SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 31, 1998
-------------
GENTLE DENTAL SERVICE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 000-23673 91-1577891
- ------------------------------- ----------- -------------------
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
222 North Sepulveda Boulevard, Suite 740, El Segundo, California 90245
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On July 31, 1998, Gentle Dental Service Corporation (the "Company")
completed the acquisition of all of the stock of Dedicated Dental Systems, Inc.
("Dedicated Dental"), a Bakersfield, California company which owns and operates
11 staff model dental offices pursuant to a license issued by the California
Department of Corporations under the California Knox- Keene Health Care Service
Plan Act of 1975. The stock was purchased from Arthur G. Kaiser, D.D.S., and
Robert J. Newman. The Company also completed the acquisition of the
nonprofessional assets of related dental practices operating at four locations
in southern California. Specifically, the Company acquired pursuant to the terms
of an asset purchase agreement the non-professional assets of California Dental
Practice Management Company and Mark Thomas, D.D.S., relating to two dental
practices operating in Bakersfield and Wasco, California, respectively. Pursuant
to the terms of a second asset purchase agreement, the Company acquired the
non-professional assets of California Dental Practice Management Company and
Clarence Au, D.D.S., relating to another dental practice operating in
Bakersfield. Lastly, pursuant to the terms of a third asset purchase agreement,
the Company acquired from Arthur G. Kaiser, D.D.S., the non-professional assets
of a dental practice operating in Indio, California.
The aggregate purchase price paid at closing on July 31, 1998 consisted of
$16,431,000 in cash and 705,101 shares of Company Common Stock valued at
$5,769,000. In addition, the Company has agreed to make cash earnout payments in
connection with the acquisition of the stock of Dedicated Dental if certain
EBITDA targets are exceeded for Dedicated Dental and the related dental
practices in the first two years following the closing, with an additional cash
earnout payment potentially payable for the third year following the closing,
unless the sum of the earnout payments already paid exceeds $2.7 million. The
Company has also agreed to make cash earnout payments as set forth in two of the
asset purchase agreements based on the EBITDA of the applicable related dental
practices for the first two years following the closing. Of the total amount of
cash paid at closing, $7,291,000 was obtained from the Company's existing cash
balances, and $9,140,000 was borrowed under the Company's existing credit
facility with Imperial Bank.
Pursuant to the agreement with Dedicated Dental, Arthur G. Kaiser became a
director of the Company effective as of the completion of the acquisition.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Audited Balance Sheets of Dedicated Dental as of December 31, 1996 and
1997, and related audited Statements of Income and Retained Earnings
and Cash Flows of Dedicated Dental for the years ended December 31,
1996 and 1997. Included as pages F-1 to F-12 of this Form 8-K/A
Amendment No. 1.
2
<PAGE>
Unaudited Balance Sheets of Dedicated Dental as of June 30, 1998, and
related unaudited Statements of Income and Retained Earnings and Cash
Flows of Dedicated Dental for the six-month periods ended June 30,
1997 and 1998. Included as pages F-13 to F-17 of this Form 8-K/A
Amendment No. 1.
Audited Combined Balance Sheets of California Dental Practice
Management Company and Related Dental Offices as of December 31, 1996
and 1997, and related audited Combined Statements of Operations,
Changes in Capital and Cash Flows of California Dental Practice
Management Company and Related Dental Offices for the years ended
December 31, 1996 and 1997. Included as pages F-18 to F-29 of this
Form 8-K/A Amendment No. 1.
Unaudited Combined Balance Sheets of California Dental Practice
Management Company and Related Dental Offices as of June 30, 1998, and
related unaudited Combined Statements of Operations and Cash Flows of
California Dental Practice Management Company and Related Dental
Offices for the six-month periods ended June 30, 1997 and 1998.
Included as pages F-30 to F-34 of this Form 8- K/A Amendment No. 1.
(b) Pro forma financial information. Pro forma Balance Sheet as of June
30, 1998 and pro forma Statements of Operations for the year ended
December 31, 1997 and the six-month period ended June 30, 1998.
Included as pages F-35 to F-39 of this Form 8-K/A Amendment No. 1.
(c) Exhibits.
2.1 Merger Agreement, dated as of September 21, 1997, between the
Company, Gentle Dental Merger Corporation, a wholly-owned
subsidiary of the Company, Dedicated Dental Systems, Inc., a
California corporation, Arthur G. Kaiser, D.D.S., and Robert J.
Newman, incorporated by reference to the Company's Report on Form
10-QSB, Accession No. 97-000656.
2.2 Asset Purchase Agreement, dated as of September 21, 1997, between
the Company, California Dental Practice Management Company, a
California general partnership, Arthur G. Kaiser, D.D.S., Robert
J. Newman and Mark Thomas, D.D.S., incorporated by reference to
the Company's Report on Form 10-QSB, Accession No. 97-000656.
2.3 Asset Purchase Agreement, dated as of September 21, 1997, between
the Company, California Dental Practice Management Company, a
California general partnership, Arthur G. Kaiser, D.D.S., Robert
J. Newman and Clarence Au, D.D.S., incorporated by reference to
the Company's Report on Form 10-QSB, Accession No. 97-000656.
3
<PAGE>
2.4 Asset Purchase Agreement, dated as of September 21, 1997, between
the Company and Arthur G. Kaiser, D.D.S., incorporated by
reference to the Company's Report on Form 10-QSB, Accession No.
97-000656.
2.5 Amendment dated February 28, 1998, to that certain Merger
Agreement, dated September 21, 1997, between and among the
Company, Gentle Dental Merger Corporation, a California
corporation, Dedicated Dental Systems, Inc., a California
corporation, Arthur G. Kaiser and Robert J. Newman, incorporated
by reference to Company's Report on Form 10- KSB, Accession No.
98-000274.
2.6 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between and among the
Company, California Dental Practice Management Company, a
California general partnership, Arthur G. Kaiser, D.D.S., Robert
J. Newman and Mark Thomas, D.D.S., incorporated by reference to
the Company's Report on Form 10-KSB, Accession No. 98-000274.
2.7 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between the Company,
California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman
and Clarence Au, D.D.S., incorporated by reference to the
Company's report on Form 10-KSB, Accession No. 98-000274.
2.8 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, by and between the Company
and Arthur G. Kaiser, D.D.S., incorporated by reference to the
Company's report on Form 10-KSB, Accession No. 98-000274.
2.9 Second Amendment dated July 31, 1998, to that certain Merger
Agreement, dated September 21, 1997, by and between the Company,
Gentle Dental Merger Corporation, a California corporation,
Dedicated Dental Systems, Inc., a California corporation, Arthur
G. Kaiser, D.D.S., and Robert J. Newman. (Included with original
Form 8-K filed by the Company on August 14, 1998.)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: October 13, 1998
GENTLE DENTAL SERVICE CORPORATION
By NORMAN R. HUFFAKER
--------------------------------------
Norman R. Huffaker,
Chief Financial Officer
5
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
Dedicated Dental Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Dedicated Dental Systems, Inc. at December
31, 1997, and the results of its operations and its cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above. The financial statements of Dedicated Dental Systems, Inc. for the year
ended December 31, 1996 were audited by other independent accountants whose
report dated April 25, 1997 expressed an unqualified opinion on those
statements.
As disclosed in Note 6 to the financial statements, the Company has certain
related party transactions.
As disclosed in Note 5 to the financial statements, the Company's shareholders
entered into a definitive stock purchase agreement during September 1997 to sell
all of the Company's outstanding shares of common stock to Gentle Dental Service
Corporation, a publicly-traded Washington corporation. The agreement was amended
as of February 28, 1998. Such stock purchase agreement has not been consummated
to date.
PRICE WATERHOUSE LLP
Portland, Oregon
February 6, 1998, except for Note 5
which is as of February 28, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Dedicated Dental Systems, Inc.
We have audited the accompanying balance sheet of Dedicated Dental Systems,
Inc. as of December 31, 1996, and the related statements of income and retained
earnings, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dedicated Dental Systems,
Inc. at December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Los Angeles, California
April 25, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
Dedicated Dental Systems, Inc.
Balance Sheet
December 31, 1996 and 1997
- -------------------------------------------------------------------------------------------------------------------------
1996 1997
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 371,974 $ 734,663
Receivables, net 644,357 938,752
Prepaid expenses and other current assets 80,062 71,437
----------- -----------
Total current assets 1,096,393 1,744,852
Equipment and leasehold improvements, net (Note 3) 836,299 1,048,917
Intangibles and other assets 43,504 98,839
Certificate of deposit - restricted (Note 1) 50,000 50,000
----------- -----------
Total assets $ 2,026,196 $ 2,942,608
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 129,649 $ 170,465
Accrued expenses 230,427 252,919
Unearned premium revenue (Note 1) 247,469 200,587
Current maturities of long-term debt 187,403 305,148
----------- -----------
Total current liabilities 794,948 929,119
----------- -----------
Long-term debt, less current maturities (Note 4) 149,564 586,082
----------- -----------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock, no par value:
500,000 shares authorized: 100,100 issued and outstanding 104,903 104,903
Retained earnings 1,661,333 1,322,504
----------- -----------
1,766,236 1,427,407
Receivable from related party (Note 6) (684,552) -
----------- -----------
Total shareholders' equity 1,081,684 1,427,407
----------- -----------
Total liabilities and shareholders' equity $ 2,026,196 $ 2,942,608
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Dedicated Dental Systems, Inc.
