U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 333-13529
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GENTLE DENTAL SERVICE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Washington 91-1577891
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Washington Street, Suite 1100, Vancouver, WA 98660
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(Address of principal executive offices)
Issuer's telephone number (360) 750-7975
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Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 X No
--- ---
As of May 12, 1997, 3,150,920 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -------
Gentle Dental Service Corporation
<TABLE>
<CAPTION>
Balance Sheets
(In thousands, except share data)
- -------------------------------------------------------------------------------------------------------
December 31, March 31,
1996 1997
----------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 229 $ 777
Accounts receivable, net 2,678 2,788
Receivables from affiliates and other receivables 1,223 1,300
Income taxes receivable 170 170
Supplies 363 382
Prepaid expenses and other current assets 708 330
---------- --------
Total current assets 5,371 5,747
Property and equipment, net 4,163 4,634
Intangible assets, net 3,225 4,820
Other assets 68 50
---------- --------
Total assets $ 12,827 $ 15,251
========== ========
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders' Equity
Current liabilities:
Accounts payable $ 1,256 $ 470
Accrued payroll and payroll related costs 364 470
Other accrued liabilities 477 558
Short-term borrowings 2,097 -
Current portion of long-term debt and capital lease obligations 917 294
---------- --------
Total current liabilities 5,111 1,792
Deferred rent 88 104
Deferred income taxes 3 37
Long-term debt, less current portion 1,822 562
Capital lease obligations, less current portion 441 593
---------- --------
Total liabilities 7,465 3,088
---------- --------
Commitments and contingent liabilities
Redeemable common stock, no par value, 190,302 shares
issued and outstanding 2,199 2,209
---------- --------
Nonredeemable shareholders' equity
Preferred stock, 30,000,000 shares authorized, no shares issued
and outstanding - -
Common stock, no par value, 50,000,000 shares authorized, 1,351,579
and 2,960,618 shares issued and outstanding, respectively 2,888 9,642
Additional paid-in capital 446 460
Retained earnings (deficit) (171) (148)
---------- --------
Total nonredeemable shareholders' equity 3,163 9,954
---------- --------
Total liabilities, redeemable common stock and
nonredeemable shareholders' equity $ 12,827 $ 15,251
========== ========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Statements of Operations
(Unaudited, in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
1996 1997
----------- -----------
<S> <C> <C>
Support services revenue $ 2,480 $ 2,945
Branch costs 1,751 1,856
Operating expenses 901 924
----------- -----------
Operating income (loss) (172) 165
----------- -----------
Nonoperating income (expense):
Interest expense (106) (98)
Other income 17 -
----------- -----------
Nonoperating expense, net (89) (98)
----------- -----------
Income (loss) before income taxes (261) 67
Provision (benefit) for income taxes (62) 34
----------- -----------
Net income (loss) (199) 33
Accretion of redeemable common stock (55) (10)
----------- -----------
Net income (loss) attributable to common stock $ (254) $ 23
=========== ===========
Net income (loss) per share of common stock $ (.18) $ .01
=========== ===========
Weighted average number of shares outstanding 1,384,484 2,326,426
=========== ===========
</TABLE>
3
<PAGE>
Gentle Dental Service Corporation
<TABLE>
<CAPTION>
Statements of Cash Flows
(Unaudited, in thousands)
- -------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (199) $ 33
Adjustments to reconcile change in net cash used in
operating activities:
Depreciation and amortization 177 205
Loss on disposal of assets - 5
Stock options granted to nonemployees 5 14
Deferred income taxes (66) 34
Deferred rent 8 16
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable, net (270) 360
Receivables from affiliates and other receivables 256 (77)
Supplies (143) (19)
Prepaid expenses and other current assets (80) (79)
Other assets 24 18
Accounts payable 204 (786)
Accrued liabilities (88) 73
----------- -----------
Net cash used in operating activities (172) (203)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment, excluding acquisitions (156) (504)
Cash paid for acquisitions, including other direct costs, net of
cash acquired (388) (973)
----------- -----------
Net cash used in investing activities (544) (1,477)
----------- -----------
Cash flows from financing activities, excluding acquisitions:
Net proceeds (payments) on short-term borrowings 388 (2,097)
Proceeds from issuance of notes payable 170 -
Payments of notes payable (92) (2,379)
Payments of capital lease obligations (19) (31)
Proceeds from issuance of common stock - 7,500
Common stock issuance costs - (765)
----------- -----------
Net cash provided by financing activities 447 2,228
----------- -----------
Increase (decrease) in cash and cash equivalents (269) 548
