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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q.--QUARTERLY REPORT UNDER
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
|_| 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
incorporation or organization) (I.R.S. Employer Identification No.)
222 No. Sepulveda Blvd., Suite 740, El Segundo, CA 90245-4340
(Address of principal executive offices)
(310) 765-2400
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
As of August 14, 2003, 3,802,787 shares of the issuer's common stock were
outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
Assets 2003 2002
------------------ -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,490 $ 3,041
Accounts receivable, net 17,831 17,934
Receivable from professional associations 359 152
Supplies inventory 4,435 4,439
Prepaid and other current assets 4,982 6,860
------------------ -----------------
Total current assets 33,097 32,426
------------------ -----------------
Property and equipment, net 16,685 17,848
Intangible assets, net 61,404 60,671
Other assets 1,574 3,922
------------------ -----------------
Total assets $ 112,760 $ 114,867
================== =================
Liabilities, Redeemable Common Stock and Shareholders' Deficit
Current liabilities not subject to compromise:
Accounts payable $ 5,403 $ 5,053
Accrued payroll and payroll related costs 9,498 8,740
Other current liabilities 15,623 13,656
Current portion of long-term debt and capital lease obligations 39,025 169,536
------------------ -----------------
Total current liabilities not subject to compromise 69,549 196,985
Current liabilities subject to compromise 135,704 --
------------------ -----------------
Total current liabilities 205,253 196,985
Long-term liabilities not subject to compromise 2,108 7,811
Long-term liabilities subject to compromise 3,743 --
------------------ -----------------
Total long-term liabilities 5,851 7,811
------------------ -----------------
Total liabilities 211,104 204,796
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Redeemable common stock, $0.001 par value, zero and 619 shares issued and outstanding in
2003 and 2002, respectively -- 51
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Shareholders' deficit:
Preferred stock, $0.001 par value, 30,000,000 shares authorized:
Preferred stock - Series A, 100 shares authorized and outstanding 1 1
Convertible Preferred stock - Series B, 70,000 shares authorized, zero shares
issued and outstanding -- --
Preferred stock - Series C, 100 shares authorized, zero shares issued and
outstanding -- --
Convertible Preferred stock - Series D, 2,000,000 shares authorized, 1,574,608
shares issued and outstanding in 2003 and 2002 11,688 11,688
Common stock, $0.001 par value, 50,000,000 shares authorized, 3,802,787 and
3,963,331 shares issued and outstanding in 2003 and 2002, respectively 4 4
Additional paid-in capital 77,853 77,853
Shareholder note receivable -- (206)
Accumulated deficit (187,890) (179,320)
------------------ -----------------
Total shareholders' deficit (98,344) (89,980)
------------------ -----------------
Total liabilities, redeemable common stock and shareholders' deficit $ 112,760 $ 114,867
================== =================
See accompanying notes to condensed consolidated financial statements.
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, dollars in thousands, except per share amounts)
----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June Six Months Ended June
30, 30,
2003 2002 2003 2002
----------- ---------- ----------- -----------
Dental practice net patient service revenue $ 57,407 $ 64,134 $ 116,056 $ 127,495
Net management fees 156 191 403 388
Licensing and other fees 128 196 269 363
----------- ---------- ----------- -----------
Total revenues 57,691 64,521 116,728 128,246
----------- ---------- ----------- -----------
Operating expenses:
Clinical salaries, benefits, and provider costs 28,423 31,010 57,770 61,966
Practice non-clinical salaries and benefits 7,833 8,310 15,919 16,806
Dental supplies and lab expenses 6,578 6,565 12,981 13,832
Practice occupancy expenses 3,440 3,364 6,849 6,673
Practice selling, general and administrative expenses 4,679 5,963 9,469 10,764
Corporate selling, general and administrative expenses 3,070 3,071 6,340 7,308
Stock compensation expense -- 74 -- 147
(Gain) loss on extinguishment of debt (1,739) 2,604 (1,739) 2,604
(Gain) loss on dental location dispositions and impairment
of long-lived assets 185 (192) 185 (192)
Depreciation and amortization 948 1,027 1,903 2,036
----------- ---------- ----------- -----------
Total operating expenses 53,417 61,796 109,677 121,944
----------- ---------- ----------- -----------
Operating income 4,274 2,725 7,051 6,302
----------- ---------- ----------- -----------
Nonoperating expense:
Interest expense, net (contractual interest was $7,000 and $13,327 for
the three and six months ended June 30, 2003) (4,713) (5,783) (11,040) (10,237)
Other, net (227) (97) (251) (257)
----------- ---------- ----------- -----------
Nonoperating expense, net (4,940) (5,880) (11,291) (10,494)
----------- ---------- ----------- -----------
Loss before reorganization expense, income taxes and cumulative (666) (3,155) (4,240) (4,192)
effect of accounting change
Reorganization expense 4,330 -- 4,330 --
----------- ---------- ----------- -----------
Loss before income taxes and cumulative effect of accounting (4,996) (3,155) (8,570) (4,192)
change
Provision for income taxes -- 30 -- 60
----------- ---------- ----------- -----------
Net loss before cumulative effect of accounting change (4,996) (3,185) (8,570) (4,252)
Cumulative effect of accounting change -- -- -- (89,000)
----------- ---------- ----------- -----------
Net loss $ (4,996) $ (3,185) $ (8,570) $ (93,252)
=========== ========== =========== ===========
Basic and dilutive:
Net loss per share before cumulative effect of accounting change $ (1.31) $ (0.83) $ (2.25) $ (1.11)
Cummulative effect of accounting change -- -- -- (23.17)
----------- ---------- ----------- -----------
Loss per share $ (1.31) $ (0.83) $ (2.25) $ (24.28)
=========== ========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
INTERDENT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
2003 2002
----------------- -----------------
Cash flows from operating activities:
Net loss $ (8,570) $ (4,252)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash reorganization items 2,816 --
Depreciation and amortization 1,903 2,036
Gain on extinguishment of debt (1,739) --
Notes and warrants issued or accrued for debt amendment fees, interest
payment-in-kind and accrued interest 4,784 6,339
Interest amortization on deferred financing costs and discounted debt 1,819 1,903
Asset write downs and other adjustments 391 195
Change in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net 93 1,840
Management fees receivable (207) (21)
Supplies inventory (39) (199)
Prepaid expenses and other current assets (484) 302
Other assets 179 (182)
Accounts payable 1,368 (2,513)
Accrued payroll and payroll related costs 766 523
Accrued merger and restructure (28) (156)
Other liabilities 2,336 1,429
----------------- -----------------
Net cash provided by operating activities before reorganization expense 5,388 7,244
Net cash paid for reorganization expense (1,018) --
----------------- -----------------
Net cash provided by operating activities 4,370 7,244
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (849) (802)
Proceeds from disposition of dental locations -- 600
Cash paid for acquisitions and earn-outs, including direct costs, net of cash (405) (1,242)
acquired
----------------- -----------------
Net cash used in investing activities (1,254) (1,444)
----------------- -----------------
Cash flows from financing activities:
Net payments on credit facility (261) (2,397)
Net proceeds from short term borrowings 1,500 --
Payments on long-term debt and obligations under capital leases (1,766) (3,669)
Payments of deferred financing costs (114) (1,294)
Proceeds from issuance of common and preferred stock -- 4
Exercise of put rights (26) (25)
----------------- -----------------
Net cash used in financing activities (667) (7,381)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 2,449 (1,581)
Cash and cash equivalents, beginning of period 3,041 7,189
----------------- -----------------
Cash and cash equivalents, end of period $ 5,490 $ 5,608
================= =================
Cash paid for interest $ 2,275 $ 4,023
================= =================
See accompanying notes to condensed consolidated financial statements.
