**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**

 

**(MarkOne)**

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2003**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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 checkmark whether the registrant (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

ý   Yes       o   No

 

As of May 12,2003, 3,963,331 shares of the issuer’s common stock were outstanding.

 

 

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**PART I –FINANCIAL INFORMATION**

** **

**Item 1.****           Financial Statements**

**INTERDENT, INC.AND SUBSIDIARIES**

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

 
|                                                                                                                                |   | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                                                                                |   | **(unaudited)**     |       |                   |       |
| **Assets**                                                                                                                          |   |                |       |                   |       |
| Current assets:                                                                                                                     |   |                |       |                   |       |
| Cash and cash equivalents                                                                                                           |   | $                   | 5,037      |                   | $          | 3,041 |   |
| Accounts receivable, net                                                                                                            |   | 18,337              |       | 17,934                 |       |
| Receivable from professional associations                                                                                           |   | 255                 |       | 152                    |       |
| Supplies inventory                                                                                                                  |   | 4,462               |       | 4,439                  |       |
| Prepaid and other current assets                                                                                                    |   | 6,218               |       | 6,860                  |       |
| Total current assets                                                                                                                |   | 34,309              |       | 32,426                 |       |
|                                                                                                                                |   |                |       |                   |       |
| Property and equipment, net                                                                                                         |   | 17,251              |       | 17,848                 |       |
| Goodwill and intangible assets, net                                                                                                 |   | 60,905              |       | 60,671                 |       |
| Other assets                                                                                                                        |   | 3,577               |       | 3,922                  |       |
| Total assets                                                                                                                        |   | $                   | 116,042    |                   | $          | 114,867 |   |
|                                                                                                                                |   |                | ** ** |                   | ** ** |
| **Liabilities,  Redeemable Common Stock and Shareholders’ Deficit**                                                            |   |                | ** ** |                   | ** ** |
|                                                                                                                                |   |                |       |                   |       |
| Current liabilities:                                                                                                                |   |                |       |                   |       |
| Accounts payable                                                                                                                    |   | $                   | 5,234      |                   | $          | 5,053 |   |
| Accrued payroll and payroll related costs                                                                                           |   | 9,731               |       | 8,740                  |       |
| Other current liabilities                                                                                                           |   | 15,256              |       | 13,656                 |       |
| Current portion of long-term debt and capital lease  obligations                                                                    |   | 172,666             |       | 169,536                |       |
| Total current liabilities                                                                                                           |   | 202,887             |       | 196,985                |       |
|                                                                                                                                |   |                |       |                   |       |
| Long-term liabilities:                                                                                                              |   |                |       |                   |       |
| Capital leases obligations, net of current portion                                                                                  |   | 612                 |       | 687                    |       |
| Long-term debt, net of current portion                                                                                              |   | 4,864               |       | 5,758                  |       |
| Other long-term liabilities                                                                                                         |   | 1,236               |       | 1,366                  |       |
| Total long-term liabilities                                                                                                         |   | 6,712               |       | 7,811                  |       |
| Total liabilities                                                                                                                   |   | 209,599             |       | 204,796                |       |
|                                                                                                                                |   |                |       |                   |       |
| Redeemable common stock, $0.001 par value, zero and  619 shares issued and outstanding in 2003 and 2002, respectively               |   | —              |       | 51                     |       |
|                                                                                                                                |   |                |       |                   |       |
| Shareholders’ equity:                                                                                                          |   |                |       |                   |       |
| Preferred stock, $0.001 par value, 30,000,000 shares  authorized:                                                                   |   |                |       |                   |       |
| Preferred stock – Series A, 100 shares authorized  and outstanding                                                             |   | 1                   |       | 1                      |       |
| Convertible Preferred stock – Series B, 70,000  shares authorized, zero shares issued and outstanding                          |   | —              |       | —                 |       |
| Preferred stock – Series C, 100 shares authorized,  zero shares issued and outstanding                                         |   | —              |       | —                 |       |
| Convertible Preferred stock – Series D, 2,000,000  shares authorized, 1,574,608 shares issued and outstanding in 2003 and 2002 |   | 11,688              |       | 11,688                 |       |
| Common stock, $0.001 par value, 50,000,000 shares  authorized, 3,963,331 shares issued and outstanding in 2003 and 2002             |   | 4                   |       | 4                      |       |
| Additional paid-in capital                                                                                                          |   | 77,853              |       | 77,853                 |       |
| Shareholder notes receivable                                                                                                        |   | (209                | )          | (206                   | )          |
| Accumulated deficit                                                                                                                 |   | (182,894            | )          | (179,320               | )          |
| Total shareholders’ deficit                                                                                                    |   | (93,557             | )          | (89,980                | )          |
| Total liabilities, redeemable common stock and  shareholders’ deficit                                                          |   | $                   | 116,042    |                   | $          | 114,867 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

2

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**INTERDENT, INC.AND SUBSIDIARIES**

 

Condensed Consolidated Statements of Operations

 

(Unaudited, dollars in thousands, except per shareamounts)

 
|                                                                 |   | **Three Months Ended March  31,** |       |
|----------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                 |   | **2003**                          | ** ** | **2002** | ** ** |
| Revenues:                                                            |   |                              |       |   |   |
| Dental practice net patient service revenue                          |   | $                                 | 58,649     |   | $ | 63,361 |   |
| Net management fees                                                  |   | 247                               |       | 197 |   |
| Licensing and other fees                                             |   | 141                               |       | 167 |   |
|                                                                 |   |                              |       |   |   |
| Total revenues                                                       |   | 59,037                            |       | 63,725 |   |
|                                                                 |   |                              |       |   |   |
| Operating expenses:                                                  |   |                              |       |   |   |
| Clinical salaries, benefits, and provider costs                      |   | 29,347                            |       | 30,956 |   |
| Practice non-clinical salaries and benefits                          |   | 8,086                             |       | 8,496 |   |
| Dental supplies and lab expenses                                     |   | 6,403                             |       | 7,267 |   |
| Practice occupancy expenses                                          |   | 3,409                             |       | 3,309 |   |
| Practice selling, general and administrative  expenses               |   | 4,790                             |       | 4,801 |   |
| Corporate selling, general and administrative  expenses              |   | 3,270                             |       | 4,237 |   |
| Stock compensation expense                                           |   | —                            |       | 73 |   |
| Depreciation and amortization                                        |   | 955                               |       | 1,009 |   |
|                                                                 |   |                              |       |   |   |
| Total operating expenses                                             |   | 56,260                            |       | 60,148 |   |
|                                                                 |   |                              |       |   |   |
| Operating income                                                     |   | 2,777                             |       | 3,577 |   |
|                                                                 |   |                              |       |   |   |
| Non-operating expense:                                               |   |                              |       |   |   |
| Interest expense, net                                                |   | (6,327                            | )          | (4,454 | ) |
| Other, net                                                           |   | (24                               | )          | (160 | ) |
|                                                                 |   |                              |       |   |   |
| Non-operating expense, net                                           |   | (6,351                            | )          | (4,614 | ) |
|                                                                 |   |                              |       |   |   |
| Loss before income taxes and cumulative effect of  accounting change |   | (3,574                            | )          | (1,037 | ) |
|                                                                 |   |                              |       |   |   |
| Provision for income taxes                                           |   | —                            |       | 30 |   |
|                                                                 |   |                              |       |   |   |
| Net loss before cumulative effect of accounting  change              |   | (3,574                            | )          | (1,067 | ) |
|                                                                 |   |                              |       |   |   |
| Cumulative effect of a change in accounting  principle               |   | —                            |       | (89,000 | ) |
|                                                                 |   |                              |       |   |   |
| Net loss                                                             |   | $                                 | (3,574     | ) | $ | (90,067 | ) |
|                                                                 |   |                              |       |   |   |
| Loss per share – basic and diluted:                             |   |                              |       |   |   |
| Before cumulative effect of a change in accounting  principal        |   | $                                 | (0.94      | ) | $ | (0.28 | ) |
| Cumulative effect of a change in accounting  principle               |   | —                            |       | (23.22 | ) |
| Net loss                                                             |   | $                                 | (0.94      | ) | $ | (23.50 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**INTERDENT, INC.AND SUBSIDIARIES**

 

Condensed Consolidated Statements of Cash Flows

 

