective as of June 15, 2000, to
the Credit Agreement, dated as of March 31, 2000, by and among the
Borrowers, the Guarantors, the financial institutions signatory
thereto, as lenders, the Administrative Agent and the Syndication
Agent. Incorporated by reference to 4.2.2 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
4.2.3 Amendment Agreement No. 2 and Waiver, effective as of August 15, 2000,
to the Credit Agreement, dated as of March 31, 2000, by and among the
Borrowers, the Guarantors, the financial institutions signatory
thereto, as lenders, the Administrative Agent and the Syndication
Agent. Incorporated by reference to 4.2.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
4.2.4 Amendment Agreement No. 3 and Waiver, effective as of April 13, 2001,
to the Credit Agreement, dated as of March 31, 2000, by and among the
Borrowers, the Guarantors, the financial institutions signatory
thereto, as lenders, the Administrative Agent and the Syndication
Agent. Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
4.2.5 Amendment Agreement No. 4 and Consent, effective as of May 31, 2001, to
the Credit Agreement, dated as of March 31, 2000, by and among the
Borrowers, the Guarantors, the financial institutions signatory
thereto, as lenders, the Administrative Agent and the Syndication
Agent. Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
4.2.6 Form of Warrant to Purchase shares of Company Common Stock issued to
the lenders pursuant to Amendment Agreement No. 6 and Waiver, effective
as of April 13, 2001, to the Amended and Restated Credit Agreement,
dated as of June 15, 1999, and Amendment Agreement No. 3 and Waiver,
effective as of April 13, 2001, to the Credit Agreement, dated as of
March 31, 2000. Incorporated by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
4.2.7 Amendment Agreement No. 5, effective as of April 15, 2002, to the
Credit Agreement, dated as of March 31, 2000, by and among the
Borrowers, the Guarantors, the financial institutions signatory
thereto, as lenders, the Administrative Agent and the Syndication
Agent. Incorporated by reference to 4.2.7 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
4.2.8 Amendment Agreement No. 6 and Consent, effective as of December 31,
2002, to the Amended and Restated Credit Agreement, dated as of June
15, 1999, by and among the Borrowers, the Guarantors, the financial
institutions signatory thereto, as lenders, the Administrative Agent
and the Syndication Agent.
4.2.9 Amendment Agreement No. 7, effective as of March 31, 2003, to the
Amended and Restated Credit Agreement, dated as of June 15, 1999, by
and among the Borrowers, the Guarantors, the financial institutions
signatory thereto, as lenders, the Administrative Agent and the
Syndication Agent.
4.3 Levine Leichtman Capital Partners II, L.P. investment documents.
4.3.1 Securities Purchase Agreement dated June 15, 2000, by and among the
Company, the Borrowers, the Guarantors and Levine Leichtman Capital
Partners II, L.P. Incorporated by reference to Exhibit 99.2 of the
Company's Report on Form 8-K filed on June 27, 2000.
4.3.2 Senior Subordinated Note dated June 15, 2000 executed by the Borrowers
in favor of Levine Leichtman Capital Partners II, L.P. Incorporated by
reference to Exhibit 4.1 of the Company's Report on Form 8-K filed on
June 27, 2000.
4.3.3 Warrant to purchase shares of Company Common Stock dated June 15, 2000
issued by the Company to Levine Leichtman Capital Partners II, L.P.
Incorporated by reference to Exhibit 4.2 of the Company's Report on
Form 8-K filed on June 27, 2000.
4.3.4 Investor Rights Agreement dated June 15, 2000, by and among the
Company, Levine Leichtman Capital Partners II, L.P., Sprout
Capital VII, L.P., Sprout Growth II, L.P., The Sprout CEO Fund, L.P.,
DLJ Capital Corp., DLJ First ESC L.L.C., SRM '93 Children's Trust,
CB Capital Investors, LLC, Michael T. Fiore, Steven R. Matzkin, D.D.S.
and Curtis Lee Smith, Jr. Incorporated by reference to Exhibit 99.3 of
the Company's Report on Form 8-K filed on June 27, 2000.
4.3.5 Amendment to Securities Purchase Agreement, Consent to Allonge to
Senior Subordinated Note and PIK Notes, Consent to Dispositions and
Waiver, dated April 13, 2001, by and among the Company, the Borrowers,
the Guarantors, and Levine Leichtman Capital Partners II, L.P.
Incorporated by reference to Exhibit 10.8 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
4.3.6 Amendment Allonge to Senior Subordinated Note Due 2005 dated as of June
15, 2000, payable to the order of Levine Leichtman Capital Partners II,
L.P., a California limited Partnership, dated April 13, 2001.
Incorporated by reference to 4.3.6 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
4.3.7 Amended and Restated Warrant to purchase shares of Company Common Stock
dated April 13, 2001 issued by the Company to Levine Leichtman Capital
Partners II, L.P. Incorporated by reference to 4.3.7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
4.3.8 Amendment No. 2 to Securities Purchase Agreement, Consent to Allonge to
Senior Subordinated Note and PIK Notes, Consent to Dispositions and
Waiver, dated April 15, 2002, by and among the Company, the Borrowers,
the Guarantors, and Levine Leichtman Capital Partners II, L.P.
Incorporated by reference to 4.3.8 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
4.3.9 Allonge Amendment No. 2 to Senior Subordinated Note Due 2005 dated as
of June 15, 2000, as amended on April 13, 2001, payable to the order of
Levine Leichtman Capital Partners II, L.P., a California limited
Partnership, dated April 15, 2002. Incorporated by reference to 4.3.9
of the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
4.4 1998 Preferred Stock and Convertible Subordinated Note investment
documents.
4.4.1 Securities Purchase Agreement dated May 12, 1998 by and among Gentle
Dental Service Corporation ("Gentle Dental") and the purchasers named
therein, including form of 7% Convertible Subordinated Notes.
Incorporated by reference to Exhibit 4.1 of Gentle Dental's Report on
Form 8-K filed on July 2, 1998.
4.4.2 Amendment dated as of April 13, 2001 to the 7% Convertible Subordinated
Notes issued by Gentle Dental. Incorporated by reference to Exhibit
10.9 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
4.4.3 Registration Rights Agreement dated March 11, 1999 by and among the
Company and the purchasers under the Securities Purchase Agreement
dated May 12, 1998. Incorporated by reference to 4.4.3 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
4.4.4 First Amendment to Registration Rights Agreement, dated June 15, 2000,
by and among the Company, the Requisite Holders and Levine Leichtman
Capital Partners II, L.P. Incorporated by reference to Exhibit 99.4 of
the Company's Report on Form 8-K filed on June 27, 2000.
4.4.5 Second Amendment to Registration Rights Agreement dated as of April 13,
2001 by and among the Company, the Requisite Holders and Union Bank,
Chase Bank, Fleet Capital Corporation, Sovereign Bank and U.S. Bank
National Association. Incorporated by reference to Exhibit 10.7 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
*10.1 Interdent, Inc.1999 Stock Incentive Plan. Incorporated by reference to
10.1 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
*10.2 2000 Key Executive Stock Incentive Plan. Incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000.
*10.3.1 Employment Agreement dated September 15, 2001 between the Company and
H. Wayne Posey. Incorporated by reference to 10.3 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
*10.3.2 Employment Agreement dated January 1, 2003 between the Company and H.
Wayne Posey.
*10.4.1 Employment Agreement dated March 11, 1999 between the Company and L.
Theodore Van Eerden. Incorporated by reference to 10.4.1 of the
Company's Annual Report on Form 10-K for the year ended December
31, 2001.
*10.4.2 Amendment to Employment Agreement dated October 11, 2001 between the
Company and L. Theodore Van Eerden. Incorporated by reference to
10.4.2 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
*10.4.3 Employee Retention Incentive Agreement dated January 10, 2002 between
the Company and L. Theodore Van Eerden. Incorporated by reference to
10.4.3 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
*10.5.1 Employment Agreement dated December 31, 2002 between the Company and
Ivar S. Chinna.
*10.5.2 Employment Agreement dated April 8, 2002 between the Company and Robert
W. Hill.
*10.6.1 First Amendment dated May 31, 2001, by and between the Company and
Steven R. Matzkin to certain option award agreements issued to Steven
R. Matzkin. Incorporated by reference to Exhibit 10.10 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
*10.6.2 Consulting Agreement dated May 31, 2001, by and between InterDent
and Steven R. Matzkin. Incorporated by reference to Exhibit 10.11 of
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001.
10.7 Agreements with Mon Acquisition Corp.
10.7.1 Asset Purchase Agreement dated April 17, 2001 by and among the Company,
Gentle Dental, DentalCo Management Services of Maryland, Inc.and Mon
Acquisition Corp. Incorporated by reference to Exhibit 2.1 to the
Company's Report on Form 8-K filed on June 18, 2001.
10.7.2 Purchase Agreement dated April 17, 2001 by and among the Company,
Gentle Dental, DentalCo Management Services of Maryland,
Inc. and Mon Acquisition Corp. Incorporated by reference to Exhibit
2.2 to the Company's Report on Form 8-K filed on June 18, 2001.
10.7.3 Business Collaboration Agreement dated April 17, 2001, by and among
Mon Acquisition Corp., the Company and Gentle Dental.
Incorporated by reference to Exhibit 10.14 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
10.7.4 Software License and Maintenance Agreement dated May 16, 2001, by and
between Gentle Dental and Mon Acquisition Corp. Incorporated by
reference to Exhibit 10.15 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001.
10.7.5 First Amendment to the Software License and Maintenance Agreement dated
May 31, 2001, by and between Gentle Dental and Mon Acquisition Corp.
Incorporated by reference to Exhibit 10.16 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
10.7.6 Transitional Services Agreement dated May 16, 2001, by and between
Gentle Dental and Mon Acquisition Corp. Incorporated by reference to
Exhibit 10.17 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
21 Subsidiaries of the registrant.
23.1 Consent of Independent Accountants, Ernst & Young LLP.
23.2 Consent of Independent Accountants, KPMG LLP.
99.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
99.2 Certification of Vice President, Finance & Accounting pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
- ------------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed in the fourth quarter of the year
ended December 31, 2002.
(I) INDEX TO FINANCIAL STATEMENTS PAGE
Report of Independent Auditors....................................................................... F-2
Consolidated Balance Sheets at December 31, 2002 and 2001............................................ F-4
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
2000................................................................................................. F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2002,
2001 and 2000........................................................................................ F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000................................................................................................. F-8
Notes to Consolidated Financial Statements........................................................... F-10
(II) FINANCIAL STATEMENT SCHEDULE
---------------------------------
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001,
and 2000............................................................................................. F-32
(all other schedules are omitted because they are not applicable or the required
information is included on the financial statements or notes thereto).
Report of Independent Auditors
The Board of Directors
InterDent, Inc.:
We have audited the accompanying consolidated balances sheets of InterDent, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
two years in the period ended December 31, 2002. Our audits also included the
financial statement schedule listed in the index at Item 15(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
InterDent, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the two years
in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has accumulated losses for the last three
years and expects to incur additional losses in the foreseeable future. In
addition, the Company has debt due in 2003 which it cannot pay. The Company
needs to obtain additional capital and/or restructure its balance sheet to
sustain future operations and continue as a going concern. These circumstances
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
As discussed in notes 2 and 7 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" effective January 1, 2002.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 28, 2003, except for
Note 16, which is dated March 31, 2003
Independent Auditors' Report
The Board of Directors
InterDent, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity (defecit) and cash flows of InterDent, Inc. and
subsidiaries for the year ended December 31, 2000. In connection with our audit
of the consolidated financial statements, we have also audited the financial
statement schedule of valuation and qualifying accounts for the year ended
December 31, 2000. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
InterDent, Inc., and subsidiaries for the year ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein for the year ended December 31, 2000.