INTERDENT, INC.
AND SUBSIDIARIES
June 30, 2003 and 2002
Notes to Condensed Consolidated Financial
Statements (Unaudited, dollars in thousands, except per
share and share amounts)
(1) ORGANIZATION
Headquartered in El Segundo, California, InterDent, Inc. ("Parent") and its
subsidiaries (collectively 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, currently
representing 135 dental locations, 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.
(2) 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, prepares 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. In January 2003, Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," ("FIN 46") which partially rescinds portions of EITF 97-2. FIN 46
addresses consolidation by a business of variable interest entities in which it
is the primary beneficiary. The accompanying Condensed Consolidated Financial
Statements are prepared in conformity with the consensus reached in EITF 97-2 as
amended by FIN 46. The application of FIN 46 does not have a material effect on
the accompanying Condensed Consolidated Financial Statements.
Simultaneous to the execution of an MSA with each PA, the Company also entered
into a shares acquisition agreement ("SAA"). 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 the 133 PAs that qualify as a friendly doctor arrangement in the
accompanying Condensed Consolidated Financial Statements and include the net
patient revenues and related expenses of these PAs. All significant intercompany
transactions have been eliminated.
As discussed above, two of the 135 dental locations under management do not have
the nominal price provision required for consolidation. As a result, the MSAs
for these two locations 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 these MSAs.
As further discussed in Note 3, on May 9, 2003 (the "Petition Date"), the Parent
and one of its subsidiaries InterDent Service Corporation (collectively, the
"Debtors"), filed a Prearranged Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Central District of California located in Santa Ana,
California (the "Bankruptcy Court"). The cases are being jointly administered
under the case name "In Re InterDent, Inc., a Delaware Corporation; InterDent
Service Corporation, a Washington Corporation," Case No. 03-13594. Accordingly,
the accompanying Condensed Consolidated Financial Statements have been prepared
in accordance with AICPA Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), on a
going-concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business. In
accordance with SOP 90-7, the financial statements for the periods presented
distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the Company. The Company conducts
its business through direct and indirect subsidiaries of the Debtors. While the
Debtors are in the reorganization process, the subsidiaries not directly
involved with the Chapter 11 proceedings are expected to continue to operate in
the ordinary course of business.
Interim reporting
The accompanying unaudited interim Condensed Consolidated Financial Statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and note disclosures normally
included in annual consolidated financial statements have been condensed or
omitted as permitted under those rules and regulations. We believe all
adjustments, consisting only of normal, recurring adjustments considered
necessary for a fair presentation, have been included and that the disclosures
made are adequate to insure that the information presented is not misleading. To
obtain a more detailed understanding of Company results, it is suggested that
these financial statements be read in conjunction with the Consolidated
Financial Statements and related notes for the year ended December 31, 2002
included in Form 10-K filed on April 30, 2003. The results of operations for the
three and six month periods ended June 30, 2003 are not necessarily indicative
of the results of operations for the entire year.
Reclassifications
Certain items related to prior periods have been reclassified to conform to the
2003 reporting format.
(3) REORGANIZATION
Prearranged Plan
April 30, 2003, the Debtors reached agreement with its senior lenders ("Senior
Secured Debt") and the holders of its senior subordinated debt ("Senior
Subordinated Debt") to convert $91,300 of the Debtors' debt to equity and
restructure the remaining $37,700 of Senior Secured Debt into a new term loan.
The agreement is to be implemented through a Prearranged Plan of Reorganization
under the Bankruptcy Code. Because the terms of the proposed reorganization plan
have been agreed upon by the holders of 100% of the Senior Secured Debt and
Senior Subordinated Debt, the Debtors believe there is a strong likelihood that
the proposed restructuring will be confirmed. The Bankruptcy Court has scheduled
the final confirmation hearing for September 3, 2003.
On May 9, 2003, the Debtors filed a Prearranged Plan of Reorganization under
Chapter 11 of the Bankruptcy Code. On or about July 22, 2003 the Bankruptcy
Court approved the Second Amended Joint Plan (as amended, the "Joint Plan") and
the Second Amended Disclosure Statement for distribution. Among other things,
the Joint Plan provides for:
o Conversion of approximately $47,100 of Senior Secured Debt to new Series A
and B Preferred Stock in the restructured entity;
o Conversion of approximately $44,200 of Senior Subordinated debt into new
Class C Common Stock in the restructured entity;
o Conversion of $39,000 of Convertible Subordinated Notes into warrants to
purchase new Class C Common Stock in the restructured entity provided the
holders of the Convertible Subordinated Notes vote for the plan;
o Restructuring of approximately $37,700 of Senior Secured Debt into a term
loan to be paid over three years; and
o The impairment of certain general unsecured claims of the Debtors.
Furthermore, pursuant to the Joint Plan, the Parent would no longer be publicly
traded after the effective date of the Joint Plan. Therefore, if the Debtors'
Joint Plan is approved as filed, the existing equity of the Company will be
extinguished and the stockholders of the Parent would receive no value for their
shares. All of the outstanding equity of the Parent, as the surviving entity,
would be owned by the holders of the restructured entity's Series A and B
Preferred Stock.
Bankruptcy Proceedings
On May 12, 2003, the Debtors were granted authorization to operate their
business in ordinary course as debtors-in-possession subject to the jurisdiction
of the Bankruptcy Court. The Bankruptcy Court also approved motions of the
Debtors to allow for:
o Payment of all employee wages, salaries, certain benefits and other
employee obligations;
o Payment of trade vendors, utilities and insurance in the ordinary course of
business for both pre and post-petition expenses;
o Access to a debtor-in-possession ("DIP") financing arrangement; and
o The use of all company bank accounts for normal business operations.
The Debtors are currently paying the post-petition claims of their vendors in
the ordinary course of business.
As a consequence of the bankruptcy petition, all pending claims and litigation
against the Debtors are stayed automatically by Section 362 of the Bankruptcy
Code, and absent further order of the Bankruptcy Court, no party may take any
action to recover any pre-petition claims, enforce any lien against or obtain
possession of any property from the Debtors. In addition, pursuant to Section
362 of the Bankruptcy Code, the Debtors may reject or assume pre-petition
executory contracts and unexpired leases, and parties affected by rejections of
the contracts or leases may file claims with the Bankruptcy Court in accordance
with the Chapter 11 reorganization process. A committee of the 7 largest
creditors has been formed to represent all unsecured creditors (the "Creditors
Committee") and will have the right to be heard on all matters that come before
the Bankruptcy Court. The Creditors Committee has agreed to support the Joint
Plan and has published a letter to all the creditors urging them to vote in
favor of the Joint Plan.
In June 2003, the Company entered into agreements with key members of our
management team designed to retain their services through the reorganization
process. The terms of the agreements become effective only when the Debtors'
Joint Plan is effective. The agreements, when effective, provide for
approximately $1,000 in retention bonus payments and stock options in the
restructured Company.