Cash and cash equivalents, beginning of period 689 229
----------- -----------
Cash and cash equivalents, end of period $ 420 $ 777
=========== ===========
</TABLE>
4
<PAGE>
Gentle Dental Service Corporation
Notes to Unaudited Financial Statements
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1. Organization and 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
California, Oregon and Washington. During the period January 1, 1997
through March 31, 1997 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"). On
March 31, 1997 the Company entered into a support services agreement with
Arena Dental Corporation, a California Professional Corporation (also, a
"PC"). 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.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price
per share in the Offering was $5.00, resulting in gross offering proceeds
of $7,500,000. Net of underwriters' discount and total offering expenses
the Company received approximately $6,205,000 in proceeds from the
Offering. The net proceeds from the Offering have been used primarily to
repay indebtedness and for acquisitions and working capital. As of March
31, 1997, approximately $660,000 of the net proceeds were held in a
temporary investment account. The effects of the Offering and related
transactions have been included in the accompanying financial statements as
of March 31, 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". In accordance with this pronouncement, the
Company will adopt the new standard for periods ending after December 15,
1997. Management does not expect the adoption of this pronouncement to have
a significant effect on reported earnings per share information.
The accompanying unaudited interim financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and note disclosures
normally included in annual financial statements have been condensed or
omitted pursuant to those rules and regulations. In the opinion of
management, all adjustments, consisting only of normal, recurring
adjustments considered necessary for a fair presentation, have been
included. Although management believes that the disclosures made are
adequate to insure that the information presented is not misleading, it is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual
report for the fiscal year ended December 31, 1996. The results for the
three months ended March 31, 1997 are not necessarily indicative of the
results of operations for the entire year.
5
<PAGE>
Gentle Dental Service Corporation
Notes to Unaudited Financial Statements
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2. 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>
Three Months Ended March 31,
1996 1997
----------- -----------
(In thousands)
<S> <C> <C>
PC dental revenue, net of provisions
for contractual adjustments and
doubtful accounts $ 4,960 $ 5,569
Less amounts retained by the PCs (2,480) (2,672)
Retail sales - 48
----------- -----------
Support services revenue $ 2,480 $ 2,945
========== ===========
</TABLE>
3. Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1997
----------- -----------
(In thousands)
<S> <C> <C>
Interest paid $ 53 $ 95
Income taxes paid - -
Supplemental schedule of noncash investing
and financing activities:
Capital lease obligations related to the leasing of
fixed assets 153 -
Accretion of put rights 55 10
Acquisition of clinics from unrelated parties:
Intangible assets 948 1,633
Liabilities assumed or issued 42 989
Common stock issued in connection
with acquisitions 538 75
Dental clinic acquisition prepayments 309 -
Tangible assets acquired in connection
with acquisitions, excluding cash 329 608
</TABLE>
6
<PAGE>
Gentle Dental Service Corporation
Notes Unaudited to Financial Statements
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4. Acquisitions
During the first quarter of 1997 the Company acquired certain operating
assets of the following dental practices:
Dental Practice Effective Date Location
--------------- -------------- --------
Shoreline March 19, 1997 Seattle, WA
Blue Oak March 31, 1997 Sacramento, CA
The accompanying financial statements include the results of operations
from the acquisitions from the dates of their respective acquisitions. The
acquisitions were accounted for as taxable purchases under which the
Company's depreciable basis in the acquired assets was "stepped-up" to the
aggregate price paid for the assets. The aggregate purchase price paid for
acquisitions during the period January 1, 1997 through March 31, 1997 was
approximately $2,121,000 which included $966,000 in cash, 109,039 shares of
common stock (valued at $475,000), $432,000 in promissory notes, and the
assumption of long-term liabilities of $248,000.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- and Results of Operations
Overview
The Company provides facilities, equipment, staffing, management support
and other ancillary services to the PCs that employ the dental services
providers of the Gentle Dental Network. The Company intends to rapidly expand
the Gentle Dental Network through acquisitions in both its existing markets as
well as new geographic markets. The PCs are exclusively in control of all
aspects of the practice of dentistry and the delivery of dental services.