/s/ KPMG LLP
Costa Mesa, California
April 6, 2001
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(dollars in thousands, except share amounts)
Assets 2002 2001
----------------- -----------------
Current assets:
Cash and cash equivalents $ 3,041 $ 7,189
Accounts receivable, net of allowances of $4,237 in 2002 and
$4,627 in 2001, respectively 17,934 23,072
Receivable from professional associations 152 581
Supplies inventory 4,439 3,613
Prepaid expenses and other current assets 6,860 4,051
----------------- -----------------
Total current assets 32,426 38,506
Property and equipment, net 17,848 20,945
Goodwill and intangible assets, net 60,671 147,532
Other assets 3,922 3,021
----------------- -----------------
Total assets $ 114,867 $ 210,004
================= =================
Liabilities
Current liabilities:
Accounts payable $ 5,053 $ 7,996
Accrued payroll and payroll related costs 8,740 9,022
Other current liabilities 13,656 14,167
Current portion of long-term debt and capital lease obligations 169,536 13,666
----------------- -----------------
Total current liabilities 196,985 44,851
Long-term liabilities:
Capital lease obligations, net of current portion 687 1,251
Long-term debt, net of current portion 5,758 154,796
Other long-term liabilities 1,366 1,871
----------------- -----------------
Total long-term liabilities 7,811 157,918
----------------- -----------------
Total liabilities $ 204,796 $ 202,769
----------------- -----------------
(Continued)
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 2002 and 2001
(dollars in thousands, except share amounts)
Redeemable Common Stock and
Shareholders' Equity (Deficit) 2002 2001
---------------- ------------------
Redeemable common stock, $0.001 par value, 619 and 17,905 shares issued and
outstanding in 2002 and 2001, respectively $ 51 $ 1,047
---------------- ------------------
Shareholders' equity (deficit):
Preferred stock, $0.001 par value, 30,000,000 shares authorized: Preferred
stock - Series A, 100 shares authorized; 100 shares issued and
outstanding in 2002 and 2001 1 1
Convertible preferred stock - Series B, 70,000 shares authorized, zero
shares issued and outstanding in 2002 and 2001 -- --
Preferred stock - Series C, 100 shares authorized; zero shares issued and
outstanding in 2002 and 2001 -- --
Convertible preferred stock - Series D, 2,000,000 shares authorized;
1,574,608 and 1,628,663 shares issued and outstanding in 2002 and 2001 11,688 12,089
Common stock, $0.001 par value, 50,000,000 shares authorized; 3,963,950 and
3,976,551 shares issued and outstanding in 2002 and 2001 4 4
Additional paid-in capital 77,853 76,502
Shareholder notes receivable (206) (184)
Accumulated deficit (179,320) (82,224)
---------------- ------------------
Total shareholders' equity (deficit) (89,980) 6,188
---------------- ------------------
Commitments and contingencies -- --
---------------- ------------------
Total liabilities, redeemable common stock and shareholders' equity $ 114,867 $ 210,004
(deficit) ================ ==================
See accompanying notes to consolidated financial statements.
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations For the years ended December 31, 2002,
2001 and 2000 (dollars in thousands, except per share amounts)
2002 2001 2000
--------------- --------------- ----------------
Revenues:
Dental practice net patient service revenue $ 248,563 $ 262,097 $ 249,281
Net management fees 781 19,838 42,998
Licensing and other fees 720 696 887
--------------- ---------------- ---------------
Total revenues 250,064 282,631 293,166
--------------- ---------------- ---------------
Operating expenses:
Clinical salaries, benefits and provider costs 121,717 129,711 119,952
Practice non-clinical salaries and benefits 32,979 39,107 42,539
Dental supplies and lab expenses 26,727 34,023 37,201
Practice occupancy expenses 13,597 16,450 17,921
Practice selling, general and administrative expenses 22,992 25,222 31,692
Corporate selling, general and administrative expenses 11,441 13,245 14,335
Stock compensation expense 147 6,232 1,362
Corporate restructure and merger costs -- (1,154) 1,730
Management merger and retention bonus -- -- 1,159
Loss (gain) on dental location dispositions and impairment 2
of long-lived assets (1,035) 12,288 49,80
Depreciation and amortization 4,035 11,983 12,574
--------------- --------------- ---------------
Total operating expenses 232,600 287,107 330,267
--------------- --------------- ---------------
Operating income (loss) 17,464 (4,476) (37,101)
--------------- ---------------- ---------------
Non-operating expense:
Interest expense, net (22,371) (19,706) (15,329)
Debt fees and financing costs -- (3,886) --
Investment impairment write down -- (1,087) --
Other expense, net (585) (208) (276)
--------------- ---------------- ---------------
Non-operating expense, net (22,956) (24,887) (15,605)
--------------- ---------------- ---------------
Loss before income taxes, extraordinary item, and 6)
cumulative effect of accounting change (5,492) (29,363) (52,70
Provision (benefit) for income taxes -- 115 (4,002)
--------------- ---------------- ---------------
Net loss before extraordinary item and cumulative effect (5,492) (29,478) (48,704)
of a change in accounting principle
Extraordinary loss on debt extinguishments, net of taxes (2,604) (5,601) --
--------------- ---------------- ---------------
Net loss before cumulative effect of a change in (8,096) (35,079) (48,704)
accounting principle
Cumulative effect of a change in accounting principle (89,000) -- --
--------------- ---------------- ---------------
Net loss (97,096) (35,079) (48,704)
Accretion of redeemable common stock -- (1) (8)
--------------- ---------------- ---------------
Net loss attributable to common stock $ (97,09$) (35,080$ (48,712)
=============== ================ ===============
Loss per share attributable to common stock - basic and
diluted
Before extraordinary item and cumulative effect of a )
change in accounting principal $ (1.44$ (7.64)$ (13.19
Extraordinary item (0.68) (1.45) --
Cumulative effect of a change in accounting principle (23.23) -- --
--------------- ---------------- ---------------
Attributed to common stock $ (25.35$ (9.09)$ (13.19)
=============== ================ ===============
See accompanying notes to consolidated financial statements.
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
For the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
Retained Total
Additional earnings shareholders'
Preferred paid-in Notes (accumulated equity
stock Common stock capital receivable deficit) (deficit)
-------------- -------------- -------------- -------------- --------------- --------------
Balance, January 1, 2000 $ 12,090 $ 4 $ 62,848 $ (615) $ 1,568 $ 75,895
Common stock issued in
connection with:
Financing -- -- 10,294 -- -- 10,294
Purchase of dental assets
from new PA affiliations -- -- 85 -- -- 85
Employee purchase plan -- -- 69 -- -- 69
Exercise of options and
warrants -- -- 96 -- -- 96
Stock options granted to
non-employees -- -- 25 -- -- 25
Non-redemption and accretion
of redeemable common stock -- -- 199 -- (8) 191
Notes receivable, net -- -- -- (10,179) -- (10,179)
Waiver of common stock
repurchase rights -- -- 27 -- -- 27
Issuance of common stock
warrants for financing,
net of issuance costs -- -- 2,603 -- -- 2,603
Common stock issued and
shares to be issued under
earn-out agreements, net -- -- 50 -- -- 50
Net loss -- -- -- -- (48,704) (48,704)
-------------- -------------- -------------- -------------- --------------- --------------
Balance, December 31, 2000 12,090 4 76,296 (10,794) (47,144) 30,452
Issuance of common stock
warrants for financing,
net of issuance costs -- -- 204 -- -- 204
Stock options granted to
non-employees -- -- 2 -- -- 2
Non-redemption and accretion
of redeemable common stock -- -- -- -- (1) (1)
Notes receivable, net -- -- -- 10,610 -- 10,610
Net loss -- -- -- -- (35,079) (35,079)
-------------- -------------- -------------- -------------- --------------- --------------
Balance, December 31, 2001 12,090 4 76,502 (184) (82,224) 6,188
Convertible preferred stock
conversion (401) -- 401 -- -- --
Common stock issued under
stock option plans -- -- 4 -- -- 4
Expiration of redeemable
common stock -- -- 946 -- -- 946
Notes receivable, net -- -- -- (22) -- (22)
Net loss -- -- -- -- (97,096) (97,096)
-------------- -------------- -------------- -------------- --------------- --------------
Balance, December 31, 2002 $ 11,689 $ 4 $ 77,853 $ (206) $ (179,320) $ (89,980)
============== ============== ============== ============== =============== ==============
See accompanying notes to consolidated financial statements.
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
2002 2001 2000
------------------- ----------------- -------------------
Cash flows from operating activities:
Net loss $ (97,096) $ (35,079) $ (48,704)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of a change in accounting
principle 89,000 -- --
Depreciation and amortization 4,035 11,983 12,574
(Gain) loss on dental location dispositions
and impairment of long-lived assets (1,035) 12,288 49,802
Loss on disposal of assets 601 497 108
Investment impairment write down -- 1,087 --
Notes and warrants issued or accrued for
debt fees and interest payment-in-kind 11,667 10,014 2,228
Interest amortization on deferred financing
costs and discounted debt 4,022 7,775 960
Amortization of stock compensation expense -- 5,742 1,362
Non-employee stock options granted and stock
issued for fees and compensation -- 2 25
Interest income on shareholder notes (22) (10) (15)
Deferred income taxes -- -- (3,361)
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable, net 4,485 1,563 (2,797)
Receivable from professional associations 429 (530) 1,422
Supplies inventory (828) 52 (73)
Prepaid expenses and other current assets 178 4,584 (2,644)
Other assets (247) (547) (856)
Accounts payable (2,943) 1,607 (157)
Accrued payroll and payroll related costs (282) 286 1,244
Accrued merger and restructure (315) (1,566) (873)
Other liabilities 594 (369) (700)
------------------- ----------------- -------------------
Net cash provided by operating activities 12,243 19,379 9,545
------------------- ----------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (1,593) (3,709) (7,851)
Net payments received on notes receivable from
professional associations -- 103 246
Net advances to professional associations -- (3,163) (8,403)
Increase in shareholder notes receivable -- -- (11,500)
Cash paid for acquisitions and earn-outs,
including direct costs, net of cash acquired (1,591) (5,237) (26,087)
Net proceeds from disposition of subsidiary and
dental locations 1,407 21,371 --
------------------- ----------------- -------------------
Net cash (used in) provided by investing $ (1,777) $ 9,365 $
activities (53,595)
------------------- ----------------- -------------------
(Continued)
INTERDENT, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
2002 2001 2000
------------------- ------------------ --------------------
Cash flows from financing activities:
Net borrowings (payment) on credit facility $ (4,572) $ (18,665) $ 21,165
Proceeds from issuance of long-term debt, net -- -- 22,761
Payments of long-term debt and obligations under
capital leases (8,577) (5,391) (5,313)
Payments of deferred financing costs (1,444) (2,441) (2,751)
Proceeds from issuance of common and preferred
stock 4 -- 11,145
Common and preferred stock issuance costs -- -- (842)
Proceeds from issuance of common stock warrants -- -- 2,739
Net payments related to warrants, options and
put rights (25) (351) (100)
------------------- ------------------ --------------------
Net cash (used in) provided by financing (14,614) (26,848) 48,804
activities
------------------- ------------------ --------------------
(Decrease) increase in cash and cash (4,148) 1,896 4,754
equivalents
Cash and cash equivalents, beginning of year 7,189 5,293 539
------------------- ------------------ --------------------
Cash and cash equivalents, end of year $ 3,041 $ 7,189 $ 5,293
=================== ================== ====================
Supplemental disclosures of cash flow information: Cash
paid (received) during period, net:
Interest $ 8,479 $ 13,236 $ 9,591
Income taxes -- (2,233) 3,418
Non-cash financing and investing activities:
Accretion of redeemable common stock -- 1 8
Non-redemption of redeemable common stock 946 -- 199
Notes issued upon redeemable common stock 25 86 25
Warrants issued in connection with public and
private offerings -- 204 --
Notes issued as debt fees and interest
payment-in-kind 4,352 9,617 2,731
Effect of acquisitions:
Liabilities assumed or issued -- -- 23,729
Issuance of long-term debt in connection with
earn-out obligations 3,718 8,068 4,970
Common stock and warrants issued and shares to be
issued under earn-out agreements, net -- -- 135
See accompanying notes to consolidated financial statements.