Debtor-in-Possession Financing Agreement
In connection with the Chapter 11 filings, the Debtors entered into a $7,500
secured debtor-in-possession credit facility ("DIP Facility") with certain of
the Debtor's Senior Secured Lenders. On May 12, 2003 the Bankruptcy Court
approved an interim amount of $3,000 of the DIP Facility. The Bankruptcy Court
approved the remainder of the DIP Facility on July 10, 2003.
The DIP Facility has a 180-day term, subject to earlier termination upon the
occurrence of certain events. Amounts borrowed under the DIP Facility have
super-priority status and will be secured by a first priority security interest
in, and lien on, all assets of the Debtor.
The DIP Facility bears interest at an annual rate ranging from 10% to 13% over
its life, and requires payment of additional interest in the event of a default.
The Debtors paid a commitment fee equal to 2.5% of the commitment, 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 the Joint Plan
described herein is confirmed, the Debtors have the right to convert the DIP
Facility into a revolving credit facility.
At June 30, 2003, there was $1,500 outstanding on the DIP Facility which is
included in other current liabilities in the Condensed Consolidated Financial
Statements.
Debtors Stand-Alone Financial Statements
In accordance with SOP 90-7 the financial statements of the Debtors, which
exclude the three subsidiaries and all PAs that are not involved in the
reorganization proceedings, are presented below. Such financial statements have
been prepared using standards consistent with the Company's Condensed
Consolidated Financial Statements without eliminating intercompany transactions.
InterDent, Inc. and InterDent Services Corporation (Debtors)
Debtor in Possession
Stand Alone Balance Sheet
As of June 30, 2003
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,545
Receivable from professional associations (*) 15,082
Supplies inventory 4,224
Prepaid and other current assets 4,588
------------------
Total current assets 25,439
------------------
Property and equipment, net 15,582
Intangible assets, net 61,346
Investment in non-debtor subsidiaries 4,062
Other assets 759
------------------
Total assets $ 107,188
==================
Liabilities and Shareholders' Deficit
Current liabilities not subject to compromise:
Accounts payable $ 5,173
Accrued payroll and payroll related costs 5,654
Other current liabilities 14,125
Current portion of long-term debt and capital lease obligations 39,025
------------------
------------------
Total current liabilities not subject to compromise 63,977
Current liabilities subject to compromise 135,704
------------------
------------------
Total current liabilities 199,681
Long-term liabilities not subject to compromise 2,108
Long-term liabilities subject to compromise 3,743
------------------
------------------
Total long-term liabilities 5,851
------------------
Total liabilities 205,532
------------------
Shareholders' deficit:
Preferred stock, $0.001 par value, 30,000,000 shares authorized:
Preferred stock - Series A, 100 shares authorized and outstanding 1
Convertible Preferred stock - Series B, 70,000 shares authorized, zero
shares
issued and outstanding --
Preferred stock - Series C, 100 shares authorized, zero shares issued and
outstanding --
Convertible Preferred stock - Series D, 2,000,000 shares authorized, 1,574,608
shares issued and outstanding in 2003 11,688
Common stock, $0.001 par value, 50,000,000 shares authorized, 3,802,757 shares
issued and outstanding in 2003 4
Additional paid-in capital 77,853
Accumulated deficit (187,890)
------------------
Total shareholders' deficit (98,344)
------------------
Total liabilities and shareholders' deficit $ 107,188
==================
* Pursuant to the MSAs with the PAs, the Debtors receivable from professional
associations is fully secured by the underlying accounts receivable of the
professional associations. Also per the MSAs, the Debtors are responsible
for billing and collecting patient receivables and managing the cash from
such collections.
InterDent, Inc. and InterDent Services Corporation (Debtors)
Debtor in Possession
Stand Alone Statement of Operations
From the Period of Petition Date of May 9, 2003 through June 30, 2003
(Unaudited)
Net management fees $ 14,839
Licensing and other fees 72
-------------------
Total revenues 14,911
-------------------
-------------------
Operating expenses:
Clinical salaries, benefits, and provider costs 3,562
Practice non-clinical salaries and benefits 4,005
Practice occupancy expenses 1,931
Practice selling, general and administrative expenses 2,024
Corporate selling, general and administrative expenses 916
Loss on dental location dispositions and impairment of long-lived assets 185
Depreciation and amortization 501
-------------------
Total operating expenses 13,124
-------------------
Operating income 1,787
-------------------
Nonoperating expense:
Interest expense, net (907)
Other, net (18)
-------------------
Nonoperating expense, net (925)
-------------------
Net income before reorganization expenses 862
Reorganization expenses 4,330
-------------------
-------------------
Net loss $ (3,468)
===================
===================
Loss per share- basic and dilutive $ (0.91)
===================
InterDent, Inc. and InterDent Services Corporation (Debtors)
Debtor in Possession
Stand Alone Statement of Cash Flows
From the Period of Petition Date of May 9, 2003 through June 30, 2003
(Unaudited)
Cash flows from operating activities:
Net loss $ (3,468)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash reorganization items 2,816
Depreciation and amortization 501
Interest amortization on deferred financing costs and discounted debt 120
Equity in income of subsidiaries (365)
Asset write-downs 373
Change in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net (900)
Supplies inventory (10)
Prepaid expenses and other current assets (95)
Other assets (124)
Accounts payable 1,186
Accrued payroll and payroll related costs 1,015
Other liabilities 180
------------------
------------------
Net cash provided by operating activities before reorganization expenses 1,229
Net cash paid for reorganization expenses (1,018)
------------------
------------------
Net cash provided by operating activities 211
------------------
------------------
Cash flows from investing activities:
Purchase of property and equipment (199)
Cash paid for acquisitions and earn-outs, including direct costs, net of cash (72)
acquired
------------------
Net cash used in investing activities (271)
------------------
Cash flows from financing activities:
Net payments on credit facility (200)
Net proceeds from short term borrowings 1,500
Payments on long-term debt and obligations under capital leases (97)
Payments of deferred financing costs (5)
------------------
Net cash provided by financing activities 1,198
------------------
Increase in cash and cash equivalents 1,503
Cash and cash equivalents, beginning of period 42
------------------
Cash and cash equivalents, end of period $ 1,545
==================
Accounting Impact of Filing Prearranged Plan of Reorganization
Liabilities subject to compromise represent liabilities of the Debtors incurred
prior to the Petition Date that are with unrelated parties. In accordance with
SOP 90-7, liabilities subject to compromise are recorded at the estimated amount
that is expected to be allowed as prepetition claims in the Chapter 11
proceedings and are subject to future adjustments. Subsequent adjustments may
result from negotiations, actions of the Bankruptcy Court, further developments
with respect to disputed claims, rejection of executory contracts and unexpired
leases, proofs of claim, implementation of the Joint Plan, or other events. The
Debtors submitted a motion with the Bankruptcy Court rejecting operating lease
agreements with a total future commitment of approximately $1,600. Other
obligations of the Company's subsidiaries that are not subject to compromise
have retained their historical balance sheet classifications and amounts.
