U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Special financial report pursuant to Section 15(d)
of the Securities Exchange Act of 1934 For
the fiscal year ended December 31, 1996
Commission file number 333-13529
GENTLE DENTAL SERVICE CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 91-1577891
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
900 Washington Street, Suite 1100, Vancouver, WA 98660
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (360) 750-7975
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No X
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
---
Issuer's revenues for its most recent fiscal year: $10,711,507
Aggregate market value of Common Stock held by nonaffiliates of the registrant
at April 14, 1997: $9,687,000. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at April 14, 1997: 3,150,920.
Transitional Small Business Disclosure Format: Yes No X
--- ---
This Special Financial Report is filed pursuant to Rule 15d-2 under the
Securities Exchange Act of 1934 and only contains the registrant's financial
statements as of December 31, 1996 and 1995 and for the two years ended
December 31, 1996.
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of Gentle Dental Service Corporation
(formerly Mutual Health Systems, Inc.)
In our opinion, the accompanying balance sheet and the related statements of
operations, of redeemable common stock and nonredeemable shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Gentle Dental Service Corporation at December 31, 1995 and 1996, and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As disclosed in Note 10 to the financial statements, the Company has certain
related party transactions.
PRICE WATERHOUSE LLP
Portland, Oregon
February 28, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Balance Sheet
- ----------------------------------------------------------------------------------------------------------------
December 31,
1995 1996
-------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 688,518 $ 229,358
Accounts receivable, net (Note 1) 2,036,654 2,678,273
Receivables from affiliates and other receivables (Note 10) 711,862 1,223,041
Income taxes receivable (Note 7) 174,448 169,391
Supplies 286,000 362,500
Prepaid expenses and other current assets (Note 12) 176,256 708,054
------------- -------------
Total current assets 4,073,738 5,370,617
Property and equipment, net (Note 3) 3,654,101 4,163,730
Intangible assets, net (Note 4) 2,057,538 3,224,780
Other assets (Note 1) 428,317 68,039
------------- -------------
Total assets $ 10,213,694 $ 12,827,166
============= =============
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders' Equity
Current liabilities:
Accounts payable $ 270,909 $ 1,256,065
Accrued payroll and payroll related costs 431,199 364,317
Other accrued liabilities 463,437 476,701
Short-term borrowings (Note 5) 1,049,025 2,097,126
Current portion of long-term debt and capital lease obligations (Note 5) 473,370 916,577
------------- -------------
Total current liabilities 2,687,940 5,110,786
Deferred rent 82,446 87,680
Deferred income taxes (Note 7) 187,123 3,193
Long-term debt, less current portion (Note 5) 2,310,212 1,822,447
Capital lease obligations, less current portion (Note 5) 423,428 440,745
------------- -------------
Total liabilities 5,691,149 7,464,851
------------- -------------
Commitments and contingent liabilities (Notes 5, 8 and 11) Redeemable common
stock, no par value, 57,551 and 190,302 shares
issued and outstanding, respectively (Note 8) 710,694 2,199,415
------------- -------------
Nonredeemable shareholders' equity (Notes 8 and 12):
Preferred stock, 30,000,000 shares authorized, no shares issued
and outstanding - -
Common stock, no par value, 50,000,000 shares authorized, 1,366,145
and 1,351,579 shares issued and outstanding, respectively 2,795,005 2,888,228
Shareholder note receivable (40,000) -
Additional paid-in capital 152,195 445,914
Retained earnings (deficit) 904,651 (171,242)
------------- -------------
Total nonredeemable shareholders' equity 3,811,851 3,162,900
------------- -------------
Total liabilities, redeemable common stock and
nonredeemable shareholders' equity $ 10,213,694 $ 12,827,166
============= =============
The accompanying notes are an integral part of this statement.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Statement of Operations
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31,
1995 1996
-------------- -------------
<S> <C> <C>
Support services revenue from affiliates
(Notes 1 and 10) $ 9,781,077 $ 10,711,507
Branch costs 4,700,695 7,176,059
Operating expenses 4,207,739 4,162,609
------------- -------------
Operating income (loss) 872,643 (627,161)
------------- -------------
Nonoperating income (expense):
Interest expense (289,608) (742,185)
Other income (expense), net (92,702) 39,418
-------------- -------------
(382,310) (702,767)
------------- -------------
Income (loss) before income taxes 490,333 (1,329,928)
Provision (benefit) for income taxes (Note 7) 233,826 (345,139)
------------- -------------
Net income (loss) 256,507 (984,789)
Accretion of redeemable
common stock (Note 8) - (91,104)
------------- -------------
Net income (loss) attributable to common stock $ 256,507 $ (1,075,893)
============= =============
Net income (loss) per share of common stock $ .19 $ (.71)
============== ============
Weighted average number of shares outstanding 1,379,960 1,524,484
============== =============
The accompanying notes are an integral part of this statement.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity
Years Ended December 31, 1995 and 1996
- --------------------------------------------------------------------------------------------------------------------------------
Nonredeemable Shareholders' Equity
-----------------------------------------------------------
Redeemable
common stock Common stock
------------------- ----------------------
Shareholder Additional Retained
note paid-in earnings
Shares Amount Shares Amount receivable capital (deficit)
------ ---------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 - $ - 1,154,250 $ 533,400 $ - $ - $ 735,087
Issuance of stock pursuant to