INTERDENT, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the years ended December 31,
2002, 2001 and 2000 (dollars in thousands, except share and per share amounts)
(1) ORGANIZATION
Headquartered in El Segundo, California, InterDent, Inc. ("InterDent" or the
"Company") is a leading provider of dental practice management services to
multi-specialty dental professional corporations and associations ("PAs") in the
United States. The dentists employed through the Company's network of affiliated
PAs provide patients with affordable, comprehensive, convenient and high quality
dentistry services, which include general dentistry, endodontics, oral surgery,
orthodontics, pedodontics, periodontics and prosthodontics.
The Company was incorporated on October 13, 1998 as a Delaware corporation to
facilitate the business combination of Gentle Dental Service Corporation
("GDSC") and Dental Care Alliance ("DCA") that occurred in March 1999. Prior to
the combination, GDSC and DCA were each publicly traded dental practice
management companies. From 1996 through 2000, the Company (and its predecessors,
GDSC and DCA) primarily focused on the expansion of its affiliated dental
network through acquisitions, completing 45 transactions in 15 markets.
The Company provides management services to affiliated PAs under long-term
management service agreements ("MSAs"). Under the MSAs, the Company bills and
collects patient receivables and provides administrative and management support
services. Each PA is responsible for employing and directing the professional
dental staff and providing all clinical services to the patients. The dentists
employed through the Company's network of affiliated dental associations provide
patients with affordable, comprehensive general dentistry services, in addition
to specialty dental services, which include endodontics, oral surgery,
orthodontics, pedodontics, periodontics and prosthodontics.
Through May 31, 2001, the Company provided 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. Effective May 31, 2001, the Company
completed the stock sale of DCA, a wholly-owned subsidiary, and certain other
assets in Maryland, Virginia, and Indiana, for $36.0 million less the assumption
of certain debt and operating liabilities. The net sales proceeds were utilized
to pay down existing borrowings under the credit facility. Also, the Company has
retained an option to repurchase the division through May 2003 and entered into
a five-year collaboration agreement and license agreement to provide our
proprietary software. See note 5 for a summary of the DCA sale transaction.
On August 6, 2001 the Company completed a one-for-six reverse split of its
common stock. All share and per share information in these financial statements
retroactively reflects the reverse split as if it had been in effect from the
beginning of the periods covered.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company provides management services to the PAs under long-term MSAs that
generally have an initial term of 40 years. Under the provisions of the MSAs,
the Company owns the non-professional assets at the affiliated practice
locations, including equipment and instruments, bills and collects patient
receivables, and provides all administrative and management support services to
the PAs. These administrative and management support services include:
financial, accounting, training, efficiency and productivity enhancement,
recruiting, marketing, advertising, purchasing, and related support personnel.
The PAs employ the dentists and the hygienists while the Company employs all
administrative personnel.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board ("FASB") reached a consensus on the accounting for transactions between
physician practice management companies and physician practices and the
financial reporting of such entities ("EITF 97-2"). For financial reporting
purposes, EITF 97-2 mandates the consolidation of physician practice activities
with the practice management company when certain conditions have been met, even
though the practice management company does not have a direct equity investment
in the physician practice. The accompanying financial statements are prepared in
conformity with the consensus reached in EITF 97-2.
Simultaneous to the execution of an MSA with each PA, the Company also entered
into a shares acquisition agreement ("SAA"). Subsequent to the sale of DCA,
under all of the SAAs entered into except for two, the Company has the right to
designate the purchaser (successor dentist) to purchase from the PA shareholders
all the shares of the PA for a nominal price of a thousand dollars or less.
Under these SAAs, the Company has the unilateral right to establish or effect a
change in the PA shareholder, at will, and without consent of the PA
shareholder, on an unlimited basis. Under EITF 97-2, the agreements with the PA
shareholders qualify as a friendly doctor arrangement. Consequently, under EITF
97-2, the Company consolidates all the accounts of those PAs in the accompanying
consolidated financial statements. Accordingly, the consolidated statements of
operations include the net patient revenues and related expenses of these PAs
and all significant intercompany transactions have been eliminated.
Each of the DCA SAAs entered into with the PAs did not have the nominal price
provision and were sold as part of the DCA sale transaction in May 2001 and the
Company currently has entered into two SAAs with PAs that do not have the
nominal price provision. Rather, the SAA purchase price is based upon a multiple
of earnings, as defined. As a result, the MSAs do not meet the criteria of
consolidation under EITF 97-2 and the consolidated statements of operations
exclude the net patient service revenues and expenses of these PAs. The Company
only includes net management fee revenues generated and expenses associated with
providing services under these MSAs.
Liquidity
The Company's independent public accountants have included a "going concern"
emphasis paragraph in their audit report accompanying the 2002 financial
statements. The paragraph states that the Company has accumulated losses for the
last three years, expects to incur additional losses in the foreseeable future,
has debt due in 2003 which it cannot pay from cash flows generated from
operations, and needs to obtain additional capital, restructure its balance
sheet, or a combination of both to sustain future operations and continue as a
going concern. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern.
The Company experienced losses attributed to common stock of $97,096 for 2002,
$35,080 for 2001, and $48,712 for 2000. Contributing to these significant losses
are certain charges for asset impairments, the disposition of DCA and several
other dental locations, debt restructuring and debt extinguishments, and stock
compensation retention programs. The Company does not anticipate future
significant non-reoccurring charges; however, net losses are expected to
continue until a long-term debt and equity restructuring plan is implemented.
While the Company experienced losses for each of the three years in the period
ended December 31, 2002, the Company's dental facilities continue to generate
positive cash flow, as reflected in cash flows from operations of $12,243 for
2002, $19,379 for 2001 and $9,454 for 2000. This ability to generate positive
cash flow from operations was instrumental in the Company's negotiation for
modifications to its existing credit agreement in April 2002. As more fully
described in Note 9, these modifications resulted in a permanent waiver of past
covenant violations, reset covenant levels, and the principal amortization
schedule was significantly modified such that approximately $20,700 of payments
were deferred until April 1, 2003. These modifications were designed to
temporarily relieve the Company from its short-term debt service obligations
until a long-term debt and restructuring plan can be implemented. Under
modifications of the credit agreement, a principal payment of $6,775 is due on
April 1, 2003 and $7,214 is due on July 1, 2003. The remaining $67,637
outstanding at December 31, 2002 is due on September 30, 2003.
On March 31, 2003, the banks agreed to an amendment to postpone substantially
all of the April payment due until April 30, 2003. Based upon the proposed
long-term financial restructuring plan described in unuadited note 17,
management anticipates an additional postponement from the banks through May 9,
2003. Due to the number of uncertainties, many out of our control, there can be
no assurance that we will be able to consummate any financial restructuring or
continue as a going concern.
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 based upon usual and customary rates or contractual rates agreed to
with managed care payors.
Net patient revenues include amounts received under capitated managed care
contracts from certain wholly-owned subsidiaries that are subject to regulatory
review and oversight by various state agencies. The subsidiaries are required to
file statutory financial statements with the state agencies and maintain minimum
tangible net equity balances and restricted deposits. The Company is in
compliance with such requirements as of December 31, 2002. Total revenues
subject to regulatory review and oversight by various state agencies were
$49,497 in 2002, $46,603 in 2001, and $42,820 in 2000.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity at date of
acquisition of three months or less to be cash equivalents.
Accounts receivable
Accounts receivable principally represent receivables from patients and
insurance carriers for dental services provided by the related PAs at
established billing rates, less allowances and discounts for patients covered by
third party payors contracts. Payments under these programs are primarily based
on predetermined rates. In addition, an allowance for doubtful accounts is
provided based upon expected collections and is included in practice selling,
general and administrative expenses. These contractual allowances, discounts and
allowance for doubtful accounts are deducted from accounts receivable in the
accompanying consolidated balance sheets. The discounts and allowances are
determined based upon historical realization rates, the current economic
environment and the age of accounts. Changes in estimated collection rates are
recorded as a change in estimate in the period the change is made. Concentration
of credit risk with respect to accounts receivable is limited due to the large
number of payors comprising the company's payor base.
Receivable from professional associations
Receivable from professional associations represents amounts owed to the Company
from two unconsolidated PAs related to reimbursable expenditures and management
fee revenues recorded in accordance with the MSA. The Company reviews the
collectibility of the patient accounts receivable of the PA and adjusts its
management fee receivables accordingly.
Supplies inventory
Supplies consist primarily of disposable dental supplies and instruments located
at the dental offices. Supplies are stated at the lower of cost (first-in,
first-out basis) or market (net realizable value).
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged to expense as
incurred and expenditures for additions and improvements are capitalized.
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the lease. Leasehold improvements are
amortized over their estimated useful life or the remaining lease period,
whichever is less. Depreciation of property and equipment is recorded using the
straight-line method over the shorter of the related lease term or the estimated
useful lives, which are as follows:
Range of lives (in
years)
--------------------
Dental equipment 3-15
Computer equipment 3
Furniture, fixtures, and equipment 3-15
Leasehold improvements 3-20
Vehicles 5
Buildings 25
Goodwill, intangible and long-lived assets
Goodwill and intangible assets result primarily from the excess of purchase cost
over the fair value of net tangible assets associated with dental practice
acquisitions. Intangibles relating to MSAs consist of the costs of purchasing
the rights to provide management support services to PAs over the initial
non-cancelable terms of the related agreements, usually 40 years. Under these
agreements, the PAs have agreed to provide dental services on an exclusive basis
only through facilities provided by the Company, which is the exclusive
administrator of all non-dental aspects of the acquired PAs, providing
facilities, equipment, support staffing, management and other ancillary
services. The agreements are non-cancelable except for performance defaults.
Through December 31, 2001, intangible assets were amortized on the straight-line
method, ranging from 5 years for other intangibles to 25 years for MSAs and
goodwill.
Through December 31, 2001, the Company periodically reviewed the recoverability
of the intangible and long-lived assets for possible impairment when events or
changes in circumstances indicated that the carrying amount of assets may not be
recoverable, as required by FASB Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"). This measurement evaluated the ability
to recover the balance of these assets from expected future operating cash flows
on an undiscounted basis through the remaining amortization period. During the
years ended December 31, 2001 and 2000, the Company recorded impairments of
certain intangibles in connection with the anticipated sale of DCA stock and
disposition of several other dental locations, as discussed in note 5.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), effective for the
Company in the first quarter of 2002. SFAS 142 requires companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful
life. Instead, goodwill and intangible assets deemed to have an indefinite
useful life are subject to an annual review for impairment. The Company
performed the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and recorded a non-cash charge of
$89,000 to reduce the carrying value of its intangibles to their estimated fair
value based upon a theoretical purchase price allocation. This impairment charge
is reflected as a cumulative effect of a change in accounting principle in the
accompanying consolidated statements of operations. For additional discussion on
the impact of adopting SFAS 142, see Note 7.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This Statement supersedes SFAS 121 and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The provisions of
this Statement were effective for the Company January 1, 2002. The adoption of
SFAS 144 did not have a significant impact on the Company's financial position
or results of operations.
