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) June 30, 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
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(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 June 30, 1998, Gentle Dental Service Corporation (the "Company")
completed the acquisition of certain assets of Pacific Dental Services, Inc.
("PDS"), consisting of all of the assets of PDS associated with 8 dental
practices managed by PDS or Orange Dental Services in Orange and Riverside
counties of California. The Company also acquired substantially all of the
assets of Orange Dental Services, a partnership of which PDS is the controlling
partner, which was the manager of one of the acquired practices. Lastly, the
acquisition included the purchase from Bryan Watanabe, D.D.S., Inc., the
professional corporation conducting one of the acquired practices ("Watanabe"),
of its rights under the previously existing management agreement between
Watanabe and PDS. In addition, the Company has entered into a definitive
agreement to acquire substantially all of the assets of TG3 Dental Services
("TG3"), which manages one additional dental practice in Riverside, California;
this acquisition is scheduled to close on October 31, 1998.
The aggregate purchase price paid at closing on June 30, 1998 consisted of
$6,510,655 in cash, assumption of $866,330 in debt, and 182,425 shares of
Company Common Stock valued at $1,616,765. The purchase price to be paid at
closing for the assets of TG3 will consist of $840,000 in cash and 40,620 shares
of Company Common Stock valued at $360,000. In addition, the Company has agreed
to make cash and stock earnout payments as set forth in the agreements based on
the EBITDA of the acquired businesses for the first three years following the
closing. The cash paid at closing was obtained from the Company's existing cash
balances.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Audited Consolidated Balance Sheet of PDS as of December 31, 1997, and
related audited Consolidated Statements of Income, Shareholders'
Equity and Cash Flows of PDS for the year ended December 31, 1997.
Included as pages F-1 to F-16 of this Form 8-K/A Amendment No. 1.
Unaudited Condensed Consolidated Balance Sheet of PDS as of March 31,
1998, and related unaudited Condensed Consolidated Statements of
Income and Cash Flows of PDS for the three-month periods ended March
31, 1997 and 1998. Included as pages F-17 to F-22 of this Form 8-K/A
Amendment No. 1.
Audited Balance Sheet of TG3 as of December 31, 1997, and related
audited Statements of Income, Partners' Capital and Cash Flows of TG3
for the period from October 29, 1997 (inception) through December 31,
1997. Included as pages F-23 to F-32 of this Form 8-K/A Amendment No.
1.
Unaudited Condensed Balance Sheet of TG3 as of March 31, 1998, and
related unaudited Condensed Statements of Income and Cash Flows of TG3
for the three-
2
<PAGE>
month period ended March 31, 1998. Included as pages F-33 to F-37 of
this Form 8-K/A Amendment No. 1.
(b) Pro forma financial information. Pro forma Condensed Consolidated
Balance Sheet as of March 31, 1998 and pro forma Consolidated
Statements of Operations for the year ended December 31, 1997 and the
three-month period ended March 31, 1998. Included as pages F-38 to
F-43 of this Form 8-K/A Amendment No. 1.
(c) Exhibits.
2.1 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and Pacific Dental
Services, Inc. (Included with original Form 8-K filed by the
Company on July 15, 1998.)
2.2 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and Orange Dental
Services. (Included with original Form 8-K filed by the Company
on July 15, 1998.)
2.3 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and TG3 Dental Services.
(Included with original Form 8-K filed by the Company on July 15,
1998.)
2.4 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and Bryan Watanabe,
D.D.S., Inc. (Included with original Form 8-K filed by the
Company on July 15, 1998.)
23.1 Consent of KPMG Peat Marwick LLP.
3
<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: September 11, 1998
GENTLE DENTAL SERVICE CORPORATION
By NORMAN R. HUFFAKER
--------------------------------------
Norman R. Huffaker,
Chief Financial Officer
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Dental Services, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific Dental
Services, Inc. and consolidated partnership (the Company) as of December 31,
1997 and the related consolidated statements of income, shareholders' equity and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Dental
Services, Inc. and consolidated partnership as of December 31, 1997 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
June 15, 1998, except as to Note 12, which is as of June 30, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Consolidated Balance Sheet
December 31, 1997
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 183,872
Management fees receivable, net (note 2) 451,000
Receivables from affiliates, net of allowance for doubtful receivables of $18,336 (note 8) 64,740
Dental supplies 172,000
Prepaid expenses and other current assets 67,388
--------------
Total current assets 939,000
Equipment and leasehold improvements, net (notes 3, 5 and 6) 1,624,654
Intangible assets, net of accumulated amortization of $167,465 (note 2) 226,094
Goodwill, net of accumulated amortization of $14,186 (notes 2 and 11) 1,919,994
Other assets, net 12,056
Receivables from affiliates, net of current portion (note 8) 275,594
--------------
Total assets $ 4,997,392
==============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 138,032
Accrued salaries, wages and benefits 202,694
Accrued expenses and other current liabilities 45,144
Current portion of long-term debt to affiliates (note 8) 185,628
Current portion of long-term debt (note 5) 94,310
Current portion of capital lease obligations (note 6) 144,781
--------------
Total current liabilities 810,589
Long-term debt to affiliates, less current portion (note 8) 519,012
Long-term debt, less current portion (note 5) 414,758
Capital lease obligation, less current portion (note 6) 422,220
Minority interest 19,096
Shareholders' equity (note 10):
Common stock, no par value. Authorized 1,000,000 shares; 101,450
shares issued and outstanding (note 10) 2,007,639
Shareholder note receivable (90,000)
Retained earnings 894,078
--------------
Total shareholders' equity 2,811,717
--------------
Total liabilities and shareholders' equity $ 4,997,392
==============
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Consolidated Statement of Income
Year ended December 31, 1997
<S> <C>
Revenues:
Management fee revenue $ 5,671,048
Other revenue 38,908
--------------
5,709,956
--------------
Operating expenses:
Practice nonclinical salaries and benefits 3,082,583
Dental supplies and lab expenses 464,900
Practice occupancy expenses 489,845
Practice selling, general and administrative expenses 689,508
Depreciation and amortization 275,531
--------------
5,002,367
--------------
Operating income 707,589
Nonoperating income (expense):
Interest expense, net (162,517)
Other income 7,424
--------------
Income before minority interest and income tax expense 552,496
Minority interest in earnings of consolidated partnerships (120,161)
--------------
Income before income tax expense 432,335
State income tax expense 16,578
--------------
Net income $ 415,757
==============
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Consolidated Statement of Shareholders' Equity
Year ended December 31, 1997
Common stock Shareholder Total
----------------------- note Retained shareholders'
Shares Amount receivable earnings equity
----------- ----------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 100 $ 328,634 -- $ 478,321 $ 806,955
Return of capital investment paid
prior to roll-up (note 10) -- (123,300) -- -- (123,300)
Stock split (notes 10 and 11) 71,200 -- -- -- --
Roll-up of partnerships (note 11) 28,700 1,657,305 -- -- 1,657,305
Purchase of facility assets (note 10) 500 50,000 -- -- 50,000
Sale of S Corporation shares (note 10) 950 95,000 $ (90,000) -- 5,000
Current year income -- -- -- 415,757 415,757
----------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 101,450 $ 2,007,639 $ (90,000) $ 894,078 $ 2,811,717
=========== =========== =========== ========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Consolidated Statement of Cash Flows
Year ended December 31, 1997
<S> <C>
Cash flows from operating activities:
Net income $ 415,757
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 275,531
Minority interest 120,161
Changes in operating assets and liabilities:
Increase in management fees receivable (159,000)
Decrease in receivables from affiliates 118,006
Decrease in dental supplies 9,758
Increase in prepaids and other current assets (29,876)
Increase in other assets (12,056)
Increase in accounts payable 7,914
Increase in accrued salaries 103,241
Increase in other liabilities 38,269
--------------
Net cash provided by operating activities 887,705
--------------
Cash flows from investing activities:
Acquisition of equipment (158,449)
Proceeds from the sale of equipment 13,940
--------------
Net cash used in investing activities (144,509)
--------------
Cash flows from financing activities:
Proceeds from long-term debt 121,598
Payments of long-term debt (245,651)
Distributions to minority interest (208,921)
Payments of capital lease obligations (108,050)
Return of capital investment (123,300)
Proceeds from issuance of common stock 5,000
--------------
Net cash used in financing activities (559,324)
--------------
Increase in cash and cash equivalents 183,872
Cash and cash equivalents, beginning of year --
--------------
Cash and cash equivalents, end of year $ 183,872
==============
(Continued)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Consolidated Statement of Cash Flows, Continued
<S> <C>
Noncash investing and financing activities:
Roll-up of partnerships, assets acquired (liabilities assumed):
Receivables from affiliates $ 10,036
Dental supplies 70,118
Property and equipment 661,280
Intangible assets 31,912
Goodwill 1,934,891
Long-term debt (714,267)
Capital lease obligations (235,809)
Minority interest (100,856)
--------------
1,657,305
Less issuance of common stock as consideration, net (1,657,305)
--------------
Net cash used in acquisition of partnership interests $ --
==============
Acquisition of facility assets:
Dental equipment $ (50,000)
Less issuance of common stock as consideration 50,000
--------------
Net cash used in acquisition $ --
==============
Issuance of common stock to management:
Notes receivable from shareholders $ (90,000)
Less issuance of common stock as consideration 95,000
--------------
Net cash received from issuance of common stock $ 5,000
==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 192,000
==============
During 1997, the Company entered into capital lease obligations for equipment
totaling $270,382.