Stock Incentive Plan - - 20,112 201,115 - - -
Common stock issued in connec-
tion with clinic acquisitions 57,551 710,694 28,456 387,003 - - -
Common stock issued in connec-
tion with private placement, net
of offering costs - - 169,327 1,633,687 - - -
Common stock issued for
promissory note from shareholder - - 4,000 40,000 (40,000) - -
Stock options granted to
nonemployees - - - - - 152,195 -
Repurchase of common stock - - (10,000) (200) - - -
Distributions to shareholders - - - - - - (86,943)
Net income - - - - - - 256,507
--------- ---------- ---------- ---------- ----------- ---------- ---------
Balance, December 31, 1995 57,551 710,694 1,366,145 2,795,005 (40,000) 152,195 904,651
Common stock issued in connec-
tion with clinic acquisitions 38,994 530,284 4,934 67,103 - - -
Common stock and warrants issued
in connection with private
placement, net of offering costs 100,000 957,357 - - - - -
Exercise of put rights (6,243) (90,024) - - - - -
Stock warrants issued related to
debt financing (Notes 5 and 8) - - - - - 8,778 -
Exercise of stock options - - 2,000 1,600 - - -
Stock options granted to
nonemployees - - - - - 51,963 -
Stock warrants issued related to
line of credit guarantees
(Notes 5 and 8) - - - - - 232,978 -
Accretion of put rights 91,104 (91,104)
Repurchase of common stock - - (24,000) (480) - - -
Common stock granted to
nonemployees - - 2,500 25,000 - - -
Proceeds from note receivable - - - - 40,000 - -
Net loss - - - - - - (984,789)
--------- ---------- ---------- ---------- ----------- ---------- ---------
Balance, December 31, 1996 190,302 $2,199,415 1,351,579 $2,888,228 $ - $ 445,914 $(171,242)
========= ========== ========== ========== =========== ========== =========
The accompanying notes are an integral part of this statement.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Statement of Cash Flows
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31,
1995 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 256,507 $ (984,789)
Adjustments to reconcile change in net cash used in
operating activities:
Depreciation and amortization 481,517 853,339
Loss on disposal of assets 86,187 63,379
Stock options granted to nonemployees 152,195 51,963
Stock issued for fees and compensation - 25,000
Amortization of warrants - 241,756
Deferred income taxes 71,470 (155,928)
Deferred rent - 5,234
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable, net 348,596 (528,182)
Receivables from affiliates and other receivables (2,476,343) (498,749)
Income taxes receivable (224,778) 5,057
Supplies (164,375) (49,000)
Prepaid expenses and other current assets (11,195) (557,481)
Other assets (78,625) 52,780
Accounts payable 87,896 965,471
Accrued liabilities 685,907 (77,123)
------------- -------------
Net cash used in operating activities (785,041) (587,273)
-------------- -------------
Cash flows from investing activities:
Purchase of property and equipment, excluding acquisitions (1,251,180) (748,357)
Cash paid for acquisitions, including other direct costs, net of
cash acquired (1,072,905) (666,870)
Dental clinic acquisition prepayments (309,130) -
------------- -------------
Net cash used in investing activities (2,633,215) (1,415,227)
------------- -------------
Cash flows from financing activities, excluding acquisitions:
Net proceeds from short-term borrowings 916,154 1,048,101
Proceeds from issuance of notes payable 2,703,511 465,548
Payments of notes payable (1,264,034) (602,197)
Payments of capital lease obligations (26,147) (276,565)
Proceeds from issuance of common stock 1,834,802 957,357
Proceeds from note receivable - 40,000
Exercise of put rights - (90,024)
Distributions to shareholders (86,943) -
Other (200) 1,120
------------- -------------
Net cash provided by financing activities 4,077,143 1,543,340
------------- -------------
Increase (decrease) in cash and cash equivalents 658,887 (459,160)
Cash and cash equivalents, beginning of year 29,631 688,518
------------- -------------
Cash and cash equivalents, end of year $ 688,518 $ 229,358
============= =============
The accompanying notes are an integral part of this statement.
</TABLE>
F-5
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Gentle Dental Service Corporation (the "Company"), incorporated on December
14, 1992, is a Washington corporation headquartered in Vancouver,
Washington. The Company, as part of a multi-specialty dental care delivery
network, provides support services to dental professional corporations in
Oregon and Washington. As of December 31, 1996, the Company provided
management support to two professional corporations under long-term support
services agreements: Gentle Dental of Oregon, P.C. and Tse, Saiget,
Watanabe & McClure, Inc., P.S., a.k.a., Gentle Dental of Washington, P.C.
(together, the "PCs"). Under the terms of the service agreements, the
Company, among other things, bills and collects patient receivables and
provides all administrative support services to the PCs in exchange for
support services fees (see Note 10).
The Company and the PCs are related through common ownership of certain
shareholders. As of December 31, 1996, there were no common Board of
Director members among the Company and the PCs. The Company and its
affiliates structure their business enterprises to comply with the state
regulatory mandates requiring dentistry practices to be owned and operated
by state-licensed dentists (see Note 10).
Revenues
Revenues consist primarily of support services fees charged to the PCs
based on an agreed-upon percentage of PC revenues under support services
agreements, net of provisions for contractual adjustments and doubtful
accounts. Such fees are recognized when earned.
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996
------------- -------------
PC dental revenue, net of provisions
for contractual adjustments and
<S> <C> <C>
doubtful accounts $ 16,028,535 $ 21,423,014
Less amounts retained by the PCs 6,247,458 10,711,507
------------- -------------
Support services revenue from affiliates $ 9,781,077 $ 10,711,507
============= =============
</TABLE>
Statement of cash flows
Cash equivalents consist of liquid investments with maturities at the date
of purchase of 90 days or less.