Liabilities subject to compromise consist of the following as of June 30, 2003:
Senior Secured Debt $ 47,134
Senior Subordinated Debt 44,249
Subordinated Convertible Debt 39,139
Other unsecured notes to sellers 7,991
Capital lease obligations 934
--------------------
--------------------
139,447
Less: Current liabilities subject to compromise 135,704
--------------------
--------------------
Long-term liabilities subject to compromise $ 3,743
====================
The Debtors are to record their debt instruments at the amount expected to be
allowed by the Bankruptcy Court. As of the petition date, the Debtors wrote off
deferred financing fees related to liabilities subject to compromise. The
charges are a component of reorganization expenses on the Condensed Consolidated
Statements of Operations. Reorganization expense also includes expenses related
to professional services and fees for services directly associated with the
Joint Plan. Reorganization expenses for the three and six-month periods ended
June 30, 2003 consisted of the following:
Three and six months
ended June 30, 2003
--------------------
Deferred financing fees $ 2,816
Professional fees 1,514
--------------------
--------------------
Total reorganization expense $ 4,330
====================
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. These subsidiaries are not
involved in the reorganization proceedings. 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 June 30, 2003. Total revenues subject to
regulatory review and oversight by various state agencies were $19,452 and
$24,897 for the six months ended June 30, 2003 and 2002, respectively.
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 Condensed 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.
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.
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 review for potential impairment upon adoption on
January 1, 2002 and thereafter annually or when an impairment indicator is
noted. As a result of completing the required test, the Company recorded a
non-cash charge in the amount of $89,000 during the fourth quarter of 2002,
retroactive to the adoption date, to reduce the carrying value of its goodwill
and certain intangible assets associated with dental practice acquisitions. The
charge restated the previously reported results for the six months ended June
30, 2002. The restatement is reflected as a cumulative effect of a change in
accounting principle in the accompanying Condensed Consolidated Statements of
Operations, as follows:
Six Months Ended
June 30, 2002
----------------------------------
As As Restated
Previously
Reported
---------------- ----------------
Total Revenues $ 128,246 $ 128,246
Operating income 6,302 6,302
Net loss before cumulative effect of a change in accounting principle (4,252) (4,252)
Cumulative effect of a change in accounting principle, net of taxes -- (89,000)
---------------- ----------------
---------------- ----------------
Net loss $ (4,252) $ (93,252)
================ ================
================ ================
Net loss per share - basic and diluted
Before cumulative effect of a change in accounting principle $ (1.11) $ (1.11)
Cumulative effect of a change in accounting principle -- (23.17)
---------------- ----------------
----------------
Net loss $ (1.11) $ (24.28)
================ ================
The Company did not record amortization on its goodwill and intangible assets
during 2003 and 2002 as all such assets are determined to have indefinite lives.
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 June 30,
2003 and 2002. However, as discussed in note 3 above, the Company is currently
involved in a restructuring that is being implemented through a Prearranged Plan
of Reorganization under Chapter 11 of the Bankruptcy Code. Due to the number of
uncertainties regarding the restructuring plan, there can be no assurance that
the fair value of the Company's assets, liabilities and long-term debt may not
be reduced.
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 the six months ended June 30, 2003, and 2002, dilutive potential common
shares of approximately 2,600,000 and 2,240,000, respectively, consisting of
convertible subordinated debt, convertible preferred stock, and the exercise of
certain options and warrants have been excluded from the computation of diluted
income per share as their effect is anti-dilutive.
The following table summarizes the computation of outstanding shares and
excludes 160,544 of shares held in escrow in connection with the sale of DCA in
May 2001. Such shares were cancelled upon release from the escrow agent in June
2003.
Three Months Ended June Six Months Ended June 30,
30,
2003 2002 2003 2002
-------------- ------------- -------------- ---------------
Net Loss $ (4,996) $ (3,185) $ (8,570) $ (93,252)
============== ============= ============== ===============
============== ============= ============== ===============
Weighted average common shares outstanding 3,802,787 3,848,688 3,802,787 3,841,060
============== ============= ============== ================
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 elements of other comprehensive income.
Stock-based compensation
The Company has adopted the disclosure-only provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by FASB
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure ("SFAS 148") and will continue to use the intrinsic value based
method of accounting prescribed under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation cost has been recognized for options granted with an option price
equal to the grant date market value of the Company's common stock. Had
compensation cost for the Company's options granted been determined based on the
fair value of the option at the grant date consistent with the provisions of
SFAS 123, the Company's net loss and net loss per share would have increased to
the pro forma amounts indicated below for the three and six-months ended June
30, 2003 and 2002, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
Net Loss, as reported $ (4,996) $ (3,185) $ (8,570) $ (93,252)
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effect -- 74 -- 147
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effect (128) (1,722) (257) (4,502)
-------------- -------------- -------------- ---------------
Net loss, pro forma $ (5,124) $ (4,833) $ (8,827) $ (97,607)
============== ============== ============== ===============
Net loss - basic and diluted:
As reported $ (1.31) $ (0.83) $ (2.25) $ (24.28)
Pro forma (1.35) (1.26) (2.32) (25.41)
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 2002. During 2003 the Company granted
options to purchase 505,000 shares of the Company's stock. The fair value of
options granted during 2003 were valued using the Black-Scholes option-pricing
model with the following weighted average assumptions: (a) no dividend yield on
the Company's stock, (b) expected volatility of the Company's stock of 170%, (c)
a risk-free interest rate of 3.10% and (d) expected option life of five years.
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 during 2003 which would be
amortized over the vesting period is $94 and were valued at an average per share
amount of $0.19.
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.
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. Income tax expense recorded for
the three months ended March 31, 2002 represents the Company's estimate of state
income tax payable. The Company has a valuation allowance to offset the entire
amount of federal and state tax benefit of loss carryforwards.
Use of estimates
In preparing the financial statements, we have made estimates and assumptions
that affect the following:
o Reported amounts of assets and liabilities at the date of the financial
statements; o Disclosure of contingent assets and liabilities at the date of the
financial statements; and o Reported amounts of revenues and expenses during the
period.
Actual results could differ from those estimates.
New accounting pronouncements
Financial Accounting Standards Board ("FASB") Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others," was issued in November 2002. The
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The Interpretation
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," which is being
superseded. The initial recognition and measurement provisions of the
Interpretation are to be applied on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The adoption of this statement did not have a material impact on the
Company's financial statements as it has not issued or modified any guarantees
since December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN 46") which addresses consolidation by a
business of variable interest entities in which it is the primary beneficiary.
The Interpretation is effective immediately for certain disclosure requirements
and variable interest entities created after January 31, 2003, and is effective
July 1, 2003 for all other variable interest entities. The Company does not
believe this interpretation will have a material impact on the Company's
financial statements.
(5) LONG TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
2003 2002
---------------- ----------------
---------------- ----------------
Senior Secured Debt, variable interest (6.50% at June 30, 2003), variable
quarterly payments, as defined, due September 30, 2003. $ 84,806 $ 81,626
Senior Subordinated Debt, interest at 17.0%, payable monthly; due September 2005 44,249 41,671
Convertible Subordinated Debt, Interest at 8%, payable semi-annually, due June 2006 39.139 38,106
Various unsecured acquisition notes payable, due in monthly and quarterly
installments of principal and interest at rates ranging from Prime (4.00% at
June 30, 2003) to 12.0%; due through November 2009 9,170 12,754
Note payable to seller, interest at 8.5%, secured by stock in subsidiary; due June
2003 581 581
---------------- ----------------
---------------- ----------------
Total long-term debt 177,945 174,738
Less long-term debt subject to compromise (3,181) --
Less current portion (174,357) (168,980)
---------------- ----------------
---------------- ----------------
Long-term debt not subject to compromise, net of current portion $ 408 $ 5,758
================ =================
Under the Bankruptcy Code, actions against the Debtors to collect prepetition
indebtedness are subject to an automatic stay provision and therefore certain
payments required by the pre-petition agreements discussed below have not been
made. Additionally, in accordance with SOP 90-7, the Debtors are required to
accrue interest during the Chapter 11 proceedings only to the extent that it is
probable that such interest will be paid pursuant to the proceedings. If the
Debtors' Joint Plan is approved as filed, the amount and structure of the
outstanding debt as of June 30, 2003 will be substantially altered.