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 1997
(1) Business Description
Pacific Dental Services, Inc. (PDSI), a subchapter S Corporation, and
Orange Dental Services, a 51% majority-owned partnership of PDSI (together
known as the "Company"), are dental care organizations that provide support
services to dental practices in Riverside County, San Bernardino County and
Orange County, California. As of December 31, 1997, the Company provided
management support services to eight dental practices (together, the DPs)
under long-term management agreements either directly entered into with
PDSI or through related partnership agreements. All eight DPs are directly
managed by PDSI or Orange Dental Services. Under the terms of the
management agreements, the Company, among other things, bills and collects
patient receivables and provides all administrative support services to the
DPs in exchange for management fees (see Note 2). The consolidated
financial statements for 1997 also include the accounts of certain 51%
owned entities, the minority interest in which were acquired by the Company
on December 16, 1997 (see Note 11).
The Company and the DPs are related through common ownership of certain
shareholders. As of December 31, 1997, there were no common Board of
Director members among the Company and the DPs. The Company and its
affiliates structure their business enterprises to comply with the state
regulatory mandates requiring dentistry practices to be owned and operated
by state-licensed dentists.
(2) Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenues
Revenues consist primarily of management fees charged to the DPs based on
an agreed-upon percentage of DP revenue under management agreements, net of
provisions for contractual adjustments and doubtful accounts. Such fees are
recognized when earned.
<TABLE>
<CAPTION>
<S> <C>
DP revenue, net of provisions for contractual adjustments and
doubtful accounts $ 8,530,048
Less amounts retained by the DPs 2,859,000
--------------
Management fee revenue $ 5,671,048
==============
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments in debt instruments
with an original maturity of three months or less to be cash equivalents.
F-7
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
Accounts Receivable
Accounts receivable principally represent management fee receivables
derived as a contractual percentage of the DPs' revenue from patients and
other third-party payors for dental services provided by the dental groups.
Amounts are recorded net of contractual allowances and allowances for
doubtful accounts. Contractual adjustments represent an estimate of the
difference between the amount billed on behalf of the DPs and the amount
which the patient, third-party payor or other is contractually obliged to
pay the DPs.
Dental Supplies
Dental supplies represent disposable supplies and instruments used in
delivering dental services to patients. The supplies are recorded at the
lower of cost or market (net realizable value).
Equipment and Leasehold Improvements
Equipment and leasehold improvements 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 dental
equipment, automobiles, computer equipment and telephone systems is
calculated using the straight-line method over estimated useful lives,
which range from five to seven years. Leasehold improvements are amortized
on the straight-line method over the shorter of the lease term or the
estimated useful life of the improvements.
Intangible Assets and Goodwill
Intangible assets result primarily from the amount of purchase price for
dental practices in excess of the fair market value of the identifiable
tangible assets. The amounts are amortized on the straight-line basis over
15 years. Amortization expense for the year ended December 31, 1997 was
$68,874.
The Company reviews its asset balances for impairment at the end of each
year or more frequently when events or changes in circumstances indicate
that the carrying amount of intangible assets may not be recoverable. To
perform this review, the Company estimates the sum of expected future
undiscounted net cash flows from the use of the related asset. If the
estimated net cash flows are less than the carrying amount of the
intangible and related asset, the Company recognizes an impairment loss in
an amount necessary to write down the intangible asset to fair value as
determined from expected future discounted cash flows. No write-down for
impairment loss was recorded for the year ended December 31, 1997.
Fair Value of Financial Instruments
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, 1997.
F-8
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
Use of 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, 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 those
estimates.
(3) Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
Equipment and leasehold improvements are summarized as follows:
<S> <C>
Dental equipment $ 364,690
Computer equipment 1,119,661
Telephone system 80,553
Automobiles 48,479
Leasehold improvements 329,731
--------------
Total equipment and leasehold improvements 1,943,114
Less accumulated depreciation and amortization (318,460)
--------------
Equipment and leasehold improvements, net $ 1,624,654
==============
</TABLE>
At December 31, 1997, equipment and leasehold improvements included
$657,637 of equipment held under capital leases with related accumulated
depreciation aggregating approximately $90,000.
(4) Malpractice Insurance
The Company does not carry malpractice insurance, however, the dentists,
managed by the Company, are insured individually with respect to dentistry
malpractice risks on a claims-made basis. Management is not aware of any
claims or incidents that may result in the assertion of a claim. However,
there may be claims from unknown incidents that may be asserted arising
from services provided to patients. Management is not aware of any claims
against the Company or its affiliated groups, which might have material
impact on the Company's financial position or results of operations.
F-9
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
(5) Long-term Debt
<TABLE>
<CAPTION>
Long-term debt, principal and interest payable in monthly installments,
at December 31, 1997 is summarized as follows:
<S> <C>
11.01% unsecured notes payable to bank, due November 1999 $ 16,637
15.75% unsecured notes payable to bank, due March 2000 8,988
10.51% notes payable to bank, secured by assets of the Company, due August 2000 134,486
9.75% unsecured notes payable to bank, due October 2001 81,072
10.5% notes payable to the seller, secured by equipment, due November 2001 24,535
8.71% notes payable to bank, secured by assets of the Company, due February 2002 28,389
12.00% unsecured notes payable to bank, due April 2002 19,333
9.05% notes payable to bank, secured by equipment, due October 2002 9,304
13.4% unsecured notes payable to bank, due January 2003 109,548
12.55% notes payable to bank, secured by assets of the Company, due August 2004 76,776
--------------
509,068
Less current portion 94,310
--------------
$ 414,758
==============
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1997 and thereafter are as follows:
Year ending December 31:
1998 $ 94,310
1999 122,852
2000 117,050
2001 87,345
2002 44,790
Thereafter 42,721
-------------
$ 509,068
=============
F-10
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
(6) Capital Lease Obligations and Operating Leases
Capital Leases
The Company leases equipment under various capital leases. Future minimum
lease payments under capital leases together with the present value of
minimum lease payments as of December 31, 1997 are as follows:
Year ending December 31:
1998 $ 224,600
1999 202,647
2000 154,557
2001 136,793
2002 30,296
Thereafter --
-------------
Total minimum lease payments 748,893
Less amount representing interest 181,892
-------------
Minimum future lease payments
as of December 31 567,001
Less current portion 144,781
-------------
Long-term portion $ 422,220
=============
Operating Leases
The Company leases its facilities and certain office equipment for varying
periods under operating leases. Generally, leases that expire are to be
renewed or replaced by other leases. At December 31, 1997, future minimum
rental payments under noncancelable operating leases are as follows:
Year ending December 31:
1998 $ 359,406
1999 336,729
2000 327,088
2001 232,331
2002 111,627
Thereafter 328,170
-------------
$ 1,695,351
=============
Rent expense was approximately $379,514 for the year ended December 31,
1997.