Statement of Income and Retained Earnings
Years Ended December 31, 1996 and 1997
- -------------------------------------------------------------------------------------------------------------------------
1996 1997
<S> <C> <C>
Revenue:
Fee for service $ 6,703,555 $ 9,982,056
Premiums 2,101,208 3,047,370
Other 58,642 137,391
----------- -----------
Total operating revenue 8,863,405 13,166,817
----------- -----------
Expenses:
Practice clinical salaries and benefits 2,974,562 4,760,541
Practice non-clinical salaries and benefits 678,379 750,600
Dental supplies and lab expense 879,097 1,329,292
Practice occupancy expense 319,701 518,170
Practice - selling, general and administrative expenses 1,055,269 1,312,050
Corporate - selling, general and administrative expenses 1,469,323 2,168,740
Depreciation and amortization 122,814 239,883
----------- -----------
Total operating expenses 7,499,145 11,079,276
----------- -----------
Operating income 1,364,260 2,087,541
Interest income 14,266 30,199
Interest expense (7,800) (69,815)
----------- -----------
Income before provision for state franchise taxes 1,370,726 2,047,925
Provision for state franchise taxes 20,560 30,719
----------- -----------
Net income 1,350,166 2,017,206
Retained earnings at beginning of period 715,282 1,661,333
Distributions to shareholders (404,115) (2,356,035)
----------- -----------
Retained earnings at end of period $ 1,661,333 $ 1,322,504
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Dedicated Dental Systems, Inc.
Statement of Cash Flows
Years Ended December 31, 1996 and 1997
- -------------------------------------------------------------------------------------------------------------------------
1996 1997
<S> <C> <C>
Operating activities:
Net income $ 1,350,166 $ 2,017,206
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 122,814 239,883
Changes in assets and liabilities, net of amounts purchased
in acquisitions:
Receivables (191,693) (294,395)
Prepaid expenses and other assets (2,137) 3,805
Accounts payable 72,885 40,816
Accrued expenses and unearned premium revenue 127,324 (24,390)
----------- -----------
Net cash provided by operating activities 1,479,359 1,982,925
----------- -----------
Investing activities:
Purchase of equipment and leasehold improvements, net of amounts
purchased in acquisitions (378,865) (300,516)
Cash paid for acquisitions (60,000) (300,000)
----------- -----------
Net cash used in investing activities (438,865) (600,516)
----------- -----------
Financing activities:
Proceeds from notes payable - 879,500
Principal payments on notes payable (148,549) (227,737)
(Increase) decrease in receivable from related party (228,184) 228,184
Cash distributions to shareholders (313,000) (1,899,667)
----------- -----------
Net cash used in financing activities (689,733) (1,019,720)
----------- -----------
Net increase in cash and cash equivalents 350,761 362,689
Cash and cash equivalents at beginning of period 21,213 371,974
----------- -----------
Cash and cash equivalents at end of period $ 371,974 $ 734,663
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-5
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization
Dedicated Dental Systems, Inc. (the "Company") was formed in 1985 as a
California S-corporation licensed as a health maintenance organization
("HMO") under the Knox-Keene Health Care Service Plan Act (the "Knox-Keene
Act"). The Company delivers managed dental care services through its dental
practice offices to enrolled individuals, subscriber groups, individuals
covered by the State of California Denti-Cal program, and individuals
covered under fee for service plans. All of the Company's operations are in
and around Bakersfield, California.
Business and regulatory environment
The Company is licensed by the Department of Corporations of the State of
California (the "DOC"). The DOC requires the Company to maintain a minimum
tangible net equity balance. At December 31, 1997, the minimum balance was
calculated as approximately $865,778. In addition, the Commissioner of
Corporations requires the Company to maintain a deposit of $50,000 pursuant
to the Knox-Keene Act. The deposit is comprised of a certificate of deposit
held by a trustee and is included in certificate of deposit - restricted in
the accompanying balance sheet. Interest earned on the funds accrues to the
Company and is not restricted as to use.
Statement of cash flows
The Company considers short-term investments which are highly-liquid, are
readily converted into cash, and have original maturities of less than
three months to be cash equivalents for purposes of cash flows. During
1996, the Company made non-cash capital contributions of land and a
building of $91,115 to a related party. During 1997, the Company issued
$456,368 in dividends which were used to offset the receivable from related
party. For the years ended December 31, 1996 and 1997, the Company paid
interest of $7,800 and $64,670, respectively, and paid state franchise
taxes of $12,161 and $39,560, respectively.
Concentrations of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of premiums receivable.
Concentrations of credit risk with respect to receivables are limited due
to the large number of individuals and employer groups comprising the
Company's customer base.
Fair value of financial instruments
The Company's balance sheet includes the following financial instruments:
cash and cash equivalents, receivables, accounts payable, and long-term
obligations. The Company considers the carrying amounts of current assets
and liabilities in the financial statements to approximate the fair value
for these financial instruments because of the relatively short period of
time between origination of the instruments and their expected realization.
The Company believes the carrying value of all the long-term obligations
approximates the fair value of such obligations.
F-6
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
Equipment and leasehold improvements
Equipment and leasehold improvements are stated at cost; replacements and
major improvements are capitalized, while repairs and maintenance are
charged to expense as incurred. Upon sale or retirement of equipment and
leasehold improvements, the cost and related accumulated depreciation and
amortization are eliminated from the accounts. Any resulting gains and
losses are included in the determination of net income. Equipment is
depreciated using the straight-line method for financial reporting purposes
over five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the useful life or the term of the
lease.
Other assets
Other assets consist primarily of capitalized loan fees incurred upon
issuing debt.
Intangibles
Intangibles represent the unamortized excess of the cost of acquiring
dental practices over the fair values of such dental practices' net
tangible assets at the dates of acquisition. Such intangibles are amortized
on a straight-line basis over 30 years.
Income taxes
The Company operates under Subchapter S of the Internal Revenue Code, and
consequently, is not subject to federal income taxes. The shareholders
include the Company's income in their own income for federal income tax
purposes. For California franchise tax purposes, the Company is subject to
taxes at a rate of 1.5 percent of taxable income.
Shareholders' equity
In February 1996, the Company's Board of Directors approved an amendment to
the Company's Certificate of Incorporation increasing the number of
authorized shares of common stock from 1,000 to 500,000. In May 1996, the
Company issued an additional 100,000 shares to its two shareholders.
Accounting for impairment of long-lived assets and for long-lived assets to
be disposed of The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." In accordance with SFAS No.
121, long-lived assets are reviewed for events or changes in circumstances
which indicate that their carrying value may not be recoverable. The
Company has determined that no long-lived assets are impaired at December
31, 1997.
Revenue recognition and health care services
Prepaid dental care premiums from enrolled groups and individuals are
reported as revenue in the month in which enrollees are entitled to receive
dental care. Premiums received prior to such period are recorded as
unearned premium revenue. Fee for services and other revenues consist of
professional fees and are reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered.
F-7
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
Medical malpractice liability insurance
The Company maintains claims-made basis professional liability insurance
coverage of $1,000,000 per incident and $1,000,000 in the aggregate on an
annual basis. Claims-made coverage covers only those claims reported during
the policy period. The Company expects to renew its existing policies and
to be able to continue to obtain coverage in future years.
Use of estimates in preparation of financial statements
The preparation of 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 reporting period. Actual results could differ from these
estimates. Principal areas requiring the use of estimates include
determination of allowances for doubtful accounts receivable, dental claims
and accruals, professional and general liabilities, and certain other
reserves.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform with financial statement presentation for the year
ended December 31, 1997. These reclassifications have no effect on
previously reported results of operations or shareholders' equity.
2. Acquisitions
On November 1, 1996, the Company purchased a dental practice, including
equipment and leasehold improvements, supplies and accounts receivable. The
total purchase price was $60,000, including $25,000 which was allocated to
intangibles. The acquisition was accounted for as a purchase transaction.
On November 15, 1996, the Company purchased a dental practice in which
related parties held "profit" ownership interests. The Purchase included
equipment and leasehold improvements, supplies, and accounts receivable.
The total purchase price was $325,000, including $10,000 which was
allocated to intangibles. The acquisition was financed through the issuance
of a note payable to seller. The acquisition was accounted for as a
purchase transaction.