F-6
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996
------------- -------------
<S> <C> <C>
Interest paid $ 289,608 $ 489,178
Income taxes paid (received) 350,000 (159,266)
Supplemental schedule of noncash investing
and financing activities:
Capital lease obligations related to the leasing of
fixed assets 534,366 274,517
Issuance of common stock in exchange for
shareholder note 40,000 -
Accretion of put rights - 91,104
Acquisition of tangible assets from related parties:
Liabilities assumed or issued 2,092,928 -
Tangible assets acquired 2,092,928 -
Acquisition of clinics from unrelated parties:
Intangible assets 2,012,409 1,335,032
Liabilities assumed or issued 453,285 147,588
Common stock issued in connection
with acquisitions 1,097,697 597,387
Dental clinic acquisition prepayments - 309,130
Tangible assets acquired in connection
with acquisitions, excluding cash 611,478 385,943
</TABLE>
Accounts receivable and allowances for contractual adjustments and
doubtful accounts
Accounts receivable principally represent receivables from patients or
dental group insurance carriers for dental services provided by the related
PCs. The Company has recorded an allowance for contractual adjustments and
doubtful accounts of $782,055 and $186,654 at December 31, 1995 and 1996,
respectively. Contractual adjustments represent an estimate of the
difference between the amount billed by the Company and the amount which
the patient, third party payor or other is contractually obligated to pay
the Company. To date, such changes in estimated contractual adjustments
have not been significant.
Affiliate receivables
Affiliate receivables consist primarily of amounts owed to the Company from
the PCs to reimburse the Company for payment of the PCs' payroll and other
direct costs, net of amounts due to the PCs related to the acquisitions and
the PCs' share of revenues.
F-7
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
Supplies
Supplies consist primarily of operatory dental supplies stored at the
clinics. Supplies are stated at the lower of cost (first-in, first-out
basis) or market.
Prepaid expenses and other current assets
During 1995, the Company implemented a conversion plan for certain parts of
its information systems. As a result, in 1995, the Company recognized a
writedown of $86,187 on the valuation of the computer equipment and
reclassified the computer equipment as equipment held for resale which was
included in prepaid expenses and other current assets. At December 31,
1996, prepaid expenses and other current assets include $20,000 of computer
equipment held for resale, net of an additional write-off of $34,569
recognized in 1996.
Property and equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred and expenditures for additions
and betterments are capitalized. Depreciation of property and equipment is
calculated using the straight-line method over estimated useful lives which
range from 3 to 15 years.
Intangible assets
Intangible assets result primarily from the excess of cost over the fair
value of net tangible assets purchased in acquisitions. Such intangibles
relate primarily to noncompetition covenants and support services
agreements. Intangibles relating to support services agreements consist of
the costs of purchasing the rights to provide management support services
to dental practices over the initial noncancelable 40-year terms of the
related support services agreements. Under these agreements, the dental
groups have agreed to provide dental services on an exclusive basis only
through facilities provided by the Company. Pursuant to the terms of the
agreements, the Company is the exclusive administrator of all non-dental
aspects of the acquired dental practices, providing facilities, equipment,
support staffing, management support and other ancillary services. The
support services agreements are noncancelable except for performance
defaults.
Intangible assets are amortized on the straight-line method over their
estimated useful lives, 5 years for organizational costs, 25 years for
support services agreements and other acquired intangibles, and 40 years
for trademarks (see Note 4).
The Company reviews its asset balances for impairment at the end of each
quarter or more frequently when events or changes in circumstances indicate
that the carrying amount of intangible assets may not be recoverable. To
perform that review, the Company estimates the sum of expected future
undiscounted net cash flows from intangible assets. If the estimated net
cash flows are less than the
F-8
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
carrying amount of the intangible asset, the Company recognizes an
impairment loss in an amount necessary to write-down the intangible asset
to a fair value as determined from expected future discounted cash flows.
No write-down for impairment loss was recorded for the years ended December
31, 1995 and 1996.
Other assets
As of December 31, 1995, other assets primarily consisted of cash payments
and deferred acquisition costs incurred during the year related to dental
clinic acquisitions not consummated until the following period (see Note
2). As of December 31, 1996, such deferred costs are insignificant.
Income taxes
Prior to 1995, the Company elected to be treated as a Subchapter S
corporation under provisions of the Internal Revenue Code. As such, the
income or losses of the Company were attributable to its shareholders in
their individual tax returns. Effective January 1, 1995, the Company
terminated its Subchapter S corporation status and elected C corporation
status under the Internal Revenue Code for tax purposes, and for financial
reporting purposes adopted Statement of Accounting Standards No. 109,
"Accounting for Income Taxes." (See Note 7).
Accounting for impairment of long-lived assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
statement provides that impairments of long-lived assets (including
property and equipment and intangible assets) be measured and valued based
on the estimated future cash flows of the Company.
The Company adopted the statement in 1996; however, the adoption did not
have a significant impact on the Company's financial position or results of
operations.
Fair value of financial assets and liabilities
The Company estimates the fair value of its monetary assets and liabilities
based upon the existing interest rates related to such assets and
liabilities compared to current market rates of interest for instruments
with a similar nature and degree of risk. The Company estimates that the
carrying value of all of its monetary assets and liabilities approximates
fair value as of December 31, 1995 and 1996.
Accounting estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results may differ from these
estimates.
F-9
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 financial statement presentations. Such
reclassifications had no effect on the Company's previously reported
results of operations or financial position.
Net income (loss) per share
Net income (loss) per share is computed based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during the periods. Common stock equivalents consist of the number of
shares issuable upon exercise of the outstanding common stock warrants and
common stock options (using the treasury stock method). Common stock
equivalents are excluded from the computation if their effect is
anti-dilutive.
