10-Q 1 fm10q.txt FORM 10-Q ================================================================================ 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. ================================================================================ PART I - FINANCIAL INFORMATION Item 1. Financial Statements

INTERDENT, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (~~Unaudited,~~Dollars in thousands, except share amounts) ~~September~~------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, Assets 2003 2002 ~~2001~~ ------------------ ------------------ (Unaudited) Current assets: Cash and cash equivalents $ 45,~~388~~490 $ 73,~~189~~041 Accounts receivable, net 1617,~~660~~831 2017,~~092~~934 ~~Management~~Receivable ~~fees~~from ~~receivable~~professional ~~643~~associations ~~581~~359 152 Supplies inventory 4,~~713~~435 34,~~613~~439 Prepaid and other current assets 74,~~840~~982 46,~~051~~860 ------------------ ------------------ Total current assets 3433,~~244~~097 3532,~~526~~426 ------------------ ------------------ Property and equipment, net 1816,~~443~~685 2017,~~945~~848 Intangible assets, net ~~149~~61,~~089~~404 ~~147~~60,~~532~~671 Other assets 41,~~043~~574 3,~~021~~922 ------------------ ------------------ Total assets $ ~~205~~112,~~819~~760 $ ~~207~~114,~~024~~867 ================== ================== Liabilities, Redeemable Common Stock and Shareholders' ~~Equity~~Deficit Current liabilities not subject to compromise: Accounts payable $ 65,~~121~~403 $ 75,~~996~~053 Accrued payroll and payroll related costs 109,~~403~~498 98,~~022~~740 Other current liabilities 1415,~~925~~623 1113,~~187~~656 Current portion of long-term debt and capital lease obligations 8939,~~364~~025 13169,~~666~~536 ------------------ ------------------ Total current liabilities ~~120~~not subject to compromise 69,~~813~~549 41196,~~871~~985 Current liabilities subject to compromise 135,704 -- ---------------- -- ---------------- ~~Long~~-~~term~~ ~~liabilities:~~Total ~~Obligations~~current ~~under~~liabilities ~~capital leases~~205,253 ~~net of current portion 806 1~~196,~~251~~985 Long-term ~~debt,~~liabilities ~~net~~not ofsubject ~~current~~to ~~portion~~compromise 432,~~804~~108 ~~119~~7,~~738~~811 ~~Convertible~~Long-term ~~senior~~liabilities ~~subordinated~~subject ~~debt~~to ~~37,359~~compromise 353,~~058~~743 ~~Other long~~-~~term~~- ~~liabilities 1,494 1,871~~ ------------------ ------------------ Total long-term liabilities 835,~~463~~851 ~~157~~7,~~918~~811 ------------------ ------------------ Total liabilities ~~204~~211,~~276~~104 ~~199~~204,~~789~~796 ------------------ ------------------ Redeemable common stock, $0.001 par value, ~~17,286~~zero and ~~17,905~~619 shares issued and outstanding in ~~2002~~2003 and ~~2001~~2002, respectively ~~997~~-- ~~1,047~~51 ------------------ ------------------ Shareholders' ~~equity~~deficit: Preferred stock, $0.001 par value, 30,000,000 shares authorized: Preferred stock - Series A, 100 shares authorized, ~~issued~~ 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 ~~and 1,628,663~~ shares issued and outstanding in ~~2002~~2003 and ~~2001~~2002 11,688 1211,~~089~~688 Common stock, $0.001 par value, 50,000,000 shares authorized, 3,~~946~~802,~~664~~787 and 3,~~976~~963,~~551~~331 shares issued and outstanding in ~~2002~~2003 and ~~2001~~2002, respectively 4 4 Additional paid-in capital 7677,~~907~~853 7677,~~502~~853 Shareholder note receivable ~~(202)~~-- (~~184~~206) Accumulated deficit (87187,~~852~~890) (82179,~~224~~320) ------------------ ------------------ Total shareholders' ~~equity~~deficit ~~546~~(98,344) 6(89,~~188~~980) ------------------ ------------------ Total liabilities, redeemable common stock and shareholders' ~~equity~~deficit $ ~~205~~112,~~819~~760 $ ~~207~~114,~~024~~867 ================== ==================

See accompanying notes to condensed consolidated financial statements.