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. During the
year ended December 31, 2001, the Company recorded an impairment charge of
$1,087 to write-off the original investment in DXC and related capitalized
closing costs. The Company no longer has an equity interest in DXC.
Fair value of financial assets, liabilities, and redeemable common stock
The Company estimates the fair value of its monetary assets, liabilities, and
redeemable common stock based upon the existing interest rates related to such
assets, liabilities, and redeemable common stock compared to current market
rates of interest for instruments with a similar nature and degree of risk. The
Company estimates that the carrying value of all of its monetary assets,
liabilities, and redeemable common stock approximates fair value as of December
31, 2002 and 2001. However, as discussed in the liquidity section of note 2, the
Company is currently in negotiations on a long-term financial restructuring plan
with the bank, its significant equity and debt holders, and other potential
outside investors. Due to the number of uncertainties regarding the negotiation
process, there can be no assurance that the fair value of the Company's assets,
liabilities and long-term debt may not be reduced.
Use of estimates
In preparing the financial statements, we have made estimates and assumptions
that affect the following:
- - Reported amounts of assets and liabilities at the date of the financial
statements; - Disclosure of contingent assets and liabilities at the date of the
financial statements; and - Reported amounts of revenues and expenses during the
period.
Actual results could differ from those estimates.
Net loss per share
The Company presents "basic" earnings per share, which is net loss 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 each of the three years in the period ended December 31, 2002, certain
dilutive potential common shares have been excluded from the computation of
diluted loss per share, as their effect is anti-dilutive. Such anti-dilutive
potential common shares consisting of convertible subordinated debt, convertible
preferred stock, contingent shares, and the exercise of certain options, and
warrants were approximately 2,300,000 for 2002, 1,900,000 for 2001, and
1,700,000 for 2000.
The following table summarizes the computation of net loss per share and
excludes 160,544 of shares held in escrow in connection with the sale of DCA in
May 2001. Such shares will be cancelled upon release from the escrow agent.
2002 2001 2000
------------------- ------------------- -------------------
Net loss before extraordinary item and
cumulative effect of a change in accounting
principle $ (5,492) $ (29,478) $ (48,704)
Extraordinary loss on debt extinguishments,
net of income tax (2,604) (5,601) --
Cumulative effect of a change in accounting
principle (89,000) -- --
Accretion of redeemable common stock -- (1) (8)
------------------- ------------------- -------------------
Net loss attributable to common stock $ (97,096) $ (35,080) $ (48,712)
=================== =================== ===================
Shares reconciliation:
Weighted average common shares outstanding 3,830,157 3,888,128 3,785,317
Contingently repurchaseable common shares -- (27,949) (91,889)
------------------- ------------------- -------------------
Basic and diluted shares 3,830,157 3,860,179 3,693,428
=================== =================== ===================
Comprehensive income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses). The Company does not
have components of other comprehensive income.
Stock-based compensation
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the
Company may elect to recognize stock-based compensation expense based on the
fair value of the awards or continue to account for stock-based compensation
under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), and disclose in the notes to the financial statements the
effects of SFAS 123 as if the recognition provisions were adopted. The Company
has elected to account for stock-based compensation under APB 25.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148"). This statement amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. It also amends and expands the disclosure
in the provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While SFAS 148 does not require
companies to account for employee stock options using the fair-value method, the
disclosure provisions of SFAS 148 are applicable to all companies with
stock-based compensation, regardless of whether they account for that
compensation using the fair-value methods of SFAS 123 or the intrinsic-value
method of APB 25. The Company has adopted the disclosure requirements of SFAS
148.
Pro forma net loss, determined as if the Company had accounted for its employee
stock based compensation under the fair-value method, is as follows:
2002 2001 2000
---------------- --------------- ---------------
Net loss attributed to common stock, as reported $ (97,096) $ (35,080) $ (48,712)
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effect 147 6,232 1,362
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effect (7,140) 5,511 (9,189)
---------------- --------------- ---------------
Net loss attributed to common stock, pro forma $ (104,089) $ (23,337) $ (56,539)
================ =============== ===============
Basic net loss per share attributed to common stock:
As reported $ (25.35) $ (9.09) $ (13.19)
Pro forma (27.18) (6.05) (15.31)
Diluted net loss per share attributed to common stock:
As reported $ (25.35) $ (9.09) $ (13.19)
Pro forma (27.18) (6.05) (15.31)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options would be amortized to expense over the
vesting period, and additional options may be granted in future years.
The Company did not grant options during the year ended December 31, 2002. The
fair value of options granted during the years ended December 31, 2001 and 2000
were valued using the Black-Scholes pricing model as prescribed by SFAS 123,
based upon the following weighted average assumptions:
2001 2000
------------------ ------------------
Risk free interest rate 4.8% 6.3%
Expected dividend yield -- --
Expected lives 5 years 5 years
Expected volatility 183% 119%
Options were assumed to be exercised over their expected lives for the purpose
of this valuation. Adjustments are made for options forfeited prior to vesting.
The total estimated value of options granted which would be amortized over the
vesting period of the options is $164 and $14,220 for the years ended December
31, 2001 and 2000, respectively. Options granted during the years ended December
31, 2001 and 2000 were valued at a per share amount of $0.36 and $18.00,
respectively.
Stock options issued to non-employees have been recorded at their estimated fair
market value and are being expensed over their respective vesting lives of up to
five years. Total compensation expense recorded for the years ended December 31,
2001 and 2000, was $2, and $25, respectively. No compensation was expensed
during the year ended December 31, 2002.
Income taxes
Income taxes are accounted for under the liability method in accordance with
Statement of Financial and Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributed to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis.
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.
New accounting pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141"). SFAS 141 eliminates the
pooling-of-interest method of accounting for business combinations and clarifies
the criteria to recognize intangible assets separately from goodwill. SFAS 141
is effective for any business combination accounted for by the purchase method
that is completed after June 30, 2001. The adoption of SFAS 141 did not have any
impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142,
goodwill and indefinite lived assets are no longer amortized but are reviewed
annually for impairment. Separate intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
provisions of SFAS 142 are effective upon its adoption effective beginning
fiscal year 2002. For additional discussion on the impact of adopting SFAS 142,
see Note 7.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, and
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The adoption
of SFAS 143 is not expected to have a significant impact on the Company's
financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for the Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
The provisions of this Statement were effective for the Company on January 1,
2002. The adoption of SFAS 144 did not have a significant impact on the
Company's financial position or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 was issued
to rescind and amend existing authoritative pronouncements. The Company will
adopt SFAS 145 in 2003, and will reclassify the extraordinary loss on debt
extinguishments to operating expenses.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or disposal Activities" ("SFAS
146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
Company expects that the provisions of this statement, which are effective for
exit or disposal activities initiated after December 31, 2002, will not have a
material effect on its financial condition or results of operations.
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147, "Acquisitions of Certain Financial Institutions" ("SFAS 147"). SFAS 147
addresses the financial accounting and reporting for the acquisition of all or
part of a financial institution. The Company has determined that SFAS 147 will
not have a material effect on the Company's financial condition or results of
operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148"). This statement amends SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. It also amends and expands the disclosure in the provisions of
SFAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS 148 does not require companies to account for employee
stock options using the fair-value method, the disclosure provisions of SFAS 148
are applicable to all companies with stock-based compensation, regardless of
whether they account for that compensation using the fair-value methods of SFAS
123 or the intrinsic-value method of APB 25. The Company has adopted the
disclosure requirements of SFAS 148.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
reporting presentation.
(3) REVENUES
The following represents amounts included in the determination of dental
practice net patient service revenue and net management fees:
2002 2001 2000
----------------- ----------------- ------------------
Dental practice net patient service revenues - all
PAs $ 250,160 $ 293,318 $ 315,603
Less: Dental practice net patient service revenues -
unconsolidated PAs (1,597) (31,221) (66,322)
----------------- ----------------- ------------------
Reported dental practice net patient service revenue $ 248,563 $ 262,097 $ 249,281
================= ================= ==================
Dental practice net patient service revenues -
unconsolidated PAs $ 1,597 $ 31,221 $ 66,322
Less: Amounts retained by dentists (816) (11,383) (23,324)
----------------- ----------------- ------------------
Reported net management fees $ 781 $ 19,838 $ 42,998
================= ================= ==================
(4) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
Business Combinations
On March 12, 1999, GDSC and DCA completed mergers in which each entity became a
wholly-owned subsidiary of InterDent, Inc. In connection with the GDSC and DCA
mergers, the Company recorded direct merger expenses and restructuring charges
of $1,183 during 2000. During the year ended December 31, 2001, the Company
finalized its corporate merger and restructure cost relating to its
restructuring plan, including charges for system conversions, redirection of
certain duplicative operations and programs, and other costs associated with the
business combinations. All merger and restructure activities are complete and as
a result, the reserve was reduced by $1,154 during the year ended December 31,
2001.
Terminated 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, the Company and Leonard Green mutually agreed to
terminate the merger agreement and the related recapitalization transaction. The
Company has recorded direct merger expenses of $547 during the year ended
December 31, 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 terminated merger have been paid as of December 31, 2000.
The following summarizes the merger and restructure activities and accrued
merger and restructure liability for the GDSC and DCA business combinations, and
the Company's terminated merger with Leonard Green through December 31, 2002:
Corporate restructure and merger costs: 2001 2000
------------- -------------
GDSC and DCA Combination:
Direct investment banking, accounting, legal and
other advisory fees $ (1,070)$ 47
Employee retention, severance and training costs -- 39
Systems integration and conversion -- 1,097
Redirection of duplicative operations, programs and
other costs (84) --
------------- -------------
Total (1,154) 1,183
InterDent and Leonard Green Terminated Merger:
Direct investment banking, accounting, legal and
other advisory fees -- 547
------------- -------------
Total corporate restructure and merger costs $ (1,154)$ 1,730
============= =============
Accrued restructure and merger liability:
Beginning Ending
Balance Expense Payments Balance
-------------- ------------- ------------- -------------
Restructure and merger activity for the
year ended December 31, 2000 $ 2,925 $ 1,730 $ (2,603)$ 2,052
============== ============= ============= =============
Restructure and merger activity for the
year ended December 31, 2001 $ 2,052 $ (1,154)$ (412)$ 486
============== ============= ============= =============
Restructure and merger activity for the
year ended December 31, 2002 $ 486 $ -- $ (315)$ 171
============== ============= ============= =============
The merger and restructure liability is included in other current liabilities in
the accompanying financial statements.
Dental practice affiliations and acquisitions
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.
There were no dental practice acquisitions during the two-year period ended
December 31, 2002. During 2002 and 2001, the Company paid $1,591 and $5,237,
respectively, in earn-out and trailing costs on affiliated dental practice
acquisitions performed in prior years. In addition to cash paid during the years
ended December 31, 2002 and 2001, the Company also converted amounts due under
earn-out agreements into long-term notes payable of $3,723 and $8,068,
respectively.