On March 1, 1997, the Company purchased a dental practice in which related
parties held "profit" ownership interests. The purchase included equipment
and leasehold improvements, supplies and accounts receivable for $400,000,
of which $50,000 was allocated to intangibles. The purchase price included
payment of $200,000 at closing, $50,000 due on April 15, 1997, $50,000 due
on June 1, 1997, and $100,000 due on January 1, 1998. Interest on the
unpaid balance is payable at 6 percent per annum. The acquisition was
accounted for as a purchase transaction.
F-8
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
2. Acquisitions (Continued)
The following unaudited pro forma information represents the results of the
Company as if all of the acquisitions had occurred at the beginning of each
period presented, after giving effect to amortization of intangibles
acquired, increased interest expense for notes issued related to the
acquisitions and increased state income taxes:
1996 1997
(unaudited) (unaudited)
------------ ------------
Operating revenue $ 10,557,488 $ 13,243,984
============ ============
Net income $ 1,669,224 $ 2,012,658
============ ============
3. Equipment and Leasehold Improvements
The following table summarizes the components of equipment and leasehold
improvements at December 31, 1996 and 1997:
December 31,
1996 1997
------------ ------------
Equipment $ 947,145 $ 1,282,220
Leasehold improvements 227,711 510,740
Construction in progress 170,235 -
------------ ------------
1,345,091 1,792,960
Less accumulated depreciation and
Amortization (508,792) (744,043)
------------ ------------
$ 836,299 $ 1,048,917
============ ============
F-9
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
4. Long-Term Debt
Long-term debt consists of the following:
December 31,
1996 1997
------------ ------------
Note payable to seller (see Note 2),
principal and Interest payments of $5,000
due monthly through July 1, 2000,
principal and interest payments of $75,000
due January 1, 1997 and April 1, 1997,
Interest at 8.5% $ 321,211 $ 137,491
Note payable to bank, principal and
interest payments of $376 due monthly
through December 1, 2000, interest at 5.9% 15,756 12,072
Note payable to seller (see Note 2), due
January 1, 1998, interest at 6% - 100,000
Note payable to bank, principal and interest
payments of $9,374 due monthly through
January 15, 2002, interest at 9.25% - 326,667
Note payable to bank, principal and interest
payments of $8,505 due monthly through
June 15, 2002, interest at 9.5% - 315,000
------------ ------------
336,967 891,230
Less current maturities (187,403) (305,148)
------------ ------------
$ 149,564 $ 586,082
============ ============
Maturities of long-term debt at December 31, 1997 are summarized as
follows:
1998 $ 305,148
1999 208,826
2000 190,916
2001 150,000
2002 36,340
----------
$ 891,230
==========
F-10
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
5. Commitments and Contingencies
The Company leases office space and equipment for its corporate and dental
practice offices under various noncancelable operating leases. See Note 6
for related party leases. Future minimum lease payments due to unrelated
parties are summarized as follows:
1998 $ 135,788
1999 105,648
2000 97,318
2001 60,456
2002 18,476
Thereafter 46,000
----------
$ 463,686
==========
Rental expense totaled $112,400 and $156,759 for the years ended December
31, 1996 and 1997, respectively.
In September 1997, the Company signed a definitive stock purchase agreement
pursuant to which all of its outstanding shares of common stock will be
acquired by Gentle Dental Service Corporation, a publicly-traded Washington
Corporation. This sale is part of a larger transaction entered into by the
Company's shareholders in which both the Company and California Dental
Practice Management Company ("DPM") and certain related dental offices will
be sold for consideration of approximately $22,200,000, paid partially in
cash and partially in stock. Additional purchase price in cash may be paid
if certain future operating performance targets are met. The acquisition
will be accounted for as a purchase transaction and is pending DOC
approval. The accompanying financial statements do not reflect any effects
of this transaction.
6. Related Party Transactions
DPM, an entity owned by the shareholders of the Company, provides
accounting, human resource and dental office operations services to the
Company for $8,000 per month under a management agreement ("Management
Agreement"). The agreement was amended effective September 1, 1996 and the
monthly allocation was reduced to $5,600 per month. The amended agreement
expires December 31, 2001.
The Company paid certain operating expenses of DPM from 1994 through April
1997 aggregating $760,613. During 1997, DPM repaid the receivable through
cash payments of $304,245 and dividends of $456,368. During 1996, the
receivable from related party relating to this transaction was included in
the balance sheet as a reduction of shareholders' equity.
During 1997, the Company paid $351,000 in captitation payments to DPM
related to dental care services provided to enrollees of its insured
groups.
F-11
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
6. Related Party Transactions (continued)
The Company leases the following dental practice offices from DPM:
Clinic Location/California
------------------------------ -------------------
Mountain View Family Dentistry Arvin
Rosedale Dental Practice Bakersfield
California Dental Center Bakersfield
San Dimas Orthodontic Center Bakersfield
Delano Family Dentistry Delano
Lake Isabella Family Dentistry Lake Isabella
The leases require aggregate monthly payments of up to $20,500 and expire
at various dates through February 2007. Rental expense, aggregating
$174,500 and $236,840 for the years ended December 31, 1996 and 1997,
respectively, is included in dental care expenses.
Future minimum lease payments under lease agreements with DPM and the
shareholders at December 31, 1997 are summarized as follows:
1998 $ 246,000
1999 213,000
2000 210,000
2001 210,000
2002 210,000
Thereafter 504,500
----------
$1,593,500
==========
F-12
<PAGE>
<TABLE>
<CAPTION>
Dedicated Dental Systems, Inc.
Balance Sheet - Unaudited
June 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
December 31, June 30, 1998
1997 (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 734,663 $ 495,011
Receivables, net 938,752 941,208
Prepaid expenses and other current assets 71,437 47,529
----------- -----------
Total current assets 1,744,852 1,483,748
Equipment and leasehold improvements, net 1,048,917 931,290
Intangibles and other assets 98,839 96,899
Certificate of deposit - restricted 50,000 50,000
----------- -----------
Total assets $ 2,942,608 $ 2,561,937
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 170,465 $ 206,664
Accrued expenses 252,919 318,771
Unearned premium revenue 200,587 235,909
Current maturities of long-term debt 305,148 205,112
----------- -----------
Total current liabilities 929,119 966,456
----------- -----------
Long-term debt, less current maturities 586,082 485,011
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value:
500,000 shares authorized: 100,100 issued and outstanding 104,903 $ 104,903
Retained earnings 1,322,504 1,005,567
----------- -----------
Total shareholders' equity 1,427,407 1,110,470
----------- -----------
Total liabilities and shareholders' equity $ 2,942,608 $ 2,561,937
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
Dedicated Dental Systems, Inc.
Statement of Income and Retained Earnings - Unaudited
For the Six Months Ended June 30, 1997 and 1998
- -------------------------------------------------------------------------------------------------------------------------
June 30, 1997 June 30, 1998
<S> <C> <C>
Revenue:
Fee for service $ 4,959,392 $ 5,933,991
Premiums 1,428,254 1,690,721
Other 32,411 24,501
----------- -----------
Total operating revenue 6,420,057 7,649,213
----------- -----------
Expenses:
Practice clinical salaries and benefits 2,608,814 3,029,087
Practice non-clinical salaries and benefits 488,487 575,039
Dental supplies and lab expense 667,731 711,261
Practice occupancy expense 222,535 253,629
Practice - selling, general and administrative expenses 599,899 604,711
Corporate - selling, general and administrative expenses 1,010,401 997,579
Depreciation and amortization 106,571 134,011
----------- -----------
Total operating expenses 5,704,438 6,305,317
----------- -----------
Operating income 715,619 1,343,896
Interest income 11,744 16,879
Interest expense (25,587) (34,829)
----------- -----------
Income before provision for state franchise taxes 701,776 1,325,946
Provision for state franchise taxes 8,800 16,812
----------- -----------
Net income 692,976 1,309,134
Retained earnings at beginning of period 1,661,333 1,322,504
Distributions to shareholders (596,018) (1,626,071)
----------- -----------
Retained earnings at end of period $ 1,758,291 $ 1,005,567
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Dedicated Dental Systems, Inc.