INTERDENT, INC. ~~and~~AND ~~subsidiaries~~SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited, dollars in thousands, except per share amounts) ---------------------------------------------------------------------------------------------------------------------------------- Three Months Ended ~~Nine~~June Six Months Ended ~~September~~June 30, ~~September~~ 30, 2003 2002 ~~2001~~2003 2002 ~~2001~~ ----------- ---------- ----------- ----------- Dental practice net patient service revenue $ 6157,~~174~~407 $ 6164,~~255~~134 $ ~~188~~116,~~669~~056 $ ~~201~~127,~~117~~495 Net management fees ~~218~~156 ~~149~~191 ~~606~~403 ~~19,703~~388 Licensing and other fees ~~197~~ 128 ~~560~~196 ~~533~~269 363 ----------- ---------- ----------- ----------- Total revenues 6157,~~589~~691 6164,~~532~~521 ~~189~~116,~~835~~728 ~~221~~128,~~353~~246 ----------- ---------- ----------- ----------- Operating expenses: Clinical salaries, benefits, and provider costs 3028,~~155~~423 3031,~~388~~010 9257,~~121~~770 ~~100~~61,~~181~~966 Practice non-clinical salaries and benefits 87,~~193~~833 8,~~303~~310 2415,~~999~~919 3016,~~752~~806 Dental supplies and lab expenses 6,~~632~~578 6,~~573~~565 2012,~~464~~981 2613,~~883~~832 Practice occupancy expenses 3,~~454~~440 3,~~583~~364 106,~~127~~849 136,~~075~~673 Practice selling, general and administrative expenses 54,~~058~~679 45,~~562~~963 159,~~822~~469 1910,~~482~~764 Corporate selling, general and administrative expenses 23,~~299~~070 3,~~319~~071 96,~~607~~340 107,~~060~~308 Stock compensation expense -- ~~4,331~~74 -- 147 6(Gain) loss on extinguishment of debt (1,~~075~~739) ~~Loss~~2,604 (~~gain~~1,739) 2,604 (Gain) loss on dental location dispositions and impairment of long-lived assets 7185 ~~6,450~~ (~~185~~192) ~~12,384~~185 (192) Depreciation and amortization 948 1,~~005~~027 21,~~840~~903 32,~~041~~036 ~~9,263~~ ----------- ---------- ----------- ----------- Total operating expenses 5653,~~803~~417 7061,~~349~~796 ~~176~~109,~~143~~677 ~~228~~121,~~155~~944 ----------- ---------- ----------- ----------- Operating income ~~(loss)~~ 4,~~786~~274 (82,~~817)~~725 137,~~692~~051 (6,~~802)~~302 ----------- ---------- ----------- ----------- Nonoperating expense: Interest expense, net (~~6,007)~~contractual ~~(4,292)~~interest ~~(16~~was $7,~~244)~~000 ~~(14~~and $13,~~971)~~327 ~~Debt~~for the three and ~~equity~~six ~~financing~~months ~~costs~~ended --June --30, --2003) (34,~~886~~713) ~~Investment~~(5,783) ~~impairment write-down --~~ (111,~~087~~040) -- (110,~~087~~237) Other, net (~~125~~227) (9297) (~~382~~251) (~~138~~257) ----------- ---------- ----------- ----------- Nonoperating expense, net (64,~~132~~940) (5,~~471~~880) (1611,~~626~~291) (2010,~~082~~494) ----------- ---------- ----------- ----------- Loss before reorganization expense, income taxes and cumulative (~~1,346~~666) (143,~~288~~155) (24,~~934~~240) (264,~~884~~192) ~~Provision~~effect ~~for~~of ~~income~~accounting ~~taxes~~change 30Reorganization 50expense 904,330 ~~150~~-- 4,330 -- ----------- ---------- ----------- ----------- Loss before ~~extraordinary~~income ~~item~~taxes and cumulative effect of accounting (14,~~376~~996) (143,~~338~~155) (38,~~024~~570) (274,~~034~~192) ~~Extraordinary~~change ~~loss~~Provision onfor ~~debt~~income ~~extinguishments~~taxes -- 30 -- ~~(2,604)~~60 ~~(5,601)~~ ----------- ---------- ----------- ----------- Net loss before cumulative effect of accounting change (14,~~376~~996) (143,~~338~~185) (58,~~628~~570) (324,~~635~~252) ~~Accretion~~Cumulative effect of ~~redeemable~~accounting ~~common~~change ~~stock~~ -- -- -- (189,000) ----------- ---------- ----------- ----------- Net loss ~~attributable to common stock~~ $ (14,~~376~~996) $ (143,~~338~~185) $ (58,~~628~~570) $ (3293,~~636~~252) =========== ========== =========== =========== ~~Loss~~Basic and dilutive: Net loss per share ~~attributable~~before tocumulative ~~common~~effect ~~stock~~of -accounting ~~basic~~change ~~and~~$ ~~dilutive~~(1.31) $ (0.3683) $ (32.6925) $ (1.4711) Cummulative effect of accounting change -- -- -- (23.17) ----------- ---------- ----------- ----------- Loss per share $ (81.4331) $ (0.83) $ (2.25) $ (24.28) =========== ========== =========== ===========