During the year ended December 31, 2000, the Company acquired substantially all
of the assets of 21 dental facilities, including, accounts receivable, supplies
and fixed assets. The aggregate dental practice acquisition purchase price
recorded during the year ended December 31, 2000, representing the fair value of
the assets acquired in the above transactions and for transactions completed in
prior periods included $14,504 in cash and assumed liabilities of $4,833. The
Company also incurred an additional earn-out obligation of $18,896, of which
$11,583 was paid in cash and $4,970 was converted to notes payable.
Approximately $36,333 of the total consideration was allocated to intangible
assets.
In connection with certain completed affiliation transactions, the Company has
agreed to pay to the sellers' future consideration in the form of cash. 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. The Company accrues for earn-out payments with
respect to these acquisitions when such amounts are probable and reasonably
estimable. As of December 31, 2002, future anticipated earn-out payments of $963
are accrued and 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 $2,000 and $3,000
through December 2004, which is expected to be settled in a combination of cash
and notes.
(5) DENTAL LOCATION DISPOSITIONS AND IMPAIRMENT OF LONG-LIVED ASSETS
Effective May 31, 2001, the Company completed the sale of its east coast
division to Mon Acquisition Corp., a group led by Steven Matzkin, DDS, former
president of the Company. The assets in the sale (the "East Coast Assets")
included the stock of Dental Care Alliance, Inc. ("DCA"), a wholly-owned
subsidiary, and assets used in the operation and management of certain dental
practices in Maryland, Virginia and Indiana. The transaction also included the
assets associated with the notes receivable made by officers of DCA as discussed
in note 10. The total consideration was $36,000 less the assumption of related
debt and operating liabilities.
Upon the two-year anniversary of the transaction close, InterDent shall have the
right to repurchase the East Coast Assets, based upon a multiple of earnings and
subject to a minimum price, as defined in the agreement. In connection with the
sale of assets, InterDent entered into a five-year license agreement totaling
$2,554, for the use the Company's proprietary practice management system,
subject to negotiations for additional term extensions. The $2,554 paid to the
Company has been recorded as deferred revenues and is being amortized over the
life of the agreement. The parties also entered into a transition services
agreement and a business collaboration delineating the use of the practice
management system, the joint purchase of supplies, the joint negotiation for
managed care contracts, training systems and other similar operational matters.
In the fourth quarter of 2000, the Company evaluated the recoverability of the
East Coast long-lived assets as a result of the anticipated sale of the East
Coast Assets as required SFAS 121. The Company estimated that the future
undiscounted cash flow from certain long-lived assets was below their carrying
values, and in the fourth quarter of 2000, the carrying value of these assets
was adjusted to their estimated fair value, resulting in a non-cash impairment
charge of $49,802 for a write-down of notes and advances to PAs of $18,124 and
intangibles of $31,678. In addition, interest income from the notes and advances
from PAs previously recorded in 2000 of $1,789 was written off to net interest
expense. The Company recorded an additional loss of $5,837 upon completion of
the transaction during 2001 on the sale of the East Coast Assets, including a
provision for anticipated closing costs. This loss was a result of investments
made in the business subsequent to December 31, 2000, and additional expenses
related to the sale.
During 2001, the Company also disposed of or identified under performing dental
locations for disposition ("Disposed Locations"). In connection with the sale of
the East Coast Assets and Disposed Locations the Company wrote off $40,246 in
total assets, yielded proceeds of $21,375, net of closing costs and recorded a
total loss on dental locations dispositions and impairment of long-lived assets
of $12,288 for the year ended December 31, 2001. The total recorded loss
includes $1,653 for the provision of direct transaction closing costs.
During 2002, the Company disposed of one dental office location and its fifty
percent equity investment in a joint venture of another dental practice
location. Also, the Company was reimbursed by an insurance carrier for a claim
of loss on the sale of certain disposed locations that occurred in 2001. In
connection with these events, the Company wrote off $372 in total assets,
yielded proceeds of $1,407, net of closing costs and recorded a total gain on
dental locations dispositions of $1,035.
The results of operations of the East Coast Assets and other disposed locations
have been reported in the Consolidated Statements of Operations through the
effective date of the sale transactions. The results of operations of the East
Coast Assets and other disposed locations included in the Consolidated
Statements of Operations for each of the three years in the period ended
December 31, 2002 are as follows and exclude certain Company allocated costs
such as provision for income taxes, credit facility interest costs, stock
compensation expense, management and retention bonus, and certain corporate
general and administrative costs:
2002 2001 2000
---------------- ----------------- -----------------
Dental practice net patient revenue $ 264 $ 16,607 $ 18,561
Net management fees -- 19,226 42,114
Licensing and other fees -- 363 887
---------------- ----------------- -----------------
Net revenues $ 264 $ 36,196 $ 61,562
================ ================= =================
Operating income (loss) $ (12) $ 3,096 $ 5,052
================ ================= =================
Income (loss) before provision for income taxes $ (12) $ 2,987 $ 6,568
================ ================= =================
(6) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2002 2001
------------------ -----------------
Dental equipment $ 15,027 $ 14,650
Computer equipment 6,447 6,320
Furniture, fixtures and equipment 3,327 3,181
Leasehold improvements 8,258 8,299
Vehicles 13 13
Land and buildings 1,200 1,200
------------------ -----------------
Total property and equipment 34,272 33,663
Less accumulated depreciation and amortization (16,424) (12,718)
------------------ -----------------
Property and equipment, net $ 17,848 $ 20,945
================== =================
Depreciation expense was $4,035 for 2002, $5,065 for 2001, and $5,489 for 2000.
(7) GOODWILL AND INTANGIBLE ASSETS
Goodwill and Intangible assets consists of the following:
2002 2001
------------- -------------
Management Services Agreements $ 49,826 $ 120,373
Goodwill 18,697 47,103
Other 30 50
------------- -------------
Total goodwill and intangible assets 68,553 167,526
Less accumulated amortization (7,882) (19,994)
------------- -------------
Goodwill and intangible assets, net $ 60,671 $ 147,532
============= =============
The Company adopted SFAS 142 during 2002, which requires companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful
life. Instead, SFAS 142 requires that goodwill and intangible assets deemed to
have an indefinite useful life be reviewed for impairment upon adoption of SFAS
142 on January 1, 2002, and annually thereafter. The impairment test is to be
performed more frequently when an event occurs or circumstances change such that
it is reasonably possible that an impairment may exist. The Company will perform
its annual impairment review during the fourth quarter of each year, commencing
in the fourth quarter of 2002.
Under SFAS 142, goodwill and certain intangible asset impairment are deemed to
exist if the net book value of a reporting unit exceeds its estimated fair
value. This methodology differs from the Company's previous policy, as permitted
under accounting standards existing at that time, of using undiscounted cash
flows to determine if goodwill and certain intangible assets are recoverable.
Upon adoption of SFAS 142 in the first quarter of 2002, the Company recorded a
non-cash charge of $89,000 to reduce the carrying value of its goodwill and
certain intangible assets associated with dental practice acquisitions. Such
impairment is reflected as a cumulative effect of a change in accounting
principle in the accompanying Consolidated Statements of Operations. In
calculating the impairment charge, the fair value of the impaired reporting
units was estimated using recent industry transactions, industry valuations, or
a combination thereof. No impairment was necessary for the year ended December
31, 2002.
The Company did not record amortization on its goodwill and intangible assets
during 2002 as all such assets are determined to have indefinite lives. The
following table reflects comparable pro forma results of operations for the
three-year period ended December 31, 2002 as though the adoption of the
non-amortization provisions of SFAS 142 occurred as of January 1, 2000:
2002 2001 2000
----------------- ---------------- ----------------
Net loss attributed to common stock:
As reported $ (97,096)$ (35,080)$ (48,712)
Amortization of goodwill and indefinite lived intangible assets -- 6,901 7,067
----------------- ---------------- ----------------
Pro forma $ (97,096)$ (28,179)$ (41,645)
================= ================ ================
Net loss per share attributable to common stock - basic and
diluted
As reported $ (25.$5) (9.$9) (13.19)
Pro forma $ (25.$5) (7.30) $ (11.28)
(8) OTHER CURRENT LIABILTIES
Other current liabilities consists of the following:
2002 2001
------------------ -----------------
Accrued earn-outs $ 963 $ 4,382
Unearned revenues 4,467 3,683
Other operating liabilities 8,226 6,102
------------------ -----------------
$ 13,656 $ 14,167
================== =================
(9) DEBT
Credit Facility Term Note
In April 2001, the Company entered into amendments to its existing senior
revolving credit facility (the "Credit Facility") to amend certain covenants. In
connection with the execution of the amendments, the banks waived the defaults
under the Credit Facility that existed at December 31, 2000 due to failure to
meet certain financial ratio covenants and reset all covenants for 2001 and
subsequent years. Additionally, the banks agreed to certain other changes
including a revised term and provisions regarding asset sales and new financing.
As consideration for these modifications, the Company agreed to an amendment fee
of $1,000, which was paid during the three months ended June 30, 2001, and an
additional fee of $1,000 payable at maturity of the term loan if certain
conditions were not met. The additional fee was paid in connection with an
additional amendment to the Credit Facility consummated in April 2002, as
discussed below. The Company also issued warrants to the banks to purchase an
aggregate of 166,667 shares of the Company's common stock at a strike price of
$3.66 per share. During the year ended December 31, 2001, the Company recorded a
charge of $3,886 for the write-off of certain prepaid debt costs related to
previously entered into credit facility agreements, loan amendment fees, warrant
issuance and associated professional fees incurred in connection with the
execution of the amended credit facility agreement.
On October 1, 2001, the Credit Facility converted into a term loan, with
required quarterly payments. On April 15, 2002, the Company entered into an
amendment to the existing Credit Facility. In connection with the execution of
the amendment, the bank agreed, among other things, to reset certain covenants
and reduce the required future quarterly principal payments of $7,214, which
were to begin on October 1, 2001. In connection with these modifications, the
Company accrued as principal the remaining $1,000 due as a result of the
amendment in 2001 as discussed above, which is payable upon maturity. The
Company also agreed to an additional amendment fee of $1,000, with cash of $500
and the remaining $500 accrued as principal, payable upon final maturity of the
Credit Facility on September 30, 2003.
Principal amounts owed under the Credit Facility bear interest at LIBOR plus
7.50% or the prime rate plus 5.75%, at the Company's option. In addition to the
cash interest charges outlined above, the Company is to pay an incremental
payment-in-kind ("PIK") interest on the outstanding principal balance of 1.0%
from April 15, 2002 though March 31, 2003, increasing to 2.0% from April 1, 2003
through maturity. The incremental PIK interest is payable upon maturity. The
Company also paid a PIK fee equal to 1.0% of the outstanding principal balance
on April 15, 2002, 2.0% on October 1, 2002, and 3.0% on April 1, 2003. PIK fees
are payable upon maturity.
The entire outstanding Credit Facility balance at December 31, 2002 of $81,626
is included in the current portion of long-term debt and capital leases in the
accompanying Consolidated Balance Sheets. Required principal installments due
are $6,775 on April 1, 2003, $7,214 on July 1, 2003 and the remaining balance
due at maturity on September 30, 2003. The Credit Facility also has mandatory
prepayment provisions for certain asset sale transactions and excess cash flows,
as defined. These prepayment provisions are applied to future required quarterly
installments.
The Credit Facility contains several covenants, including but not limited to,
restrictions on the Company's ability to incur indebtedness or repurchase
shares, a prohibition on dividends without prior approval, prohibition on
acquisitions, and fees for excess earn-out and debt payments, as defined. There
are also financial covenant requirements relating to compliance with specified
cash flow, liquidity, and leverage ratios. The Company's obligations under the
Credit Facility, including the applicable subsidiaries in the guarantees, are
secured by a security interest in substantially all assets of each of such
entities.