F-11
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
(7) Commitments and Contingencies
Litigation
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
(8) Related Party Transactions
<TABLE>
<CAPTION>
Long-term debt to affiliates, principal and interest payable in monthly
installments, at December 31, 1997 is summarized as follows:
<S> <C>
12.00% secured notes payable to a partnership, due October 1999 $ 34,930
8.00% secured notes payable, due February 2000 246,437
9.00% secured notes payable, due June 2001 156,011
8.00% secured notes payable, due August 2001 99,821
9.00% secured notes payable, due June 2002 87,472
8.00% secured notes payable, due December 2002 79,969
----------
704,640
Less current portion 185,628
----------
$ 519,012
==========
</TABLE>
The aggregate maturities of long-term debt to affiliates for each of the
five years subsequent to December 31, 1997 and thereafter are as follows:
Year ending December 31:
1998 $ 185,628
1999 183,281
2000 168,178
2001 121,309
2002 46,244
Thereafter -
-------------
$ 704,640
=============
The first related party note payable is to a partnership in which the
President of the Company maintains a majority interest. The note arose from
the acquisition of dental facility assets from the dental practice the
above noted partnership manages. The note is secured by equipment.
F-12
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
Two of the notes payable balances relate to the Orange Dental Practice. One
note arose from the purchase of the Orange Dental Practice during 1995 and
had a balance of $79,969 at December 31, 1997. The note payable is secured
by certain assets of the Company. The assets of this practice were sold in
July 1996 to another dentist, who in turn sold a 51% partnership interest
in the practice assets back to the Company in 1997. Accordingly, the
Company did not record a gain in connection with the sale of the assets of
this practice. The Company financed $360,000 of the sale of the net assets
of the facility in 1996. As of December 31, 1997, the notes receivable
balance from the dentist was $317,030. To repurchase the facility assets,
the Company issued a $257,000 note payable to the dentist due in February
2000 with a principal balance at December 31, 1997 of $246,437. The note is
secured by certain assets of the Company.
Three notes payable relate to the purchase of the Costa Mesa Dental
Practice. At the time the practice was purchased by the Company in 1994,
two dentist/partners owned the practice. The first note was issued in 1994
for $270,000 to one of the dentist/partners for the acquisition of a
portion of the facility's assets. The note payable is secured by the
corresponding portion of the Costa Mesa Dental facility's assets. Its
principal balance at December 31, 1997 was $156,011. The next note was
issued to the other dentist/partner for $330,000 for the remaining portion
of the practice assets. The note was held personally outside the Company
until it was assumed in the 1997 roll-up, discussed in Note 11. The note is
secured by the remaining assets of the Costa Mesa Dental facility. Its
principal balance at December 31, 1997 was $87,472. The same
dentist/shareholder holds the third note payable for $215,000 for
additional fixed assets purchased for the Costa Mesa Dental facility. It is
secured by the related fixed assets purchased. Its principal balance at
December 31, 1997 was $99,821.
(9) Income Taxes
The Company has elected to be taxed under the provision of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal corporate income taxes on its taxable income. Instead, the
shareholders include their respective shares of the Company's net income in
their individual income tax returns. The income tax expense is based upon
the state tax rate applicable to S Corporations.
(10) Shareholders' Equity
Throughout 1997, the sole shareholder received distributions from PDSI that
were considered returns of capital investment in the Company totaling
$123,300. On December 16, 1997, the original stock issued in 1995 was split
as a part of the acquisition of several partnerships, a private practice
and assets from the original shareholder. See Note 11 to the consolidated
financial statements for further discussion.
On December 31, 1997, PDSI acquired certain assets of the Corona dental
practice and gave as consideration 500 shares of common stock valued at
$50,000, based on the fair market value of the assets acquired.
On December 31, 1997, PDSI sold 950 shares of common stock valued at
$95,000 to certain management of the Company. As consideration for the
shares of common stock, PDSI received $5,000 cash and a note receivable for
$90,000. Management paid the remaining balance in January 1998.
F-13
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
(11) Partnership Roll-up
On December 16, 1997, the Company acquired the assets and assumed
liabilities of the Riverside Dental Services, TG Dental Services, TG 2
Dental Services, and TC Dental Services partnerships, as well as the assets
and liabilities of a private practice (collectively known as the "Roll-up
Entities") in exchange for shares of PDSI Common Stock. Each of the
partnerships had contracted to manage an associated dental office. All of
the Roll-up Entities contracted with PDSI to manage the dental offices. In
addition to the Roll-up Entities, certain equipment was purchased from the
sole shareholder of PDSI. In order to properly allocate PDSI shares among
the original shareholder and the new shareholders, the original 100 shares
of common stock issued in 1995 were split 713-to-one. As consideration for
the net assets of the Roll-up Entities, PDSI issued 28,700 shares valued at
approximately $1,660,000.
The acquisition of the minority partnership interests and the assets of the
private practices for shares of PDSI were accounted for as purchases. The
excess of the aggregate purchase price over the fair market value of net
assets acquired of approximately $1,770,000 is being amortized over 15
years.
As PDSI had controlling interests in the Roll-up Entities through 51%
ownership interest and management control, these entities were already
consolidated prior to the acquisition. The following summarized unaudited
pro forma financial information assumes the acquisition of the private
practice had occurred on January 1, 1997:
Net revenues $ 5,709,956
Net earnings 528,320
===============
(12) Subsequent Events
Dental Office Acquisitions
PDSI entered into three new partnerships, which acquired three dental
offices subsequent to year end: Mission Viejo, Pomona and Anaheim.
The Mission Viejo office was purchased on May 1, 1998. It is managed by the
TB Dental Services Partnership, which is a new partnership formed between
PDSI and Dr. Beuhler. PDSI holds a 51% financial interest in the
partnership. The total purchase price was $550,000 which was paid for as
follows: $51,000 cash from PDSI; $49,000 cash from Dr. Beuhler; and a
$450,000 note payable assumed by TB Dental Services Partnership bearing an
annual interest rate of 10.75% for 84 months.
The Pomona office was purchased on June 16, 1998. It is managed by Pomona
Dental Service Partnership, which is a new partnership formed between PDSI
and Dr. Levi. PDSI holds a 51% financial interest in the partnership. The
total purchase price was $425,000 which was paid for as follows: $25,500
cash from PDSI; $24,500 cash from Dr. Levi; and a $375,000 note payable
assumed by Pomona Dental Service Partnership bearing an annual interest
rate of 10.75% for 84 months.
The Anaheim office was purchased on June 8, 1998. It is managed by TS
Dental Services Partnership, which is a new partnership formed between PDSI
and Dr. Schwandt. PDSI holds a 51% financial interest in the partnership.
The total purchase price was $25,000, which was paid by PDSI.
F-14
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
Sale of Dental Practices to Gentle Dental Service Corporation
On June 30, 1998, The Company entered into agreements with Gentle Dental
Service Corporation (GDSC) to sell the assets, management rights and
related liabilities of the Costa Mesa, Santa Ana, Moreno Valley, Riverside
1, Corona, Hesperia, Apple Valley, Orange and Riverside 2 dental offices.
The tangible assets and management rights of all of these dental offices
except the Riverside 2 office are owned by the Company. The Riverside 2
tangible assets and rights to management fee revenue are held by the TG 3
Dental Services Partnership.
As consideration for the assets of the eight dental offices sold by the
Company, GDSC paid the Company $5,940,000 in cash, of which $5,200,000 and
$740,000 was paid to the Company and various lenders (including related
parties), respectively, and GDSC stock of approximately $1,550,000, and
assumed $870,000 of long-term debt, capital leases and operating leases. A
significant portion of the cash received by PDSI was used to pay down
outstanding debt and to pay dividends to shareholders. In addition, an
"earnout consideration" is to be paid based on future earnings of the
dental offices acquired over the next three years.
Notes Payable
PDSI entered into two notes payable subsequent to year end. One of these
notes payable was then subsequently paid down by GDSC as part of the sale
agreement, as discussed above. The notes bear interest at 11% and 12% and
have terms of seven and two years, respectively, with monthly payments due.