(Unaudited, dollars in thousands)

 
|                                                                                    |   | **Three Months Ended March  31,** |   |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                    |   | **2003**                          |   | **2002** |   |
|                                                                                    |   |                              |   |   |   |
| Cash flows from operating activities:                                                   |   |                              |   |   |   |
| Net loss                                                                                |   | $                                 | (3,574 | ) | $ | (90,067 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities:        |   |                              |   |   |   |
| Cumulative effect of a change in accounting  principle                                  |   | —                            |   | 89,000 |   |
| Depreciation and amortization                                                           |   | 955                               |   | 1,009 |   |
| Loss on disposal of assets                                                              |   | —                            |   | 259 |   |
| Interest income on shareholder notes                                                    |   | (3                                | )      | (12 | ) |
| Notes issued as interest payment-in-kind and other  accrued interest                    |   | 2,730                             |   | 2,263 |   |
| Interest amortization on deferred financing costs                                       |   | 1,287                             |   | 295 |   |
| Change in assets and liabilities, net of the effect  of acquisitions:                   |   |                              |   |   |   |
| Accounts receivable, net                                                                |   | (403                              | )      | 144 |   |
| Receivable from professional associations                                               |   | (103                              | )      | (12 | ) |
| Supplies inventory                                                                      |   | (23                               | )      | (60 | ) |
| Prepaid expenses and other current assets                                               |   | (350                              | )      | 1,665 |   |
| Other assets                                                                            |   | 158                               |   | (177 | ) |
| Accounts payable                                                                        |   | 181                               |   | (911 | ) |
| Accrued payroll and payroll related costs                                               |   | 991                               |   | 1,402 |   |
| Accrued merger and restructure                                                          |   | —                            |   | (76 | ) |
| Other liabilities                                                                       |   | 2,146                             |   | 1,538 |   |
|                                                                                    |   |                              |   |   |   |
| Net cash provided by operating activities                                               |   | 3,992                             |   | 6,260 |   |
|                                                                                    |   |                              |   |   |   |
| Cash flows from investing activities:                                                   |   |                              |   |   |   |
| Purchase of property and equipment                                                      |   | (358                              | )      | (367 | ) |
| Cash paid for acquisitions and earn-outs, including  direct costs, net of cash acquired |   | (226                              | )      | (833 | ) |
|                                                                                    |   |                              |   |   |   |
| Net cash used in investing activities                                                   |   | (584                              | )      | (1,200 | ) |
|                                                                                    |   |                              |   |   |   |
| Cash flows from financing activities:                                                   |   |                              |   |   |   |
| Payments on long-term debt and obligations under  capital leases                        |   | (1,278                            | )      | (1,704 | ) |
| Payments of deferred financing costs                                                    |   | (108                              | )      | (498 | ) |
| Exercise of redeemable common stock put rights                                          |   | (26                               | )      | (25 | ) |
|                                                                                    |   |                              |   |   |   |
| Net cash used in financing activities                                                   |   | (1,412                            | )      | (2,227 | ) |
|                                                                                    |   |                              |   |   |   |
| Increase in cash and cash equivalents                                                   |   | 1,996                             |   | 2,833 |   |
|                                                                                    |   |                              |   |   |   |
| Cash and cash equivalents, beginning of period                                          |   | 3,041                             |   | 7,189 |   |
|                                                                                    |   |                              |   |   |   |
| Cash and cash equivalents, end of period                                                |   | $                                 | 5,037  |   | $ | 10,022 |   |
|                                                                                    |   |                              |   |   |   |
| Cash paid for interest                                                                  |   | $                                 | 2,309  |   | $ | 2,150 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**INTERDENT,INC.**

**ANDSUBSIDIARIES**

 

March 31, 2003 and2002

 

Notes to CondensedConsolidated Financial Statements

 

(Unaudited,dollars in thousands, except per share and share amounts)

 

**(1)ORGANIZATION**

 

Headquartered in ElSegundo, California, InterDent, Inc. (“InterDent” or the “Company”) is aleading provider of dental practice management services to multi-specialtydental professional corporations and associations (“PAs”) in the UnitedStates.  The dentists employed throughthe Company’s network of affiliated PAs provide patients with affordable,comprehensive, convenient and high quality dentistry services, which includegeneral dentistry, endodontics, oral surgery, orthodontics, pedodontics,periodontics and prosthodontics.

 

The Company wasincorporated on October 13, 1998 as a Delaware corporation to facilitatethe business combination of Gentle Dental Service Corporation (“GDSC”) andDental Care Alliance (“DCA”) that occurred in March 1999.  Priorto the combination, GDSC and DCA were each publicly traded dental practicemanagement companies.  From 1996through 2000, the Company (and its predecessors, GDSC and DCA) primarilyfocused on the expansion of its affiliated dental network through acquisitions,completing 45 transactions in 15 markets.

 

The Company providesmanagement services to affiliated PAs, currently representing 137 dentallocations, under long-term management service agreements (“MSAs”).  Under the MSAs, the Company bills andcollects patient receivables and provides administrative and management supportservices.  Each PA is responsible foremploying and directing the professional dental staff and providing allclinical services to the patients.

 

**(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation**

 

The Company provides managementservices to the PAs under long-term MSAs that generally have an initial term of40 years.  Under the provisions of theMSAs, the Company owns the non-professional assets at the affiliated practicelocations, including equipment and instruments, prepares bills and collectspatient receivables, and provides all administrative and management supportservices to the PAs. These administrative and management support servicesinclude: financial, accounting, training, efficiency and productivity enhancement,recruiting, marketing, advertising, purchasing, and related supportpersonnel.  The PAs employ the dentistsand the hygienists while the Company employs all administrative personnel.

 

The Emerging Issues TaskForce (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached aconsensus on the accounting for transactions between physician practicemanagement companies and physician practices and the financial reporting ofsuch entities (“EITF 97-2”).  Forfinancial reporting purposes, EITF 97-2 mandates the consolidation of physicianpractice activities with the practice management company when certainconditions have been met, even though the practice management company does nothave a direct equity investment in the physician practice.  The accompanying financial statements areprepared in conformity with the consensus reached in EITF 97-2.

 

Simultaneous to theexecution of an MSA with each PA, the Company also entered into a sharesacquisition agreement (“SAA”).  Underall of the SAAs entered into except for two, the Company has the right todesignate the purchaser (successor dentist) to purchase from the PAshareholders all the shares of the PA for a nominal price of a thousand dollarsor less.  Under these SAAs, the Companyhas 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 PAshareholders qualify as a friendly doctor arrangement.  Consequently, under EITF 97-2, the Companyconsolidates all the accounts of those PAs in the accompanying CondensedConsolidated Financial Statements. Accordingly, the Condensed Consolidated Statements of Operations includethe net patient revenues and related expenses of these PAs and all significantintercompany transactions have been eliminated.

 

The Company currently hasentered into two SAAs with PAs, representing 3 dental locations that do nothave the nominal price provision. Rather, the SAA purchase price is based upon a multiple of earnings, asdefined.  As a result, the MSAs do notmeet the criteria of consolidation under EITF 97-2 and the consolidatedstatements of operations exclude the net patient service revenues and expensesof these PAs.  The Company only includesnet management fee revenues generated and expenses associated with providingservices under these MSAs.

 

5

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**Liquidity and Capital Resources**

 

***Proposed restructuring***

*** ***

On April 30, 2003, theCompany reached agreement with its senior lenders (“Senior Secured Debt”) andthe holders of its senior subordinated debt (“Senior Subordinated Debt”) toconvert $90,000 of the Company’s debt to equity and restructure the remaining$38,000 of Senior Secured Debt into a new term loan.  The agreement is to be implemented by a Prearranged Plan ofReorganization under Chapter 11 of the United States Bankruptcy Code (the“Bankruptcy Code”).  On May 9, 2003, theCompany and its subsidiary InterDent Service Corporation (collectively, the“Debtors”) filed a Prearranged Plan of Reorganization under Chapter 11 of theUnited States Bankruptcy Code in the United States Bankruptcy Court for theCentral District of California located in Santa Ana, California (the“Bankruptcy Court”). The cases are being jointly administered under the casename “In Re InterDent, Inc., a Delaware Corporation; InterDent ServiceCorporation, a Washington Corporation,” Case No. 03-13594. Included in theCondensed Consolidated Financial Statements are the financial position andresults of operations of subsidiaries that are not party to the PrearrangedPlan of Reorganization. Because the terms of the proposed reorganization planhave been agreed upon by the holders of 100% of the $128,000 of Senior Secured Debtand Senior Subordinated Debt, the Company believes there is a strong likelihoodthat the proposed restructuring will be confirmed.  See note 6 to the Notes to Condensed Consolidated FinancialStatements regarding the proposed restructuring and the proceedings underChapter 11 of the Bankruptcy Code.

 

***Liquidity***

 

The Company experienced aloss of $97,096 for fiscal year 2002. Contributing to this significant loss are certain charges for assetimpairments, disposition of certain dental locations, and debt restructuringand debt extinguishments.  The Companybelieves such charges are unusual in nature and are not expected to continue inthe near future.  The loss of $3,574 forthe three months ended March 31, 2003 is primarily the result the Company’sdebt service obligations on its outstanding debt.  For the three months ended March 31, 2003, interest expense was$6,327, of which $2,309 was paid in cash, $2,730 was accrued and converted intonew notes as payment in kind and the remaining amount was amortization ofdeferred financing costs paid in prior years. Net losses are expected to continue due to the Company’s high level ofinterest expense.  Also, a significantportion of debt is due during 2003, which the Company cannot pay from cashflows from operations, and needs to obtain additional capital, restructure itsbalance sheet, or a combination of both to sustain future operations, asdiscussed above.

 

**Interimreporting**

 

The accompanying unaudited interim Condensed Consolidated Financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annualconsolidated financial statements have been condensed or omitted as permittedunder those rules and regulations.  Webelieve all adjustments, consisting only of normal, recurring adjustmentsconsidered necessary for a fair presentation, have been included and that thedisclosures made are adequate to insure that the information presented is notmisleading.  To obtain a more detailedunderstanding of Company results, it is suggested that these financialstatements be read in conjunction with the Consolidated Financial Statementsand related notes for the year ended December 31, 2002 included in Form 10-Kfiled on April 30, 2003.  The results ofoperations for the three months ended March 31, 2003 are not necessarilyindicative of the results of operations for the entire year.