The 2002 amendment to the Credit Facility met the criteria of substantial
modification as outlined under the provisions of EITF 96-19 and is accounted for
as an extinguishment of debt. Accordingly, in the second quarter of 2002 the
Company recorded an extraordinary loss of $2,604. The extraordinary loss
represents amendment fees of $2,000 incurred to extinguish the original Credit
Facility and $604 for the write-off of the non-amortized portion of deferred
financing costs associated with the original note agreement. Professional fees
and bank PIK fees paid, or anticipated to be paid, of $6,167 for the execution
of the amended Credit Facility have been capitalized and are being amortized
over the remaining life of the Credit Facility. At December 31, 2002, $2,316 in
anticipated future PIK fees is included in other current liabilities.
Senior Subordinated Notes
In June 2000, the Company raised $36,500 from the sale of debt and equity to
Levine Leichtman Capital Partners II, L.P. under a securities purchase
agreement. The equity portion of the transaction comprised 458,333 shares of
common stock valued at $11,000. The debt portion of the transaction comprised a
senior subordinated note with a face value of $25,500 (the "Levine Note"). The
Company also issued a warrant to purchase 354,167 shares of its common stock at
an initial price of $41.04 per share, which as described below, was subsequently
reduced to $20.88 per share. The warrant was valued at $2,739. The warrant value
was reflected as a discount to the face value of the Levine Note and has been
subsequently written off as discussed below.
In April 2001, the Company entered into an amendment to the Levine Note. In
connection with the amendment, the lender waived the defaults under the Levine
Note that existed at December 31, 2000 due to failure to meet certain financial
ratio covenants and reset all covenants for 2001 and subsequent years, in
addition to certain other modifications. The Amendment met the criteria of
substantial modification as outlined in EITF 96-19. As such, the Levine Note was
considered extinguished, with a new note issued in its place. The extinguishment
was recorded as an extraordinary charge of $5,601. No tax benefit was recorded
as a result of the charge as the realization of available deferred tax assets is
not assured. The extraordinary loss represents $3,351 for write-off of the
non-amortized portion of the warrant discount and deferred financing costs
associated with the original note and an amendment fee of $2,250 incurred to
extinguish the original note. In addition to the amendment fee, the PIK interest
rate was increased to 16.5% and price of the warrants was reduced from an
initial strike price of $41.04 per share to $20.88 per share. Professional fees
incurred for the execution of the amended note agreement have been capitalized
and are being amortized over the remaining life of the Levine Note.
In April 2002, the Company entered into an additional amendment to the Levine
Note. In connection with the amendment, the lender reset all covenants for 2002
and subsequent years, in addition to certain other modifications. As
consideration for the amendment, the Company has agreed to pay an amendment fee
of $2,000, payable in additional notes and increase the PIK interest rate by
one-half percentage point. The amendment fee has been capitalized and is being
amortized over the remaining life of the Levine Note.
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 defined excess cash flows. The
Levine Note bears interest at 12.5%, payable monthly, with an option to pay the
interest in a PIK note. The Company is currently issuing PIK notes at 17.0% for
payment of current interest amounts owed. 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.
Subordinated Convertible Notes
In 1998, the Company issued $30,000 of subordinated convertible notes
("Convertible Notes"). The Convertible Notes mature June 2006 and bear interest
at 7.0%, payable semi-annually with an option to pay the interest in a PIK note,
which the Company is currently exercising for payment of current interest
amounts due. As outlined in the note agreement, the interest rate on the
Convertible Notes has increased to 8.0% as a result of the Company's election to
pay the current interest due in a PIK note. In April 2001, the Company entered
into an amendment to the Convertible Notes and the lender waived the
cross-default provision that existed at December 31, 2000 due to the covenant
violations under the Credit Facility and agreed to reset all covenants for 2001
and subsequent years, in addition to certain other modifications. As
consideration for the amendment, the Company has agreed to reduce the conversion
price of the notes. The Convertible Notes are convertible into shares of the
common stock at $39.00 for each share of common stock issuable upon conversion
of outstanding principal and accrued but unpaid interest on such subordinated
notes and shall be automatically converted into common stock if the rolling
21-day average closing market price of the common stock on 20 out of any 30
consecutive trading days is more than $107.40
Long-term debt consists of the following:
2002 2001
------------------ ------------------
Credit Facility term note, variable interest (10.1% as of December 31,
2002), variable required quarterly payments, as defined, due September
30, 2003. $ 81,626 $ 81,755
Levine Note, interest at 17.0%, payable monthly; due September 2005 41,671 33,258
Convertible Notes, Interest at 8%, payable semi-annually, due June 2006 38,106 35,058
Various unsecured acquisition notes payable, due in monthly and quarterly
installments of principal and interest at rates ranging from Prime
(4.25% at December 31, 2002) to 12.0%; due through November 2009 12,754 14,073
Note payable to seller, interest at 8.5%, secured by stock in subsidiary;
due March 2003 581 581
Senior subordinated note payable, face value of $2,083 discounted
interest at 8.0%; due July 2002 -- 1,991
Senior subordinated note payable, interest at 8.0%; due in monthly
installments of principal and interest of $14; due July 2002 -- 83
Subordinated note payable, interest at 8.0%, interest payable quarterly
annually through January 2002; due January 2002 -- 696
------------------ ------------------
Total long-term debt 174,738 167,495
Less current portion (168,980) (12,699)
------------------ ------------------
Long-term debt, net of current portion $ 5,758 $ 154,796
================== ==================
Under the various debt agreements, scheduled maturities on long-term debt are
due as follows: $89,203 in 2003, $4,313 in 2004, $42,670 in 2005, $38,209 in
2006, $111 in 2007 and $232 thereafter. As outlined in the liquidity discussion
of note 2, the Company does dot have the ability to fund its debt due in 2003
from cash flows generated from operations, and needs to obtain additional
capital, restructure its balance sheet, or a combination of both. There can be
no assurance that the Company will be able to consummate any financial
restructuring to prevent a default on its debt payments under the Credit
Facility. The Levine Note and Convertible Notes agreements also have
cross-default provisions associated with the Credit Facility. Accordingly, the
scheduled maturities for the Levine Note and Convertible Notes payable in 2005
and 2006 totaling $79,777 have also been accelerated to current portion of
long-term debt and capital lease obligations in the accompanying Consolidated
Balance Sheets.
(10) REDEEMABLE COMMON STOCK
The Company entered into various shareholder put right agreements in connection
with certain dental practice affiliations. The Company also completed a private
placement offering (the "Placement Offering") of 16,666 shares of the Company's
redeemable common stock in June 1996. In connection with the Placement Offering,
the shareholder received certain put rights which were exercisable after June
21, 2001 but not later than June 21, 2003 if the Company has not completed a
public offering of its common stock by June 21, 2001 at a price of at least
$132.00 per share and with net proceeds to the Company of at least $10,000. The
per share price applicable to the put rights is 20 times the Company's average
adjusted net income per share for the two most recent fiscal years preceding the
exercise of the rights. In the December 2002, the shareholder sold the Placement
Offering shares subject to redemption, as the put rights had no future value
because the Company reported negative adjusted earnings for the two-year period
ended December 31, 2002.
The shares of common stock subject to the put rights are reported in the balance
sheet as redeemable common stock. Such shares have been recorded at their fair
value as of date of acquisition, inclusive of accretion during each of the three
years in the period ended December 31, 2002. The Company records accretion on a
ratable basis over the redemption period of the respective stock. The following
summary presents the changes in the redeemable common stock:
Shares of
Redeemable Redeemable
Common Stock Common Stock
------------- --------------
Balance, January 1, 2000 26,326 $ 1,796
Accretion of redeemable common stock -- 8
Exercise of redeemable common stock (1,015) (121)
Non-redemption redeemable common stock (2,459) (199)
------------- --------------
Balance, December 31, 2000 22,852 1,484
Accretion of redeemable common stock -- 1
Exercise of redeemable common stock (4,947) (438)
------------- --------------
Balance, December 31, 2001 17,905 1,047
Exercise of redeemable common stock (620) (51)
Non-redemption redeemable common stock (16,666) (945)
------------- --------------
Balance, December 31, 2002 619 $ 51
============= ==============
In December 2002, the shareholder of the 619 remaining shares subject to
redemption provided election notification to exercise such put right. The put
transaction was completed in January 2003.
(11) SHAREHOLDERS' EQUITY
A reconciliation of the total shares of preferred and common stock outstanding
during the three-year period ended December 31, 2002 is as follows:
Convertible
Preferred Preferred
Stock - Stock - Common
Series A Series D Stock
----------- ------------ ------------
Balance, January 1, 2000 100 1,628,663 3,492,911
Common stock issued in connection with:
Financing -- -- 458,333
Acquisitions -- -- 6,427
Employee purchase plan -- -- 1,588
Exercise of warrants -- -- 13,798
Exercise of options -- -- 1,035
Non-redemption and accretion of redeemable common stock -- -- 2,459
----------- ------------ ------------
Balance, December 31, 2000 and 2001 100 1,628,663 3,976,551
Common stock issued in connection with:
Employee purchase plan -- -- 16,666
Preferred Stock Conversion -- (54,055) 9,016
Reverse split partial shares -- -- 67
Cancelled shares served as note receivable collateral (55,636)
Non-redemption and accretion of redeemable common stock -- -- 17,286
----------- ------------ ------------
Balance, December 31, 2002 100 1,574,608 3,963,950
=========== ============ ============
Preferred Stock
The Company's presently authorized Preferred Stock rank senior to outstanding
Common Stock. The shares of Series B Preferred Stock were authorized in
connection with issuance of the Convertible Notes as discussed in note 9. The
Series B Preferred Stock conversion provision of the Convertible Notes has
expired. Accordingly, although the Series B Preferred Stock is authorized, the
Company does not expect any such shares to ever be issued. Similarly, 100 shares
of Series C Preferred Stock were authorized and issued in connection with the
Convertible Note issuance, but then converted into 10 shares of common stock in
the March 1999 merger transaction. The Company does not expect any shares of
Series C Preferred Stock to be issued. The shares of Series D Preferred Stock
are convertible into shares of our Common Stock at the rate of one-sixth of a
share of Common Stock for each share of Series D Preferred Stock (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 anti-dilutive provisions. The Series D Preferred
Stock holders are entitled to vote on all matters as to which the Common Stock
shareholders are entitled to vote, based upon the number of shares Common Stock
the Series D Preferred Stock is convertible into. The Series A Preferred Stock
is not convertible, is entitled to elect a director, and is otherwise
non-voting.
Common Stock
Outstanding common stock shares include 160,544 of shares held in escrow in
connection with the sale of DCA in May 2001. Such shares will be cancelled upon
release from the escrow agent. A total of 36,920 and 56,541 outstanding shares
of Common Stock issued at a price of $2.70 and $1.35 per share, respectively,
are subject to repurchase by the Company at the original issue price at its
election.
Stock Warrants
In connection with certain financing and acquisition activities, the Company has
granted warrants to purchase shares of the Company's common stock. At December
31, 2002 there are outstanding warrants to purchase up to 538,306 shares of the
Company's common stock at an exercise price ranging from $3.66 to $56.63 per
share. All warrants have been recorded at their estimated fair value at the date
of grant and expire at various dates through April 2011.