The aggregate maturities of the remaining additional long-term debt are as
follows:
Year ending December 31:
1998 $ 4,864
1999 8,062
2000 716
-------------
$ 13,643
=============
F-15
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Consolidated Financial Statements, Continued
Operating Leases
PDSI entered into several operating leases subsequent to year end with
terms of five to ten years. The aggregate lease commitments for the new
leases entered into, for each of the five years subsequent to December 31,
1997 and thereafter, are as follows:
Year ending December 31:
1998 $ 125,761
1999 196,986
2000 201,136
2001 205,385
2002 209,734
Thereafter 649,040
-------------
$ 1,588,042
=============
F-16
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Condensed Consolidated Balance Sheets
December 31, March 31,
Assets 1997 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 183,872 $ 183,794
Management fees receivable 451,000 504,274
Receivables from affiliates, net 64,740 32,106
Dental supplies 172,000 172,000
Prepaid expenses and other current assets 67,388 67,388
------------------ -----------------
Total current assets 939,000 959,562
Equipment and leasehold improvements, net 1,624,654 1,672,055
Intangible assets, net 226,094 213,313
Goodwill, net 1,919,994 1,879,987
Other assets, net 12,056 11,094
Receivables from affiliates, net of current portion 275,594 289,083
------------------ -----------------
Total assets $ 4,997,392 $ 5,025,094
================== =================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 138,032 $ 125,346
Accrued salaries, wages and benefits 202,694 192,835
Accrued expenses and other current liabilities 45,144 16,223
Current portion of long-term debt to affiliates 185,628 185,628
Current portion of long-term debt 94,310 94,310
Current portion of capital lease obligations 144,781 144,781
------------------ -----------------
Total current liabilities 810,589 759,123
Long-term debt to affiliates, less current portion 519,012 456,827
Long-term debt, less current portion 414,758 392,547
Capital lease obligation, less current portion 422,220 385,057
Minority interest 19,096 17,476
Shareholders' equity:
Common stock, no par value. Authorized 1,000,000 shares; 101,450 shares
issued and outstanding in 1997 and 1998. 2,007,639 2,007,639
Shareholder note receivable (90,000) -
Retained earnings 894,078 1,006,425
------------------ -----------------
Total shareholders' equity 2,811,717 3,014,064
------------------ -----------------
Total liabilities and shareholders' equity $ 4,997,392 $ 5,025,094
================== =================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Condensed Consolidated Statement of Income
(Unaudited)
Three Months Ended March 31,
1997 1998
------------------- -------------------
<S> <C> <C>
Revenues:
Management fee revenue $ 1,141,283 $ 1,667,431
Other revenue 50 29,447
------------------- -------------------
1,141,333 1,696,878
------------------- -------------------
Operating expenses:
Practice nonclinical salaries and benefits 607,239 880,824
Dental supplies and lab expenses 74,499 124,359
Practice occupancy expenses 77,026 158,867
Practice selling, general and administrative expenses 120,220 242,228
Depreciation and amortization 43,532 110,579
------------------- -------------------
922,516 1,516,857
------------------- -------------------
Operating income 218,817 180,021
Nonoperating income (expense):
Interest expense, net (19,635) (44,744)
Other income 7,900 -
------------------- -------------------
Income before minority interest and income taxes 207,082 135,277
Minority interest in earnings of consolidated partnerships (22,252) (21,950)
------------------- -------------------
Income before income taxes 184,830 113,327
State income taxes 851 980
------------------- -------------------
Net income $ 183,979 $ 112,347
=================== ===================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
PACIFIC DENTAL SERVICES, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended March 31,
1997 1998
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 183,979 $ 112,347
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 43,532 110,579
Minority interest 22,252 21,950
Changes in operating assets and liabilities:
Increase in management fees receivable (40,000) (53,274)
Decrease in receivables from affiliates 24,931 32,634
Decrease in dental supplies 66,043 -
Decrease in prepaids and other current assets 18,640 -
Increase in other assets (32,800) -
Decrease in accounts payable (21,500) (12,686)
Increase (decrease) in accrued salaries 14,975 (9,859)
Decrease in accrued expenses and other current liabilities (6,875) (28,921)
------------------- -------------------
Net cash provided by operating activities 273,177 172,770
------------------- -------------------
Cash flows from investing activities:
Long-term advances to affiliates - (13,489)
Acquisition of equipment (211,058) (104,230)
Proceeds from the sale of equipment 20,912 -
------------------- -------------------
Net cash used in investing activities (190,146) (117,719)
------------------- -------------------
Cash flows from financing activities:
Proceeds from long-term debt 32,936 -
Payments of long-term debt (69,074) (84,396)
Payments of capital lease obligations (24,287) (37,163)
Proceeds from repayment of shareholder notes receivable - 90,000
Partnership distribution - (23,570)
Payment of dividends (20,172) -
------------------- -------------------
Net cash used in financing activities (80,597) (55,129)
------------------- -------------------
Increase (decrease) in cash and cash equivalents 2,434 (78)
Cash and cash equivalents, beginning of period - 183,872
------------------- -------------------
Cash and cash equivalents, end of period $ 2,434 $ 183,794
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 26,576 $ 49,402
=================== ===================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
F-19
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Business Description
Pacific Dental Services, Inc. (PDSI), a subchapter S Corporation, and
Orange Dental Services, a 51% majority-owned partnership of PDSI (together
known as the "Company"), are dental care organizations that provide support
services to dental practices in Riverside County, San Bernardino County and
Orange County, California. As of March 31, 1998, the Company provided
management support services to eight dental practices (together, the DPs)
under long-term (8 to 20 years) management agreements either directly
entered into with PDSI or through related partnership agreements. All eight
DPs are directly managed by PDSI or Orange Dental Services. Under the terms
of the management agreements, the Company, among other things, bills and
collects patient receivables and provides all administrative support
services to the DPs in exchange for management fees (see Note 2). The
consolidated financial statements also include the accounts of certain 51%
owned entities, the minority interest in which were acquired by the Company
on December 16, 1997 (see Note 3)
The Company and the DPs are related through common ownership of certain
shareholders. As of March 31, 1998, there were no common Board of Director
members among the Company and the DPs. The Company and its affiliates
structure their business enterprises to comply with the state regulatory
mandates requiring dentistry practices to be owned and operated by
state-licensed dentists.
(2) Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements have been prepared on the
accrual basis of accounting and include the accounts of the Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Pursuant to EITF 97-2, the nature of the management agreements that the
Company has entered into with the DPs does not permit the Company to
consolidate the activities of the DPs.
Interim Reporting
The accompanying unaudited interim condensed consolidated 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 consolidated financial statements and notes thereto
included in the Company's consolidated financial statements for the year
ended December 31, 1997. The results for the three months ended March 31,
1998 are not necessarily indicative of the results of operations for the
entire year.
F-20
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Condensed Consolidated Financial Statements, Continued
Revenues
Revenues consist primarily of management fees charged to the DPs based on
an agreed-upon percentage of DP revenue under management agreements, net of
provisions for contractual adjustments and doubtful accounts. Such fees are
recognized when earned.
(3) Partnership Roll-up
On December 16, 1997, the Company acquired the minority interests in the
assets and liabilities of the Riverside Dental Services, TG Dental
Services, TG 2 Dental Services, and TC Dental Services partnerships, as
well as the assets and liabilities of a private practice (collectively
known as the "Roll-up Entities") in exchange for shares of PDSI Common
Stock. Each of the partnerships had contracted to manage an associated
dental office. All of the Roll-up Entities contracted with PDSI to manage
the dental offices. In addition to the Roll-up Entities, certain equipment
was purchased from the sole shareholder of PDSI. In order to properly
allocate PDSI shares among the original shareholder and the new
shareholders, the original 100 shares of common stock issued in 1995 were
split 713-to-one. As consideration for the net assets of the Roll-up
Entities, PDSI issued 28,700 shares valued at approximately $1,660,000.
The acquisition of the minority partnership interests and the assets of the
private practices for shares of PDSI were accounted for as purchases. The
excess of the aggregate purchase price over the fair market value of net
assets acquired of approximately $1,770,000 is being amortized over 15
years.
As PDSI had controlling interests in the Roll-up Entities through 51%
ownership interest and management control, these entities were already
consolidated prior to the acquisition. In addition, the revenues and net
earnings from the private practice approximate the net management fee
revenue previously received by PDSI prior to PDSI's acquisition of the
facility assets of the private practice.
(4) Subsequent Events
Dental Office Acquisitions
PDSI entered into three new partnerships, which acquired three dental
offices subsequent to March 31, 1998: Mission Viejo, Pomona and Anaheim.
The Mission Viejo office was purchased on May 1, 1998. It is managed by the
TB Dental Services Partnership, which is a new partnership formed between
PDSI and Dr. Beuhler. PDSI holds a 51% financial interest in the
partnership. The total purchase price was $550,000 which was paid as
follows: $51,000 cash from PDSI; $49,000 cash from Dr. Beuhler; and a
$450,000 note payable assumed by TB Dental Services Partnership bearing an
annual interest rate of 10.75% for 84 months.