The following outlines the significant terms of our Senior Secured Debt, Senior
Subordinated Debt, and convertible notes ("Convertible Subordinated Debt"):
Senior Secured Debt
Principal amounts owed under the Senior Secured Debt bear interest at Prime plus
2.5% payable monthly as of June 30, 2003. Through the Petition Date, the Company
was issuing payment-in-kind ("PIK") notes at 13.0% for payment of interest
amounts owed on the principle balance. In addition, we are were required to pay
an incremental 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 due was paid through the issuance
of PIK notes through the Petition Date.
On April 30, 2003, we entered into amendments to our existing Senior Secured
Debt to postpone the $6.7 million due on April 30, 2003 until May 9, 2003.
Required principal installments of $7.2 million were also due on July 1, 2003
and the remaining balance is due at maturity on September 30, 2003. In
conjunction with amendments signed in April 2001, the Company issued warrants to
the senior lenders to purchase an aggregate of 166,667 shares of the Company's
common stock at a strike price of $3.66 per share. The warrants had no value at
the date of grant.
The Senior Secured Debt 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 Senior Secured Debt,
including the applicable subsidiaries in the guarantees, are secured by a
security interest in substantially all assets of each of such entities. The
Company was in default with certain of it covenants related to the Senior
Secured Debt at June 30, 2003.
Senior Subordinated Debt
In June 2000, we raised $36.5 million from the sale of debt and equity to Levine
Leichtman Capital Partners II, L.P. ("Levine") under a securities purchase
agreement. The equity portion of the transaction comprised 458,333 shares of
common stock valued at $11.0 million. The debt portion of the transaction
comprised the Senior Subordinated Debt with a face value of $25.5 million. As
part of the transaction with Levine, we also issued a warrant to purchase
354,167 shares of Company common stock at a current strike price of $20.88 per
share.
The entire principal of the Senior Subordinated Debt is due September 2005 but
may be paid earlier at our election, subject to a prepayment penalty.
Additionally, the Levine Note has mandatory principal prepayments based upon a
change in ownership, certain asset sales, or excess cash flows. The Senior
Subordinated Debt bears interest on its face at 12.5%, payable monthly, with an
option to pay the interest in a PIK note at a higher interest rate. Through the
Petition Date, the Company was issuing PIK notes at 17.0% for payment of
interest amounts owed. The securities purchase agreement contains covenants,
including but not limited to, restricting our 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. Additionally, the Senior Subordinated Debt has
cross default provisions that have been triggered by the default on the Senior
Secured Debt at June 30, 2003.
Convertible Subordinated Debt
In 1998, we issued $30.0 million of Convertible Subordinated Debt. The
Convertible Subordinated Debt matures June 2006 and currently bear interest at
8.0%, payable semi-annually with an option to pay the interest in a PIK note
also bearing interest at 8.0%, which we are currently exercising for payment of
current interest amounts due through the Petition Date. Effective with the
Chapter 11 filings, we were no longer required to accrue for the incremental PIK
interest under SOP 90-7 as it is not expected to be paid. The Convertible
Subordinated Debt is 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.
(7) DENTAL PRACTICE AFFILIATIONS AND DISPOSITIONS
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. In addition to cash paid of $168 during the six months ended June 30,
2003, the Company also converted $684 of amounts due under earn-out agreements
into long-term notes payable. As of June 30, 2003, future anticipated earn-out
payments of $626 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 $1,000 and $1,500 from July 2003 to December 2004, which is expected to
be paid in a combination of cash and notes. However, as discussed in Note 3
above, the Company is currently involved in a restructuring that is being
implemented through a Prearranged Plan of Reorganization under Chapter 11 of the
Bankruptcy Code, which may substantially change the anticipated earn-out
payments.
(7) CONTINGENCIES
Except as may otherwise be deemed by the Bankruptcy Court overseeing the Chapter
11 filings, the automatic stay protection afforded by Chapter 11 generally
automatically stays any litigation proceedings pending against either or both of
the Debtors. All such claims will be addressed through the proceedings
applicable to the Chapter 11 cases. The automatic stay would not, however, apply
to actions brought against subsidiaries not involved in the reorganization
proceedings.
In July 2002, the Debtor'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 the Debtors 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 Debtor has reached an agreement,
to settle the case and all amounts due to either party. The settlement agreement
has been approved by the Bankruptcy Court and will be effective upon
confirmation of the Debtors' Joint Plan.
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.
INTERDENT, INC.
AND SUBSIDIARIES
Item 2. 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-Q 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 financial restructuring, 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; the outcome of our proceedings under
Chapter 11 of the Bankruptcy Code and its effect upon our leverage; 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. As of June 30, 2003
we provided management services to 135 dental offices that employ 544 dentists,
including 133 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
either the expenses incurred in operating the practice plus a percentage of the
net revenues of the affiliated dental practice or a set percentage of the net
revenues of 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 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. In January 2003, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," ("FIN 46") which partially rescinds portions of EITF 97-2. FIN 46
addresses consolidation by a business of variable interest entities in which it
is the primary beneficiary. The accompanying Condensed Consolidated Financial
Statements are prepared in conformity with the consensus reached in EITF 97-2 We
do not believe the application of FIN 46 will have a material effect on the
accompanying Condensed Consolidated Financial Statements.
Simultaneous to the execution of an MSA with each PA, we also entered into a
shares acquisition agreement ("SAA"). Under all of the SAAs entered into except
for two, 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 the 133 PAs
that qualify for the friendly doctor arrangement in the accompanying Condensed
Consolidated Financial Statements. Accordingly, the Condensed Consolidated
Statements of Operations include the net patient revenues and related expenses
of these PAs and all significant intercompany transactions have been eliminated.
As discussed above, two of the 135 dental locations under management do not have
the nominal price provision required for consolidation. As a result, the MSAs
for these two locations 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. We only include net
management fee revenues generated and expenses associated with providing
services under these MSAs.
Restructuring
As further discussed in Note 3 to the Condensed Consolidated Financial
Statements, on May 9, 2003 (the "Petition date"), InterDent, Inc. and its
subsidiary InterDent Service Corporation (collectively, the "Debtors") filed a
Prearranged Plan of Reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the Central District of California located in Santa Ana, California (the
"Bankruptcy Court"). The cases are being jointly administered under the case
name "In Re InterDent, Inc., a Delaware Corporation; InterDent Service
Corporation, a Washington Corporation," Case No. 03-13594. Accordingly, the
accompanying Condensed Consolidated Financial Statements have been prepared in
accordance with AICPA Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code," ("SOP 90-7") on a
going-concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business. In
accordance with SOP 90-7, the financial statements for the periods presented
distinguish transactions and events that are directly associated with the
reorganization from our ongoing operations. We conduct our business through our
direct and indirect subsidiaries. While the Debtors are in the reorganization
process, the subsidiaries not directly involved with the Chapter 11 proceedings
are expected to continue to operate in the ordinary course of business.