2. Acquisitions
On January 2, 1995, the Company purchased from the PCs the net accounts
receivable of the PCs totaling $2,092,928 in exchange for interest-only
promissory notes payable on December 31, 1995. The principal portion of the
promissory notes issued to the PCs by the Company was satisfied via
reductions to the Company's receivables from the PCs.
During 1995, the Company acquired substantially all of the assets of seven
dental practices in Washington and Oregon including cash, accounts
receivable, supplies and fixed assets, net of the assumption of certain
liabilities. The total purchase price of $2,345,774 for the seven acquired
clinics includes $982,400 paid in cash, $1,097,697 in redeemable and
nonredeemable common stock, and $174,872 in promissory notes. In addition,
the Company paid $90,805 in cash for closing costs which have been included
in the total purchase price.
The Company issued a total of 86,007 shares of stock in conjunction with
these acquisitions. 20,000 such shares were valued by management at $10.00
per share for one acquisition in January 1995 and 66,007 were valued at
$13.60 per share for the remaining acquisitions. These common stock values
reflect the estimated fair market value at the dates of the acquisitions.
Certain shares of the common stock issued are subject to "put rights" from
the shareholders as discussed in Note 8.
Outstanding promissory notes issued related to the acquisitions at December
31, 1995 totaled $119,871, consisting of $57,371, included in short-term
borrowings and subsequently paid in January 1996 and $62,500, included in
long-term debt and due in monthly instalments of principal and interest at
10.25% commencing in January 1996 and maturing in December 1998.
F-10
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. Acquisitions (Continued)
In 1996, the Company acquired substantially all of the assets of four
clinics in Oregon and Washington, including cash, accounts receivable,
supplies and fixed assets, net of the assumption of certain liabilities.
The total purchase price of $1,601,485 for the four acquired clinics
includes $943,890 in cash, $597,387 in redeemable and nonredeemable common
stock and a promissory note for $28,098. In addition, the Company paid for
closing costs of $32,110 which have been included in the total purchase
price.
The Company issued a total of 43,928 shares of stock in conjunction with
these acquisitions. Such shares were valued by management at $13.60 per
share. The common stock values reflect the estimated fair value on the
dates of the acquisitions. Certain shares of the common stock issued are
subject to "put rights" from the shareholders as discussed in Note 8.
The outstanding promissory note issued related to a 1996 acquisition,
included in long-term debt, is due in quarterly instalments of principal
and interest at 9.0% commencing on May 31, 1996 and maturing in July 1998.
The above acquisitions in 1995 and 1996 have been accounted for using the
purchase method of accounting. The excess of the total acquisition cost
over the fair value of the net tangible assets acquired representing the
estimated future value of the support services agreements is being
amortized over 25 years using the straight-line method (see Note 4). The
results of operations for these acquisitions have been included in the
financial statements of the Company since the dates of acquisitions.
The following unaudited pro forma information represents the results of
operations of the Company as if all of the acquisitions had occurred as of
January 1, 1995, after giving effect to amortization of the cost of
acquisition in excess of the fair value of net tangible assets acquired,
adjustments to reflect the difference in compensation between historical
amounts and amounts specified in the purchase agreements, increased
interest expense for notes issued related to the acquisitions and increased
income taxes:
Year ended
December 31,
1995
(Unaudited)
---------------
Support services revenue $ 11,983,208
===============
Net income $ 46,901
===============
Earnings per share $ .03
===============
The pro forma results for the year ended December 31, 1996 have not been
presented because the effect of 1996 acquisitions on the Company's
operations is not significant.
F-11
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. Acquisitions (Continued)
The unaudited pro forma information does not purport to be indicative of
the results which would actually have been obtained had the acquisitions
occurred as of January 1, 1995 or which may be obtained in the future.
<TABLE>
<CAPTION>
3. Property and Equipment
December 31,
1995 1996
------------- -------------
<S> <C> <C>
Dental equipment $ 2,318,951 $ 2,542,266
Computer equipment 481,867 830,334
Office equipment, furniture and fixtures 503,504 540,319
Vehicles 19,447 19,447
Leasehold improvements 761,906 1,313,055
------------- -------------
4,085,675 5,245,421
Less accumulated depreciation and amortization (431,574) (1,081,691)
------------- -------------
$ 3,654,101 $ 4,163,730
============= =============
</TABLE>
At December 31, 1995 and 1996, property and equipment include $553,362 and
$761,710, respectively, of equipment held under capital leases with related
accumulated amortization aggregating $55,709 and $194,081, respectively.
4. Intangible Assets
<TABLE>
<CAPTION>
Intangible assets consist of the following:
December 31,
1995 1996
------------- -------------
<S> <C> <C>
Support services agreements $ 2,012,409 $ 3,324,778
Trademarks 50,000 50,000
Organizational costs 70,391 70,391
------------- -------------
2,132,800 3,445,169
Less accumulated amortization (75,262) (220,389)
------------- -------------
$ 2,057,538 $ 3,224,780
============= =============
</TABLE>
F-12
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Borrowings
Short-term borrowings
The Company had a total of $2,097,126 outstanding at December 31, 1996
under two operating lines of credit with a bank secured by substantially
all the assets of the Company.
Line of credit No. 1 bears interest at prime plus 1% (9.25% at December 31,
1996) and the Company may borrow a maximum of $1,850,000, limited to a
borrowing base calculated as 75% of the Company's net eligible accounts
receivable. All unpaid principal and interest is due and payable October
31, 1997. The Company must pay a commitment fee of 1/2% per annum of the
average daily unused portion of the $1,850,000 available.
Line of credit No. 2 bears interest at prime plus 2.5% (10.75% at December
31, 1996) and the Company may borrow up to a maximum of $650,000. All
unpaid principal and interest was due and payable February 28, 1997.