Statement of Cash Flows - Unaudited
For the Six Months Ended June 30, 1997 and 1998
- -------------------------------------------------------------------------------------------------------------------------
June 30, 1997 June 30, 1998
<S> <C> <C>
Operating activities:
Net income $ 692,976 $ 1,309,134
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 106,571 134,011
Changes in assets and liabilities, net of amounts purchased
in acquisitions:
Receivables (216,799) (2,456)
Prepaid expenses and other assets 8,853 23,908
Accounts payable 97,752 36,199
Accrued expenses and unearned premium revenue 16,075 101,174
----------- -----------
Net cash provided by operating activities 705,428 1,601,970
----------- -----------
Investing activities:
Proceeds from sale of equipment ---- 92,145
Purchase of equipment and leasehold improvements, net of amounts
purchased in acquisitions (147,665) (6,589)
Cash paid for acquisitions (300,000) (100,000)
----------- -----------
Net cash used in investing activities (447,665) (14,444)
----------- -----------
Financing activities:
Proceeds from notes payable 750,006 ----
Principal payments on notes payable (99,399) (201,107)
(Increase) decrease in receivable from related party (21,837) ----
Cash distributions to shareholders (596,018) (1,626,071)
----------- -----------
Net cash used in financing activities 32,752 (1,827,178)
----------- -----------
Net increase (decrease) in cash and cash equivalents 290,515 (239,652)
Cash and cash equivalents at beginning of period 371,974 734,663
----------- -----------
Cash and cash equivalents at end of period $ 662,489 $ 495,011
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-15
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements - Unaudited
June 30, 1997 and 1998
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization
Dedicated Dental Systems, Inc. (the "Company") was formed in 1985 as a
California S-corporation licensed as a health maintenance organization
("HMO") under the Knox-Keene Health Care Service Plan Act (the "Knox-Keene
Act"). The Company delivers managed dental care services through its dental
practice offices to enrolled individuals, subscriber groups, individuals
covered by the State of California Denti-Cal program, and individuals
covered under fee for service plans. All of the Company's operations are in
and around Bakersfield, California.
Business and regulatory environment
The Company is licensed by the Department of Corporations of the State of
California (the "DOC"). The DOC requires the Company to maintain a minimum
tangible net equity balance. At June 30, 1998, the minimum balance was
calculated as approximately $884,000. In addition, the Commissioner of
Corporations requires the Company to maintain a deposit of $50,000 pursuant
to the Knox-Keene Act. The deposit is comprised of a certificate of deposit
held by a trustee and is included in certificate of deposit - restricted in
the accompanying balance sheet. Interest earned on the funds accrues to the
Company and is not restricted as to use.
Interim Reporting
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 footnote disclosures
normally included in complete 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 financial
statements for the years ended December 31, 1996 and 1997. The results for
the six months ended June 30, 1997 and 1998 are not necessarily indicative
of the results of operations for the entire year.
Use of estimates in preparation of financial statements
The preparation of 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 reporting period. Actual results could differ from these
estimates. Principal areas requiring the use of estimates include
determination of allowances for doubtful accounts receivable, dental claims
and accruals, professional and general liabilities, and certain other
reserves.
2. Acquisitions
On March 1, 1997, the Company purchased a dental practice in which related
parties held "profit" ownership interests. The purchase included equipment
and leasehold improvements, supplies and accounts receivable for $400,000,
of which $50,000 was allocated to intangibles. The purchase price included
payment of $200,000 at closing, $50,000 due on April 15, 1997, $50,000 due
on June 1,
F-16
<PAGE>
Dedicated Dental Systems, Inc.
Notes to Financial Statements - Unaudited
June 30, 1997 and 1998
- --------------------------------------------------------------------------------
2. Acquisitions (Continued)
1997, and $100,000 due on January 1, 1998. Interest on the unpaid balance
is payable at 6 percent per annum. The acquisition was accounted for as a
purchase transaction.
3. Commitments and Contingencies
The Company leases office space and equipment for its corporate and dental
practice offices under various noncancelable operating leases.
In September 1997, the Company signed a definitive stock purchase agreement
pursuant to which all of its outstanding shares of common stock will be
acquired by Gentle Dental Service Corporation, a publicly-traded Washington
Corporation. This sale is part of a larger transaction entered into by the
Company's shareholders in which both the Company and California Dental
Practice Management Company ("DPM") and certain related dental offices will
be sold for consideration of approximately $22,200,000, paid partially in
cash and partially in stock. Additional purchase price in cash may be paid
if certain future operating performance targets are met. The acquisition
was accounted for as a purchase transaction and was completed on July 31,
1998. The accompanying financial statements do not reflect any effects of
this transaction.
F-17
<PAGE>
Report of Independent Accountants
To the Partners of
California Dental Practice Management Company
and Related Dental Offices
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, of changes in capital and of cash flows present
fairly, in all material respects, the financial position of California Dental
Practice Management Company and Related Dental Offices ("the Company") at
December 31, 1996 and 1997 and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the management
of California Dental Practice Management Company and Related Dental Offices; 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 4 to the financial statements, California Dental Practice
Management Company and Related Dental Offices have certain related party
transactions.
As disclosed in Note 5 to the financial statements, California Dental Practice
Management Company and Related Dental Offices during September 1997 have signed
definitive agreements to sell most of their operating assets, except land and
buildings, to Gentle Dental Service Corporation, a publicly-traded Washington
Corporation. The agreements were amended as of February 28, 1998. Such sales
agreements have not been consummated to date.
PRICE WATERHOUSE LLP
Portland, Oregon
February 6, 1998, except for Note 5
which is as of February 28, 1998
F-18
<PAGE>
<TABLE>
<CAPTION>
California Dental Practice Management Company and
Related Dental Offices
Balance Sheet
December 31, 1996 and 1997
- -------------------------------------------------------------------------------------------------------------------------
1996 1997
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 51,939 $ 24,701
Account receivable, net (Note 1) 281,665 253,216
Supplies 20,990 -
Prepaid expenses and other current assets (Note 1) 15,604 8,188
----------- -----------
Total current assets 370,198 286,105
Property and equipment, net (Note 2) 2,058,867 1,905,916
Other assets (Note 1) 5,121 2,060
----------- -----------
Total assets $ 2,434,186 $ 2,194,081
=========== ===========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 125,162 $ 76,123
Accrued liabilities 60,121 48,542
Due to affiliates (Note 4) 658,365 -
Unearned rental income (Note 4) 16,358 -
Current portion of long-term debt and capital lease
obligations (Note 3) 142,421 389,082
----------- -----------
Total current liabilities 1,002,427 513,747
Long-term debt, less current portion (Note 3) 855,082 836,188
----------- -----------
Total liabilities 1,857,509 1,349,935
Commitments and contingent liabilities (Note 5)
Capital 576,677 844,146
----------- -----------
Total liabilities and partners' capital $ 2,434,186 $ 2,194,081
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
California Dental Practice Management Company and
Related Dental Offices
Statement of Operations
Years Ended December 31, 1996 and 1997
- -------------------------------------------------------------------------------------------------------------------------
1996 1997
<S> <C> <C>
Dental practice revenue $ 6,347,066 $ 4,793,675
Management services revenue from affiliates 163,187 166,631
----------- -----------
6,510,253 4,960,306
----------- -----------
Practice clinical salaries and benefits 2,395,454 1,775,369
Practice non-clinical salaries and benefits 459,436 353,231
Dental supplies and lab expense 514,649 556,242
Practice occupancy expense 200,974 123,079
Practice-selling, general and administrative expenses 419,429 425,031
Corporate-selling, general and administrative expenses 899,016 699,383
Depreciation and amortization 132,632 137,377
----------- -----------
Total operating expenses 5,021,590 4,069,712
----------- -----------
Operating income 1,488,663 890,594
----------- -----------
Nonoperating income (expense):
Interest expense, net (86,769) (97,724)
Other income, net 149,203 214,548
----------- -----------
62,434 116,824
----------- -----------
Net income $ 1,551,097 $ 1,007,418
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-20
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Statement of Changes in Capital
Years Ended December 31, 1996 and 1997
- --------------------------------------------------------------------------------
Partners'
capital
------------
Balance at December 31, 1995 $ 813,259
Net income 1,551,097
Distributions (1,924,125)
Contributions 136,446
------------
Balance at December 31, 1996 576,677
Net income 1,007,418
Distributions (1,196,317)
Contributions 456,368
------------
Balance at December 31, 1997 $ 844,146
============
The accompanying notes are an integral part of this statement.
F-21
<PAGE>
<TABLE>
<CAPTION>
California Dental Practice Management Company and
Related Dental Offices
Statement of Cash Flows
Years Ended December 31, 1996 and 1997
- -------------------------------------------------------------------------------------------------------------------------
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,551,097 $ 1,007,418
Adjustments to reconcile change in net cash used in
operating activities:
Depreciation and amortization 132,633 137,377
Loss on disposition of equipment 70,460 -
Changes in certain assets and liabilities:
Accounts receivable, net 101,203 28,449
Supplies (20,990) 20,990
Prepaid expenses and other current assets (11,608) 7,416
Other assets 11,715 300
Accounts payable 27,728 (49,039)
Accrued liabilities 5,477 (11,579)
Unearned rental income 16,358 (16,358)
Due to affiliates 218,446 (201,997)
----------- -----------
Net cash provided by operating activities 2,102,519 922,977
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (44,485) (58,810)
----------- -----------
Net cash used in investing activities (44,485) (58,810)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable - 345,973
Payments on notes payable (160,661) (118,206)
Cash contributions by owners 45,331 -
Distributions to owners (1,924,125) (1,119,172)
----------- -----------
Net cash used in financing activities (2,039,455) (891,405)
----------- -----------
Increase (decrease) in cash and cash equivalents 18,579 (27,238)
Cash and cash equivalents, beginning of year 33,360 51,939
----------- -----------
Cash and cash equivalents, end of year $ 51,939 $ 24,701
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-22
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
California Dental Practice Management Company and Related Dental Offices
(the "Company") collectively include certain accounts of California Dental
Practice Management Company ("DPM") (a partnership which provides
management services to affiliated dental practices), Indio Dental Clinic (a
dental office wholly owned by the majority owner of DPM), and five dental
offices (Ming & H, Crosstown, Wasco, Rosedale, and Valley) owned by various
practicing dentists. As a combined entity, the Company provides dental
services to patients, bills and collects patient receivables related to the
foregoing six dental offices, and provides administrative support services
to dental offices owned by an affiliated company, Dedicated Dental Systems,
Inc. (DDS). All of the Company's operations are in and around Bakersfield,
California.