F-21
<PAGE>
PACIFIC DENTAL SERVICES, INC.
Notes to Condensed Consolidated Financial Statements, Continued
The Pomona office was purchased on June 16, 1998. It is managed by Pomona
Dental Service Partnership, which is a new partnership formed between PDSI
and Dr. Levi. PDSI holds a 51% financial interest in the partnership. The
total purchase price was $425,000 which was paid for as follows: $25,500
cash from PDSI; $24,500 cash from Dr. Levi; and a $375,000 note payable
assumed by Pomona Dental Service Partnership bearing an annual interest
rate of 10.75% for 84 months.
The Anaheim office was purchased on June 8, 1998. It is managed by TS
Dental Services Partnership, which is a new partnership formed between PDSI
and Dr. Schwandt. PDSI holds a 51% financial interest in the partnership.
The total purchase price was $25,000, which was paid by PDSI.
Sale of Dental Practices to Gentle Dental Service Corporation
On June 30, 1998, The Company entered into agreements with Gentle Dental
Service Corporation (GDSC) to sell the assets, management rights and
related liabilities of the Costa Mesa, Santa Ana, Moreno Valley, Riverside
1, Corona, Hesperia, Apple Valley, Orange and Riverside 2 dental offices.
The tangible assets and management rights of all of these dental offices
except the Riverside 2 office are owned by the Company. The Riverside 2
tangible assets and rights to management fee revenue are held by the TG 3
Dental Services Partnership.
As consideration for the assets of the eight dental offices sold by the
Company, GDSC paid the Company $5,940,000 in cash, of which $5,200,000 and
$740,000 was paid to the Company and various lenders (including related
parties), respectively, and GDSC stock valued at approximately $1,550,000,
and assumed $870,000 of long-term debt, capital leases and operating
leases. A significant portion of the cash received by PDSI was used to pay
down outstanding debt and to pay dividends to shareholders. In addition, an
"earnout consideration" is to be paid based on future earnings of the
dental offices acquired over the next three years.
Operating Leases
PDSI entered into several operating leases subsequent to year-end with
terms of five to ten years. The aggregate lease commitments for the new
leases entered into, for each of the five years subsequent to December 31,
1997 and thereafter, are as follows:
Year ending December 31:
1998 $ 125,761
1999 196,986
2000 201,136
2001 205,385
2002 209,734
Thereafter 649,040
-------------
$ 1,588,042
=============
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of
TG 3 Dental Services:
We have audited the accompanying balance sheet of TG 3 Dental Services, a
California General Partnership, (the Partnership) as of December 31, 1997 and
the related statements of income, partners' capital and cash flows for the
period from October 29, 1997 (inception) through December 31, 1997. These
financial statements are the responsibility of the Partnership'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 TG 3 Dental Services as of
December 31, 1997 and the results of its operations and its cash flows for the
period from October 29, 1997 (inception) through December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
July 6, 1998
F-23
<PAGE>
<TABLE>
<CAPTION>
TG 3 DENTAL SERVICES
(A California General Partnership)
Balance Sheet
December 31, 1997
Assets
<S> <C>
Current assets:
Cash $ 100
Management fees receivable, net (note 2) 10,996
Dental supplies 25,000
Prepaid expenses and other current assets 1,200
--------------
Total current assets 37,296
Equipment and leasehold improvements, net (note 4) 93,950
Receivables from affiliates (note 8) 20,000
--------------
Total assets $ 151,246
==============
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 11,004
Accrued salaries, wages and benefits 3,215
Current portion of long-term debt (note 6) 11,767
--------------
Total current liabilities 25,986
Long-term debt, less current portion (note 6) 107,314
Partners' captial 17,946
--------------
Total liabilities and partners' capital $ 151,246
==============
See accompanying notes to financial statements.
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
TG 3 DENTAL SERVICES
(A California General Partnership)
Statement of Income
For the period from October 29, 1997 (inception) through December 31, 1997
<S> <C>
Management fee revenue $ 35,096
--------------
Operating expenses:
Practice non-clinical salaries and benefits 11,351
Dental supplies and lab expenses 2,861
Practice occupancy expenses 2,363
Practice selling, general and administrative expenses 9,131
Depreciation 1,546
--------------
27,252
--------------
Operating income 7,844
Nonoperating expense:
Interest expense (1,199)
--------------
Net income $ 6,645
==============
See accompanying notes to financial statements.
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
TG3 Dental Services
(A California General Partnership)
Statement of Partners' Capital
For the period from October 29, 1997 (inception) through December 31, 1997
Stephen Thorne's Dr. Carolyn Total Partners'
Capital Ghazal's Capital Capital
------------------- ------------------- ------------------
<S> <C> <C> <C>
Initial capital contributions made on
October 29, 1997 (inception) $ 11,322 $ 1,321 $ 12,643
Distributions -- (1,342) (1,342)
Current year income 3,389 3,256 6,645
------------------- ------------------- ------------------
Balances at December 31, 1997 $ 14,711 $ 3,235 $ 17,946
=================== =================== ==================
See accompanying notes to financial statements.
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
TG 3 DENTAL SERVICES
(A California General Partnership)
Statement of Cash Flows
For the period from October 29, 1997 (inception) through December 31, 1997
<S> <C>
Cash flows from operating activities:
Net income $ 6,645
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 1,546
Changes in operating assets and liabilities:
Increase in management fees receivable (10,996)
Increase in prepaids and other assets (1,200)
Increase in accounts payable 11,004
Increase in accrued liabilities 3,215
--------------
Net cash used in operating activities 10,214
--------------
Cash flows from investing activities:
Acquisition of equipment (10,496)
Acquisition of dental practice assets (110,000)
Note receivable from affiliate (20,000)
--------------
Net cash used in investing activities (140,496)
--------------
Cash flows from financing activities:
Proceeds from long-term debt 120,000
Payments of long-term debt (919)
Capital contribution 12,643
Capital distributions (1,342)
--------------
Net cash provided by financing activities 130,382
--------------
Increase in cash and cash equivalents 100
Cash and cash equivalents, inception --
--------------
Cash and cash equivalents, end of year $ 100
==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,199
==============
See accompanying notes to financial statements.
</TABLE>
F-27
<PAGE>
TG 3 DENTAL SERVICES
(A California General Partnership)
Notes to Financial Statements
December 31, 1997
(1) Business Description
TG 3 Dental Services, a California General Partnership, (the Partnership),
was formed on October 29, 1997 (inception). The Partnership is a dental
care organization that provides support services to a dental practice in
Riverside County, California. As of December 31, 1997, the Partnership
provided management support under a long-term (20 year) management
agreement with the dental practice. Under the terms of the management
agreement, the Partnership, among other things, bills and collects patient
receivables and provides all administrative support services to the dental
practice in exchange for management fees (see note 2).
The Partnership and the dental practice are related through common
ownership of one partner. As of December 31, 1997, there was one common
partner among the Partnership and the dental practice. The Partnership and
its affiliate structure their business enterprises to comply with the state
regulatory mandates requiring dentistry practices to be owned and operated
by state-licensed dentists.
(2) Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared on the accrual basis of
accounting. Pursuant to EITF 97-2, the nature of the management agreement
that the Partnership has entered into with the dental practice does not
permit the Partnership to consolidate the activities of the dental
practice.
Revenues
Revenues consist primarily of management fees charged to the professional
corporation based on an agreed-upon percentage of the dental practice
revenue under a management agreement, net of provisions for contractual
adjustments and doubtful accounts. Such fees are recognized when earned.
<TABLE>
<CAPTION>
<S> <C>
Professional corporation dental revenue, net of provision for
contractual adjustments and doubtful accounts $ 50,137
Less amounts retained by the dental practice 15,041
--------------
Management fee revenue $ 35,096
==============
</TABLE>
Accounts Receivable
Accounts receivable principally represent management fee receivables
derived as a contractual percentage of the dental practice's revenue from
patients and other third-party payors for dental services provided by the
dental group.
Dental Supplies
Dental supplies represent disposable supplies and instruments used in
delivering dental services to patients. The supplies are recorded at the
lower of cost or market (net realizable value).