In connection with a 1996 modification to line of credit No. 1 and the
issuance of line of credit No. 2, certain directors, officers and
shareholders personally guaranteed a total of $1,000,000 of the two
operating lines of credit. In exchange for the guarantees, the Company
issued 115,000 common stock warrants with an exercise price of $7.50 to
those individuals. In connection with line of credit No. 2, the Company
issued 4,333 common stock warrants with an exercise price of $7.50 to the
lender (see Note 8).
The Company had $991,654 outstanding at December 31, 1995 under an
operating line of credit secured by substantially all of the assets of the
Company. The credit line bore interest at prime plus 1/2% (9.25% at
December 31, 1995) and the Company could borrow a maximum of $1,500,000,
limited to a borrowing base calculated as 75% of the Company's net eligible
accounts receivable. The Company paid a commitment fee of 1/2% per annum of
the average daily unused portion of the $1,500,000 available. Additionally,
at December 31, 1995, the Company owed to an individual $57,371 related to
receivables purchased in acquiring a dental practice. These borrowings, as
well as any accrued and unpaid interest, were paid subsequent to December
31, 1995.
F-13
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. Borrowings (Continued)
December 31,
1995 1996
------------- -------------
<S> <C> <C>
Long-term debt
Note payable to bank due in monthly instalments of principal and
interest at prime plus 1.25% (9.5% at December 31, 1996),
collateralized by accounts receivable, inventory and equipment,
maturing August 1999 $ 937,500 $ 666,667
Notes payable to bank with interest-only payments for the
first 12 months at prime plus 1.5% (9.75% at December 31, 1996), due
in monthly instalments of principal and interest beginning in August
1996, maturing August 2000, secured by accounts receivable,
inventory and equipment 1,684,064 1,699,125
Note payable due in monthly instalments of principal and
interest at 9.99%, collateralized by a vehicle, maturing
June 2000 14,727 14,591
Unsecured note payable, due in monthly instalments of
principal and interest at 10.25% commencing on January 1,
1996, maturing December 1998 (Note 2) 62,500 44,529
Unsecured note payable, due in quarterly instalments of
principal and interest at 9.0% commencing on May 31, 1996,
maturing July 1998 (Note 2) - 25,425
Unsecured note payable, due in monthly instalments of
principal and interest at 10.47% commencing on June 30,
1996, maturing November 2003 - 139,903
------------- -------------
2,698,791 2,590,240
Less current portion 388,579 767,793
------------- -------------
$ 2,310,212 $ 1,822,447
============= =============
</TABLE>
Scheduled maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 767,793
1998 769,284
1999 653,373
2000 332,148
2001 22,988
Thereafter 44,654
-------------
$ 2,590,240
=============
</TABLE>
F-14
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Borrowings (Continued)
The credit line agreements and notes payable to bank include provisions for
maintaining certain financial covenants including debt service coverage
ratio, current ratio, debt to tangible net worth ratio, minimum tangible
net worth, and restrictions on payment of cash dividends. At December 31,
1995, the Company obtained a waiver of certain of these covenants. The
credit line agreement was revised during 1996 and the Company is in
compliance with these covenants at December 31, 1996. Subsequent to
December 31, 1996, the Company has fully repaid all amounts owed under its
credit line agreements and notes payable to the bank (see Note 12).
Capital lease obligations
The Company has entered into certain capital lease obligations related to
the acquisition of dental and computer equipment. The leases, which are
secured by the equipment, bear interest at rates ranging from 12% - 14% and
require monthly payments of principal and interest.
Future minimum payments under the Company's capital lease obligations at
December 31, 1996 are summarized as follows:
1997 $ 212,634
1998 206,928
1999 175,620
2000 126,495
2001 13,133
---------
734,810
Less portion representing interest 145,281
---------
589,529
Less current portion 148,784
---------
$ 440,745
=========
6. Profit Sharing Plan
The Company participates in a 401(k) profit sharing plan and trust covering
substantially all employees. Profit sharing contributions are made at the
discretion of management. No employer profit sharing contributions were
made for the years ended December 31, 1995 and 1996. The Company also
provides a non-discretionary matching 401(k) contribution equal to 3% of
participants' eligible compensation. The Company's 401(k) contributions
were $48,936 and $55,190, respectively, for the years ended December 31,
1995 and 1996.
F-15
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes
<TABLE>
<CAPTION>
The provision (benefit) for income taxes is as follows:
Year ended December 31,
1995 1996
------------- --------------
<S> <C> <C>
Current:
Federal $ 147,134 $ (174,711)
State 15,222 (14,500)
------------- -------------
162,356 (189,211)
------------- -------------
Deferred:
Federal 64,951 (143,161)
State 6,519 (12,767)
------------- -------------
71,470 (155,928)
------------- -------------
Total provision (benefit) $ 233,826 $ (345,139)
============= =============
</TABLE>
The provision for income taxes for the year ended December 31, 1995
includes the recognition of a cumulative net deferred tax liability of
$24,975 associated with the termination of the Company's Subchapter S
corporation status on January 1, 1995.