The Company and DDS, a corporation which owns and operates dental offices
and provides managed healthcare insurance, are related through common
ownership. The Company and its affiliates structure their business
enterprises to comply with state regulatory mandates requiring dentistry
practices to be owned and operated by state-licensed dentists.
In November 1996, the Valley dental office was purchased by DDS. In
February 1997, the Company opened a dental practice, Wasco, through a joint
effort with the owner of the Crosstown dental office. In March 1997, the
Rosedale dental office was purchased by DDS.
Principles of combination
The accompanying combined financial statements include the accounts of the
purchased operations (see Note 5) of DPM and the dental offices noted above
through the date of purchase by DDS. The entities have been combined for
financial reporting purposes because DPM manages the dental practices and
receives 51% of the net profits therefrom in exchange for its management
services. In addition, DPM and each of the dental offices have entered into
agreements to sell most of their assets to Gentle Dental Service
Corporation (see Note 5). Intercompany transactions and balances including
those related to the management services have been eliminated.
Revenues
Revenues consist primarily of dental services charged to patients, net of
provisions for contractual adjustments and doubtful accounts. Management
services revenue consists of support services charged to affiliated dental
offices and laboratories. Such revenues are recognized when earned.
Statement of cash flows
Cash equivalents consist of highly liquid investments with maturities at
the date of purchase of ninety days or less. During 1996, the Company
received non-cash capital contributions of land and buildings of $110,842
and $91,115, respectively. During 1997, DPM distributed assets of $77,145
to its owners. In addition, $456,368 due to affiliates was retired through
dividends. These transactions have been excluded from the accompanying
statement of cash flows. For the years ended December 31, 1996 and 1997,
the Company paid interest of $86,769 and $105,023, respectively.
F-23
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
Accounts receivable and allowances for contractual adjustments
Accounts receivable principally represent receivables from patients or
dental group insurance carriers for dental services provided by the dental
offices. The Company has recorded an allowance for contractual adjustments
of $132,170 and $367,411 at December 31, 1996 and 1997, 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.
Supplies
Supplies consist primarily of operatory dental supplies stored at the DPM
office and at one of the dental offices. Supplies are stated at the lower
of cost (first-in, first-out basis) or market. Supplies are expensed when
they are delivered to the dental offices for consumption.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist primarily of prepaid
insurance premiums and prepaid property taxes.
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 5 to 25 years.
Other assets
Other assets primarily consist of capitalized loan fees incurred upon
issuing debt related to the purchase of property.
Affiliate payables
Affiliate payables consist primarily of amounts owed for payments made by
DDS since 1994 on behalf of the Company related to a consulting agreement.
In 1996, the payable was partially offset by receivables from DDS related
to services provided to DDS by DPM. During 1997, the balance was paid in
full utilizing cash from operations and dividends distributed to DPM
shareholders by DDS.
Income taxes
DPM is a partnership under provisions of the Internal Revenue Code. The
Related Dental Offices are sole proprietorships, and as such, the income or
losses of DPM and the Related Dental Offices are attributable to their
owners in their individual tax returns.
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.
F-24
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
Accounting for impairment of long-lived assets (continued)
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, 1996 and 1997.
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.
2. Property and Equipment
December 31,
1996 1997
------------ ------------
Land and buildings $ 1,994,884 $ 1,994,884
Dental equipment, furniture and fixtures 525,662 452,018
Computer equipment 87,845 87,845
Vehicles 24,617 -
Leasehold improvements 238,578 214,404
------------ ------------
2,871,586 2,749,151
Less accumulated depreciation and amortization (812,719) (843,235)
------------ ------------
$ 2,058,867 $ 1,905,916
============ ============
F-25
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
3. Long-Term Debt
The Company has obtained notes from various banks to finance the purchase
of property and equipment and to finance operations. In addition, the
Company has issued notes payable to individuals related to the purchase of
dental offices in prior years. Long-term debt balances are as follows:
December 31,
1996 1997
------------ ------------
Note payable to bank with interest-only
payments until maturity at prime plus
1.25% (9.75% at December 31, 1997),
collateralized by real property,
maturing July 2000 $ 174,000 $ 138,000
Note payable to bank due in monthly
instalments of principal and interest
at 11%, secured by a vehicle, maturing
February 1998 6,154 -
Note payable to bank due in equal monthly
instalments of principal and interest
at prime plus 2% (10.5% at
December 31, 1997), maturing April 2000 38,744 27,077
Note payable to bank due in monthly
instalments of $2,894 for principal and
interest at 8.65% through February 1998,
secured by real property with the remainder
due March 1998 234,637 219,629
Mortgage payable to bank due in monthly
instalments of principal and interest at
8.35%, secured by real property, maturing
June 2006 (see Note 4 - Building Partnership) 232,807 216,780
Note payable to bank, due in monthly
instalments of principal and interest at
9.65%, secured by real property, maturing
September 2002 - 190,110
Various unsecured notes payable due in
monthly instalments of principal and
interest at interest rates ranging from
8% to 9%, maturing between December
1998 and March 2002 311,161 433,674
------------ ------------
997,503 1,225,270
Less current portion (142,421) (389,082)
------------ ------------
$ 855,082 $ 836,188
============ ============
F-26
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
3. Long-Term Debt (Continued)
Scheduled maturities of long-term debt at December 31, 1997 are as follows:
1998 $ 389,082
1999 161,401
2000 170,324
2001 110,024
2002 88,800
Thereafter 305,639
----------
$1,225,270
==========
4. Transactions With Affiliates
Management services
DPM provides accounting, human resources, and dental office operations
services to DDS under a management agreement. The amended management
agreement expires December 31, 2001. The revenue related to these services
is included in management services revenues. In addition, DPM purchases
dental supplies in bulk and sells these supplies to its affiliated dental
offices at cost.
During 1996 and 1997, DPM leased the following dental practice offices to
DDS:
Clinic Location/California
------------------------------ -------------------
California Dental Center Bakersfield
Rosedale Dental Practice Bakersfield
San Dimas Orthodontic Center Bakersfield
Delano Family Dentistry Delano
Lake Isabella Family Dentistry Lake Isabella
In addition, in 1996 the owners contributed a dental practice office
located in Arvin, California to the Company, which the Company began
leasing to DDS in 1997.
F-27
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
4. Transactions With Affiliates (Continued)
Management services (continued)
The leases call for aggregate monthly payments to DPM of up to $20,500 and
expire at various dates through February 2007. Future minimum lease
payments to be received from DDS under these operating leases at December
31, 1997 are summarized as follows:
1998 $ 246,000
1999 213,000
2000 210,000
2001 210,000
2002 210,000
Thereafter 504,500
----------
$1,593,500
==========
Rental income of $174,500 and $289,600 is included in other income for the
years ended December 31, 1996 and 1997, respectively.
Payables to affiliates
DDS has paid certain operating expenses from 1994 through April 1997
aggregating $760,613 relating to a consulting agreement on behalf of DPM.
During 1997, the Company began repaying this balance. Accordingly, payables
to DDS of $684,552 and $0 as of December 31, 1996 and 1997, respectively,
are included on the balance sheet as a component of the payable to
affiliates. This balance is net of receivables from affiliates for
management services and dental supplies.
Building partnership
The Company co-owns a building which houses San Dimas Orthodontic Clinic,
an orthodontic practice owned by DDS. The building was financed through the
issuance of a long-term loan from a bank to a partnership which includes
the owners of California Dental Practice Management Company. According to
the terms of the building partnership, the Company is responsible for
44.52% of the mortgage payment and common area charges relating to the
building. The total mortgage balance was $522,927 and $486,927 at December
31, 1996 and 1997, respectively; accordingly, the Company's obligation for
the mortgage aggregated $232,807 and $216,780 at December 31, 1996 and
1997, respectively (see Note 3).
5. Commitments and Contingent Liabilities
The Company leases certain of its dental practice offices from third
parties. These leases range in terms from five to ten years. Rent expense,
including month-to-month rentals, for the years ended December 31, 1996 and
1997 aggregated $154,304 and $123,079, respectively.
