LAWSUIT—Dental-Services Outfits Battling Over Acquisition Deal

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El Segundo-based InterDent Inc. has fudged the books to avoid paying the full purchase price for dental-practice assets it bought last July, according to a lawsuit filed in Los Angeles Superior Court last week.

InterDent, which provides equipment and management services to dentists, bought the assets in question from Los Angeles-based Amerident Dental Corp., a similar dental-management company. Those assets were the equipment and management service contracts for 10 dental practices.

Amerident filed suit claiming the two-part sale to InterDent involved a down payment and subsequent payments based on the profitability of the practices. Its suit alleges that InterDent deliberately used accounting methods that dramatically reduced reported profits to cheat Amerident out of more than $10 million.

To avoid making significant “earn-out” payments, the defendant (InterDent) manipulated its books and records and modified business practices to claim the assets purchased had not met the threshold to trigger any later payments, the suit charges.

Amerident officials referred questions to attorney Louis “Skip” Miller, a partner in the Century City-based law firm of Christensen, Miler, Fink, Jacobs, Glaser, Weil & Shapiro.

Miller’s firm, known for its bare-knuckles style of litigating, also charged in the suit that InterDent officials had “looted” the former Amerident assets and engaged in “fraudulent business practices.”

Miller said, “This is not a complicated story. We are seeking to recover at least $10 million owed, based on contract. We will go to trial in six to nine months, and we will recover the money.”

InterDent’s response

Most InterDent officials were unavailable for comment last week, but released a prepared statement.

“InterDent filed a lawsuit against Amerident at the end of September. They feel they are the aggrieved party. The business (Amerident) was not as represented,” said Lillian Armstrong, an InterDent spokeswoman. “They will not comment further.”

At the heart of Amerident v. InterDent are charges relating to somewhat arcane accounting practices from Jan. 1 to July 31, 2000, the crucial period during which profits would be calculated to determine the “earn-out” to be paid by InterDent for 10 dental management practices that it purchased from Amerident. The suit claims that InterDent dramatically hiked the amount of accounts receivables considered bad debts, and thus uncollectable, reducing the calculated profit needed to determine “earn-out.”

One knowledgeable source said bad debts went from 3.5 percent to 8 percent of receivables in the six-month period.

Amerident also accuses InterDent of other, more mundane wrongdoing with the same intent: allowing “bundles of checks” to accumulate without being deposited, and deducting from earnings the salaries of “corporate staff” members.

One person close to the deal said there is a lesson in this saga for other business owners: Don’t base the total sale price of your company on future profits. Though a common enough sales strategy, it places powerful incentives on the buyers to minimize reported profits, and has caused more than one lawsuit in the past.

“They (InterDent) said they couldn’t get financing to buy the 10 practices, so in effect (Amerident) gave them financing,” said the knowledgeable source. “(Amerident) wouldn’t do that again.”

Recent dramas

The publicly held InterDent, founded in 1997, has been in the news recently for other reasons. Last November, management announced a plan to take the company private, but the deal cratered in April when Los Angeles-based leveraged-buyout shop Leonard Green & Partners yanked its financing.

InterDent stock took that news badly, falling from a high of $9.12 a share in September 1999 to $3.25 a share as of last week.

InterDent owns the hard assets and staffs the administrative side of 226 dental practices, collecting fees from about 750 dentists. Those fees and other revenues are projected to hit $300 million in 2000.

In the second quarter ended June 30, InterDent reported net income of $2.11 million (9 cents a share), virtually unchanged from the $2.13 million (9 cents a share) reported a year earlier. However, revenues grew to $71.4 million from $55 million for the same periods. (As of late last week, InterDent had not yet released third-quarter results.)

The InterDent story on Wall Street is that the company is in “industry roll-up” mode, acquiring other dental-management practices in the hope of gaining market heft, discounts on purchases and reduced overhead per revenue dollar.

The company suffered from a lack of capital in 1999, but in June of this year Los Angeles-based finance house Levine Leichtman Capital Partners forked over $36.5 million to InterDent but it came with a hefty price. Levine took back 2.75 million shares at $4 each, and a $25.5 million note due in 2005 that pays 12.5 percent interest, annually. Levine Leichtman also took warrants on 2.125 million shares at $6.84 a share, exercisable until 2010.0

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