 

**Net revenues**

 

Revenues consistprimarily of PA net patient service revenue (“net patient revenue”) and Companynet management fees. Net patient revenue represents the consolidated revenue ofthe PAs reported at the estimated net realizable amounts from patients, thirdparty payors and others for services rendered, net of contractual adjustments.Net management fees represent amounts charged to the unconsolidated PAs inaccordance with the MSA as a percentage of the PAs net patient service revenueunder MSAs, net of provisions for contractual adjustments and doubtful accounts.  Such revenues are recognized as services areperformed based upon usual and customary rates or contractual rates agreed towith managed care payors.

 

6

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Net patient revenues include amounts received under capitated managed care contracts from certain wholly owned subsidiaries that are subject to regulatory review and oversight by various state agencies.  The subsidiaries are required to file statutory financial statements with the state agencies and maintain minimum tangible net equity balances and restricted deposits.  The Company is in compliance with such requirements as of March 31, 2003.  Total revenues subject to regulatory review and oversight by various state agencies were $10,493 and $12,063 for the three months ended March 31, 2003 and 2002, respectively.

 

**Accountsreceivable**

 

Accounts receivableprincipally represent receivables from patients and insurance carriers fordental services provided by the related PAs at established billing rates, lessallowances and discounts for patients covered by third party payorscontracts.  Payments under theseprograms are primarily based on predetermined rates.  In addition, an allowance for doubtful accounts is provided basedupon expected collections and is included in practice selling, general andadministrative expenses.  Thesecontractual allowances, discounts and allowance for doubtful accounts arededucted from accounts receivable in the accompanying Condensed ConsolidatedBalance Sheets.  The discounts andallowances are determined based upon historical realization rates, the currenteconomic environment and the age of accounts. Changes in estimated collection rates are recorded as a change inestimate in the period the change is made. Concentration of credit risk with respect to accounts receivable islimited due to the large number of payors comprising the company’s payor base.

 

**Goodwill,intangible and long-lived assets**

 

Goodwill and intangibleassets result primarily from the excess of purchase cost over the fair value ofnet tangible assets associated with dental practice acquisitions.  Intangibles relating to MSAs consist of thecosts of purchasing the rights to provide management support services to PAsover the initial non-cancelable terms of the related agreements, usually40 years.  Under these agreements,the PAs have agreed to provide dental services on an exclusive basis onlythrough facilities provided by the Company, which is the exclusive administratorof all non-dental aspects of the acquired PAs, providing facilities, equipment,support staffing, management and other ancillary services. The agreements arenon-cancelable except for performance defaults.  Through December 31, 2001, intangible assets were amortized onthe straight-line method, ranging from 5 years for other intangibles to25 years for MSAs and goodwill.

 

Through December 31,2001, the Company periodically reviewed the recoverability of the intangibleand long-lived assets for possible impairment when events or changes incircumstances indicated that the carrying amount of assets may not berecoverable, as required by FASB Statement of Financial Accounting StandardsNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of” (“SFAS 121”). This measurement evaluated the ability to recover the balance of theseassets from expected future operating cash flows on an undiscounted basisthrough the remaining amortization period.

 

In July 2001, the FASBissued Statement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”), effective for the Company in the first quarterof 2002.  SFAS 142 requires companies tostop amortizing goodwill and certain intangible assets with an indefiniteuseful life.  Instead, goodwill andintangible assets deemed to have an indefinite useful life are subject toreview for potential impairment upon adoption on January 1, 2002 and thereafterannually or when an impairment indicator is noted.  As a result of completing the required test, the Company recordeda 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 goodwilland certain intangible assets associated with dental practiceacquisitions.  The charge restated thepreviously reported results for the three months ended March 31, 2002.  The restatement is reflected as a cumulativeeffect of a change in accounting principle in the accompanying CondensedConsolidated Statements of Operations, as follows.

 

7

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|                                                                                          |   | **Three  Months Ended  March 31, 2002** |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                          |   | **As  Previously  Reported**            |   | **As Restated** |   |
|                                                                                          |   |                                    |   |   |   |
| Total Revenues                                                                                |   | $                                       | 63,725 |   | $ | 63,725 |   |
| Operating income                                                                              |   | 3,577                                   |   | 3,577 |   |
| Net loss before extraordinary item and cumulative  effect of a change in accounting principle |   | (1,067                                  | )      | (1,067 | ) |
| Cumulative effect of a change in accounting  principle, net of taxes                          |   | —                                  |   | (89,000 | ) |
| Net loss                                                                                      |   | $                                       | (1,067 | ) | $ | (90,067 | ) |
|                                                                                          |   |                                    |   |   |   |
| Net loss per share – basic and diluted                                                   |   | $                                       |   |   | $ |   |   |
| Before cumulative effect of a change in accounting  principle                                 |   | (0.28                                   | )      | (0.28 | ) |
| Cumulative effect of a change in accounting  principle                                        |   | —                                  |   | (23.22 | ) |
| Net loss                                                                                      |   | $                                       | (0.28  | ) | $ | (23.50 | ) |

 

The Company did notrecord amortization on its goodwill and intangible assets during 2003 and 2002as all such assets are determined to have indefinite lives.

 

**Fairvalue of financial assets, liabilities, and redeemable common stock**

 

The Company estimates thefair value of its monetary assets, liabilities, and redeemable common stockbased upon the existing interest rates related to such assets, liabilities, andredeemable common stock compared to current market rates of interest forinstruments with a similar nature and degree of risk.  The Company estimates that the carrying value of all of itsmonetary assets, liabilities, and redeemable common stock approximates fairvalue as of March 31, 2003 and 2002. However, as discussed in the liquidity section above, the Company has anagreement with its Senior Secured Debt and Senior Subordinated Debt holders tobe implemented by a Prearranged Plan of Reorganization under Chapter 11 of theBankruptcy Code.  Due to the number ofuncertainties regarding the restructuring plan, there can be no assurance thatthe fair value of the Company’s assets, liabilities and long-term debt may notbe reduced.

 

**Net loss per share**

 

The Company presents“basic” earnings per share, which is net loss divided by the average weightedcommon shares outstanding during the period, and “diluted” earnings per share,which considers the impact of common share equivalents.  Dilutive potential common shares representshares issuable using the treasury stock method.

 

For the three monthsended March 31, 2003, and 2002, dilutive potential common shares ofapproximately 2,600,000 and 2,800,000, respectively, consisting of convertiblesubordinated debt, convertible preferred stock, and the exercise of certainoptions and warrants have been excluded from the computation of diluted incomeper share as their effect is anti-dilutive.

 

The following tablesummarizes the computation of outstanding shares and excludes 160,544 of shares held in escrow inconnection with the sale of DCA in May 2001. Such shares will be cancelled upon release from the escrow agent.

 

8

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|                                       |   | **Three Months Ended March  31,** |   |
|--------------------------------------------|--------|-----------------------------------|--------|
|                                       |   | **2003**                          |   | **2002** |   |
|                                       |   |                              |   |   |   |
| Net Loss                                   |   | $                                 | (3,574 | ) | $ | (90,067 | ) |
|                                       |   |                              |   |   |   |
| Outstanding share reconciliation:          |   |                              |   |   |   |
| Weighted average common shares outstanding |   | 3,802,787                         |   | 3,833,313 |   |
| Contingently repurchaseable common shares  |   | —                            |   | — |   |
|                                       |   |                              |   |   |   |
| Outstanding basic and diluted shares       |   | 3,802,787                         |   | 3,833,313 |   |
|                                            |        |                                   |        |  |  |  |  |

** **

**Comprehensive income**

 

Statement of FinancialAccounting Standards No. 130, “Reporting Comprehensive Income” establishes standardsfor reporting and display of comprehensive income and its components (revenues,expenses, gains, and losses).  TheCompany does not have elements of other comprehensive income.

 

**Stock-based compensation**

 

TheCompany has adopted the disclosure-only provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation (“SFAS 123”), as amended by FASBStatement No. 148, Accounting for Stock-Based Compensation – Transition andDisclosure (“SFAS 148”) and will continue to use the intrinsic value basedmethod 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 beenrecognized for options granted with an option price equal to the grant datemarket value of the Company’s common stock. Had compensation cost for the Company’s options granted been determinedbased on the fair value of the option at the grant date consistent with theprovisions of SFAS 123, the Company’s net loss and net loss per share wouldhave increased to the pro forma amounts indicated below for the three monthsended March 31, 2003 and 2002, respectively.

 

|                                                                                                                                         |   | **Three Months Ended March  31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                         |   | **2003**                          |   | **2002** |   |
|                                                                                                                                         |   |                              |   |   |   |
| Net loss, as reported                                                                                                                        |   | $                                 | (3,574 | ) | $ | (90,067 | ) |
|                                                                                                                                         |   |                              |   |   |   |
| Add: Stock-based employee compensation expense  included in reported net loss, net of related tax effect                                     |   | —                            |   | 73 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effect |   | (129                              | )      | (2,780 | ) |
|                                                                                                                                         |   |                              |   |   |   |
| Net loss, pro forma                                                                                                                          |   | $                                 | (3,703 | ) | $ | (92,774 | ) |
|                                                                                                                                         |   |                              |   |   |   |
| Net loss – basic and diluted:                                                                                                           |   |                              |   |   |   |
| As reported                                                                                                                                  |   | $                                 | (0.94  | ) | $ | (23.50 | ) |
| Pro forma                                                                                                                                    |   | (0.97                             | )      | (24.20 | ) |

 

These pro forma amountsmay not be representative of future disclosures since the estimated fair valueof stock options would be amortized to expense over the vesting period, andadditional options may be granted in future years.