F-28
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements
December 31, 1996 and 1997
- --------------------------------------------------------------------------------
5. Commitments and Contingent Liabilities (Continued)
Management expects to renew or replace leases that expire. Following is a
summary of scheduled future minimum lease payments:
1998 $ 117,624
1999 117,624
2000 117,624
2001 93,984
2002 76,964
Thereafter 127,296
----------
$ 651,116
==========
In September 1997, the Company signed definitive agreements to sell
substantially all of its operating assets, except for its land and
buildings with a net book value of $1,724,700, to Gentle Dental Service
Corporation, a publicly traded Washington Corporation. This sale is part of
a larger transaction entered into by the owners of the Company in which
certain of the Company's assets and DDS will be sold for an aggregate
consideration of approximately $22,200,000, paid partially in cash and
partially in common stock of Gentle Dental Service Corporation. Additional
purchase price in cash may be paid if certain future operating performance
targets are met. The acquisition will be accounted for as a purchase
transaction. The accompanying financial statements do not reflect the
effects of this transaction, which has not been consummated to date.
F-29
<PAGE>
<TABLE>
<CAPTION>
California Dental Practice Management Company and
Related Dental Offices
Balance Sheet
June 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
December 31, June 30, 1998
1997 (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 24,701 $ 58,217
Account receivable, net 253,216 356,986
Prepaid expenses and other current assets 8,188 72,011
----------- -----------
Total current assets 286,105 487,214
Property and equipment, net 1,905,916 1,787,444
Other assets 2,060 52,040
----------- -----------
Total assets $ 2,194,081 $ 2,326,698
=========== ===========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 76,123 $ 73,129
Accrued liabilities 48,542 54,927
Current portion of long-term debt and capital lease
obligations 389,082 165,207
----------- -----------
Total current liabilities 513,747 293,263
Long-term debt, less current portion 836,188 709,244
----------- -----------
Total liabilities 1,349,935 1,002,507
Commitments and contingent liabilities
Capital 844,146 1,324,191
----------- -----------
Total liabilities and partners' capital $ 2,194,081 $ 2,326,698
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
California Dental Practice Management Company and
Related Dental Offices
Statement of Operations - Unaudited
For the Six Months Ended June 30, 1997 and 1998
- -------------------------------------------------------------------------------------------------------------------------
June 30, 1997 June 30, 1998
<S> <C> <C>
Dental practice revenue $ 2,448,013 $ 2,280,303
Management services revenue from affiliates 450,155 241,052
----------- -----------
2,898,168 2,521,355
----------- -----------
Practice clinical salaries and benefits 1,001,403 1,049,422
Practice non-clinical salaries and benefits 123,054 155,203
Dental supplies and lab expense 296,510 267,132
Practice occupancy expense 65,320 69,255
Practice-selling, general and administrative expenses 154,210 175,139
Corporate-selling, general and administrative expenses 655,911 317,404
Depreciation and amortization 51,506 52,711
----------- -----------
Total operating expenses 2,347,914 2,086,266
----------- -----------
Operating income 550,254 435,089
----------- -----------
Nonoperating income (expense):
Interest expense, net (50,829) (50,406)
Other income, net 75,411 132,045
----------- -----------
24,582 81,639
----------- -----------
Net income $ 574,836 $ 516,728
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
California Dental Practice Management Company and
Related Dental Offices
Statement of Cash Flows - Unaudited
For the Six Months Ended June 30, 1997 and 1998
- -------------------------------------------------------------------------------------------------------------------------
June 30, 1997 June 30, 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 574,836 $ 516,728
Adjustments to reconcile change in net cash used in
operating activities:
Depreciation and amortization 51,506 52,711
Loss on disposition of assets ---- 87,084
Changes in certain assets and liabilities:
Accounts receivable, net (161,546) (103,770)
Supplies 20,990 ----
Prepaid expenses and other current assets (82,411) (63,823)
Other assets (85,250) (49,980)
Accounts payable (43,873) (2,994)
Accrued liabilities (18,295) 6,385
Unearned rental income 49,657 ----
Due to affiliates 47,685 ----
----------- -----------
Net cash provided by operating activities 353,299 442,341
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (18,977) (21,323)
----------- -----------
Net cash used in investing activities (18,977) (21,323)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 112,854 ----
Payments on notes payable (83,045) (350,819)
Distributions to owners (364,136) (36,683)
----------- -----------
Net cash used in financing activities (334,327) (387,502)
----------- -----------
Increase (decrease) in cash and cash equivalents (5) 33,516
Cash and cash equivalents, beginning of period 51,939 24,701
----------- -----------
Cash and cash equivalents, end of period 51,934 58,217
=========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-32
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements - Unaudited
June 30, 1997 and 1998
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
California Dental Practice Management Company and Related Dental Offices
(the "Company") collectively include certain accounts of California Dental
Practice Management Company ("DPM") (a partnership which provides
management services to affiliated dental practices), Indio Dental Clinic (a
dental office wholly owned by the majority owner of DPM), and four dental
offices (Ming & H, Crosstown, Wasco, and Rosedale,) owned by various
practicing dentists. As a combined entity, the Company provides dental
services to patients, bills and collects patient receivables related to the
foregoing five dental offices, and provides administrative support services
to dental offices owned by an affiliated company, Dedicated Dental Systems,
Inc. (DDS). All of the Company's operations are in and around Bakersfield,
California.
The Company and DDS, a corporation which owns and operates dental offices
and provides managed healthcare insurance, are related through common
ownership. The Company and its affiliates structure their business
enterprises to comply with state regulatory mandates requiring dentistry
practices to be owned and operated by state-licensed dentists.
In February 1997, the Company opened a dental practice, Wasco, through a
joint effort with the owner of the Crosstown dental office. In March 1997,
the Rosedale dental office was purchased by DDS.
Principles of combination
The accompanying combined financial statements include the accounts of the
purchased operations of DPM and the dental offices noted above through the
date of purchase by DDS. The entities have been combined for financial
reporting purposes because DPM manages the dental practices and receives
51% of the net profits therefrom in exchange for its management services.
In addition, DPM and each of the dental offices have entered into
agreements to sell most of their assets to Gentle Dental Service
Corporation (see Note 2). Intercompany transactions and balances including
those related to the management services have been eliminated.
Revenues
Revenues consist primarily of dental services charged to patients, net of
provisions for contractual adjustments and doubtful accounts. Management
services revenue consists of support services charged to affiliated dental
offices and laboratories. Such revenues are recognized when earned.
Interim Reporting
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 footnote disclosures
normally included in complete 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 financial
statements for the years ended December 31, 1996 and 1997. The results for
the six months ended June 30, 1997 and 1998 are not necessarily indicative
of the results of operations for the entire year.
F-33
<PAGE>
California Dental Practice Management Company and
Related Dental Offices
Notes to Financial Statements - Unaudited
June 30, 1997 and 1998
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies (Continued)
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.
2. Commitments and Contingent Liabilities
The Company leases certain of its dental practice offices from third
parties. These leases range in terms from five to ten years. Management
expects to renew or replace leases that expire.
In September 1997, the Company signed definitive agreements to sell
substantially all of its operating assets, except for its land and
buildings with a net book value of $1,724,700, to Gentle Dental Service
Corporation, a publicly traded Washington Corporation. This sale is part of
a larger transaction entered into by the owners of the Company in which
certain of the Company's assets and DDS will be sold for an aggregate
consideration of approximately $22,200,000, paid partially in cash and
partially in common stock of Gentle Dental Service Corporation. Additional
purchase price in cash may be paid if certain future operating performance
targets are met. The acquisition was completed on July 31, 1998 and was
accounted for as a purchase transaction. The accompanying financial
statements do not reflect the effects of this transaction.