The Company's revenues consist of fees received for services provided under
three Support Services Agreements between the Company and the PCs (the "Support
Services Agreements"). The Company's support services revenue ("Support Services
Revenue") is equal to a percentage of the net revenue of the PCs ("Net PC
Revenue"). Net PC Revenue equals the gross billings of the PCs less provisions
for contractual discounts and doubtful accounts.
During the first quarter of 1997, the Company acquired one dental practice
in the Seattle, Washington metropolitan area and one dental practice in the
Sacramento, California metropolitan area.
In connection with the acquisition of dental practices, the Company
capitalizes a portion of the purchase price as intangible assets relating to
noncompetition covenants and the cost of purchasing the right to provide
management support services to the acquired practices under the Support Services
Agreements. These intangible assets are amortized on a straight-line basis over
25 years. The resulting amortization expense reduces net income, but not cash
flow, and the size of this expense will increase as the Company completes more
acquisitions.
Results of Operations
The following table shows the derivation of the Company's revenues from the
net revenues of the PCs for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1997
----------- -----------
(Unaudited, in thousands)
<S> <C> <C>
PC dental revenue, net of provisions
for contractual adjustments and
doubtful accounts $ 4,960 $ 5,569
Less amounts retained by the PCs (2,480) (2,672)
Retail sales - 48
----------- -----------
Support services revenue $ 2,480 $ 2,945
=========== ===========
</TABLE>
8
<PAGE>
Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended
March 31, 1996
Revenue. Net PC Revenue increased 12.3% from $5.0 million for the three
months ended March 31, 1996 to $5.6 million for the three months ended March 31,
1997. Revenues increased 11% for branch offices in operation during both
periods. Additional growth was attributed to one practice acquisition during the
period of April 1, 1996 to January 1, 1997.
Support Services Revenue increased 18.8% from $2.5 million for the three
months ended March 31, 1996 to $2.9 million for the three months ended March 31,
1997. This higher rate of growth compared with the growth of Net PC Revenue was
primarily the result of the increase in the percentage of Net PC Revenue payable
under the Support Services Agreements from 50% to 51% and 50% to 53% for the
Washington and Oregon PCs, respectively. In addition 1.9% of the Support
Services Revenue or 10.3% of the growth was attributed to retail sales of
Sonicare Plus Sonic toothbrushes.
Branch Costs. Branch costs include all staff compensation and related
payroll costs at the dental facilities, other than dentists, hygienists, and
dental assistants, and all dental supplies, facilities, equipment depreciation,
and general branch administrative expense. Branch costs increased 6.0% from $1.8
million for the three months ended March 31, 1996 to $1.9 million for the three
months ended March 31, 1997. Branch costs as a percentage of Net PC Revenue
decreased from 35.3% to 33.3% for the three months ended March 31, 1996 and
1997, respectively. This decrease is primarily attributed to a reduction in
laboratory service and dental supply costs.
Operating Expenses. The Company's operating expenses increased 2.6% from
$901,000 for the three months ended March 31, 1996 to $924,000 for the three
months ended March 31, 1997. Operating expenses as a percentage of Net PC
Revenue decreased from 18.2% to 16.6% for the three months ended March 31, 1996
and 1997, respectively. This decrease in operating expenses as a percentage of
Net PC Revenue is consistent with the Company's strategy to increase the growth
rate of revenue at a rate higher than the growth rate in operating expenses.
Nonoperating Income (Expense). Nonoperating expense, net increased from
$89,000 for the three months ended March 31, 1996 to $98,000 for the three
months ended March 31, 1997. This increase is attributed to a decrease in other
income of $17,000 offset by a decrease in interest expense of $8,000.
Provision (Benefit) for Income Taxes. For the three months ended March 31,
1996 the Company recognized a tax benefit resulting from its taxable loss for
the period. Because the Company has in the past made some practice acquisitions
under a tax-free merger structure, the amortization of intangible assets from
those acquisitions reduces earnings but is not deductible for tax purposes.