 

The Company did not grantoptions during 2002.  The fair value ofoptions granted during 2003 were valued using the Black-Scholes option-pricingmodel with the following weighted average assumptions: (a) no dividendyield on the Company’s stock, (b) expected volatility of the Company’sstock of 170%, (c) a risk-free interest rate of 3.10% and (d) expectedoption life of five years.  Options wereassumed to be exercised over their expected lives for the purpose of thisvaluation.  Adjustments are made foroptions forfeited prior to vesting.  Thetotal estimated value of options granted which would be amortized over thevesting period of the options is $94 for the three months March 31, 2003 andwere valued at an average per share amount of $0.19.

 

9

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**Segmentreporting**

 

The Company has adoptedStatement of Financial Accounting Standards No. 131, Disclosures about Segmentsof an Enterprise and Related Information (“SFAS” 131”). SFAS 131 supersedesSFAS 14, Financial Reporting for Segments of a Business Enterprise, replacingthe “industry segment” approach with the “management” approach.  The management approach designates theinternal reporting that is used by management for making operating decisionsand assessing the performance as the source of the Company’s reportablesegments. The adoption of SFAS 131 did not have an impact for the reporting anddisplay of segment information as each of the affiliated dental practices isevaluated individually by the chief operating decision maker and considered tohave similar economic characteristics, as defined in the pronouncement, andtherefore are aggregated.

 

**Incometaxes**

 

Income taxes areaccounted for under the liability method in accordance with Statement ofFinancial and Accounting Standards No. 109, Accounting for Income Taxes (“SFAS109”).  Under the liability method,deferred tax assets and liabilities are recognized for the future taxconsequences attributed to differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax basis.Income tax expense recorded for the three months ended March 31, 2002represents the Company’s estimate of state income tax payable.  The Company has a valuation allowance tooffset the entire amount of federal and state tax benefit of losscarryforwards.

 

**Use ofestimates**

 

In preparing thefinancial statements, we have made estimates and assumptions that affect thefollowing:

 

•                  Reported amounts of assets andliabilities at the date of the financial statements;

•                  Disclosure of contingent assets andliabilities at the date of the financial statements; and

•                  Reported amounts of revenues andexpenses during the period.

 

Actual results coulddiffer from those estimates.

 

**Newaccounting 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 inNovember 2002.  The Interpretationelaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees thatit has issued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The Interpretationincorporates, without change, the guidance in FASB Interpretation No. 34,“Disclosure of Indirect Guarantees of Indebtedness of Others,” which is beingsuperseded.  The initial recognition andmeasurement provisions of the Interpretation are to be applied on a prospectivebasis to guarantees issued or modified after December 31, 2002, irrespective ofthe guarantor’s fiscal year-end.  Theadoption of this statement did not have a material impact on the Company’sfinancial statements as it has not issued or modified any guarantees sinceDecember 31, 2002.

 

In January 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities,” which addresses consolidation bya business of variable interest entities in which it is the primarybeneficiary. The Interpretation is effective immediately for certaindisclosure requirements and variable interest entities created after January31, 2003, and in fiscal 2004 for all other variable interest entities. Thisinterpretation will not have a material impact on the Company’s financialstatements.

 

**(3)DENTAL PRACTICE AFFILIATIONS AND DISPOSITIONS**

 

In connection withcertain completed affiliation transactions, the Company has agreed to pay tothe sellers’ future consideration in the form of cash.  The amount of future consideration payableunder earn-outs is generally computed based upon financial performance of theaffiliated dental practices during certain specified periods.  The Company accrues for earn-out paymentswith respect to these acquisitions when such amounts are probable andreasonably estimable.  In addition tocash paid of $108 during the

 

10

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three months ended March31, 2003, the Company also converted $684 of amounts due under earn-outagreements into long-term notes payable. As of March 31, 2003, future anticipated earn-out payments of $286 areaccrued and included in other current liabilities.  For those acquisitions with earn-out provisions, the Companyestimates the total maximum earn-out that could be paid, including amountsalready accrued, is between $2,000 and $3,000 from April 2003 toDecember 2004, which is expected to be paid in a combination of cash andnotes.

 

**(4)LONG-TERM DEBT**

 

Long-term debtconsists of the following:

 

|                                                                                                                                                                                                         |   | **March 31,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                                                                                                                                                                                         |   |                |   |                   |   |
| Senior Secured Debt, variable interest (9.86% at  March 31, 2003), variable quarterly payments, as defined, due September 30,  2003.                                                                         |   | $                   | 81,831 |                   | $      | 81,626 |   |
| Senior Subordinated Debt, interest at 17.0%, payable  monthly; due September 2005                                                                                                                            |   | 43,467              |   | 41,671                 |   |
| Convertible Subordinated Debt, Interest at 8%,  payable semi-annually, due June 2006                                                                                                                         |   | 38,811              |   | 38,106                 |   |
| Various unsecured acquisition notes payable, due in  monthly and quarterly installments of principal and interest at rates ranging  from Prime (4.25% at March 31, 2002) to 12.0%; due through November 2009 |   | 12,369              |   | 12,754                 |   |
| Note payable to seller, interest at 8.5%, secured by  stock in subsidiary; due June 2003                                                                                                                     |   | 581                 |   | 581                    |   |
|                                                                                                                                                                                                         |   |                |   |                   |   |
| Total long-term debt                                                                                                                                                                                         |   | 177,059             |   | 174,738                |   |
| Less current portion                                                                                                                                                                                         |   | (172,195            | )      | (168,980               | )      |
|                                                                                                                                                                                                         |   |                |   |                   |   |
| Long-term debt, net of current portion                                                                                                                                                                       |   | $                   | 4,864  |                   | $      | 5,758 |   |

 

As outlined in Note 2under “Liquidity”, the Company does not have the ability to fund its scheduleddebt payments due in 2003 from cash flows generated from operations, and needsto obtain additional capital, restructure its balance sheet, or a combinationof both.  On April 30, 2003, the Companyreached agreement with its Senior Secured Debt and Senior Subordinated Debtholders to convert $90,000 of the Company’s debt to equity and restructure theremaining $38,000 of Senior Secured Debt into a new term loan.  The agreement is to be implemented by aPrearranged Plan of Reorganization under Chapter 11 of the Bankruptcy Code,which the Company filed on May 9, 2003. See note 6 regarding the proposedrestructuring and the proceedings under Chapter 11 of the Bankruptcy Code.

 

There can be no assurancethat the Company will be able to consummate any financial restructuring toprevent a default on its debt payments under the Senior Secured Debt.  The Senior Subordinated Debt and convertiblenotes (“Convertible Subordinated Debt”) also have cross-default provisionsassociated with the Senior Secured Debt. Accordingly, the scheduled maturities for the Senior Subordinated Debtand Convertible Subordinated Debt, payable in 2005 and 2006 totaling $82,278,have also been accelerated to current portion of long-term debt and capitallease obligations in the accompanying Condensed Consolidated BalanceSheets.  The following outlines thesignificant terms of the Senior Secured Debt, Senior Subordinated Debt andConvertible Subordinated Debt:

 

**SeniorSecured Debt**

 

Principal amounts owedunder the Senior Secured Debt bear interest at LIBOR plus 7.50% or the primerate plus 5.75%, at the Company’s option. In addition, the Company is to pay an incremental payment-in-kind(“PIK”) interest on the outstanding principal balance of 1.0% from April 15,2002 though March 31, 2003, increasing to 2.0% from April 1, 2003 throughmaturity.  The Company is also to pay aPIK fee equal to 3.0% of the outstanding balance on April 1, 2003.  All PIK interest and fees are payable uponmaturity.

 

11

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On March 31, 2003, theCompany entered into amendments to its existing Senior Secured Debt.  In connection with the execution of theamendments, the senior lenders, among other things, modified the principalpayment due on April 1, 2003.  Thesemodifications were designed to temporarily relieve the Company from itsshort-term debt service obligations, as the Company was in negotiations on along-term financial restructuring plan with the senior lenders, its significantequity and debt holders, and other potential outside investors.  Under the terms of the amended agreements,the original required principal payment due of $7,214 was reduced to $500, withthe remaining $6,714 due on April 30, 2003. In the fourth quarter of 2002, the Company prepaid $439 of the requiredApril 1, 2003 principal payment in connection with proceeds from the sale ofcertain dental practices, as required under the terms of the Senior SecuredDebt.  Accordingly, the required April1, 2003 payment was $61.  On April 30,2003, the banks agreed to amendments to postpone the $6,714 due on April 30,2003 until May 9, 2003.  Requiredprincipal installments of $7,214 are also due on July 1, 2003 and the remainingbalance due at maturity on September 30, 2003. See note 6 regarding the proposedrestructuring and the proceedings under Chapter 11 of the Bankruptcy Code.