F-34
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1998
(in thousands)
(unaudited)
(a) (b) (c)
Pro Forma Pro Forma
Assets Company DDS DPM Adjustments Consolidated
------ -------- -------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 16,243 $ 495 $ 58 $ (341) (g) $ 16,455
Accounts receivable 8,146 941 357 (44) (h) 9,400
Other current assets 3,973 48 72 (334) (i) 3,759
-------- -------- -------- --------- -----------
Total current assets 28,362 1,484 487 (719) 29,614
Property and equipment 14,213 931 1,787 (1,899) (j) 15,032
Intangible assets 47,198 97 - 21,021 (k) 68,316
Other long-term assets 1,063 50 52 (52) (l) 1,113
-------- -------- -------- --------- -----------
Total assets $ 90,836 $ 2,562 $ 2,326 $ 18,351 $ 114,075
======== ======== ======== ========= ===========
Liabilities and Shareholders' Equity
Current liabilities $ 17,538 $ 966 $ 293 $ (220) (m) $ 18,577
Long term debt and capital leases,
net of current portion 35,115 485 709 15,237 (n) 51,546
Other long-term liabilities 125 - - - 125
Redeemable common stock 2,142 - - - 2,142
Shareholders' equity 35,916 1,111 1,324 3,334 (o) 41,685
-------- -------- -------- --------- -----------
Total liabilities and shareholders'
equity $ 90,836 $ 2,562 $ 2,326 $ 18,351 $ 114,075
======== ======== ======== ========= ===========
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(in thousands, except per share amounts)
(unaudited)
(d) (e) (f)
Pro Forma Pro Forma
Company DDS DPM Adjustments Consolidated
-------- -------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Dental practice net patient service
revenue - consolidated $ 29,327 $ 9,982 $ 4,794 $ - $ 44,103
Premiums - 3,047 - - 3,047
Net management fees 14,076 - 167 (167) (p) 14,076
Other - 138 - - 138
-------- -------- -------- --------- -----------
Net revenues 43,403 13,167 4,961 (167) 61,364
Costs and expenses
Clinical salaries and benefits 13,701 4,760 1,776 (112) (q) 20,125
Practice nonclinical salaries and benefits 8,177 751 353 - 9,281
Dental supplies and lab 6,271 1,330 557 - 8,158
Practice occupancy expenses 3,527 518 123 - 4,168
Practice selling, general and administrative
expenses 4,912 1,312 425 - 6,649
Corporate selling, general and administrative
expenses 5,700 2,168 699 (483) (r) 8,084
Corporate restructure and merger costs 1,809 - - - 1,809
Depreciation and amortization 1,847 240 137 604 (s) 2,828
-------- -------- -------- --------- -----------
Operating income (loss) (2,541) 2,088 891 (176) 262
Nonoperating income (expense):
Interest expense, net (653) (40) (98) (1,438) (t) (2,229)
Other income (expense) (74) - 214 (214) (u) (74)
-------- -------- -------- --------- -----------
(727) (40) 116 (1,652) (2,303)
-------- -------- -------- --------- -----------
Profit (loss) before income taxes (3,268) 2,048 1,007 (1,828) (2,041)
Income tax (benefit) expense (81) 31 - - (50)
-------- -------- -------- --------- -----------
Net income (loss) (3,187) 2,017 1,007 (1,828) (1,991)
Dividends on redeemable convertible
preferred stock - Series B (932) - - - (932)
Accretion of redeemable common stock (34) - - - (34)
-------- -------- -------- --------- -----------
Net income (loss) attributable
to common stock $ (4,153) $ 2,017 $ 1,007 $ (1,828) $ (2,957)
======== ======== ======== ========= ===========
Loss per share attributable to common stock -
basic and diluted $ (0.91) $ (0.56)
======== ===========
Weighted average number of shares 4,559 5,264
======== ===========
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30, 1998
(in thousands, except per share amounts)
(unaudited)
(a) (b) (c)
Pro Forma Pro Forma
Company DDS DPM Adjustments Consolidated
-------- -------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Dental practice net patient service revenue
- consolidated $ 38,503 $ 5,934 $ 2,280 $ - $ 46,717
Premiums - 1,690 - - 1,690
Net management fees 935 - 241 (241) (p) 935
Other - 25 - - 25
-------- -------- -------- --------- -----------
Net Revenues 39,438 7,649 2,521 (241) 49,367
Costs and expenses
Clinical salaries and benefits 17,664 3,029 1,049 - 21,742
Practice nonclinical salaries and benefits 5,885 575 155 - 6,615
Dental supplies and lab 4,549 711 267 - 5,527
Practice occupancy expenses 2,262 254 69 - 2,585
Practice selling, general and administrative
expenses 3,820 604 175 - 4,599
Corporate selling, general and administrative
expenses 2,785 998 317 (317) (r) 3,783
Depreciation and amortization 1,584 134 52 305 (s) 2,075
-------- -------- -------- --------- -----------
Operating income 889 1,344 437 (229) 2,441
Nonoperating income (expense):
Interest expense, net (1,043) (18) (50) (719) (t) (1,830)
Other income (expense) (7) - 132 73 (u) 198
-------- -------- -------- --------- -----------
(1,050) (18) 82 (646) (1,632)
-------- -------- -------- --------- -----------
Profit (loss) before income taxes (161) 1,326 519 (875) 809
Income tax (benefit) expense (65) 17 - 48 (v) -
-------- -------- -------- --------- -----------
Net Income (loss) (96) 1,309 519 (923) 809
Accretion of redeemable common stock (12) - - - (12)
-------- -------- -------- --------- -----------
Net income (loss) attributable to
common stock $ (108) $ 1,309 $ 519 $ (923) $ 797
======== ======== ======== ========= ===========
Income (loss) per share attributable to common
stock - basic and diluted $ (0.01) $ 0.09
======== ===========
Weighted average number of shares 7,932 8,637
======== ===========
</TABLE>
F-37
<PAGE>
Gentle Dental Service Corporation
Notes to Pro Forma Consolidated Financial Information
June 30, 1998 and December 31, 1997
(amounts in thousands)
The accompanying pro forma consolidated financial information presents the Pro
Forma Consolidated Statement of Operations of Gentle Dental Service Corporation
(the "Company") for the year ended December 31, 1997 and six months ended June
30, 1998, as if the acquisition of the stock of Dedicated Dental Systems, Inc.
("DDS") and assets of California Dental Practice Management Company and Related
Dental Offices ("DPM") had occurred on January 1, 1997, and the Pro Forma
Condensed Consolidated Balance Sheet of the Company as of June 30, 1998 as if
the acquisition of DDS and DPM had occurred on that date.
The pro forma adjustments reflected in the Pro Forma Condensed Consolidated
Balance Sheet and the Pro Forma Consolidated Statement of Operations are as
follows:
(a) Consolidated financial position and consolidated statement of operations of
the Company as of and for the six months ended June 30, 1998.
(b) Balance sheet and statement of income of DDS as of and for the six months
ended June 30, 1998.
(c) Balance sheet and statement of operations of DPM as of and for the six
months ended June 30, 1998.
(d) Consolidated statement of operations of the Company for the year ended
December 31, 1997.
(e) Statement of income of DDS for the year ended December 31, 1997.
(f) Statement of operations of DPM for the year ended December 31, 1997.
(g) Reflects adjustment to DDS and DPM Cash and cash equivalents for amounts
not acquired.
(h) Reflects adjustment to DPM Accounts receivable for balances not acquired.
(i) Reflects reclassification of prepaid acquisition costs to intangible
assets.
(j) Reflects adjustments to DPM Property and equipment for $1,252 of property
not acquired and a $647 adjustment to record equipment acquired at fair
market value.
(k) Reflects adjustment to record Intangible assets at excess of purchase price
over the fair market value of DDS and DPM net assets acquired.
(l) Reflects elimination of DPM long-term related party receivables not
acquired.
(m) Reflects adjustment of $370 to current portion of long-term debt and
capital lease obligations for amounts not assumed and a $150 increase to
accrued expenses for additional costs related to the acquisition.
F-38
<PAGE>
(n) Reflects adjustment to Long term debt and capital lease, net of current
portion for $1,194 of such debt of DDS and DPM not assumed and the assumed
borrowing of $16,431 to finance the cash portion of the purchase price of
DDS and DPM.
(o) Reflects elimination of DDS and DPM Shareholder's equity of $2,435 in
accordance with purchase accounting treatment and the issuance of $5,769 of
Company common stock as part of the purchase price.
(p) Reflects adjustment to eliminate DPM Net management fees, an intercompany
item between DDS and DPM.
(q) Reflects elimination of profit sharing agreement with one dentist, which
was terminated as a condition to the closing.
(r) Reflects elimination of intercompany management fees and the elimination of
real estate expenses associated with assets not acquired:
Six months Year ended
June 30, 1998 December 31, 1997
------------- -----------------
Management fees $ 241 $ 167
Real estate expenses 76 316
----- -----
$ 317 $ 483
===== =====
(s) Reflects adjustment for Depreciation and amortization expense related to
the fixed assets and intangibles recorded as a result of the purchase of
DDS and DPM. The following table reconciles the two components to the total
adjustment:
Six months Year ended
June 30, 1998 December 31, 1997
------------- -----------------
Depreciation Expense $(150) $(330)
Amortization Expense 455 934
----- -----
$ 305 $ 604
===== =====
Depreciation expense decrease stems from real estate not acquired by the
Company and fair market values of equipment appraised at less than net book
value.
Amortization expense increase stems from intangible assets recorded as a
result of the acquisition.
(t) Reflects adjustment for Interest expense, net as a result of assumed
borrowing, as of January 1, 1997, to finance the purchase of DDS and DPM at
an estimated interest rate of 8.75%.
(u) Reflects the elimination of DDS and DPM Other income (expense) related to
assets not included in the purchase.
(v) Reflects adjustment of Income tax benefit (expense) to the estimated tax on
the pro forma consolidated profit (loss) before income tax.