Critical Accounting Policies and Estimates
The preparation of our Condensed 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 those related to carrying value of accounts
receivables, goodwill, intangible and long-lived assets, income taxes and any
potential future impairment. 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 Condensed Consolidated Financial Statements,
including estimating the fair value of our 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 and six-month period ended June 30, 2003, compared to the
three and six-month period ended June 30, 2002, as reported in our Condensed
Consolidated Financial Statements and the related notes thereto appearing
elsewhere herein.
Three Months Ended June 30, 2003 Statement of Operations Compared to Three
Months Ended June 30, 2002
Dental Practice Net Patient Service Revenue. Dental practice net patient service
revenue represents the clinical patient revenues at affiliated dental practices
where the consolidation requirements of EITF 97-2 have been met. There were 133
and 139 such offices at June 30, 2003 and 2002, respectively. Dental practice
net patient service revenue decreased 10.6% to $57.7 million for 2003 compared
to $64.5 million for 2002 as a result of same store sales declines and the sale
or merging of six under performing practice locations into existing facilities.
The daily dental practice net patient service revenue for offices open for at
least one year as of June 30, 2003 decreased approximately 8.4% from the same
period in the prior year. The major contributing factor to this decrease is the
effect of a very poor national economy and high unemployment rates in the
markets we serve. Additionally, the Oregon Department of Health Services has
reduced the dental benefits offered under its Oregon Health Plan to address the
State of Oregon statewide budget crisis. The effect of this reduction in
benefits offered to low income residents in the three months ended June 30, 2003
resulted in a decrease in our capitation revenue from the state of Oregon by
nearly 37%, or approximately $3.0 million from the same period last year. We are
currently implementing certain initiatives to replace the lost revenues
associated with the Oregon Health Plan and other locations negatively affected
by the poor economy. Such initiatives include converting the capacity of our
offices servicing the Oregon Health Plan to fee-for-service revenue patients,
increasing revenues from managed care plans, or a combination of both.
Practice Operating Expenses. Practice operating expenses represent the costs
directly 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 $50.9 million for 2003 compared to $55.2
million for 2002, representing a 7.7% reduction in spending. The practice
operating expenses as a percentage of revenue increased 2.7% to 88.3% in 2003
from 85.6% in 2002. The increase in such expense as a percentage of revenue is
due to the decline in overall same store revenues, as discussed above. The
components that make up the practice operating expenses are largely
fixed-variable or fixed cost, except for dental supplies and lab expense which
are variable cost. We have been and 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 expense, legal and audit fees, general insurance,
director and officer liability insurance, corporate office supplies, and other
miscellaneous costs at our corporate facilities. Corporate selling, general and
administrative expenses were unchanged at $3.1 million for both 2003 and 2002.
Reorganization. Reorganization expenses for the three and six months ended June
30, 2003 include $2.9 million in non-cash charges to write off debt issuance
costs related to compromised debt and $1.4 million in professional fees
associated with our Plan of Reorganization and bankruptcy services. The write
off of debt issuance costs is required under SOP 90-7 to adjust the historical
carrying amounts of our Credit Facility, Senior Subordinated Debt and
Convertible Subordinated Debt to the estimated allowed claim amount by the
Bankruptcy Court. Total restructuring expenses for the three and six months
ended June 30, 2003 were $4.3 million.
(Gain) Loss on extinguishment of debt. In May 2003, we entered into an agreement
with one of our unsecured note holders in which existing debt was cancelled in
exchange for a new agreement under which the holders will receive a stream of
payments over two years. No tax benefit was recorded as a result of the charge
as the realization of the available deferred tax assets is not assured.
The gain on extinguishment of debt of $1.7 million represents the decrease in
the estimated present value of future anticipated cash payments.
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 recognized an
extraordinary charge of $2.6 million for 2002. No tax benefit was recorded as a
result of the charge as the realization of the 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.
Depreciation and Amortization. Depreciation and amortization expense was
approximately $1.0 million for 2003 and 2002, and is entirely attributed to
depreciation and amortization of property and equipment, including leasehold
improvements, over their appropriate estimated useful lives or lease term. As
discussed in Note 4 to the accompanying Condensed Consolidated Financial
Statements, in January 2002 we implemented Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets". Accordingly, we have
eliminated the amortization of our intangible assets as all such assets are
considered to have indefinite lives.
Interest Expense. Interest expense, net of interest income, was $4.7 million for
2003 compared to $5.8 million for 2002. The decrease is attributed to lower
interest rates on the Senior Debt; a reduction in the amount of interest being
accrued; and lower amortization of deferred financing costs as of the Petition
Date in accordance with SOP 90-7.
Provision for Income Taxes. Our statutory tax rate for federal and state
purposes is approximately 40%. For 2003, no income taxes are due as a result of
the recorded loss for the period. The income tax expense of $0.03 million for
2002 represented our state tax payable. We did not recognize a tax benefit for
the losses incurred in 2003 and 2002 as our tax loss carryforwards are fully
reserved by a valuation allowance, due to their uncertainty in realization.
Six Months Ended June 30, 2003 Statement of Operations Compared to Six Months
Ended June 30, 2002
Dental Practice Net Patient Service Revenue. Dental practice net patient service
revenue represents the clinical patient revenues at affiliated dental practices
where the consolidation requirements of EITF 97-2 have been met. There were 133
and 139 such offices at June 30, 2003 and 2002, respectively. Dental practice
net patient service revenue decreased 9.0% to $116.7 million for 2003 compared
to $128.2 million for 2002 as a result of same store sales declines and the sale
or merging of six under performing practice locations into existing facilities.
The daily dental practice net patient service revenue for offices open for at
least one year as of June 30, 2003 decreased approximately 7.6% from the same
period in the prior year. The major contributing factor to this decrease is the
effect of a very poor national economy and high unemployment rates in the
markets we serve. Additionally, the Oregon Department of Health Services has
reduced the dental benefits offered under its Oregon Health Plan to address the
State of Oregon statewide budget crisis. The effect of this reduction in
benefits offered to low income residents in the six months ended June 30, 2003
resulted in a decrease in our capitation revenue from the state of Oregon by
nearly 28%, or approximately $4.4 million from the same period last year. We are
currently implementing certain initiatives to replace the lost revenues
associated with the Oregon Health Plan and other locations negatively affected
by the poor economy. Such initiatives include converting the capacity of our
offices servicing the Oregon Health Plan to fee-for-service revenue patients,
increasing revenues from managed care plans, or a combination of both.
Practice Operating Expenses. Practice operating expenses represent the costs
directly associated with operating and managing the practice facility locations,
including regional support departments.
Practice operating expenses were $103.0 million for 2003 compared to $110.0
million for 2002, representing a 6.4% reduction. As a percentage of revenue, the
practice operating expenses increased 2.4% to 88.2% in 2003 from 85.8% in 2002.