 

The Senior Secured Debtcontains several covenants, including but not limited to, restrictions on theCompany’s ability to incur indebtedness or repurchase shares, a prohibition ondividends without prior approval, prohibition on acquisitions, and fees forexcess earn-out and debt payments, as defined. There are also financial covenant requirements relating to compliancewith specified cash flow, liquidity, and leverage ratios.  The Company’s obligations under the SeniorSecured Debt, including the applicable subsidiaries in the guarantees, aresecured by a security interest in substantially all assets of each of suchentities.

 

The Company also issuedwarrants to the senior lenders to purchase an aggregate of 166,667 shares ofthe Company’s common stock at a strike price of $3.66 per share.

** **

**SeniorSubordinated Debt**

** **

In June 2000, theCompany raised $36,500 from the sale of debt and equity to Levine LeichtmanCapital Partners II, L.P. (“Levine”) under a securities purchaseagreement.  The equity portion of thetransaction comprised 458,333 shares of common stock valued at $11,000.  The debt portion of the transactioncomprised of the Senior Subordinated Debt with a face value of $25,500.  As part of the transaction with Levine, theCompany also issued a warrant to purchase 354,167 shares of the Company’scommon stock at a current strike price of $20.88 per share.

 

The entire principal ofthe Senior Subordinated Debt is due September 2005 but may be paid earlierat the Company’s election, subject to a prepayment penalty.  Additionally, the Senior Subordinated Debthas mandatory principal prepayments based upon a change in ownership, certainasset sales, or excess cash flows.  TheSenior Subordinated Debt bears interest at 12.5%, payable monthly, with anoption to pay the interest in a PIK note. The Company is currently issuing PIK notes at 17.0% for payment ofcurrent interest amounts owed.  Thesecurities purchase agreement contains covenants, including but not limited to,restricting the Company’s ability to incur certain indebtedness, liens orinvestments, restrictions relating to agreements affecting capital stock,maintenance of a specified net worth and compliance with specified financialratios.

 

**ConvertibleSubordinated Debt**

 

In 1998, the Companyissued $30,000 of Convertible Subordinated Debt.  The Convertible Subordinated Debt matures June 2006 and currentlybear interest at 8.0%, payable semi-annually with an option to pay the interestin a PIK note also bearing interest at 8.0%, which the Company is currentlyexercising for payment of current interest amounts due.  The Convertible Subordinated Debt isconvertible into shares of the common stock at $39.00 for each share of commonstock issuable upon conversion of outstanding principal and accrued but unpaidinterest on such subordinated notes and shall be automatically converted intocommon stock if the rolling 21-day average closing market price of the commonstock on 20 out of any 30 consecutive trading days is more than $107.40.

 

**(5)****         CONTINGENCIES**

 

In July 2002, InterDent’sclaims against Amerident of approximately $3,000 for breach of contract, breachof the implied covenant of good faith and fair dealing, intentional misrepresentationand negligent misrepresentation (Los Angeles Superior Court CaseNo. BC237600)

 

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proceeded to trial, as didthe claims by Amerident for damages ranging from $8,000 to $11,000 againstInterDent and Gentle Dental Management, Inc. related to the July 21, 1999 saleof substantially all of the assets of ten dental practices in California andNevada and breach of a promissory note. In August 2002 a mistrial was declared because there were insufficientjurors to proceed.  The cases areexpected to be retried in the second quarter of 2003.  Management believes the Amerident claims against the Company arewithout merit or will not have a material adverse effect on the Company’sconsolidated operating results, liquidity or financial position, or cash flows.

 

The Company has been named asa defendant in various other lawsuits in the normal course of business,primarily for malpractice claims.  TheCompany and affiliated dental practices, and associated dentists are insuredwith respect to dentistry malpractice risks on a claims-made basis.  Management believes all of these pendinglawsuits, claims, and proceedings against the Company are without merit or willnot have a material adverse effect on the Company’s consolidated operatingresults, liquidity or financial position, or cash flows.

 

**(6)SUBSEQUENT EVENTS**

** **

**ProposedRestructuring and Proceedings under Chapter 11 of the Bankruptcy Code**

 

On April 30, 2003, theCompany reached agreement with its Senior Secured Debt and Senior SubordinatedDebt holders to convert $90,000 of the Company’s debt to equity and restructurethe remaining $38,000 of Senior Secured Debt into a new term loan.  The agreement is to be implemented by aPrearranged Plan of Reorganization under Chapter 11 of the BankruptcyCode.  The restructuring is subject tocourt approval and other customary conditions. If the restructuring iscompleted as proposed, the existing equity in the Company will be extinguished.The restructuring will also eliminate the Company’s $39,000 ConvertibleSubordinated Debt. Two of the Company’s existing lenders have agreed to providethe Company with a $7,500 debtor-in-possession credit facility, subject tocourt approval.

 

On May 9, 2003, theCompany and its subsidiary InterDent Service Corporation (collectively, the“Debtors”) filed a Prearranged Plan of Reorganization under Chapter 11 of theUnited States Bankruptcy Code in the United States Bankruptcy Court for theCentral District of California located in Santa Ana, California (the“Bankruptcy Court”). The cases are being jointly administered under the casename “In Re InterDent, Inc., a Delaware Corporation; InterDent ServiceCorporation, a Washington Corporation,” Case No. 03-13594.

 

Because the terms of theproposed reorganization plan have been agreed upon by the holders of 100% ofthe $128,000 of Senior Secured Debt and Senior Subordinated Debt, the Companybelieves there is a strong likelihood that the proposed restructuring will beconfirmed.  The principal effects of therestructuring on the Company’s debt will be as follows.

 

***Senior Secured Debt and Senior Subordinated Debt. ***There wasapproximately $84,000******of Senior Secured Debt outstanding as of April 1,2003.  Of this amount, approximately$38,000 was held by JP Morgan Chase Bank, Fleet Capital Corporation and U.S.Bank National Association (collectively, the “Bank Lenders”) and $47,000 washeld by funds managed by DDJ Capital Management, LLC and Pleasant StreetInvestors, LLC (the “Other Senior Lenders”). In addition, Levine Leichtman Capital Partners II, L.P. (“LLCP”) heldapproximately $44,000 of Senior Subordinated Debt.

 

The full amount of the$38,000 of Senior Secured debt held by the Bank Lenders will be assumed by theCompany following the reorganization and restructured as follows (the“Restructured Bank Debt”).  TheRestructured Bank Debt will have a three-year term and bear interest at primeplus 2.5% or, at the Company’s option, LIBOR plus 4.0%.  The principal will be payable asfollows:  $400 during 2003, $5,000payable in $1,250 equal quarterly installments during 2004, $6,000 payable in$1,500 equal quarterly installments during 2005, and $8,000 payable in $2,000equal quarterly installments during 2006 until maturity, when the total unpaid balancewill be due.

 

The $90,000 of SeniorSecured Debt and Senior Subordinated Debt held by the Other Senior Lenders andLLCP will be converted into equity of the Company, consisting of common stock,a new issue of 5% convertible preferred stock and warrants to purchaseadditional common stock constituting 16.5% of the Company’s common stockassuming conversion of the new convertible preferred stock.

 

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***Convertible Subordinated Debt.***Whilethe restructuring will eliminate the approximately $39,000 of ConvertibleSubordinated Debt outstanding as of April 1, 2003, under certain circumstancesthe holders of this debt might receive the right to purchase an aggregate of 3%of the common stock of the Company.

 

***Debtor-in-Possession Credit Facility.***  Certain of the Company’s Senior SecuredLenders have agreed to provide a $7,500 debtor-in-possession credit facility(the “DIP Facility”) to pay certain post-petition expenses.  The DIP Facility will become available onthe first day following its approval by the Bankruptcy Court and will have a180-day term, subject to earlier termination upon the occurrence of certainevents.  Amounts borrowed under the DIPFacility will have super-priority status and will be secured by a firstpriority security interest in, and lien on, all assets of the Company.

 

The DIP Facility willbear interest at an annual rate ranging from 10% to 13% over the life of thefacility, and will require payment of additional interest in the event of adefault.  On the closing date, acommitment fee equal to 2.5% of the commitment will be due the lenders, andupon termination an additional fee equal to 2.5% of the commitment will be due.  In exchange for the termination fee, thelenders have agreed that if a plan of reorganization described herein isconfirmed, the Company will have the right to convert the DIP Facility into arevolving credit facility.