F-28
<PAGE>
TG 3 DENTAL SERVICES
(A California General Partnership)
Notes to Financial Statements, Continued
Equipment and Leasehold Improvements
Equipment and leasehold improvements 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 office and
dental equipment, furniture, computer equipment and telephone systems is
calculated using the straight-line method over estimated useful lives,
which range from five to seven years. Leasehold improvements are amortized
on the straight-line method over the shorter of the lease term or the
estimated useful life of the improvements.
Fair Value of Financial Instruments
The Partnership 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 Partnership
estimates that the carrying value of all of its monetary assets and
liabilities approximates fair value as of December 31, 1997.
Use of Estimates
The preparation of the Partnership'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, 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 those
estimates.
(3) Acquisition
On October 29, 1997 (inception), the Partnership acquired all of the
tangible assets of the dental practice under management, which included
$85,000 of equipment and $25,000 of dental supplies. As consideration for
these assets, the Partnership paid $110,000 in cash.
(4) Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
Equipment and leasehold improvements are summarized as follows:
<S> <C>
Office and dental equipment $ 20,000
Computer equipment 50,496
Telephone system 10,000
Leasehold improvements 15,000
--------------
Total equipment and leasehold improvements 95,496
Less accumulated depreciation (1,546)
--------------
Equipment and leasehold improvements, net $ 93,950
==============
</TABLE>
F-29
<PAGE>
TG 3 DENTAL SERVICES
(A California General Partnership)
Notes to Financial Statements, Continued
(5) Malpractice Insurance
The Partnership does not carry malpractice insurance, however, the
dentists, managed by the Partnership, are individually insured with respect
to dentistry malpractice risks on a claims-made basis. Management is not
aware of any claims or incidents that may result in the assertion of a
claim. However, there may be claims from unknown incidents that may be
asserted arising from services provided to patients. Management is not
aware of any claims against the Partnership or its affiliated group, which
might have material impact on the Partnership's financial position or
results of operations.
(6) Note Payable
<TABLE>
<CAPTION>
Long-term debt at December 31, 1997 is summarized as follows:
<S> <C>
11.99% unsecured note payable to bank, principal and interest
in monthly installments, due December 2004 $ 119,081
Less current portion 11,767
--------------
$ 107,314
==============
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1997 and thereafter are as follows:
Year ending December 31:
1998 $ 11,767
1999 13,258
2000 14,938
2001 16,831
2002 18,964
Thereafter 43,323
--------------
$ 119,081
==============
F-30
<PAGE>
TG 3 DENTAL SERVICES
(A California General Partnership)
Notes to Financial Statements, Continued
(7) Commitments and Contingencies
Leases
The Partnership leases its facility under an operating lease. Generally,
leases that expire are to be renewed or replaced by other leases. At
December 31, 1997, future minimum rental payments under noncancelable
operating leases are as follows:
Year ending December 31:
1998 $ 11,413
1999 11,698
2000 11,992
--------------
$ 35,103
==============
Rent expense was $1,856 for the period from October 29, 1997 (inception)
through December 31, 1997.
Litigation
The Partnership is subject to various claims and legal actions that arise
in the ordinary course of business. In the opinion of management, the
ultimate resolution of such matters will not have a material adverse effect
on the Partnership's financial position or results of operations.
(8) Related Party Transactions
The long-term related party note receivable relates to the purchase of the
Riverside II dental practice. One of the Partners borrowed $20,000 from the
Partnership in order to finance part of the purchase price of the dental
practice. The interest free note is unsecured and its term is undefined.
(9) Income Taxes
The Partnership does not pay federal or state corporate income taxes on its
taxable income. Instead, the partners are liable for individual federal and
state income taxes on their respective share of partnership earnings.
F-31
<PAGE>
TG 3 DENTAL SERVICES
(A California General Partnership)
Notes to Financial Statements, Continued
(10) Subsequent Event
Sale of Partnership to Gentle Dental Service Corporation On June 30, 1998,
the Partnership entered into a definitive agreement to sell the assets,
management rights and related liabilities of the Partnership to Gentle
Dental Service Corporation (GDSC). The transaction is expected to close
during the fourth quarter of 1998. GDSC will pay $840,000 in cash, with a
portion of such amount representing the long term debt obligation payoff
amounts to be determined on or before October 31, 1998; and GDSC stock
valued at $360,000. In addition, an "earnout consideration" is to be paid
based on earnings of the business acquired over the next two years. Note
Payable
The Partnership entered into a $50,000 note payable subsequent to year end.
The note bears interest of 11% and has a term of seven years, with monthly
principal and interest payments due.
The aggregate maturity of the long-term debt for each of the five years
subsequent to December 31, 1997 and thereafter are as follows:
Year ending December 31:
1998 $ 3,286
1999 5,402
2000 6,027
2001 6,724
2002 7,503
Thereafter 21,058
--------------
$ 50,000
==============
F-32
<PAGE>
<TABLE>
<CAPTION>
TG 3 DENTAL SERVICES
(A California General Partnership)
Condensed Balance Sheets
December 31, March 31,
Assets 1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 100 $ 49,013
Management fees receivable, net 10,996 10,589
Dental supplies 25,000 25,000
Prepaid expenses and other current assets 1,200 8,939
------------- -------------
Total current assets 37,296 93,541
Equipment and leasehold improvements, net 93,950 164,163
Receivables from affiliates 20,000 20,000
------------- -------------
Total assets $ 151,246 $ 277,704
============= =============
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 11,004 $ 74,339
Accrued salaries, wages and benefits 3,215 4,321
Current portion of long-term debt 11,767 14,116
------------- -------------
Total current liabilities 25,986 92,776
Long-term debt, less current portion 107,314 152,154
Partners' captial 17,946 32,774
------------- -------------
Total liabilities and partners' capital $ 151,246 $ 277,704
============= =============
See accompanying notes to condensed financial statements.
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
TG 3 DENTAL SERVICES
(A California General Partnership)
Condensed Statement of Income
(Unaudited)
Three Months
Ended
March 31,
1998
------------------
<S> <C>
Management fee revenue $ 105,093
------------------
Operating expenses:
Practice non-clinical salaries and benefits 22,597
Dental supplies and lab expenses 4,062
Practice occupancy expenses 3,516
Practice selling, general and administrative expenses 13,543
Depreciation 2,535
------------------
46,253
------------------
Operating income 58,840
Nonoperating expense:
Interest expense 3,542
------------------
Net income $ 55,298
==================
See accompanying notes to condensed financial statements.
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
TG 3 DENTAL SERVICES
(A California General Partnership)
Condensed Statement of Cash Flows
(Unaudited)
Three Months
Ended
March 31,
1998
-----------------
<S> <C>
Cash flows from operating activities:
Net income $ 55,298
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 2,535
Changes in operating assets and liabilities:
Decrease in management fees receivable 407
Increase in prepaids and other assets (7,739)
Increase in accounts payable 63,335
Increase in accrued salaries, wages and benefits 1,106
-----------------
Net cash provided by operating activities 114,942
-----------------
Cash flows from investing activities:
Acquisition of equipment (72,748)
-----------------
Net cash used in investing activities (72,748)
-----------------
Cash flows from financing activities:
Proceeds from long-term debt 50,000
Payments of long-term debt (2,811)
Capital distributions (40,470)
-----------------
Net cash provided by financing activities 6,719
-----------------
Increase in cash and cash equivalents 48,913
Cash and cash equivalents, beginning of period 100
-----------------
Cash and cash equivalents, end of period $ 49,013
=================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,542
=================
See accompanying notes to condensed financial statements.
</TABLE>
F-35
<PAGE>
TG 3 DENTAL SERVICES
(A California General Partnership)
Notes to Condensed Financial Statements
(Unaudited)
(1) Business Description
TG 3 Dental Services, a California General Partnership, (the Partnership),
was formed on October 29, 1997 (inception). The Partnership is a dental
care organization that provides support services to a dental practice in
Riverside County, California. As of December 31, 1997, the Partnership
provided management support under a long-term (20 years) management
agreement with the dental practice. Under the terms of the management
agreement, the Partnership, among other things, bills and collects patient
receivables and provides all administrative support services to the dental
practice in exchange for management fees (see note 2).
The Partnership and the dental practice are related through common
ownership of one partner. The Partnership and its affiliate structure their
business enterprises to comply with the state regulatory mandates requiring
dentistry practices to be owned and operated by state-licensed dentists.