Deferred Compensation
The Company made advances of $11,500 to certain officers of the Company and
provided certain other officers with a minimum guarantee of the value of their
stock options in order to retain and provide incentives to such officers. In
connection with the advances, such officers issued interest-bearing notes
payable to the Company. Shares of the Company's common stock and options owned
by such officers have been pledged to secure the notes. The notes were included
in shareholders' equity as a reduction to equity. Interest on the notes accrues
at rates ranging from 6.4% to 10.2%. The notes and accrued interest are due June
2004, payable in cash or Company common stock and options with varying minimum
values. The notes and accrued interest are with recourse to the officers until
May or June of 2002, depending upon the individual note agreement, after which
the notes and accumulated interest are non-recourse, subject only to the
underlying pledged collateral. The minimum guarantee of the value of certain
officers' stock options can be exercised for a two-year period beginning June
30, 2002.
The difference in the amount of the notes and the value of the collateral at the
date of the loans was being amortized over the life of the notes, representing
stock compensation expense. The amortization reflected the deficit of the
underlying pledged collateral on the individual note dates. The Company also
adjusted the amortization to reflect changes in the quoted fair market value.
The decline, if any, was amortized as stock compensation expense over the life
of the notes. The amortization expense was adjusted cumulatively for changes in
fair value of the collateral. Increases in the stock price, if any, resulted in
a credit to expense, up to the amount of prior expense recognized for this
portion of the notes. In addition, the minimum guarantee of the value of the
stock options was being amortized as stock compensation expense.
The total original advance included $5,900 paid to DCA officers. These advances
were sold in connection with the sale of DCA as discussed in note 5. The
remaining non-amortized outstanding balance of the advances of $4,600 to DCA
officers was included in the determination of impairment of long-lived assets
and advances recorded in the fourth quarter of 2000. During the third quarter of
2001, the entire non-amortized balance of the remaining notes was written off as
a result of the acceleration of the non-recourse provision of the note due from
the former CEO and the significant decline in the underlying value of the
pledged collateral, which is considered to be other than temporary.
Shareholder Notes Receivable
In 1997, the Company was issued a shareholder note receivable by an officer. In
connection with the execution of the officer's amended employment agreement in
May 2000, the note with a face amount of $150 and related accrued interest of
$32, subject to provisions of the agreement, was to be forgiven in May 2002. The
note and accrued interest was being expensed over the twenty-four month period.
During 2001, the remaining balance on the note was written off as compensation
expense based on the note being converted to non-recourse pursuant to the
severance agreement with the officer. The Company recorded a stock compensation
expense of $129 and $53, respectively during the years ended December 31, 2001
and 2000. In addition, the Company forgave its rights to repurchase 33,382
common shares held by the officer at $2.70 and recorded a charge to stock
compensation of $27 during the year ended December 31, 2000.
Stock Options
The Company adopted the InterDent, Inc. 1999 Stock Incentive Plan (the
"Incentive Plan"). Benefits under the Incentive Plan include the granting of
incentive stock options, non-qualified stock options, stock appreciation rights,
and stock awards to employees and non-employees of the Company. The Incentive
Plan is administered by the Compensation Committee of the Company's Board of
Directors (the "Committee"), which has the authority to determine the persons,
or entities to whom awards are be made, the amounts, and other terms and
conditions of the awards. Share grants issued under the Incentive Plan generally
expire ten to fifteen years from the original grant date, depending upon the
nature of the share grant. The Incentive Plan provides for the issuance of up to
541,666 shares of Company common stock. As of December 31, 2002, options for a
total of 70,515 shares were outstanding, of which options for 68,798 shares were
exercisable.
The Company adopted the InterDent, Inc. 2000 Key Executive Stock Incentive Plan
(the "Executive Plan"). Benefits under the Executive Plan include, without
limitation, the granting of incentive stock options, non-qualified stock
options, stock appreciation rights, performance shares, and restricted and
non-restricted stock awards to employees and non-employees of the Company. The
Committee administers the Executive Plan and has the authority to determine the
persons or entities to which awards will be made, the amounts, and other terms
and conditions of the awards. Share grants issued under the Executive Plan
generally expire 0ten years from the original grant date, depending upon that
nature of the share grant. The Executive Plan provides for the issuance of up to
500,000 shares of Company common stock. As of December 31, 2002, options for a
total of 243,333 shares were outstanding, of which 80,000 were exercisable.
Prior to the merger of GDSC and DCA, each of the entities had active incentive
and non-qualified stock option plans (collectively the "Former Plans"). Benefits
under the Former Plans include incentive stock options, non-statutory stock
options, stock appreciation rights or bonus rights, award of stock bonuses,
and/or sale of restricted stock that were granted to employees and
non-employees. The Former Plans provided for the issuance of up to 687,875
shares of Company common stock and were frozen during 1999. As of December 31,
2002, options for a total of 25,363 shares were outstanding, of which options
for 23,551 shares were exercisable. Shares outstanding under the Former Plans
are generally subject to a three to five-year vesting schedule from the date of
grant and expire ten years from the original grant date.
The following summary presents the options granted and outstanding under the
various plans for the three-year period ended December 31, 2002:
Number of shares
Weighted Ave.
Employee Non-employee Total Exercise Price
---------------------------------------------------- ---------------------
Outstanding, January 1, 2000 254,950 141,833 396,783 $ 40.07
Granted 775,167 15,992 791,159 23.52
Exercised (618) (418) (1,036) 19.02
Canceled (14,262) (23,236) (37,498) 42.72
---------------------------------------------------- ---------------------
Outstanding, December 31, 2000 1,015,237 134,171 1,149,408 28.38
Granted 460,000 -- 460,000 0.37
Exercised -- -- -- --
Canceled (896,851) (86,890) (983,741) 28.56
---------------------------------------------------- ---------------------
Outstanding, December 31, 2001 578,386 47,281 625,667 7.49
Granted -- -- -- --
Exercised -- -- -- --
Canceled (252,814) (33,642) (286,456) 3.32
---------------------------------------------------- ---------------------
Outstanding, December 31, 2002 325,572 13,639 339,211 $ 11.01
==================================================== =====================
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options granted under the various plans at December 31, 2002:
Weighted average
number of options
------------------------------------------
Exercise Contractual life
price Outstanding Exercisable remaining
----------------- -------------------- ------------------- -------------------
$ 0.00 - 6.00 207,543 127,543 8.6
18.01 - 24.00 104,584 19,584 7.4
24.01 - 30.00 2,254 2,254 3.4
30.01 - 26.00 502 400 5.7
36.01 - 42.00 9,474 9,382 6.3
42.01 - 48.00 4,621 4,587 4.9
48.01 - 54.00 8,148 6,514 5.0
$ 54.01 - 60.00 2,085 2,085 2.2
-------------------- ------------------- -------------------
339,211 172,349 8.0
==================== =================== ===================
(12) EMPLOYEE BENEFITS
In 1999 the Company adopted the InterDent, Inc. 401(k) Plan (the "InterDent
Plan") in accordance with Section 401(k) of the Internal Revenue Code. The
InterDent Plan covers substantially all employees of the Company and its
affiliates. Contributions to the InterDent Plan are discretionary. There was no
Company contribution to the plan during the three years in the period ended
December 31, 2002.
(13) INCOME TAXES
Income tax provision (benefit) consists of the following:
2002
------------------------------------------------------------------
Current Deferred Total
--------------------- -------------------- -------------------
U.S. Federal income taxes $ -- $ -- $ --
State and local income taxes -- -- --
--------------------- -------------------- -------------------
$ -- $ -- $ --
===================== ==================== ===================
2001
------------------------------------------------------------------
Current Deferred Total
--------------------- -------------------- -------------------
U.S. Federal income taxes $ -- $ -- $ --
State and local income taxes 115 -- 115
--------------------- -------------------- -------------------
$ 115 $ -- $ 115
===================== ==================== ===================
2000
------------------------------------------------------------------
Current Deferred Total
--------------------- -------------------- -------------------
U.S. Federal income taxes $ (732) $ (2,959) $ (3,691)
State and local income taxes 91 (402) (311)
--------------------- -------------------- -------------------
$ (641) $ (3,361) $ (4,002)
===================== ==================== ===================
The effective tax rate differed from the U.S. statutory Federal rate of 35% due to the following:
2002 2001 2000
------------------- -------------------- -------------------
U.S. Federal taxes at statutory rate $ (33,013) $ (9,983) $ (17,920)
Increase (decrease):
State income taxes, net of federal tax benefit (4,164) (1,014) (2,235)
Valuation allowance for deferred tax assets 31,463 11,288 16,975
Transaction costs originally non-deductible -- -- (732)
Amortization of nondeductible goodwill and other
nondeductible items 3,851 288 318
Other 1,863 (464) (408)
------------------- -------------------- -------------------
Income tax provision (benefit) $ -- $ 115 $ (4,002)
=================== ==================== ===================
Deferred income tax assets (liabilities) comprise the following:
2002 2001
-------------------- -------------------
Deferred income tax assets:
Net operating loss carryforward $ 42,295 $ 19,837
Impairment of goodwill, intangibles, long-lived assets and advances 26,872 658
Accrued payroll and related costs 848 653
Capital loss 326 14,944
Allowance for doubtful accounts 120 117
Tax credits 246 246
Restructure and severance accrual 61 176
Other accruals (52) 2,030
Other -- 88
-------------------- -------------------
Total gross deferred income tax assets 70,716 38,749
Less valuation allowance (61,347) (29,028)
-------------------- -------------------
Deferred income tax assets, net of valuation allowance 9,369 9,721
-------------------- -------------------
Deferred income tax liabilities:
Property and equipment, principally due to differences in depreciation
and capitalized costs (5,203) (5,354)
Intangible assets, principally due to accrual for financial reporting
purposes (3,541) (3,742)
Other (625) (625)
-------------------- -------------------
Deferred income tax liabilities (9,369) (9,721)
-------------------- -------------------
Net deferred income tax asset (liability) $ -- $ --
==================== ===================
Reconciliation of net deferred income tax asset (liability):
Current deferred income tax assets $ 3,749 $ 2,888
Long-term deferred income tax liabilities (3,749) (2,888)
-------------------- -------------------
$ -- $ --
==================== ===================
The Company has a valuation allowance for all net deferred tax assets. At
December 31, 2002, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $111,000 that are available to offset
future taxable income, if any, through 2022. The Company also has certain state
net operating loss carryforwards, which are available to offset future taxable
income. In accordance with the Internal Revenue Code, the annual utilization of
net operating loss carryforwards and credits that existed in certain
corporations prior to affiliation with InterDent may be limited.
(14) COMMITMENTS AND CONTINGENCIES
Commitments
The Company has entered into various operating leases, primarily for commercial
property. Commercial properties under operating leases mostly include space
required to perform dental services and space for administrative facilities.
Lease expense, including month-to-month equipment rentals was $10,730 for 2002,
$13,122 for 2001 and $15,056 for 2000.