The increase in such expense as a percentage of revenue is due to the decline in
overall same store revenues, as discussed above. The components that make up the
practice operating expenses are largely fixed-variable or fixed cost, except for
dental supplies and lab expense which are variable cost. We have been and
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 expense, legal and audit fees, general insurance,
director and officer liability insurance, corporate office supplies, and other
miscellaneous costs at our corporate facilities. Corporate selling, general and
administrative expenses decreased $1.0 million to $6.3 million in 2003 from $7.3
million in 2002. The decrease in the year to date expenses is attributed to
reductions in corporate overhead in 2003.
Depreciation and Amortization. Depreciation and amortization expense was
approximately $1.9 and $2.0 million for 2003 and 2002, respectively and is
entirely attributed to depreciation and amortization of property and equipment,
including leasehold improvements, over their appropriate estimated useful lives
or lease term. As discussed in note 4 to the accompanying Condensed Consolidated
Financial Statements, in January 2002 we implemented Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets".
Accordingly, we have eliminated the amortization of our intangible assets as all
such assets are considered to have indefinite lives.
Interest Expense. Interest expense, net of interest income, was $11.0 million
for 2003 compared to $10.2 million for 2002. In April 2002, we entered into
various amendments to our senior lenders and the holder of our senior
subordinated debt that increased our borrowing costs due to escalations in
interest rates and the amortization of deferred closing costs over the life of
the loans. The increase has been partially offset by a decrease in interest in
2003 resulting from lower interest rates on the Senior Secured Debt; a reduction
in the amount of interest being accrued; and lower amortization of deferred
financing costs as of the Petition Date in accordance with SOP 90-7.
Provision for Income Taxes. Our statutory tax rate for federal and state
purposes is approximately 40%. For 2003, no income taxes are due as a result of
the recorded loss for the period. The income tax expense of $0.06 million for
2002 represented our state tax payable. We did not recognize a tax benefit for
the losses incurred in 2003 and 2002 as our tax loss carryforwards are fully
reserved by a valuation allowance, due to their uncertainty in realization.
Liquidity and Capital Resources
Restructuring
April 30, 2003, the Debtors reached agreement with its senior lenders ("Senior
Secured Debt") and the holders of its senior subordinated debt ("Senior
Subordinated Debt") to convert a portion of the Debtors' debt to equity and
restructure the remaining amount of Senior Secured Debt into a new term loan.
The agreement is to be implemented through a Prearranged Plan of Reorganization
under the Bankruptcy Code. Because the terms of the proposed reorganization plan
have been agreed upon by the holders of 100% of the Senior Secured Debt and
Senior Subordinated Debt, the Debtors believe there is a strong likelihood that
the proposed restructuring will be confirmed. The Bankruptcy Court has scheduled
the final confirmation hearing for September 3, 2003.
On May 9, 2003, the Debtors filed a Prearranged Plan of Reorganization under
Chapter 11 of the Bankruptcy Code. On or about July 22, 2003 the Bankruptcy
Court approved the Second Amended Joint Plan (as amended, the "Joint Plan") and
the Second Amended Disclosure Statement for distribution. Among other things,
the Joint Plan provides for:
o Conversion of approximately $47.1 million of Senior Secured Debt to new
Series A and B Preferred Stock in the restructured entity;
o Restructuring of approximately $37.7 million of Senior Secured Debt into a
term loan to be fully paid over three years;
o Conversion of approximately $44.2 million of Senior Subordinated debt into
new Class C Common Stock in the restructured entity;
o Conversion of $39.0 million of Convertible Subordinated Notes into warrants
to purchase new Class C Common Stock in the restructured entity provided
the holders of the Convertible Subordinated Notes vote for the plan; and o
The impairment of certain general unsecured claims of the Debtors.
Furthermore, pursuant to the Joint Plan, the Parent would no longer be publicly
traded after the effective date of the Joint Plan. Therefore, if the Debtors'
Joint Plan is approved as filed, the existing equity of the Company will be
extinguished and the stockholders of the Parent would receive no value for their
shares. All of the outstanding equity of the Parent, as the surviving entity,
would be owned by the holders of the restructured entity's Series A and B
Preferred Stock.
Bankruptcy Proceedings
On May 12, 2003, the Debtors were granted authorization to operate their
business in ordinary course as debtors-in-possession subject to the jurisdiction
of the Bankruptcy Court. Also on May 12th, the Bankruptcy Court approved motions
of the Debtors to allow for:
o Payment of all employee wages, salaries, certain benefits and other
employee obligations;
o Payment of trade vendors, utilities and insurance in the ordinary course of
business for both pre and post-petition expenses;
o Access to a debtor-in-possession ("DIP") financing arrangement; and
o The use of all company bank accounts for normal business operations.
The Debtors are currently paying the post-petition claims of their vendors in
the ordinary course of business.
As a consequence of the bankruptcy petition, all pending claims and litigation
against the Debtors are stayed automatically by Section 362 of the Bankruptcy
Code, and absent further order of the Bankruptcy Court, no party may take any
action to recover any pre-petition claims, enforce any lien against or obtain
possession of any property from the Debtors. In addition, pursuant to Section
362 of the Bankruptcy Code, the Debtors may reject or assume pre-petition
executory contracts and unexpired leases, and parties affected by rejections of
the contracts or leases may file claims with the Bankruptcy Court in accordance
with the Chapter 11 reorganization process. A committee of the 7 largest
creditors has been formed to represent all unsecured creditors ("the Creditors
Committee") and will have the right to be heard on all matters that come before
the Bankruptcy Court. The Creditors Committee has agreed to support the Joint
Plan and has published a letter to all the creditors urging them to vote in
favor of the Joint Plan.
Debtor-in-possession financing agreement
In connection with the Chapter 11 filings, the Debtors entered into a $7.5
million secured debtor-in-possession credit facility ("DIP Facility") with
certain of the Debtor's Senior Secured Lenders. On May 12, 2003 the Bankruptcy
Court approved an interim amount of $3.0 million of the DIP Facility. The
Bankruptcy Court approved the remainder of the DIP Facility on July 10, 2003.
The DIP Facility has a 180-day term, subject to earlier termination upon the
occurrence of certain events. Amounts borrowed under the DIP Facility have
super-priority status and will be secured by a first priority security interest
in, and lien on, all assets of the Debtor.
The DIP Facility bears interest at an annual rate ranging from 10% to 13% over
its life, and requires payment of additional interest in the event of a default.
The Debtors paid a commitment fee equal to 2.5% of the commitment, 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 Debtors have the right to
convert the DIP Facility into a revolving credit facility.
At June 30, 2003 there was $1.5 million outstanding on the DIP Facility which is
included in other current liabilities in the Condensed Consolidated Financial
Statements.
Current Financial Condition and Cashflows
At June 30, 2003, cash and cash equivalents were $5.5 million, representing a
$2.5 million increase in cash and cash equivalents from $3.0 million at December
31, 2002. The increased cash position results primarily from borrowings on the
DIP Facility and the timing of receipts and disbursements. Net cash provided by
operations amounted to $4.4 million for 2003 compared to $7.2 million for 2002.
The decrease in net cash provided by operations is primarily attributed to an
increase in our net loss before cumulative effect of a change in accounting
principle of $4.3 million. The increase in net loss is the primarily result of a
very poor national economy and high unemployment rates in the markets we serve.
This has been further compounded by the reduction in dental benefits offered
under the Oregon Department of Health Services health plan.