Deferred tax assets (liabilities) are comprised of the following
components:
<TABLE>
<CAPTION>
December 31,
1995 1996
------------- -------------
<S> <C> <C>
Property and equipment $ (140,983) $ (379,453)
Intangibles (5,642) (12,423)
Cash versus accrual reporting for tax purposes - long-term (40,498) (38,413)
Net operating loss carryforward - 418,144
Other - 8,952
------------- -------------
Net long-term deferred tax liability $ (187,123) $ (3,193)
============= =============
Cash versus accrual reporting for tax purposes - current $ (20,250) $ (29,645)
Accrued payroll related costs 75,156 56,549
------------- -------------
Net current deferred tax assets, included in prepaid and
other current assets $ 54,906 $ 26,904
============= =============
</TABLE>
F-16
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes (Continued)
<TABLE>
<CAPTION>
The effective tax rate differed from the U.S. statutory federal tax rate
due to the following:
Year ended December 31,
1995 1996
----------- -----------
<S> <C> <C>
Statutory federal rate 34.0% (34.0)%
State taxes, net of federal benefit 2.3 (3.2)
Non-deductible intangibles and other permanent differences 6.3 11.2
Other, primarily cumulative effect from the termination
of Subchapter S corporation status in 1995 5.1 -
----------- ----------
47.7% (26.0)%
=========== ==========
</TABLE>
8. Redeemable Common Stock and Nonredeemable Shareholders' Equity
Redeemable common stock
As part of the 1995 and 1996 acquisitions discussed in Note 2, the Company
granted "put rights" to certain shareholders that may require the Company
to redeem 96,545 shares of its common stock at a redemption price ranging
from $13.38 to $19.62 per share. If all shareholders with such "put rights"
exercise their options, the Company would be required to repurchase the
above shares of common stock for $1,408,554. The redemption periods began
April 1, 1996 and continue through January 4, 2003. If the shareholder does
not place a redemption request during the redemption period, the "put
right" will expire on the stated expiration date. "Put rights" for all but
20,000 shares terminate in the event of the Company successfully completing
a public offering at a price of at least $20.00 per share. During 1996, the
Company redeemed 6,243 shares of redeemable common stock for $90,024.
The shares of common stock subject to the "put rights" are reported on the
balance sheet as redeemable common stock. Such shares have been recorded at
their fair value as of the dates of acquisition, inclusive of accretion
during the year ended December 31, 1996. The Company records accretion on a
ratable basis over the redemption period of the respective stock. Such
accretion for the year ended December 31, 1996 was $91,104. Accretion in
prior years was insignificant.
F-17
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. Redeemable Common Stock and Nonredeemable Shareholders' Equity (Continued)
<TABLE>
<CAPTION>
Such common stock at December 31, 1996 is redeemable as follows:
Number Redemption Redemption
of shares amount price range
------------ ------------ -------------
<S> <C> <C> <C>
1997 6,615 $ 102,929 $ 15.56
1998 2,974 50,023 16.82
1999 2,754 50,013 13.38-18.16
2000 40,849 576,479 13.60-19.62
2001 29,681 438,056 13.60-18.80
Thereafter 7,429 101,030 13.60
------------ ------------
90,302 $ 1,318,530
============ ============
</TABLE>
Private placement of redeemable common stock and warrants
In May 1996, the Company completed a private placement offering ("the
offering") of 100,000 shares of the Company's common stock which include
warrants to purchase 100,000 additional shares of the Company's common
stock at an exercise price of $7.50 per share. Total proceeds from the
offering (net of offering costs of $42,643) were $957,357. The net proceeds
allocated to common stock aggregated $732,430. The stock warrants were
recorded at their estimated fair value of $224,927 and are entitled to
certain "piggyback" registration rights. The stock warrants expire on
December 14, 2001; no stock warrants have been exercised to date.
In connection with the private placement, the shareholder received certain
"put rights" which are exercisable after June 21, 2001 but no later than
June 21, 2003 if the Company has not completed a public offering of its
common stock by June 21, 2001 at a price of at least $22.00 per share and
net proceeds to the Company of at least $10,000,000. The per share price
applicable to the "put rights" is 20 times the Company's average adjusted
net income per share for the two most recent fiscal years preceding the
exercise of the rights. As of December 31, 1996, the Company has not
recorded any accretion related to the above "put rights."
Preferred stock
Preferred stock may be issued by the Board of Directors with preferences to
be determined at the time of issuance. Through December 31, 1996, none of
the 30,000,000 authorized shares of the Company's preferred stock has been
issued or is outstanding.
Shareholder note receivable
In 1995, the Company issued to a shareholder 4,000 shares of common stock
at $10.00 per share in exchange for a note from the shareholder. The note
bore interest at prime plus 0.5% (9.25% at December 31, 1995),
collateralized by the common stock, and was repaid on September 26, 1996.
F-18
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. Redeemable Common Stock and Nonredeemable Shareholders' Equity (Continued)
Stock warrants issued in conjunction with debt issuance
As discussed in Note 5, in May 1996 the Company issued warrants to purchase
4,333 shares of the Company's common stock at $7.50 per share to a lender.
The stock warrants were valued at $8,778 and have been recorded as debt
issuance costs and additional paid-in-capital. The estimated fair value of
the stock warrants was amortized over the six-month term of the line of
credit. As of December 31, 1996, the stock warrants have been fully
amortized. Such amortization expense has been included in interest expense
in the statement of operations. The stock warrants expire on May 31, 2001
and carry certain "piggyback" registration rights. The stock warrants have
not been exercised to date.
In addition, in May 1996, the Company issued to certain directors,
officers, and shareholders of the Company warrants to purchase 115,000
shares of the Company's common stock at $7.50 per share in consideration
for guaranteeing the Company's line-of-credit (see Note 5). The estimated
fair value of the stock warrants was $232,978 and amortized over the
six-month term of the line of credit. As of December 31, 1996, the stock
warrants have been fully amortized. Such amortization expense has been
included in interest expense in the statement of operations. All stock
warrants expire in May 2001 and no such stock warrants have been exercised
to date.