Accordingly, for the three months ended March 31, 1997, the effective tax rate
was 50%, which is higher than the applicable statutory tax rate.
9
<PAGE>
Liquidity and Capital Resources
At March 31, 1997, the Company's cash and cash equivalents were $777,000
and working capital was $3.6 million. Net cash used in operating and investing
activities was $716,000 and $1.7 million for the three month periods ending
March 31, 1996 and 1997, respectively. Net cash provided by financing activities
was $2.2 million and $447,000 for the periods ending March 31, 1996 and 1997,
respectively.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price per
share in the Offering was $5.00, resulting in gross offering proceeds of
$7,500,000. Net of underwriters' discounts and total offering expenses the
Company received approximately $6,205,000 in proceeds from the Offering. The net
proceeds from the Offering have been used primarily to repay indebtedness and
for acquisitions and working capital. As of March 31, 1997, approximately
$660,000 of the net proceeds were held in a temporary investment account.
The Company's current credit facility with its principal bank provides
access to up to $1.85 million. No amount was outstanding as of March 31, 1997.
This facility carries an interest rate of prime plus 1.0% and matures October
31, 1997. The Company is currently in negotiations for a significant increase in
its borrowing capacity. Although the Company's financial position has improved
subsequent to its initial public offering in February 1997, there can be no
assurance as to the credit terms and amount the Company will be able to secure.
The Company believes that its existing cash balances, amounts available
under the credit facility and cash from operations will be sufficient to fund
its operations for at least the next 12 months. However, to execute its long
term business strategy, the Company will require substantial additional funding
to acquire new practices and to expand and maintain practices within the Gentle
Dental Network. The Company will seek to obtain needed funds through additional
long-term or short-term borrowing arrangements or through the public or private
issuance of additional debt or equity securities. There can be no assurance that
any such financing will be available to the Company or will be available on
terms acceptable to the Company.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------
On June 26, 1996, Donald E. Janoff, D.D.S., a former employee of Gentle
Dental of Oregon, P.C. filed a complaint in the circuit court of the state of
Oregon for the county of Multnomah against Gentle Dental, P.C. for breach of
contract. The complaint alleged that Gentle Dental, P.C. breached Dr. Janoff's
employment contract by wrongfully terminating the contract and sought damages of
$375,000. On April 25, 1997, the court entered a summary judgment against Dr.
Janoff on all claims. Dr. Janoff has until May 27, 1997 to appeal.
Item 2. Changes in Securities
- -------
On March 31, 1997, the Company issued 109,039 shares of Common Stock to
Blue Oak Dental Group as part of the purchase price for the acquisition of
substantially all of the assets of Blue Oak Dental Group, as described in the
Form 8-K referred to below. The sale of the stock was exempt from registration
under Section 4(2) of the Securities Act of 1933 because the purchaser and each
of the four partners of the purchaser, either alone or together with their legal
and other advisors, had the knowledge and experience in business and financial
matters to evaluate an investment in the Company, received information about the
Company and made appropriate investment representations.
Item 6. Exhibits and Reports on Form 8-K
- -------
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
On April 14, 1997, the Company filed a Current Report on Form 8-K
to report under Item 2 the acquisition on March 31, 1997 of
substantially all of the assets of Blue Oak Dental Group. No
financial statements were included in the report.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GENTLE DENTAL SERVICE CORPORATION
(Registrant)
Date: May 15, 1997 By: L. THEODORE VAN EERDEN
------------ -------------------------------------
L. Theodore Van Eerden
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENTLE
DENTAL SERVICE CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 777
<SECURITIES> 0
<RECEIVABLES> 2,788
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,747
<PP&E> 4,634
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,251
<CURRENT-LIABILITIES> 1,792
<BONDS> 0
2,209
0
<COMMON> 9,642
<OTHER-SE> 312
<TOTAL-LIABILITY-AND-EQUITY> 15,251
<SALES> 2,945
<TOTAL-REVENUES> 2,945
<CGS> 0
<TOTAL-COSTS> 2,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 67
<INCOME-TAX> 34
<INCOME-CONTINUING> 33
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
</TABLE>