See accompanying notes to condensed consolidated financial statements.

INTERDENT, INC. ~~and~~AND ~~subsidiaries~~SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited, dollars in thousands) ~~Nine~~---------------------------------------------------------------------------------------------------------------------------------- Six Months Ended ~~September~~June 30, 2003 2002 ~~2001~~ ----------------- ------------------ Cash flows from operating activities: Net loss $ (58,~~628~~570) $ (324,~~635~~252) Adjustments to reconcile net loss to net cash provided by operating activities: ~~Depreciation and amortization 3,041 9,263 Loss (gain) on dental location dispositions and impairment of long~~Non-~~lived~~cash ~~assets~~reorganization ~~(185)~~items 122,~~384~~816 ~~Loss on disposal of assets 511 98 Investment impairment write down~~ -- ~~1,087~~Depreciation ~~Non-employee stock options granted~~ and ~~stock~~amortization ~~issued~~1,903 ~~for fees and compensation --~~ 2 ~~Amortization of stock compensation expense -- 5~~,~~742~~036 ~~Interest~~Gain ~~income~~ on ~~shareholder~~extinguishment ~~notes~~of ~~(18)~~debt (81,739) -- Notes and warrants issued or accrued for debt amendment fees, interest payment-in-kind and accrued interest 84,~~916~~784 76,~~906~~339 Interest amortization on deferred financing costs and discounted debt 31,~~132~~819 71,~~641~~903 Asset write downs and other adjustments 391 195 Change in assets and liabilities, net of the effect of acquisitions: Accounts receivable, net ~~2,779~~93 1,~~244~~840 Management fees receivable (62207) (~~475~~21) Supplies inventory (~~1,102~~39) 27(199) Prepaid expenses and other current assets ~~752~~(484) ~~2,059~~302 Other assets (179) (~~485~~182) Accounts payable (1,~~875)~~368 3(2,~~520~~513) Accrued payroll and payroll related costs ~~802~~766 ~~(331)~~523 Accrued merger and restructure (~~235~~28) (~~312~~156) Other liabilities 2,336 1,~~252~~429 ----------------- ----------------- Net cash provided by operating activities before reorganization expense 5,388 7,244 Net cash paid for reorganization expense (~~827~~1,018) -- --------------- -- ----------------- Net cash provided by operating activities 114,~~901~~370 157,~~900~~244 ----------------- ------------------ Cash flows from investing activities: Purchase of property and equipment (~~1,104~~849) (~~2,693~~802) ~~Net payments received on notes receivable from professional associations -- 103 Net advances to professional associations -- (3,163)~~ Proceeds from disposition of dental locations, ~~net~~-- ~~direct~~600 ~~costs paid 557 22,461~~ Cash paid for acquisitions and earn-outs, including direct costs, net of cash (~~1,461~~405) (41,~~248~~242) acquired ----------------- ------------------ Net cash (used in) ~~provided by~~ investing activities (21,~~008~~254) 12(1,~~460~~444) ----------------- ------------------ Cash flows from financing activities: Net payments on credit facility (~~3,739~~261) (182,~~415~~397) Net proceeds from short term borrowings 1,500 -- Payments on long-term debt and obligations under capital leases (71,~~616~~766) (3,~~751~~669) Payments of deferred financing costs (~~1,318~~114) (21,~~347~~294) Proceeds from issuance of common and preferred stock 4 -- 4 Exercise of put rights (2526) (~~376~~25) ----------------- ------------------ Net cash used in financing activities (~~12,694~~667) (247,~~889~~381) ----------------- ------------------ Increase (decrease) in cash and cash equivalents (2,~~801)~~449 3(1,~~741~~581) Cash and cash equivalents, beginning of period 3,041 7,189 ~~5,293~~ ----------------- ------------------ Cash and cash equivalents, end of period $ 45,~~388~~490 $ 85,~~764~~608 ================= ================== Cash paid for interest $ 62,~~211~~275 $ 94,~~138~~023 ================= =================~~= Cash (refunded) paid for income taxes $ -- $ (1,437) ================= ==================~~