 

14

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*Forward-looking and CautionaryStatements*

* *

***ThePrivate Securities Litigation Reform Act of 1995 provides a “safe harbor” forcertain forward-looking statements. Certain information included in thisForm 10-Q and other materials filed with the Securities and ExchangeCommission (as well as information included in oral statements or other writtenstatements made or to be made by the Company) contain statements that areforward looking, such as statements relating to financial restructuring,business strategies, plans for future development and upgrading, capitalspending, financing sources, changes in interest rates, and the effects ofregulations.  Such forward-looking statementsinvolve important known and unknown risks and uncertainties that could causeactual results and liquidity to differ materially from those expressed oranticipated in any forward-looking statements. Such risks and uncertaintiesinclude, but are not limited to: those related to the effects of competition;leverage and debt service; the outcome of our proceedings under Chapter 11of the Bankruptcy Code and its effect upon our leverage; financing needs orefforts; actions taken or omitted to be taken by third parties, including theCompany’s customers, suppliers, competitors, and stockholders, as well aslegislative, regulatory, judicial, and other governmental authorities; changesin business strategy; general economic conditions; changes in health care laws,regulations or taxes; risks related to development and upgrading systems; andother factors described from time to time in the Company’s reports filed withthe Securities and Exchange Commission. Accordingly, actual results may differmaterially from those expressed in any forward-looking statement made by or onbehalf of the Company.  Anyforward-looking statements are made pursuant to the Private SecuritiesLitigation Reform Act of 1995, and, as such, speak only as of the date made.The Company undertakes no obligation to revise publicly these forward-lookingstatements to reflect subsequent events or circumstances***

 

**Overview**

 

Weare a leading provider of dental practice management services tomulti-specialty dental professional corporations and associations(“PAs”) in the United States.  Thedentists employed through our network of affiliated PAs provide patients with affordable, comprehensive, convenientand high quality dentistry services, which include general dentistry,endodontics, oral surgery, orthodontics, pedodontics, periodontics andprosthodontics. As of March 31, 2003 we provided management services to 137dental offices that employ 559 dentists, including 151 specialists.  We currently operate in Arizona, California,Hawaii, Idaho, Kansas, Nevada, Oklahoma, Oregon, and Washington.

 

Wehave historically affiliated with PAs by purchasing the operating assets ofthose 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 exclusiveadministrator of all non-clinical aspects of the dental practices, whereas theaffiliated PAs are exclusively in control of all aspects of the practice anddelivery of dental services.  Ascompensation for services provided under the MSAs, we receive a management feetypically equal to either the expenses incurred in operating the practice plusa percentage of the net revenues of the affiliated dental practice or a setpercentage of the net revenues of affiliated dental practices.

 

The Emerging Issues TaskForce (“EITF”) of the Financial Accounting Standards Board reached a consensuson the accounting for transactions between physician practice managementcompanies and physician practices and the financial reporting of such entities(EITF issue number 97-2).  For financialreporting, EITF 97-2 mandates the consolidation of physician practiceactivities with the practice management company when certain conditions havebeen met, even though the practice management company does not have a directequity investment in the physician practice. The accompanying Condensed Consolidated Financial Statements areprepared in conformity with the consensus reached in EITF 97-2.

 

Simultaneous to theexecution of an MSA with each PA, we also entered into a shares acquisitionagreement (“SAA”).  Under all of theSAAs 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 thePA for a nominal price of $1,000 or less. Under these SAAs, we have the unilateral right to establish or effect achange in the PA shareholder, at will, and without consent of the PAshareholder, on an unlimited basis.  Under the provisions of EITF 97-2, the agreements with the PAshareholders qualify as a friendly doctor arrangement.  Consequently, under EITF 97-2, weconsolidate all the accounts of those PAs in the accompanying CondensedConsolidated Financial Statements. Accordingly, the Condensed Consolidated Statements of Operations includethe net patient revenues and related expenses of these PAs and all significantintercompany transactions have been eliminated.

 

We currently have enteredinto two SAA with PAs, representing three dental locations that do not have thenominal price provision.  Rather, theSAA purchase price is based upon a multiple of earnings, as defined.  As a result, the agreements do not meet thecriteria of consolidation under EITF 97-2 and the Condensed ConsolidatedStatements of Operations exclude the net patient service

 

15

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revenues and expenses ofthese PAs.  We only include netmanagement fee revenues generated and expenses associated with providingservices under the MSAs.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of ourCondensed Consolidated Financial Statements requires management to makeestimates and judgments that affect the reported amounts of assets, liabilitiesand revenues and expenses.  On anon-going basis we evaluate these estimates, including those related to carryingvalue 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 variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about carrying valuesof assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions.

 

We have identified thepolicies below as critical to our business operations and the understanding ofour results of operations.

 

*Valuationof accounts receivables* The carrying amount of accounts receivables requires management toassess the future collectibility of our accounts receivable and establish anallowance for patients covered by third-party payor contracts, anticipateddiscounts and doubtful accounts.  Ourestablished allowance is determined based upon historical realization rates,the current economic environment and the age of accounts.  Changes in our estimated collection ratesare 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 andlong-lived assets annually, or more frequently when events occur such as lossof key personnel, change in legal factors, operating results, etc., which wouldsuggest 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 andassumptions that affect our Condensed Consolidated Financial Statements,including estimating the fair value of our assets, determining the carryingvalue of the balance sheet, performing a comparison of fair value to carryingvalue, and calculating an implied value of goodwill, intangibles and long-livedassets.  If impairment is determined, wemake the appropriate adjustment to the goodwill, intangible or long-livedassets to reduce the asset’s carrying value.

 

*Incometaxes*  We record avaluation allowance to reduce our deferred income tax assets to the amount thatis more likely than not to be realized.  Our assessment of the realizationof deferred income tax assets requires that estimates and assumptions be madeas to taxable income of future periods.  Projection of future periodearnings is inherently difficult as it involves consideration of numerousfactors such as our overall strategies, market growth rates, responses bycompetitors, assumptions as to operating expenses and other industry specificfactors.

 

**Resultsof Operations**

 

The followingdiscussion highlights changes in historical revenues and expense levels for thethree-month period ended March 31, 2003, compared to the three-month periodended March 31, 2002, as reported in our Condensed Consolidated FinancialStatements and the related notes thereto appearing elsewhere herein.

 

***Three Months Ended March 31, 2003 Statement of OperationsCompared to Three Months Ended March 31, 2002***

 

***Dental Practice Net Patient Service Revenue.***Dental practice net patient service revenue represents the clinical patientrevenues at affiliated dental practices where the consolidation requirements ofEITF 97-2 have been met. There were 134 and 137 such offices at March 31, 2003and 2002, respectively. Dental practice net patient service revenue decreased7.4% to $58.6 million for 2003 compared to $63.4 million for 2002 asa result of same store sales declines and the sale or merging of five under performingpractice locations into existing facilities.

 

The daily dental practicenet patient service revenue for offices open for at least one year as of March31, 2003 decreased approximately 6.9% from the same period in the prior year.The major contributing factor to this decrease is the effect of a very poornational economy and high unemployment rates in the markets we serve.Additionally, the Oregon Department of Health Services has reduced the dentalbenefits offered under its Oregon Health Plan to address the State of Oregonstatewide budget crisis.  The effect ofthis reduction in benefits offered to low income residents resulted in adecrease in our capitation revenue from the state of Oregon by nearly 18%, orapproximately $1.4 million in the three months ended March 31, 2003.  We are currently implementing certaininitiatives to replace the lost revenues associated with the Oregon Health Planand other locations negatively affected by the poor economy.  Such initiatives include converting thecapacity of our offices servicing the Oregon Health Plan to fee-for-servicerevenue patients, increasing revenues from managed care plans, or a combinationof both.

 

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***PracticeOperating Expenses.***Practiceoperating expenses represent the direct costs associated with operating andmanaging the practice facility locations, including regional supportdepartments.  These costs are comprisedof the following expenses:

* *

*Clinical Salaries, Benefits and Provider Costs* include allpatient service provider staff compensation and related payroll costs at theconsolidated affiliated dental practices, including dentists, hygienists anddental assistants, and dental assistants for the unconsolidated affiliateddental practices;

* *

*Practice Non-clinical Salaries and Benefits* include allstaff compensation and related payroll costs at all dental and regionalfacilities other than dentists, hygienists, and dental assistants;

* *

*Dental Supplies and Lab Expenses* include alldirect supply costs in the performance of patient treatment programs;

* *

*Practice Occupancy Expenses* include facilityleases, property taxes, utilities, janitorial services, repairs andmaintenance; and

* *

*Practice Selling, General, and Administrative Expenses* includegeneral office, advertising, professional services (excluding dentistry),office supplies, bank processing fees, local taxes, insurance, bad debtexpense, and other miscellaneous costs at the dental facilities and regionalcenters.

 

Practiceoperating expenses were $52.0 million for 2003 compared to$54.8 million for 2002, representing a 5.1% decrease. The practiceoperating expenses as a percentage of revenue increased 2.1% to 88.1% in 2003from 86.0% in 2002.  The increase insuch expense as a percentage of revenue is due to the decline in overall samestore revenues, as discussed above.  Thecomponents  that make up the practiceoperating expenses  are largely fixed orfixed-variable cost, except for dental supplies and lab expense which arevariable cost.  We have been and continue to seek reductions in practice operating expenses asa percentage of revenue by a combination of revenue enhancement and costcutting initiatives.  Such costs areexpected to decline as a percent of revenue and reflect costs in line with ourbetter practices once our various operational initiatives are completed.

 

***Corporate Selling, General and Administrative Expenses.***Corporateselling, general and administrative expenses include: corporate salaries,general office costs, investor relations expense, legal and audit fees, generalinsurance, director and officer liability insurance, corporate office supplies,and other miscellaneous costs at our corporate facilities. Corporate selling,general and administrative expenses were $3.3 million for 2003 compared to $4.2million for 2002, representing a 22.8% decrease.  The decrease is primarily attributed to reductions in corporateoverhead, certain restructuring and other performance bonuses paid in 2002 of $0.35million and a decrease of $0.47 million in consulting and litigation fees.