The future minimum lease payments under capital and non-cancelable operating
leases with remaining terms of one or more years consist of the following at
December 31, 2002:
Capital Operating
------------------------ -------------------------
2003 $ 650 $ 9,148
2004 279 7,585
2005 168 6,244
2006 128 5,263
2007 118 4,964
Thereafter 158 9,544
------------------------ -------------------------
Total minimum lease obligations 1,501 $ 42,748
=========================
Less portion attributable to (258)
interest
------------------------
Obligations under capital lease 1,243
Less current portion (556)
------------------------
$ 687
========================
Contingencies
In July 2002, InterDent's claims against Amerident of approximately $3,000 for
breach of contract, breach of the implied covenant of good faith and fair
dealing, intentional misrepresentation and negligent misrepresentation (Los
Angeles Superior Court Case No. BC237600) proceeded to trial, as did the claims
by Amerident for damages ranging from $8,000 to $11,000 against InterDent and
Gentle Dental Management, Inc. related to the July 21, 1999 sale of
substantially all of the assets of ten dental practices in California and Nevada
and breach of a promissory note. In August 2002 a mistrial was declared because
there were insufficient jurors to proceed. The cases are expected to be retried
in the second quarter of 2003. Management believes the Amerident claims against
the Company are without merit or will not have a material adverse effect on the
Company's consolidated operating results, liquidity or financial position, or
cash flows.
The Company has been named as a defendant in various other lawsuits in the
normal course of business, primarily for malpractice claims. The Company and
affiliated dental practices, and associated dentists are insured with respect to
dentistry malpractice risks on a claims-made basis. Management believes all of
these pending lawsuits, claims, and proceedings against the Company are without
merit or will not have a material adverse effect on the Company's consolidated
operating results, liquidity or financial position, or cash flows.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly condensed consolidated
financial information for each of the Company's last eight fiscal quarters. This
quarterly information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments necessary to
present fairly the unaudited quarterly results set forth herein. The Company's
quarterly results have in the past been subject to fluctuations, and thus the
operating results for any quarter are not necessarily indicative of results for
any future period.
2002 2001
----------------------------------------- ------------------------------------------
3/31(a) 6/30 9/30 12/31 3/31 6/30 9/30 12/31
-------- -------- --------- --------- --------- --------- --------- ---------
OPERATING RESULTS:
Total Revenues $ 63,725 $ 64,521 $ 61,589 $ 60,229 $ 83,578 $ 76,243 $ 61,532 $ 61,278
Operating income (loss) 3,577 5,329 4,786 3,772 5,009 (2,994) (8,817) 2,326
Net loss before extraordinary
item and cumulative effect of a
change in accounting principle (1,067) (581) (1,376) (2,468) (520) (12,176) (14,338) (2,444)
Extraordinary loss on debt
extinguishments, net of taxes -- (2,604) -- -- -- (5,601) -- --
Cumulative effect of a change in
accounting principle, net of
taxes (89,000) -- -- -- -- -- -- --
Accretion of redeemable common
stock -- -- -- -- (1) -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Net loss attributable to common $ (90,067) (3,185) $ (1,376) $ (2,468) $ (521) $ (17,777) $ (14,338) $ (2,444)
stock
======== ======== ========= ========= ========= ========= ========= =========
Net loss per share attributable
to common stock - basic and
diluted
Before extraordinary item and
cumulative effect of a change
in accounting principle $ (0.28) $ (0.15) $(0.36) $(0.65) $(0.13) $(3.16) $(3.69) $ (0.66)
Extraordinary item -- (0.68) -- -- -- (1.45) -- --
Cumulative effect of a change in
accounting principle (23.23) -- -- -- -- -- -- --
-------- -------- --------- --------- --------- --------- --------- ---------
Attributed to common stock $(23.51) $ (0.83) $(0.36) $(0.65) $(0.13) $(4.61) $(3.69) (0.66)
======== ======== ========= ========= ========= ========= ========= =========
(a) As restated for the three months ended March 31, 2002 to include a non-cash
impairment charge of $89,000 effective January 1, 2002 related to the cumulative
effect of a change in accounting principle in connection with adoption of SFAS
142. See table below for summary of restated quarter.
Three Months Ended
March 31, 2002
-------------------------------
As As Restated
Previously
Reported
-------------- ---------------
OPERATING RESULTS:
Total Revenues $ 63,725 $ 63,725
Operating income 3,577 3,577
Net loss before extraordinary item and cumulative effect of a
change in accounting principle (1,067) (1,067)
Extraordinary loss on debt extinguishments, net of taxes -- --
Cumulative effect of a change in accounting principle, net of
taxes -- (89,000)
-------------- ---------------
Net loss attributable to common stock $ (1,067) (90,067)
============== ===============
Net loss per share attributable to common stock - basic and
diluted $ $
Before extraordinary item and cumulative effect of a change in
accounting principle (0.31) (0.28)
Extraordinary item -- --
Cumulative effect of a change in accounting principle -- (23.23)
-------------- ---------------
Attributed to common stock $ (0.28) $ (23.51)
============== ===============
(16) SUBSEQUENT EVENT
On March 31, 2003, the Company entered into amendments to its existing Credit
Facility. In connection with the execution of the amendments, the banks, among
other things, modified the principal payment due on April 1, 2003. These
modifications were designed to temporarily relieve the Company from its
short-term debt service obligations, as the Company is currently in negotiations
on a long-term financial restructuring plan with the banks, its significant
equity and debt holders, and other potential outside investors. Under the terms
of the amended agreements, the original required principal payment due of $7,214
was reduced to $500, with the remaining $6,714 due on April 30, 2003. In the
fourth quarter of 2002, the Company prepaid $439 of the required April 1, 2003
principal payment in connection with proceeds from the sale of certain dental
practices, as required under the Credit Facility. Accordingly, the required
April 1, 2003 payment was $61.
(17) SUBSEQUENT EVENT (UNAUDITED)
On April 30, 2003, the Company reached an agreement on the terms of a financial
restructuring with its senior lenders and the holders of its Senior Subordinated
Debt. If implemented, the restructuring will extinguish all of the Company's
existing common and preferred equity.
If the restructuring is confirmed as currently proposed, the Company's
outstanding senior and senior subordinated debt as of April 1, 2003 will be
reduced from approximately $128,000 to approximately $38,000 by conversion of
$90,000 of the debt into equity. The restructuring will also eliminate the
Company's $39,000 convertible subordinated debt. Two of the Company's existing
lenders have agreed to provide the Company with a $7,500 debtor-in-possession
credit facility.
It is expected that the restructuring will be completed through a pre-arranged
filing under Chapter 11 of the United States Bankruptcy Code (the "Code") by the
Company and the subsequent judicial confirmation of a plan of reorganization
under the Code. Because the terms of the proposed reorganization plan have been
agreed upon by the holders of 100% of the $128,000 of Senior Secured Debt and
Senior Subordinated Debt, the Company believes there is a strong likelihood that
the proposed restructuring will be confirmed. The principal effects of the
restructuring on the Company's debt will be as follows.
Senior Secured Debt and Senior Subordinated Debt. There was approximately
$84,000 of Senior Secured Debt outstanding under the Credit Facility as of April
1, 2003. Of this amount, approximately $38,000 was held by JP Morgan Chase Bank,
Fleet Capital Corporation and U.S. Bank National Association (collectively, the
"Bank Lenders") and $47,000 was held by funds managed by DDJ Capital Management,
LLC and Pleasant Street Investors, LLC (the "Other Senior Lenders"). In
addition, Levine Leichtman Capital Partners II, L.P. ("LLCP") held approximately
$44,000 of Senior Subordinated Debt.
The full amount of the $38,000 of Senior Secured debt held by the Bank
Lenders will be assumed by the Company following the reorganization and
restructured as follows (the "Restructured Bank Debt"). The Restructured Bank
Debt will have a three-year term and bear interest at prime plus 2.5% or, at the
Company's option, LIBOR plus 4.0%. The principal will be payable as follows:
$400 during 2003, $5,000 in equal quarterly installments during 2004, $6,000 in
equal quarterly installments during 2005, and $2,000 payable each quarter during
2006 until maturity, when the total unpaid balance will be due.
The $90,000 of Senior Secured Debt and Senior Subordinated Debt held by the
Other Senior Lenders and LLCP will be converted into equity of the Company,
consisting of common stock, a new issue of 5% convertible preferred stock and
warrants to purchase additional common stock constituting 16.5% of the Company's
common stock assuming conversion of the new convertible preferred stock.
Convertible Subordinated Debt. While the restructuring will eliminate the
approximately $39,000 of Convertible Subordinated Debt outstanding as of April
1, 2003, under certain circumstances the holders of this debt might receive the
right to purchase an aggregate of 3% of the fully diluted common stock of the
Company.
Debtor-in-Possession Credit Facility. Certain of the Company's Senior Secured
Lenders have agreed to provide a $7,500 debtor-in-possession credit facility
(the "DIP Facility") to pay certain post-petition expenses. The DIP Facility
will become available on the first day following its approval by the Bankruptcy
Court and will have a 180-day term, subject to earlier termination upon the
occurrence of certain events. Amounts borrowed under the DIP Facility will have
super-priority status and will be secured by a first priority security interest
in, and lien on, all assets of the Company.
The DIP Facility will bear interest at an annual rate ranging from 10% to 13%
over the life of the facility, and will require payment of additional interest
in the event of a default. On the closing date, a commitment fee equal to 2.5%
of the commitment will be due the lenders, and upon termination an additional
fee equal to 2.5% of the commitment will be due. In exchange for the
termination fee, the lenders have agreed that if a plan of reorganization
described herein is confirmed, the Company will have the right to convert the
DIP Facility into a revolving credit facility.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Additions
------------------------------
Charged to Charged to Deductions Balance at
Balance at costs and other
beginning of expenses accounts
year (1) (2) (3) (4) end of year
-------------- -------------- ------------- -------------- ---------------
Accounts Receivable Allowance:
2002 $ 4,627,000 $ 13,600,000 $ -- $ 13,990,000 $ 4,237,000
2001 9,755,000 14,579,000 314,000 20,021,000 4,627,000
2000 8,548,000 10,445,000 4,258,000 13,496,000 9,755,000
Advances to PA Allowance:
2002 $ -- $ -- $ -- $ -- $ --
2001 20,282,000 -- 217,000 20,499,000 --
2000 152,000 19,913,000 256,000 39,000 20,282,000
(1) Before considering recoveries on accounts or notes previously written off.
(2) On accounts receivable allowances, charged to allocation of acquisition
purchase accounting entry.
(3) On advances to PA allowances, charged to management fees revenue.
(4) Accounts written off, net of recoveries. For 2001, includes write offs
associated with dental location dispositions of $988,000 for Accounts
Receivable Allowances and $20,499,000 for Advances to PA Allowances.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 30, 2003.
INTERDENT, INC.
By: /s/ H. WAYNE POSEY
--------------------------------------------
H. Wayne Posey
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities indicated on April 30, 2003.
Signature Title
Principal Executive Officer:
H/s/ H. WAYNE POSEY Chairman of the Board and Chief Executive
- --------------------------------------------
H. Wayne Posey Officer
Principal Financial and
Accounting Officer:
/s/ ROBERT W. HILL Vice President, Finance & Accounting
- -----------------------------------------------------
Robert W. Hill
Directors:
/s/ GERALD R. AARON___ Director
- ------------------------------------
Gerald R. Aaron, D.D.S.
/s/ STEVEN HARTMAN Director
- ------------------------------------
Steven Hartman
Director
/s/ PAUL H. KECKLEY
- -------------------
Paul H. Keckley, PhD
INTERDENT, INC.
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, H. Wayne Posey, certify that:
1. I have reviewed this annual report on Form 10-K of InterDent, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 30, 2003
_/s/ H. WAYNE POSEY
--------------------
H. Wayne Posey
Chairman of the Board and
Chief Executive Officer
INTERDENT, INC.
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Robert W. Hill, certify that:
1. I have reviewed this annual report on Form 10-K of InterDent, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 30, 2003
_/s/ ROBERT W. HILL
--------------------
Robert W. Hill
Vice President, Finance & Accounting