(2) Significant Accounting Policies
Basis of Presentation
The condensed financial statements have been prepared on the accrual basis
of accounting. Pursuant to EITF 97-2, the nature of the management
agreement that the Partnership has entered into with the dental practice
does not permit the Partnership to consolidate the activities of the dental
practice.
Interim Reporting
The accompanying unaudited interim condensed financial statements of the
Partnership 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 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 Partnership's
financial statements for the year ended December 31, 1997. The results for
the three months ended March 31, 1998 are not necessarily indicative of the
results of operations for the entire year.
Revenues
Revenues consist of management fees charged to the dental practice based on
an agreed-upon percentage of the dental practice revenues under the
management agreement. Such fees are recognized when earned.
F-36
<PAGE>
TG 3 DENTAL SERVICES
(A California General Partnership)
Notes to Condensed Financial Statements, Continued
(3) Notes Payable
On February 1, 1998 the Partnership borrowed an additional $50,000 from a
bank. The unsecured note payable bears interest at 10.97% with monthly
principal and interest payments due through February 2005.
(4) Acquisition
On October 29, 1997 (inception), the Partnership acquired all of the
tangible assets of the dental practice under management, which included
$85,000 of equipment and $25,000 of dental supplies. As consideration for
these assets, the Partnership paid $110,000 in cash.
(5) Subsequent Event
Sale of Partnership to Gentle Dental Service Corporation On June 30, 1998,
the Partnership entered into a definitive agreement to sell the assets,
management rights and related liabilities of the Partnership to Gentle
Dental Service Corporation (GDSC). The transaction is expected to close
during the fourth quarter of 1998. GDSC will pay $840,000 in cash, with a
portion of such amount representing the long term debt obligation payoff
amounts to be determined on or before October 31, 1998; and GDSC stock
valued at $360,000. In addition, an "earnout consideration" is to be paid
based on earnings of the business acquired over the next two years.
F-37
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1998
(in thousands)
(unaudited)
(a) (b) (c)
Pro Forma Pro Forma
Assets Company PDSI TG3 Adjustments Consolidated
------ ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 70 $ 184 $ 49 $ (168) (g) $ 135
Accounts receivable 6,995 536 11 190 (h) 7,732
Other current assets 3,949 239 34 - 4,222
---------- ---------- ---------- ----------- ------------
Total current assets 11,014 959 94 (1,053) 12,089
Property and equipment 12,195 1,672 164 (736) (i) 13,295
Intangible assets 33,885 2,093 - 6,368 (j) 42,346
Other long-term assets 338 301 20 (310) (k) 349
---------- ---------- ---------- ----------- ------------
Total Assets $ 57,432 $ 5,025 $ 278 $ 5,344 $ 68,079
========== ========== ========== =========== ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities $ 9,321 $ 759 $ 93 $ (177) (l) $ 9,996
Long term debt and capital leases, net of
current portion 25,041 1,235 152 6,608 (m) 33,036
Other long-term liabilities 118 17 - (17) (n) 118
Redeemable common stock 2,137 - - - 2,137
Shareholders' Equity 20,815 3,014 33 (1,070) (o) 22,792
---------- ---------- ---------- ----------- ------------
Total Liabilities and Shareholders' equity $ 57,432 $ 5,025 $ 278 $ 5,344 $ 68,079
========== ========== ========== =========== ============
</TABLE>
F-38
<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 PDSI TG3 Adjustments Consolidated
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Dental practice net patient service revenue -
consolidated $ 29,327 $ - $ - $ 8,580 (p) $ 37,907
Net management fees 14,076 5,671 35 (5,706) (q) 14,076
---------- ---------- ---------- ----------- ------------
Net Revenues 43,403 5,671 35 2,874 51,983
Costs and expenses
Clinical salaries and benefits 13,701 - - 2,874 (r) 16,575
Practice nonclinical salaries and benefits 8,177 3,083 11 - 11,271
Dental supplies and lab 6,271 465 3 - 6,739
Practice occupancy expenses 3,527 490 2 - 4,019
Practice selling, general and administrative expenses 4,912 690 9 (483) (s) 5,128
Corporate selling, general and administrative expenses 5,700 - - - 5,700
Corporate restructure and merger costs 1,809 - - - 1,809
Depreciation and amortization 1,847 276 2 243 (t) 2,368
---------- ---------- ---------- ----------- ------------
Operating income (loss) (2,541) 667 8 240 (1,626)
Nonoperating income (expense):
Interest expense, net (653) (163) (1) (504) (u) (1,321)
Other income (expense) (74) 49 - (49) (v) (74)
---------- ---------- ---------- ----------- ------------
(727) (114) (1) (553) (1,395)
---------- ---------- ---------- ----------- ------------
Profit (loss) before minority interest and
income taxes (3,268) 553 7 (313) (3,021)
Minority interest in earnings of consolidated
partnerships - (120) - 120 (w) -
Income tax benefit (expense) 81 (17) - (64) (x) -
---------- ---------- ---------- ----------- ------------
Net Income (loss) (3,187) 416 7 (257) (3,021)
Dividends on redeemable convertible preferred stock -
Series B (932) - - - (932)
Accretion of redeemable common stock (34) - - - (34)
---------- ---------- ---------- ----------- ------------
Net loss attributable to common stock $ (4,153) $ 416 $ 7 $ (257) $ (3,987)
========== ========== ========== =========== ============
Loss per share attributable to common stock -
basic and diluted $ (0.91) $ (0.83)
========== ============
Weighted average number of shares 4,559 4,782
========== ============
</TABLE>
F-39
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the quarter ended March 31, 1998
(in thousands, except per share amounts)
(unaudited)
(a) (b) (c)
Pro Forma Pro Forma
Company PDSI TG3 Adjustments Consolidated
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Dental practice net patient service revenue -
consolidated $ 17,859 $ - $ - $ 2,570 (p) $ 20,429
Net management fees 484 1,667 105 (1,772) (q) 484
---------- ---------- ---------- ----------- ------------
Net Revenues
18,343 1,667 105 798 20,913
Costs and expenses
Clinical salaries and benefits 8,214 - - 798 (r) 9,012
Practice nonclinical salaries and benefits 2,831 881 23 - 3,735
Dental supplies and lab 2,084 124 4 2,212
Practice occupancy expenses 1,084 159 3 - 1,246
Practice selling, general and administrative expenses 1,868 242 14 (122) (s) 2,002
Corporate selling, general and administrative expenses 1,407 - - - 1,407
Depreciation and amortization 725 111 2 17 (t) 855
---------- ---------- ---------- ----------- ------------
Operating income (loss) 130 150 59 105 444
Nonoperating income (expense):
Interest expense, net (423) (45) (4) (118) (u) (590)
Other income (expense) (18) 30 - (30) (v) (18)
---------- ---------- ---------- ----------- ------------
(441) (15) (4) (148) (608)
---------- ---------- ---------- ----------- ------------
Profit (loss) before minority interest and
income taxes (311) 135 55 (43) (164)
Minority interest in earnings of consolidated
partnerships - (22) 22 (w) -
Income tax benefit
(expense) 125 (1) - 1 (x) 125
---------- ---------- ---------- ----------- ------------
Net Income (loss) (186) 112 55 (20) (39)
Accretion of redeemable common stock (7) - - - (7)
---------- ---------- ---------- ----------- ------------
Net loss attributable to common stock $ (193) $ 112 $ 55 $ (20) $ (46)
========== ========== ========== =========== ============
Loss per share attributable to common stock -
basic and diluted $ (0.02) $ (0.01)
========== ============
Weighted average number of shares 7,755 7,978
========== ============
</TABLE>
F-40
<PAGE>
Gentle Dental Service Corporation
Notes to Pro Forma Consolidated Financial Information
March 31, 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 quarter ended March 31,
1998, as if the acquisition of assets of Pacific Dental Services, Inc. ("PDSI")
and TG3 Dental Services ("TG3") had occurred on January 1, 1997, and the Pro
Forma Condensed Consolidated Balance Sheet of the Company as of March 31, 1998
as if the acquisition of PDSI and TG3 had occurred on that date.
Prior to the acquisition, the management agreements between PDSI and TG3 and
their respective managed dental practices did not meet the criteria of EITF 97-2
so as to permit the consolidation of the dental practices' financial results in
the financial statements of PDSI and TG3. In connection with the acquisition of
assets of PDSI and TG3, the management agreements were amended and restated into
a form that now permits the Company to consolidate the accounts of these dental
practices for financial reporting purposes.