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)

~~Three~~Assets ~~Months~~Current ~~Ended~~assets: ~~Nine~~Cash ~~Months~~and ~~Ended~~cash ~~September~~equivalents 30$ 1,545 ~~September~~Receivable 30from professional associations (*) 15,082 ~~2002~~Supplies ~~2001~~inventory ~~2002~~4,224 ~~2001~~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 ------------------ ~~Net~~------------------ ~~loss~~Total ~~attributed~~current liabilities not subject to ~~common~~compromise ~~stock~~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: AsPreferred ~~reported~~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,~~376)~~ 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 (14187,~~338~~890) $------------------ Total shareholders' deficit (598,~~628~~344) ------------------ Total liabilities and shareholders' deficit $~~(32~~ 107,~~636~~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) ~~Amortization~~Debtor in Possession Stand Alone Statement of ~~indefinite~~Operations ~~lived~~From ~~intangible~~the ~~assets~~Period --of 1Petition Date of May 9,~~789~~ 2003 through June 30, 2003 (Unaudited) Net management fees $ 14,839 Licensing and other fees 72 ------------------- 5Total revenues 14,~~215~~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 ------------------- ~~Pro~~Operating ~~forma~~income ~~$ (~~1,~~376)~~787 $------------------- ~~(12~~Nonoperating expense: Interest expense,~~549~~ net (907) $Other, net (518) ------------------- Nonoperating expense,~~628~~ net (925) ------------------- Net income before reorganization expenses 862 Reorganization expenses 4,330 ------------------- ------------------- Net loss $ (273,~~421~~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 ~~per~~$ ~~share~~(3,468) ~~attributable~~Adjustments to ~~common~~reconcile ~~stock~~net loss to net cash provided by operating activities: Non-cash ~~basic~~reorganization items 2,816 Depreciation and ~~diluted~~amortization As501 ~~reported~~Interest $amortization on deferred financing costs and discounted debt 120 Equity in income of subsidiaries (~~0.36~~365) $Asset write-downs 373 Change in assets and liabilities, net of the effect of acquisitions: Accounts receivable, net (~~3.69~~900) $Supplies inventory (10) Prepaid expenses and other current assets (95) Other assets (124) Accounts payable 1~~.47~~,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 (~~8.43~~199) ~~Pro~~Cash ~~forma~~paid $for acquisitions and earn-outs, including direct costs, net of cash (~~0.36~~72) $acquired ------------------ Net cash used in investing activities (~~3.23~~271) $------------------ Cash flows from financing activities: Net payments on credit facility (200) Net proceeds from short term borrowings 1~~.47~~,500 Payments on long-term debt and obligations under capital leases (97) $Payments of deferred financing costs (~~7.09~~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:

~~Three~~Six Months Ended ~~Nine~~June ~~Months Ended September~~ 30, ~~September 30,~~ 2002 ~~2001 2002 2001~~ ------------- --------------------- As As Restated Previously Reported ---------------- ---------------- ~~Loss~~Total ~~before~~Revenues ~~extraordinary item~~ $ (1128,~~376)~~246 $ ~~(14~~128,~~338)~~246 $Operating (3income 6,~~024)~~302 ~~$ (27~~6,~~034)~~302 ~~Extraordinary~~Net loss onbefore ~~debt~~cumulative ~~extinguishments~~effect --of --a change in accounting principle (24,~~604~~252) (54,~~601~~252) ~~Accretion~~Cumulative effect of ~~redeemable~~a ~~common~~change ~~stock~~in --accounting --principle, net of taxes -- (189,000) ---------------- ---------------- ---------------- ---------------- Net loss ~~attributable to common stock~~ $ (14,~~376~~252) ~~(14,338)~~$ (593,~~628~~252) ~~(32,636)~~ ============= ===~~===========~~ ============== ==~~===========~~ Outstanding Shares Reconciliation: Weighted average common shares outstanding 3,835,457 3,888,152 3,839,172 3,906,398 Contingent returnable common shares -- -- -- (36,503) ------------- -------------- -------------- ------------- Outstanding basic and diluted shares 3,835,457 3,888,152 3,839,172 3,869,895 ============= ===~~===========~~ ============== ==~~===========~~ ~~Loss~~Net loss per share - basic and diluted: Before ~~extraordinary~~cumulative ~~item~~effect $of ~~(0.36)~~a $change ~~(3.69)~~in accounting principle $ (01.7911) $ (61.9811) ~~Extraordinary~~Cumulative ~~loss~~effect onof ~~debt~~a ~~extinguishments~~change --in accounting principle -- (023.6817) ~~(1.45)~~ ------------- --- ----------- ----- --------- -------~~------~~ ~~Attributable~~Net toloss ~~common stock~~ $ (~~0.36) $ (3.69) $ (~~1.4711) $ (824.4328) ============= ===~~===========~~ ============== ==~~===========~~

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 ~~Nine~~June Six Months Ended ~~September~~June 30, ~~September~~ 30, 2003 2002 ~~2001~~2003 2002 ~~2001~~ ----------- ---~~--------~~ ---------- ---~~--------~~ ~~Dental practice net patient service revenue~~ - ~~all PAs $ 61,658 $ 61,510 $ 189,841 $ 232,103 Dental practice net patient service revenue~~ - ~~unconsolidated PAs (484) (255) (1,172) (30,986)~~ ----------- -~~----------~~ ---------- -----~~------~~ ~~Reported~~Net ~~practice~~Loss ~~net patient service revenue~~ $ 61(4,~~174~~996) $ 61(3,~~255~~185) $ ~~188~~(8,~~669~~570) $ ~~201~~(93,~~117~~252) ============== ============= ============== =============== ~~Dental~~============== ~~practice~~============= ~~net~~============== ~~patient~~=============== ~~service~~Weighted ~~revenue~~average -common ~~unconsolidated~~shares ~~PAs~~outstanding ~~$ 484 $ 255 $ 1~~3,~~172~~802,787 ~~$ 30~~3,~~986~~848,688 ~~Amounts retained by dentists (266) (106) (566) (11~~3,~~283)~~802,787 ~~----------- ----------- ---------- ----------- Net management fees $ 218 $ 149 $ 606 $ 19~~3,~~703~~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.

~~INTERDENT,~~Three ~~INC.~~Months ~~(Registrant)~~Ended ~~Date:~~Six ~~November~~Months 13Ended June 30, ~~2002~~June ~~By:~~30, ~~\s\~~2003 H.2002 ~~WAYNE~~2003 ~~POSEY~~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 H.employee ~~Wayne~~compensation ~~Posey~~expense ~~Chief~~determined ~~Executive~~under ~~Officer~~fair ~~By:~~value ~~\s\~~based ~~ROBERT~~method W.for ~~HILL~~all awards, net of related tax effect (128) (1,722) (257) (4,502) -------------- -------------- -------------- --------------- ~~Robert~~Net W.loss, ~~Hill~~pro ~~Vice~~forma ~~President~~$ (5,124) ~~Finance~~$ (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:

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

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