 

***Depreciation and Amortization.*** Depreciation and amortization expense wasapproximately $1.0 million for 2003 and 2002, and is entirely attributed todepreciation and amortization of property and equipment, including leaseholdimprovement, over their appropriate estimated useful lives or lease term.  Asdiscussed in note 2 to the accompanying Condensed Consolidated FinancialStatements, in January 2002 we implemented Statement of Financial AccountingStandard No. 142, “Goodwill and Other Intangible Assets”.  Accordingly, we have eliminated theamortization of our intangible assets as all such assets are considered to haveindefinite lives.

*** ***

***InterestExpense.*** Interest expense, net of interest income, was$6.3 million for 2003 compared to $4.5 million for 2002.  In April 2002, we entered into variousamendments to our senior lenders and the holder of our senior subordinateddebt, as further described in note 4 to the Condensed Consolidated FinancialStatements.  These amendments increasedour borrowing costs due to escalations in interest rates and the amortizationof deferred closing costs over the life of the loans.  Much of our total interest due is paid as interest payment-in-kind(“PIK”), in the form of additional notes. PIK notes for 2003 were $2.7 million as compared to $2.2 million2002.  Because of our ability to PIK asignificant level of our current interest due under the terms of various debtarrangements, we had sufficient cash flows to meet our other interest andoperating expense requirements during 2003 and 2002.

 

***Provision for Income Taxes.*** Ourstatutory tax rate for federal and state purposes is approximately 40%.  For 2003, no income taxes are due as aresult of the recorded loss for the period. The income tax expense of $0.03million for 2002 represented our state tax payable. We did not recognize a taxbenefit for the losses incurred in 2003 and 2002 as our tax loss carryforwardsare fully reserved by a valuation allowance, due to their uncertainty in realization.

 

**Liquidityand Capital Resources**

 

***Proposed Restructuring***

** **

On April 30, 2003, wereached an agreement with our senior lenders (“Senior Secured Debt”) and theholders of our senior subordinated debt (“Senior Subordinated Debt”) to convert$90.0 million of our debt to equity and restructure the remaining$38.0 million

 

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of Senior Secured Debtinto a new term loan.  The agreement isto be implemented by a Prearranged Plan of Reorganization under Chapter 11 ofthe United States Bankruptcy Code (the “Bankruptcy Code”).  If the restructuring is completed asproposed, the existing equity in the Company will be extinguished.  On May 9, 2003, we and our subsidiaryInterDent Service Corporation (collectively, the “Debtors”) filed a PrearrangedPlan of Reorganization under Chapter 11 of the United States Bankruptcy Code inthe United States Bankruptcy Court for the Central District of Californialocated in Santa Ana, California (the “Bankruptcy Court”). The cases are beingjointly administered under the case name “In Re InterDent, Inc., a DelawareCorporation; InterDent Service Corporation, a Washington Corporation,” Case No.03-13594. Included in the Condensed Consolidated Financial Statements are thefinancial position and results of operations of subsidiaries that are not partyto the Prearranged Plan of Reorganization. Because the terms of the proposedreorganization plan have been agreed upon by the holders of 100% of the $128.0million of Senior Secured Debt and Senior Subordinated Debt, we believe thereis a strong likelihood that the proposed restructuring will be confirmed.  See note 6 to the Notes to CondensedConsolidated Financial Statements regarding the proposed restructuring and theproceedings under Chapter 11 of the Bankruptcy Code.

 

***Liquidity***

 

We experienced a loss of$97.1 million for fiscal year 2002. Contributing to this significant loss is certain charges for assetimpairments, disposition of certain dental locations, and debt restructuringand debt extinguishments.  We believesuch charges are unusual in nature and are not expected to continue in the nearfuture.  The loss of $3.6 million forthe three months ended March 31, 2003 is primarily the result our debt serviceobligations on our outstanding debt. For the three months ended March 31, 2003, interest expense was $6.3million, of which $2.3 million was paid in cash, $2.7 million was accrued andconverted into new notes as payment in kind and the remaining amount wasamortization of deferred financing costs paid in prior years.  Net losses are expected to continue due toour high level of interest expense. Also, a significant portion of debt is due during 2003, which we cannotpay from cash flows from operations, and needs to obtain additional capital,restructure its balance sheet, or a combination of both to sustain futureoperations, as discussed above.

 

***Current FinancialCondition and Cashflows***

 

AtMarch 31, 2003, cash and cash equivalents were $5.0 million, representinga $2.0 million increase in cash and cash equivalents from$3.0 million at December 31, 2002 and the change merely reflects thetiming of receipts and disbursements. Net cash provided by operations amounted to $4.0 million for 2003compared to $6.2 million for 2002. The decrease in net cash provided by operations is primarily attributedto an increase in our net loss before cumulative effect of a change inaccounting principle of $2.5 million.

 

Netcash used by investing activities was $0.6 million for 2003 as compared tocash used of $1.2 million for 2002. Approximately $0.40 million in cash paid for each period related to thepurchase of property and equipment.  Thereduction in cash used by investing activities is a result of fewer earn outsettlements related to acquisitions performed in prior years as severalagreements have expired.  In connection with certain completed affiliationtransactions, we have agreed to pay to the sellers’ future consideration in theform of cash.  The amount of futureconsideration payable under earn-outs is generally computed based uponfinancial performance of the affiliated dental practices during certainspecified periods.  We accrue forearn-out payments with respect to these acquisitions when such amounts areprobable and reasonably estimable.  Inaddition to cash paid of $0.11 million during 2003, we also converted $0.68million of amounts due under earn-out agreements into long-term notespayable.  As of March 31, 2002, futureanticipated earn-out payments of $0.29 million are accrued and included inother current liabilities.  For thoseacquisitions with earn-out provisions, we estimate the total maximum earn-outthat could be paid, including amounts already accrued, is approximately $2.0million from April 2003 to December 2004, which is expected to bepaid in a combination of cash and notes

 

Net cash used infinancing activities was $1.4 million for 2003 as compared to cash used of$2.2 million for 2002.  Thedecrease in cash used is primarily attributed to deferred financing costs paidin 2002 associated with the amendments to the Credit Facility and Levine Note.

 

***Outstanding Debt and OtherFinancing Arrangements***

 

As outlined in the Note 2 under “Liquidity” to theNotes to Condensed Consolidated Financial Statements, we do not have theability to fund our scheduled debt payments due in 2003 from cash flowsgenerated from operations, and need to obtain additional capital, restructureits balance sheet, or a combination of both. On April 30, 2003, we reached an agreement with our Senior Secured Debtand Senior Subordinated Debt holders to convert $90 million of our debt toequity and restructure the remaining $38 million of the Senior Secured Debtinto a new term loan.  The agreement isto be implemented by a Prearranged Plan of Reorganization under Chapter 11 ofthe Bankruptcy Code, which we filed on May 9, 2003. See note 6 to theaccompanying Condensed Financial Statements regarding the proposedrestructuring and the proceedings under Chapter 11 of the Bankruptcy Code.

 

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The following outlines the significant terms of ourSenior Secured Debt, Senior Subordinated Debt, and convertible notes(“Convertible Subordinated Debt”):

 

*Senior Secured Debt*

** **

Principal amounts owed under the Senior Secured Debtbear interest at LIBOR plus 7.50% or the prime rate plus 5.75%, at ouroption.  In addition, we are to pay anincremental payment-in-kind (“PIK”) interest on the outstanding principalbalance of 1.0% from April 15, 2002 though March 31, 2003, increasing to 2.0%from April 1, 2003 through maturity.  Weare also to pay a PIK fee equal to 3.0% of the outstanding balance on April 1,2003.  All PIK interest and fees arepayable upon maturity.

 

On March 31, 2003, we entered into amendments to ourexisting Senior Secured Debt.  Inconnection with the execution of the amendments, the senior lenders, amongother things, modified the principal payment due on April 1, 2003.  These modifications were designed totemporarily relieve us from our short-term debt service obligations, as we werein negotiations on a long-term financial restructuring plan with the seniorlenders, our significant equity and debt holders, and other potential outsideinvestors.  Under the terms of theamended agreements, the original required principal payment due of $7.2 millionwas reduced to $0.50 million, with the remaining $6.7 million due on April 30,2003.  In the fourth quarter of 2002, weprepaid $0.44 million of the required April 1, 2003 principal payment inconnection with proceeds from the sale of certain dental practices, as requiredunder the terms of the Senior Secured Debt. Accordingly, the required April 1, 2003 payment was $0.06 million.  On April 30, 2003, the banks agreed toamendments to postpone the $6.7 million due on April 30, 2003 until May 9,2003.  Required principalinstallments of $7.2 million are also due on July 1, 2003 and the remainingbalance due at maturity on September 30, 2003.

 

The Senior Secured Debtcontains several covenants, including but not limited to, restrictions on ourability to incur indebtedness or repurchase shares, a prohibition on dividendswithout prior approval, prohibition on acquisitions, and fees for excessearn-out and debt payments, as defined. There are also financial covenant requirements relating to compliancewith specified cash flow, liquidity, and leverage ratios.  Our obligations under the Senior SecuredDebt, including the applicable subsidiaries in the guarantees, are secured by asecurity interest in substantially all assets of each of such entities.

 

Wealso issued warrants to the senior lenders to purchase an aggregate of 166,667shares of the InterDent common stock at a strike price of $3.66 per share.