9. Stock Incentive Plan
The Board of Directors adopted a Stock Incentive Plan ("the Plan"), as
amended during 1996. The Plan provides for issuance of up to 1,000,000
shares of common stock in connection with various stock grants, awards and
sales granted under such plan to employees and nonemployees (primarily key
PC personnel). The Plan authorizes the grant of incentive stock options,
non-statutory stock options, stock appreciation rights or bonus rights;
award of stock bonuses; and/or sale of restricted stock. The exercise price
for incentive stock options may not be less than the fair market value of
the underlying shares on the date of grant. The Plan is administered by the
Company's Board of Directors. The Board has the authority to determine the
persons to whom awards will be made, the amounts, and other terms and
conditions of the awards. Shares issued under the Plan are generally
subject to a five-year vesting schedule from the date of grant and expire
ten years from the original grant date.
Stock options issued to nonemployees have been recorded at their estimated
fair market value and are being expensed over their respective vesting
lives of up to five years. Total compensation expense recorded for the
years ended December 31, 1995 and 1996 was $152,195 and $51,963,
respectively.
In addition to the stock options granted, the Plan issued an aggregate of
83,362 shares for $274,615 through stock bonuses and restricted stock sales
prior to December 31, 1996.
F-19
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Stock Incentive Plan (Continued)
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value based
method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost related to stock options
issued to employees under these plans using the method of accounting
prescribed by the Accounting Principles Board Opinion No. 25 ("AFB 25"),
"Accounting for Stock Issued to Employees." Entities electing to remain
with the accounting in APB 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during the years ended December
31, 1995 and 1996; using the minimum value pricing model as prescribed by
SFAS 123 and the following weighted average assumptions used for grants:
Risk free interest rate 6.5%
Expected dividend yield - %
Expected lives 7 years
Expected volatility N/A
Options were assumed to be exercised over the seven-year expected life for
the purpose of this valuation. Adjustments are made for options forfeited
prior to vesting. The total value of options granted was computed as the
following approximate amounts, which would be amortized on the
straight-line basis over the vesting period of the options:
Year ended December 31, 1995 $ 333,763
Year ended December 31, 1996 $ 301,480
If the Company had accounted for stock options issued to employees in
accordance with SFAS 123, the Company's net income attributable to common
stock and pro forma net income per share would have been reported as
follows:
<TABLE>
<CAPTION>
Net income (loss) attributable to common stock
Year ended December 31,
1995 1996
------------- --------------
<S> <C> <C>
As reported $ 256,507 $ (1,075,893)
Pro Forma 221,596 (1,155,300)
</TABLE>
F-20
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Stock Incentive Plan (Continued)
Statement of Financial Accounting Standards No. 123 (SFAS 123) (continued)
<TABLE>
<CAPTION>
Pro forma net income (loss) per common and common equivalent share
Year ended December 31,
1995 1996
------------- -------------
<S> <C> <C>
As reported $ 0.19 $ (0.71)
Pro Forma 0.16 (0.76)
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1995 and 1996 are not likely to be representative of the effects on
reported net income (loss) and net income (loss) per common equivalent
share for future years, because options vest over several years and
additional awards generally are made each year.
<TABLE>
<CAPTION>
The following summary presents the options granted and outstanding as of
December 31, 1996:
Weighted
Number of Shares average
------------------------------------------------- exercise
Employee Nonemployee Total price
-------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1994 110,000 - 110,000 $ 5.76
Granted 136,000 72,750 208,750 10.23
Exercised - - - -
Canceled (31,000) (5,000) (36,000) 6.56
-------------- --------------- --------------
Outstanding, December 31, 1995 215,000 67,750 282,750 8.96
Granted 134,250 12,000 146,250 10.80
Exercised (2,000) - (2,000) .80
Canceled (96,549) (5,833) (102,382) 8.19
-------------- --------------- --------------
Outstanding, December 31, 1996 250,701 73,917 324,618 8.57
============= ============== =============
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at December 31, 1996:
<TABLE>
<CAPTION>
Exercise Number of options Weighted average
price Outstanding Exercisable contractual life remaining
------------- ----------- ----------- --------------------------
<S> <C> <C> <C>
$ 0.02 15,250 15,250 8.57 years
6.00 22,000 11,500 7.82
10.00 218,918 94,450 9.08
13.60 68,450 18,890 8.92
</TABLE>
F-21
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. Transactions With Affiliates
Major customers
The Company currently derives substantially all of its revenue from the
PCs, with which it has support services agreements. As described in Note 1,
the Company and the PCs are related through common ownership of certain
shareholders.
Support services agreements
The Company provides management support services to the PCs under support
services agreements with forty-year terms. The Company is currently earning
revenues under these agreements based on specified percentages of net
dental practice patient revenues as defined in the agreements. Such
percentages are negotiated with the PCs and have been developed and revised
as necessary based on the Company's services and operating needs. Under the
support services agreements for 1995, support services revenue is based
upon 61% of net PC revenue.
Effective January 1, 1996 the support services agreements were amended such
that support services revenue is based upon the following percentage of net
PC revenue:
<TABLE>
<CAPTION>
Washington Oregon
---------- ------
<S> <C> <C>
1996 50% 50%
1997 51% 53%
1998 52% 54%
1999 53% 55%
2000 54% 55%
2001, and thereafter 55% 55%
</TABLE>
Office lease
The Company leases office space for $4,126 per month from Gentle Dental of
Washington, PC (see Note 1) on a month-to-month basis. Lease expense
aggregated approximately $49,512 for the years ended December 31, 1995 and
1996.
Receivables from affiliates
The Company transacts various other business with the PCs, including
short-term operating advances.