F-39
<PAGE>
EXHIBIT INDEX
Exhibit Description
2.1 Merger Agreement, dated as of September 21, 1997, between the Company,
Gentle Dental Merger Corporation, a wholly-owned subsidiary of the
Company, Dedicated Dental Systems, Inc., a California corporation,
Arthur G. Kaiser, D.D.S., and Robert J. Newman, incorporated by
reference to Company's Report on Form 10-QSB, Accession No. 97-000656.
The following exhibits and schedules to the Merger Agreement have been
omitted and will be provided to the Securities and Exchange Commission
upon request:
Exhibit A New Dental Practice Leases
Exhibit B Opinion of DDS's Counsel
Exhibit C Opinion of GDSC's Counsel
Exhibit D Terms of Employment
Schedule 0.1 Locations
Schedule 5.06 Litigation
Schedule 5.08-1 Collective Bargaining Agreements
Schedule 5.08-2 Employee Benefits
Schedule 5.08-3 Employment Manuals and Policies
Schedule 5.08-4 Directors, Officers and Employees
Schedule 5.09 Financial Statements
Schedule 5.10 Receivables
Schedule 5.11 Prepaid Expenses and Deferred Charges
Schedule 5.12 Tangible Personal Property
Schedule 5.13 Accounts Payable and Accrued Liabilities
Schedule 5.14 Indebtedness
Schedule 5.15 Undisclosed Liabilities
Schedule 5.17 Leases and Real Property
Schedule 5.18 Contracts
Schedule 5.21 Insurance
Schedule 5.28 Consents and Approvals
Schedule 5.30 Bank Accounts
Schedule 5.31 Pending Knox-Keene Approvals
2.2 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Mark Thomas, D.D.S., incorporated by reference to the Company's Report
on Form 10-QSB, Accession No. 97-000656.
<PAGE>
The following exhibits and schedules to the Asset Purchase Agreement
have been omitted and will be provided to the Securities and Exchange
Commission upon request:
Exhibit A Assumption Agreement
Exhibit B Assignment and Bill of Sale to GDSC
Exhibit C-1 Assignment to Thomas Professional Corporation
Exhibit C-2 Assignment to Professional Corporation
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
Exhibit G Addendum to Employment Agreement
Exhibit H Articles and Bylaws of Professional Corporation
Schedule 1.02-2 Excluded Assets
Schedule 1.10 Purchase Price Allocation
Schedule 2.04 Consents
Schedule 4.06 Litigation
Schedule 4.08-2 Employee Benefits
Schedule 4.08-3 Employment Manuals and Policies
Schedule 4.08-4 Compensation
Schedule 4.09 Financial Statements
Schedule 4.10 Receivables
Schedule 4.11 Prepaid Expenses and Other
Schedule 4.12 Tangible Personal Property
Schedule 4.13 Payables
Schedule 4.14 Indebtedness
Schedule 4.15 Other Liabilities
Schedule 4.17 Leases
Schedule 4.18 Contracts
Schedule 4.21 Insurance
Schedule 4.27 Consents and Approvals
2.3 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Clarence Au, D.D.S., incorporated by reference to the Company's Report
on Form 10-QSB, Accession No. 97-000656.
The following exhibits and schedules to the Asset Purchase Agreement
have been omitted and will be provided to the Securities and Exchange
Commission upon request:
Exhibit A Assumption Agreement
Exhibit B Assignment and Bill of Sale to GDSC
<PAGE>
Exhibit C Assignment to Professional Corporation
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
Exhibit G Addendum to Employment Agreement
Exhibit H Articles and Bylaws of Professional Corporation
Schedule 1.02-2 Excluded Assets
Schedule 1.10 Purchase Price Allocation
Schedule 2.04 Consents
Schedule 4.06 Litigation
Schedule 4.08-2 Employee Benefits
Schedule 4.08-3 Employment Manuals and Policies
Schedule 4.08-4 Compensation
Schedule 4.09 Financial Statements
Schedule 4.10 Receivables
Schedule 4.11 Prepaid Expenses and Other
Schedule 4.12 Tangible Personal Property
Schedule 4.13 Payables
Schedule 4.14 Indebtedness
Schedule 4.15 Other Liabilities
Schedule 4.17 Leases
Schedule 4.18 Contracts
Schedule 4.21 Insurance
Schedule 4.27 Consents and Approvals
2.4 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company and Arthur G. Kaiser, D.D.S., incorporated by reference to the
Company's Report on Form 10-QSB, Accession No. 97-000656.
The following exhibits to the Asset Purchase Agreement have been
omitted and will be provided to the Securities and Exchange Commission
upon request:
Exhibit A Assumption Agreement
Exhibit B Assignment and Bill of Sale to GDSC
Exhibit C Assignment to Professional Corporation
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
Exhibit G Addendum to Employment Agreement
Exhibit H Articles and Bylaws of Professional Corporation
Schedule 1.02-2 Excluded Assets
Schedule 1.10 Purchase Price Allocation
Schedule 2.04 Consents
Schedule 4.06 Litigation
<PAGE>
Schedule 4.08-2 Employee Benefits
Schedule 4.08-3 Employment Manuals and Policies
Schedule 4.08-4 Compensation
Schedule 4.09 Financial Statements
Schedule 4.10 Receivables
Schedule 4.11 Prepaid Expenses and Other
Schedule 4.12 Tangible Personal Property
Schedule 4.13 Payables
Schedule 4.14 Indebtedness
Schedule 4.15 Other Liabilities
Schedule 4.17 Leases
Schedule 4.18 Contracts
Schedule 4.21 Insurance
Schedule 4.27 Consents and Approvals
2.5 Amendment dated February 28, 1998, to that certain Merger Agreement,
dated September 21, 1997, between and among the Company, Gentle Dental
Merger Corporation, a California corporation, Dedicated Dental
Systems, Inc., a California corporation, Arthur G. Kaiser and Robert
J. Newman, incorporated by reference to Company's Report on Form
10-KSB, Accession No. 98-000274.
The following exhibit to the Amendment has been omitted and will be
provided to the Securities and Exchange Commission upon request:
Schedule 1.07 Allocation of Purchase Price
2.6 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between and among the Company,
California Dental Practice Management Company, a California general
partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and Mark
Thomas, D.D.S., incorporated by reference to the Company's Report on
Form 10-KSB, Accession No. 98-000274.
The following exhibits to the Amendment have been omitted and will be
provided to the Securities and Exchange Commission upon request:
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
2.7 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between the Company, California
Dental Practice Management Company, a California general partnership,
Arthur G. Kaiser, D.D.S., Robert J. Newman and Clarence Au, D.D.S.,
incorporated by reference to the Company's report on Form 10-KSB,
Accession No. 98-000274.
<PAGE>
The following exhibits to the Amendment have been omitted and will be
provided to the Securities and Exchange Commission upon request:
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
2.8 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, by and between the Company and
Arthur G. Kaiser, D.D.S., incorporated by reference to the Company's
report on Form 10-KSB, Accession No. 98-000274.
The following exhibits to the Amendment have been omitted and will be
provided to the Securities and Exchange Commission upon request:
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
Exhibit G Addendum to Employment Agreement
2.9 Second Amendment dated July 31, 1998, to that certain Merger
Agreement, dated September 21, 1997, by and between the Company,
Gentle Dental Merger Corporation, a California corporation, Dedicated
Dental Systems, Inc., a California corporation, Arthur G. Kaiser,
D.D.S., and Robert J. Newman. (Included with original Form 8-K filed
by the Company on August 14, 1998.)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to incorporation by reference in the registration statements
on Form S-8 (Nos. 333-25315 and 333-25319) of Gentle Dental Service Corporation
of our report dated February 6, 1998, except for Note 5 which is as of February
28, 1998, relating to the balance sheet of Dedicated Dental Systems, Inc. as of
December 31, 1997 and the related statements of income and retained earnings and
cash flows for the year ended December 31, 1997, and of our report dated
February 6, 1998, except for Note 5 which is as of February 28, 1998, relating
to the combined balance sheets of California Dental Practice Management Company
and Related Dental Offices as of December 31, 1996 and 1997, and related
combined statements of operations, changes in capital and cash flows for the
years ended December 31, 1996 and 1997, which reports appear in this Current
Report on Form 8-K/A Amendment No. 1 of Gentle Dental Service Corporation.
PricewaterhouseCoopers LLP
Portland, Oregon
October 13, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 333- 25315 and 333-25319) of Gentle Dental Service Corporation of our
report dated April 25, 1997 relating to the balance sheet of Dedicated Dental
Systems, Inc. as of December 31, 1996 and the related statements of income and
retained earnings and cash flows for the year ended December 31, 1996, which
report appears in this Current Report on Form 8-K/A Amendment No. 1 of Gentle
Dental Service Corporation.
ERNST & YOUNG LLP
Los Angeles, California
October 9, 1998