** **

*Senior SubordinatedDebt*

** **

InJune 2000, we raised $36.5 million from the sale of debt and equity toLevine Leichtman Capital Partners II, L.P. (“Levine”) under a securitiespurchase agreement.  The equity portionof the transaction comprised 458,333 shares of common stock valued at $11.0million.  The debt portion of thetransaction comprised the Senior Subordinated Debt with a face value of $25.5million.  As part of the transactionwith Levine, we also issued a warrant to purchase 354,167 shares of InterDentcommon stock at a current strike price of $20.88 per share.

 

The entireprincipal of the Senior Subordinated Debt is due September 2005 but may bepaid earlier at our election, subject to a prepayment penalty.  Additionally, the Levine Note has mandatoryprincipal prepayments based upon a change in ownership, certain asset sales, orexcess cash flows.  The SeniorSubordinated Debt bears interest at 12.5%, payable monthly, with an option topay the interest in a PIK note.  We arecurrently issuing PIK notes at 17.0% for payment of current interest amounts owed.  The securities purchase agreement containscovenants, including but not limited to, restricting our ability to incurcertain indebtedness, liens or investments, restrictions relating to agreementsaffecting capital stock, maintenance of a specified net worth and compliancewith specified financial ratios.

 

*ConvertibleSubordinated Debt*

 

In 1998, we issued$30.0 million of Convertible Subordinated Debt.  The Convertible Subordinated Debt matures June 2006 and currentlybear interest at 8.0%, payable semi-annually with an option to pay the interestin a PIK note also bearing interest at 8.0%, which we are currently exercisingfor payment of current interest amounts due. The Convertible Subordinated Debt is convertible into shares of thecommon stock at $39.00 for each share of common stock issuable upon conversionof outstanding principal and accrued but unpaid interest on such subordinatednotes and shall be automatically converted into common stock if the rolling21-day average closing market price of the common stock on 20 out of any 30consecutive trading days is more than $107.40.

 

*Preferred andCommon Stock*

* *

Weare authorized to issue 30,000,000 shares of Preferred Stock.  Presently authorized series of our PreferredStock include the following series:

 

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•Series A—100 shares authorized, issued and outstanding;

•Series B—70,000 shares authorized, zero issued or outstanding;

•Series C—100 shares authorized, zero shares issued or outstanding; and

•Series D—2,000,000 shares authorized, 1,574,608 shares are issued andoutstanding.

 

Our presently authorized Preferred Stock rank seniorto outstanding Common Stock.  The sharesof Series B Preferred Stock were authorized in connection with issuance ofthe Convertible Subordinated Debt as discussed above.  The Series B Preferred Stock conversion provision of theConvertible Subordinated Debt has expired. Accordingly, although the Series B Preferred Stock is authorized, we donot expect any such shares to ever be issued. Similarly, 100 shares of Series C Preferred Stock were authorized andissued in connection with the Convertible Subordinated Debt issuance, but thenconverted into 10 shares of common stock in the March 1999 mergertransaction.  We do not expect anyshares of Series C Preferred Stock to be issued.  The shares of Series D Preferred Stock are convertible intoshares of our Common Stock at the rate of one-sixth of a share of Common Stockfor each share of Series D Preferred Stock (assuming there are no declared butunpaid dividends on the Series D Preferred Stock), in each case subject toadjustment for stock splits, reverse splits, stock dividends, reorganizationsand similar anti-dilutive provisions. The Series D Preferred Stock holdersare entitled to vote on all matters as to which the Common Stock shareholdersare entitled to vote, based upon the number of shares Common Stock theSeries D Preferred Stock is convertible into.  The Series A Preferred Stock is not convertible, is entitledto elect a director, and is otherwise non-voting.

 

Atotal of 36,920 and 56,541 outstanding shares of Common Stock issued at a priceof $2.70 and $1.35 per share, respectively, are subject to repurchase by us atthe original issue price at our election.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risks**

 

Wedo not utilize financial instruments for trading purposes and hold noderivative financial instruments, which could expose us to significant marketrisk.  Our interest expense is sensitiveto changes in the general level of interest rates as our credit facility hasinterest rates based upon LIBOR or the prime rate, as discussed in the notes toConsolidated Financial Statements.

 

At March 31, 2003, we had$83.4 million in floating rate debt under the Credit Facility and otherlong-term debt.  The detrimental effecton our pre-tax earnings of a hypothetical 100 basis point increase in theaverage interest rate under the credit facility would have an impact ofapproximately $0.20 million for the three-months ended March 31,2003.  This sensitivity analysis doesnot consider any actions we might take to mitigate our exposure to such achange in the Credit Facility rate.  Thehypothetical change used in this analysis may be different from what actuallyoccurs in the future.  Our remainingsubordinated notes, convertible subordinated dent, long-term debt and capitallease obligations of $93.1 million are at fixed rates of interest.

 

**Item 4**. Controls and Procedures

 

(a)          Evaluationof disclosure controls and procedures.

 

The Company’s principalexecutive officer and its principal financial officer, based on theirevaluation of the Company’s disclosure controls and procedures (as defined inExchange Act Rules 13a -14 (c)) as of a date within 90 days prior to the filingof this Quarterly Report on Form 10-Q, have concluded that the Company’sdisclosure controls and procedures are adequate and effective for the purposesset forth in the definition in Exchange Act rules.

 

(b)         Changesin internal controls.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s internal controls subsequent to the date oftheir evaluation.

 

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**PART II – OTHERINFORMATION**

 

**Item 2.****           Changes in Securities and Use of Proceeds**

 

Thepayment of dividends is within the discretion of the Board of Directors;however, we intend to retain earnings from operations for use in the operationand expansion of our business and do not expect to pay cash dividends in theforeseeable future.  In addition, oursenior credit lender currently prohibits the payment of cash dividends.  Any future decision with respect todividends will depend on future earnings, operations, capital requirements andavailability, restrictions in future financing agreements and other businessand financial considerations.

 

**Item 5.  OtherInformation**

 

InterDent, Inc. common stock trades on the OTC Bulletin Board under thesymbol DENT.OB.

 

Wachovia Bank, N.A. is the Transfer Agent andRegistrar for the stock of InterDent, Inc. Shareholder matters, such as a transfer of shares, stock transferrequirements, missing stock certificates and changes of address, should bedirected 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-free800/829-8432

 

**Item 6.  Exhibits,Financial Statement Schedules and Reports on Form 8-K**

** **

**(a)  Exhibits**

 

4.1                                 AmendmentAgreement No. 11, effective as of April 30, 2003, to the Amended and RestatedCredit Agreement, dated as of June 15, 1999, by and among the Borrowers, theGuarantors, the financial institutions signatory thereto, as lenders, theAdministrative Agent and the Syndication Agent.

 

4.2                                 AmendmentAgreement No. 8, effective as of April 30, 2003, to the Amended and RestatedCredit Agreement, dated as of June 15, 1999, by and among the Borrowers, the Guarantors,the financial institutions signatory thereto, as lenders, the AdministrativeAgent and the Syndication Agent.

 

99.1                           Certificationof Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of2002.

 

99.2                           Certificationof Vice President, Finance & Accounting pursuant to Section 906 ofSarbanes-Oxley Act of 2002.

 

**(b)  Reports on Form 8-K**

 

No reports on Form8-K were filed in the three months ended March 31, 2003.

 

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**SIGNATURES**

** **

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
|   |         |   |   |   | **INTERDENT, INC**.                       |   |
|--------|--------------|--------|--------|--------|-------------------------------------------|--------|
|   |         |   |   |   | (Registrant)                              |   |
|   |         |   |   |   |
| Date:  | May 20, 2003 |   |   | By:    |    /s/ H. WAYNE POSEY           |   |
|   |         |   |   |   | H. Wayne Posey                            |
|   |         |   |   |   | Chief Executive  Officer                  |
|   |         |   |   |   |                                      |
|   |         |   |   |   |                                      |
|   |         |   |   | By:    |    /s/ ROBERT W. HILL           |   |
|   |         |   |   |   | Robert W. Hill                            |
|   |         |   |   |   | Vice President,  Finance & Accounting |
|        |              |        |        |        |                                           |        |  |

 

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**INTERDENT,INC.**

 

CERTIFICATIONPURSUANT TO

RULE 13A-14 OF THESECURITIES EXCHANGE ACT OF 1934,

AS ADOPTEDPURSUANT TO

SECTION 302 OF THESARBANES-OXLEY ACT OF 2002

 

**CERTIFICATION**

 

I, H. Wayne Posey,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of InterDent, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: May 20, 2003

 

 
|   |   /s/ H. WAYNE POSEY                             |   |
|--------|-------------------------------------------------------|--------|
|   | H. Wayne Posey                                        |
|   | **Chairman of the Board and**Chief  Executive Officer |

 

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**INTERDENT,INC.**

** **

CERTIFICATIONPURSUANT TO

RULE 13A-14 OF THESECURITIES EXCHANGE ACT OF 1934,

AS ADOPTEDPURSUANT TO

SECTION 302 OF THESARBANES-OXLEY ACT OF 2002

 

**CERTIFICATION**

 

I, Robert W. Hill,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of InterDent, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which could adverselyaffect the registrant’s ability to record, process, summarize and reportfinancial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: May 20, 2003

 
|   | /s/  ROBERT W. HILL                           |   |
|--------|-----------------------------------------------|--------|
|   | Robert  W. Hill                               |
|   | **Vice  President, Finance & Accounting** |

 

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