11. Commitments and Contingent Liabilities
Effective January 1, 1995, the Company assumed operating leases for dental
service locations. These leases range in term from 5 to 10 years with
options to renew several of the leases. The Company has entered into
operating lease agreements for office space and parking. Rent expense,
including month-to-month rentals, for the years ended December 31, 1995
and 1996 was $837,487 and $1,255,709, respectively.
F-22
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
11. Commitments and Contingent Liabilities (Continued)
Management expects to renew or replace leases that expire. Following is a
summary of scheduled future minimum lease payments, including assumed
leases:
1997 $ 1,103,754
1998 1,121,472
1999 1,052,203
2000 857,728
2001 668,281
Thereafter 1,861,192
-------------
$ 6,664,630
=============
12. Subsequent Events
During 1996, the Company filed an SB-2 registration statement with the
Securities and Exchange Commission ("SEC") for an initial public offering
(IPO). On February 12, 1997 the SEC approved and accepted the Company's
amended SB-2 registration statement. Effective February 13, 1997, the
Company is openly traded on the NASDAQ SmallCap market.
The offering included 1,500,000 shares of the Company's common stock. Net
proceeds from the offering were $6,937,500, inclusive of $562,500 in
underwriting fees and direct offering costs. As of December 31, 1996,
offering costs of approximately $457,000 had been incurred and were
included within prepaid expenses and other current assets in the
accompanying balance sheet.
Concurrent with the receipt of the net proceeds, the Company utilized
$4,426,246 to repay all outstanding principal under the Company's various
bank loan arrangements (see Note 5). No significant gain or loss resulted
in connection with the debt extinguishment.
On September 19, 1996, the Board of Directors granted certain officers of
the Company the authority to reprice employee stock options to the IPO
price at the date this price was determinable. All other terms with respect
to such options were maintained. On February 12, 1997 (the IPO date), the
Company repriced all employee stock options outstanding to the IPO price of
$5 per share (except for certain stock options held by the Company's chief
executive officer, which were repriced at 110% of the IPO price). The
Company did not recognize compensation expense related to the repricing of
the employee stock options as the adjusted exercise price was not below the
Company's quoted fair value as of the repricing date.
F-23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 16, 1997.
GENTLE DENTAL SERVICE CORPORATION
By: DANY Y. TSE
-------------------------------------
Dany Y. Tse
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934,, this report has
been signed by the following persons on behalf of the registrant and in the
capacities indicated on April 16, 1997.
Signature Title
--------- -----
Principal Executive Officer:
DANY Y. TSE
- ---------------------------------- President, Chief Executive
Dany Y. Tse, DMD Officer, and Director
Principal Financial and
Accounting Officer:
L. THEODORE VAN EERDEN
- ---------------------------------- Chief Financial Officer and Corporate
L. Theodore Van Eerden Secretary
*RICHARD A. ARMSTRONG
- ---------------------------------- Director
Richard A. Armstrong
*KENNETH D. HOOTEN
- ---------------------------------- Director
Kenneth D. Hooten
*DANIEL P. HUNT
- ---------------------------------- Director
Daniel P. Hunt
*JERALD L. WILLBUR
- ---------------------------------- Director
Jerald L. Willbur, Ed.D.
- ---------------------------------- Director
Craig W. Wong, DMD
- ---------------------------------- Director
Paul H. Keckley
*GERALD R. AARON
- ---------------------------------- Director
Gerald R. Aaron
*By: L. THEODORE VAN EERDEN
-----------------------------------
L. Theodore Van Eerden
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
24.1 Powers of Attorney
27.1 Financial Data Schedule
EXHIBIT 24.1
POWERS OF ATTORNEY
------------------
(Special Financial Report on Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or
director of Gentle Dental Service Corporation, does hereby constitute and
appoint Dany Y. Tse and L. Theodore Van Eerden and each of them his true and
lawful attorney and agent to execute in his name (whether on behalf of Gentle
Dental Service Corporation or as an officer or director of said Company) the
Company's Special Financial Report on Form 10-K for year ended December 31, 1996
and any amendment thereto and to file the same with the Securities and Exchange
Commission; and the undersigned does hereby ratify and confirm all that said
attorney and agent shall do or cause to be done by virtue hereof.
DATED: April 16, 1997
DANY Y. TSE L. THEODORE VAN EERDEN
- ---------------------------------- ----------------------------------
Dany Y. Tse L. Theodore Van Eerden
RICHARD A. ARMSTRONG KENNETH D. HOOTEN
- ---------------------------------- ----------------------------------
Richard A. Armstrong Kenneth D. Hooten
DANIEL P. HUNT JERALD L. WILLBUR
- ---------------------------------- ----------------------------------
Daniel P. Hunt Jerald L. Willbur
- ---------------------------------- ----------------------------------
Craig W. Wong Paul H. Keckley
GERALD R. AARON
- ----------------------------------
Gerald R. Aaron
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENTLE
DENTAL SERVICE CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 229,358
<SECURITIES> 0
<RECEIVABLES> 2,678,273
<ALLOWANCES> 186,654
<INVENTORY> 0
<CURRENT-ASSETS> 5,370,617
<PP&E> 4,163,730
<DEPRECIATION> 1,081,691
<TOTAL-ASSETS> 12,827,166
<CURRENT-LIABILITIES> 5,110,786
<BONDS> 0
2,199,415
0
<COMMON> 2,888,228
<OTHER-SE> 274,672
<TOTAL-LIABILITY-AND-EQUITY> 12,827,166
<SALES> 10,711,507
<TOTAL-REVENUES> 10,711,507
<CGS> 0
<TOTAL-COSTS> 11,338,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 742,185
<INCOME-PRETAX> (1,329,928)
<INCOME-TAX> (345,139)
<INCOME-CONTINUING> (984,789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (984,789)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> 0
</TABLE>