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 quarter ended March 31, 1998.
(b) Condensed consolidated balance sheet and condensed consolidated statement
of income of PDSI as of and for the quarter ended March 31, 1998.
(c) Condensed consolidated balance sheet and condensed consolidated statement
of income of TG3 as of and for the quarter ended March 31, 1998.
(d) Consolidated statement of operations of the Company for the year ended
December 31, 1997.
(e) Consolidated statement of income of PDSI for the year ended December 31,
1997.
(f) Consolidated statement of income of TG3 for the year ended December 31,
1997.
(g) Reflects adjustment to PDSI and TG3 Cash and cash equivalents for amounts
not acquired.
(h) Reflects adjustment to PDSI and TG3 Accounts receivable to record patient
level receivables of the managed dental practices, in lieu of management
fee receivables, as a result of the consolidation of these practices
post-acquisition, and reflects an adjustment to eliminate $32 of related
party receivables not acquired.
(i) Reflects adjustment to PDSI and TG3 Property and equipment for property not
acquired and to record equipment acquired at fair market value.
(j) Reflects adjustment to record Intangible assets at excess of purchase price
over the fair market value of PDSI and TG3 net assets acquired.
(k) Reflects elimination of long-term related party receivables not acquired.
F-41
<PAGE>
(l) Reflects adjustment to current portion of long-term debt and capital lease
obligations for amounts not assumed.
(m) Reflects adjustment to Long term debt and capital lease, net of current
portion for $743 of such debt of PDSI and TG3 not assumed, and the assumed
borrowing (if the acquisition had been completed on March 31, 1998) of
$7,351 to finance the cash portion of the purchase price of PDSI and TG3.
(n) Reflects elimination of liability for minority interest in Orange Dental
Services, which minority interest was acquired by the Company.
(o) Reflects elimination of PDSI and TG3 Shareholders' equity of $3,047 in
accordance with purchase accounting treatment and the issuance of $1,977 of
Company common stock as part of the purchase price.
(p) Reflects adjustment to record net patient service revenue of the dental
practices managed by PDSI and TG3 as a result of the consolidation of these
practices post-acquisition.
(q) Reflects adjustment to eliminate PDSI and TG3 Net management fees as a
result of the consolidation of the managed dental practices
post-acquisition.
(r) Reflects adjustment to include Clinical salaries and benefits of the dental
practices managed by PDSI and TG3 as a result of the consolidation of these
practices post-acquisition.
(s) Reflects the following adjustments to Practice selling, general and
administrative expenses:
(1) Elimination of certain expenses associated with the lease of PDSI's
corporate office which was not assumed by the Company.
(2) Elimination of certain expenses associated with PDSI employees not
hired by the Company and based on a new employment agreement between
the Company and the President of PDSI.
(3) Elimination of certain employee benefits not offered by the Company.
Quarter ended Year ended
March 31, 1998 December 31, 1997
-------------- -----------------
(1) ($102) ($407)
(2) (5) (17)
(3) (15) (59)
------- --------
($122) ($483)
===== =====
(t) Reflects adjustment for Depreciation and amortization expense related to
the fixed assets and intangibles recorded as a result of the purchase of
PDSI and TG3. The following table reconciles the two components to the
total adjustment:
Quarter ended Year ended
March 31, 1998 December 31, 1997
-------------- -----------------
Depreciation Expense ($62) ($150)
Amortization Expense 79 393
----- -------
$17 $243
==== ====
F-42
<PAGE>
Depreciation expense decrease stems from leasehold improvements 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.
(u) Reflects adjustment for Interest expense, net as a result of assumed
borrowing to finance the purchase of PDSI and TG3 at an estimated interest
rate of 8%.
(v) Reflects the elimination of PDSI and TG3 Other income (expense) related to
assets not included in the purchase.
(w) Reflects elimination of minority interest in earnings of various
consolidated partnerships, which minority interests were either acquired by
PDSI in a December 1997 roll-up transaction or acquired by the Company as
part of the acquisition transaction.
(x) Reflects adjustment of Income tax benefit (expense) to the estimated tax on
the pro forma consolidated profit (loss) before income tax.
F-43
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
2.1 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and Pacific Dental
Services, Inc. (Included with original Form 8-K filed by the
Company on July 15, 1998.)
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 C Assumption Agreement
Exhibit D Assignment and Bill of Sale
Exhibit E Management Agreement
Exhibit F Shares Acquisition Agreement
Exhibit G Dentist Employment Agreement
Exhibit H Agreement Regarding New Offices
Exhibit I Employment Agreement
Schedule 1.02-2 Excluded Assets
Schedule 1.10 Purchase Price Allocation
Schedule 3.04 Litigation
Schedule 3.06-2 Employee Benefits
Schedule 3.06-3 Employment Manuals and Policies
Schedule 3.06-4 Compensation
Schedule 3.07 Financial Statements
Schedule 3.08 Receivables
Schedule 3.09 Prepaid Expenses and Other
Schedule 3.10 Tangible Personal Property
Schedule 3.11 Payables
Schedule 3.12 Indebtedness
Schedule 3.13 Other Liabilities
Schedule 3.15 Leases
Schedule 3.16 Contracts
Schedule 3.19 Insurance
Schedule 3.22 Permits
Schedule 3.25 Consents and Approvals
2.2 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and Orange Dental
Services. (Included with original Form 8-K filed by the Company on
July 15, 1998.)
<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
Exhibit C Management Agreement
Exhibit D Shares Acquisition Agreement
Exhibit E Dentist Employment Agreement
Schedule 1.02-2 Excluded Assets
Schedule 1.09 Purchase Price Allocation
Schedule 3.04 Litigation
Schedule 3.06-2 Employee Benefits
Schedule 3.06-3 Employment Manuals and Policies
Schedule 3.06-4 Compensation
Schedule 3.12 Indebtedness
Schedule 3.13 Other Liabilities
Schedule 3.15 Leases
Schedule 3.16 Contracts
Schedule 3.19 Insurance
Schedule 3.22 Permits
Schedule 3.25 Consents and Approvals
2.3 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and TG3 Dental Services.
(Included with original Form 8-K filed by the Company on July 15,
1998.)
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
Exhibit C Management Agreement
Exhibit D Shares Acquisition Agreement
Exhibit E Dentist Employment Agreement
Schedule 1.02-2 Excluded Assets
Schedule 1.10 Purchase Price Allocation
Schedule 3.04 Litigation
Schedule 3.06-2 Employee Benefits
Schedule 3.06-3 Employment Manuals and Policies
Schedule 3.06-4 Compensation
Schedule 3.07 Financial Statements
Schedule 3.08 Receivables
<PAGE>
Schedule 3.09 Prepaid Expenses and Other
Schedule 3.10 Tangible Personal Property
Schedule 3.11 Payables
Schedule 3.12 Indebtedness
Schedule 3.13 Other Liabilities
Schedule 3.15 Leases
Schedule 3.16 Contracts
Schedule 3.19 Insurance
Schedule 3.22 Permits
Schedule 3.25 Consents and Approvals
2.4 Asset Purchase Agreement, dated as of June 30, 1998, between the
Company, Gentle Dental Management, Inc. and Bryan Watanabe,
D.D.S., Inc. (Included with original Form 8-K filed by the Company
on July 15, 1998.)
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 Assignment and Bill of Sale
Exhibit B Management Agreement
Exhibit C Shares Acquisition Agreement
Exhibit D Dentist Employment Agreement
23.1 Consent of KPMG Peat Marwick LLP.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Gentle Dental Service Corporation:
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 June 15, 1998, except as to Note 12 which is as of June 30, 1998,
relating to the consolidated balance sheet of Pacific Dental Services, Inc. as
of December 31, 1997 and the related consolidated statements of income,
shareholders' equity and cash flows for the year ended December 31, 1997, and of
our report dated July 6, 1998 relating to the balance sheet of TG3 Dental
Services as of December 31, 1997 and the related statements of income, partners'
capital and cash flows for the period from October 29, 1997 (inception) through
December 31, 1997, which reports appear in this Current Report on Form 8-K/A
Amendment No. 1 of Gentle Dental Service Corporation.
KPMG PEAT MARWICK LLP
Orange County, California
September 11, 1998