Net cash used by investing activities was $1.3 million for 2003 as compared to
cash used of $1.4 million for 2002. Approximately $0.80 million in cash paid for
each period related to the purchase of property and equipment. The reduction in
cash used by investing activities is a result of fewer earn out settlements
related to acquisitions performed in prior years as several agreements have
expired. 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. In
addition to cash paid of $0.40 million during 2003, we also converted $0.68
million of amounts due under earn-out agreements into long-term notes payable.
As of June 30, 2003, future anticipated earn-out payments of $0.63 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 approximately $1.5 million from July 2003
to December 2004, which is expected to be paid in a combination of cash and
notes. However, as discussed above, we are currently involved in a restructuring
that is being implemented through a Prearranged Plan of Reorganization under
Chapter 11 of the Bankruptcy Code, which may substantially change the
anticipated earn-out payments.
Net cash used in financing activities was $0.67 million for 2003 as compared to
cash used of $7.4 million for 2002. Expenditures in 2003 were primarily for the
pay down of debt totaling $2.0 million offset by borrowings of $1.5 million on
the DIP Facility. The decrease from prior year is attributed to a reduction of
current year principal pay down on debt related to the Bankruptcy proceedings.
Outstanding Debt and Other Financing Arrangements
Under the Bankruptcy Code, actions against the Debtors to collect prepetition
indebtedness are subject to an automatic stay provision and therefore certain
payments required by the pre-petition agreements discussed below have not been
made. Additionally, in accordance with SOP 90-7, the Debtors are required to
accrue interest during the Chapter 11 proceedings only to the extent that it is
probable that such interest will be paid pursuant to the proceedings. If the
Debtors' Joint Plan is approved as filed, the amount and structure of the
outstanding debt as of June 30, 2003 will be substantially altered.
The following outlines the significant terms of our Senior Secured Debt, Senior
Subordinated Debt, and convertible notes ("Convertible Subordinated Debt"):
Senior Secured Debt
Principal amounts owed under the Senior Secured Debt bear interest at Prime plus
2.5% as of June 30, 2003. Through the Petition Date, we were issuing
payment-in-kind ("PIK") notes at 13.0% for payment of interest amounts owed on
the principal balance. In addition, we are were required to pay an incremental
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 due was paid through the issuance of PIK notes
through the Petition Date. We also issued warrants to the senior lenders to
purchase an aggregate of 166,667 shares of the Company common stock at a strike
price of $3.66 per share.
On April 30, 2003, we entered into amendments to our existing Senior Secured
Debt to postpone the $6.7 million due on April 30, 2003 until May 9, 2003.
Required principal installments of $7.2 million were also due on July 1, 2003
and the remaining balance is due at maturity on September 30, 2003.
The Senior Secured Debt 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 Senior Secured Debt,
including the applicable subsidiaries in the guarantees, are secured by a
security interest in substantially all assets of each of such entities. We were
in default with certain of it covenants related to the Senior Secured Debt at
June 30, 2003.
Senior Subordinated Debt
In June 2000, we raised $36.5 million from the sale of debt and equity to Levine
Leichtman Capital Partners II, L.P. ("Levine") under a securities purchase
agreement. The equity portion of the transaction comprised 458,333 shares of
common stock valued at $11.0 million. The debt portion of the transaction
comprised the Senior Subordinated Debt with a face value of $25.5 million. As
part of the transaction with Levine, we also issued a warrant to purchase
354,167 shares of Company common stock at a current strike price of $20.88 per
share.
The entire principal of the Senior Subordinated Debt is due September 2005 but
may be paid earlier at our election, subject to a prepayment penalty.
Additionally, the Levine Note has mandatory principal prepayments based upon a
change in ownership, certain asset sales, or excess cash flows. The Senior
Subordinated Debt bears interest on its face at 12.5%, payable monthly, with an
option to pay the interest in a PIK note at a higher interest rate. Through the
Petition Date, we were issuing PIK notes at 17.0% for payment of interest
amounts owed. The securities purchase agreement contains covenants, including
but not limited to, restricting our 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. Additionally, the Senior Subordinated Debt has cross default provisions
that have been triggered by the default on the Senior Secured Debt at June 30,
2003.
Convertible Subordinated Debt
In 1998, we issued $30.0 million of Convertible Subordinated Debt. The
Convertible Subordinated Debt matures June 2006 and currently bear interest at
8.0%, payable semi-annually with an option to pay the interest in a PIK note
also bearing interest at 8.0%, which we are currently exercising for payment of
current interest amounts due thru the Petition Date. Effective with the Chapter
11 filings, we were no longer required to accrue for the incremental PIK
interest under SOP 90-7 as it is not expected to be paid. The Convertible
Subordinated Debt is 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.
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 Subordinated Debt as discussed above. The Series B
Preferred Stock conversion provision of the Convertible Subordinated Debt 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
Subordinated Debt 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We do not utilize financial instruments for trading purposes and hold no
derivative financial instruments, which could expose us to significant market
risk. Our interest expense is sensitive to changes in the general level of
interest rates as our credit facility has interest rates based upon LIBOR or the
prime rate, as discussed in the notes to Consolidated Financial Statements.
At June 30, 2003, we had $87.2 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 $0.44 million
for the six-months ended June 30, 2003. 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 $93.6 million are at fixed rates of interest.
Item 4. 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 Quarterly Report on Form 10-Q, 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 II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The payment of dividends is within the discretion of the Board of Directors;
however, we intend to retain earnings from operations for use in the operation
and expansion of our business and do not expect to pay cash dividends in the
foreseeable future. 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.
Item 5. Other Information
InterDent, Inc. common stock trades on the OTC Bulletin Board under the symbol
DENTQ.OB.
Wachovia Bank, N.A. 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, N.A. at the following address and telephone
number:
Wachovia Bank, N.A.
Shareholder Services Group
1525 W. WT Harris Blvd., 3C3
Charlotte, North Carolina 28288-1153
Telephone Numbers: 704/590-0394, or toll-free 800/829-8432
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------
(a) Exhibits
2.1 Debtors' Second Amended Disclosure Statement Describing Second Amended
Chapter 11 Plan Under of the Bankruptcy Code as modified on July 22, 2003.
2.2 Debtors' Second Amended Joint Chapter 11 Plan of Reorganization Under of
the Bankruptcy Code as modified on July 22, 2003.
10.1 Post-Petition Loan and Security Agreement Dated as of May 12, 2003 among
InterDent, inc. and InterDent Service Corporation Debtors-in-Possession, as
Borrowers and B III-A Capital Partners. L.P.; B IV Capital Partners, L.P.;
General Motors Employees Global Group Pension Trust; and Levine Leichtman
Capital Partners II, L.P., as Lenders.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Vice President, Finance & Accounting Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Vice President, Finance & Accounting Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
(1) Current Report on Form 8-K dated May 12, 2003, reporting under Item 3
the Company filed a voluntary petition Under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Central District
of California.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERDENT, INC.
---------------------------------
(Registrant)
Date: August 20, 2003 By: /s/ H. WAYNE POSEY
------------------------------ ---------------------------------
------------------------------
H. Wayne Posey
Chief Executive Officer
By: /s/ ROBERT HILL
---------------------------------
Robert W. Hill
Vice President, Finance &
Accounting