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) November 4, 1997
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GENTLE DENTAL SERVICE CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 333-13529 91-1577891
- ------------------------------- ----------- -------------------
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
22800 Savi Ranch Parkway, Suite 206, Yorba Linda, CA 92887
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 998-0587
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(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 November 4, 1997, Gentle Dental Service Corporation (the "Company")
completed the merger of GMS Dental Group, Inc. ("GMS"), a privately held
corporation, with and into the Company, with the Company as the surviving
corporation. The merger is being accounted for as a pooling of interests. Upon
consummation of the merger, the Company issued 4,512,377 shares of its Common
Stock in exchange for substantially all of the outstanding stock of GMS. One
former GMS shareholder has notified the Company of his intent to assert his
appraisal rights which entitle him to be paid by the Company the fair value of
his GMS shares in cash. An additional 35,784 shares will be issued to this
shareholder if he withdraws or fails to perfect his appraisal rights. The
Company also assumed outstanding stock options and warrants of GMS which
converted into employee and consultant options to purchase a total of 110,600
shares of Company Common Stock at an average price of $0.48 per share and
warrants to purchase a total of 248,848 shares of Company Common Stock at an
average price of $6.57 per share.
A total of 297,076 of the shares issued in the merger are subject to
repurchase by the Company under previously existing agreements at an average
price of $0.32 per share if, among other things, the Company's EBITDA (on a
combined basis but excluding CEO salary and related expense) for 1997 does not
exceed $4,723,500. This EBITDA target is not expected to be met and,
accordingly, these shares are expected to be repurchased in early 1998. Another
297,071 of the shares issued in the merger are subject to repurchase by the
Company under the same prior agreements at the same price if, among other
things, the Company's EBITDA (on a combined basis but excluding CEO salary and
related expense) for 1998 does not exceed $12,683,250.
To determine the number of shares issued in the merger, the parties
initially agreed to a 53/47 ratio between the value of the Company's business
and the value of GMS's business based on the relative patient level revenues of
the two companies, assuming the completion of the Company's previously announced
acquisition of Dedicated Dental Systems, Inc. and related dental practices
("DDS"). To determine the final merger ratio, these values were adjusted for the
relative levels of debt, stock options and warrants, and estimated earn-out
obligations of the two companies related to their respective previous
acquisitions, as well as for the expected repurchase of shares in early 1998 as
discussed above. Shares issued to GMS shareholders in the merger currently
represent approximately 59% of the outstanding Common Stock; however, upon
consummation of the DDS acquisition and after repurchase of the shares discussed
above, the shares issued to GMS shareholders in the merger will represent
approximately 47.5% of the outstanding Common Stock.
Prior to the merger, GMS was a dental practice management company providing
management support services to 22 dental offices with 102 dentists in
California, Idaho, and Hawaii. The Company intends to continue the business of
GMS.
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<PAGE>
Upon consummation of the merger, the board of directors of the Company was
reconstituted to consist of the following directors:
Gerald R. Aaron, DDS Steven R. Bull, DDS
Kenneth D. Hooten Robert Finzi
Paul H. Keckley Michael T. Fiore
Dany Y. Tse, DMD Kathleen D. La Porte
L. Theodore Van Eerden Wayne Posey
Craig W. Wong, DMD Grant Sadler
Upon consummation of the merger, the executive officers of the Company were
reconstituted to consist of the following:
Michael T. Fiore Co-Chairman, Chief Executive
Officer and President
Dany Y. Tse, DMD Co-Chairman, Founder and President
of Clinical Services Council
L. Theodore Van Eerden Executive Vice President and Chief
Development Officer
Grant Sadler Vice Chairman and Co-Founder
Norman Huffaker Chief Financial Officer
Venture funds affiliated with the Sprout Group received 1,649,562 shares of
Company Common Stock in the merger, which currently represent 21.4% of the
outstanding Common Stock. Directors Robert Finzi and Kathleen D. La Porte are
representatives of the Sprout Group. Mr. Fiore and Mr. Sadler received 356,772
and 395,541 shares of Company Common Stock in the merger, respectively,
currently representing 4.3% and 5.1%, respectively, of the outstanding Common
Stock.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Audited Consolidated Balance Sheets of GMS as of September 30, 1997
and December 31, 1996, and related audited Consolidated Statements of
Operations, Stockholders' Equity and Cash Flows of GMS for the nine
months ended September 30, 1997 and for the period from October 11,
1996 (inception) through December 31, 1996. Incorporated by reference
to pages F-24 to F-42 of the Company's Registration Statement on Form
SB-2, Registration No. 333-44037.
(b) Pro forma financial information. Pro forma Balance Sheet as of
September 30, 1997 and pro forma Statements of Operations for the nine
months ended September 30, 1997 and for the year ended December 31,
1996. Included as pages 5 to 8 of this Form 8-K/A Amendment No. 1.
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<PAGE>
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of October 30, 1997,
between the Company and GMS Dental Group, Inc. (Included with
original Form 8-K filed by the Company on November 19, 1997.)
23.1 Consent of KPMG Peat Marwick LLP.
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: January 20, 1998.
GENTLE DENTAL SERVICE CORPORATION
By NORMAN R. HUFFAKER
--------------------------------------
Norman R. Huffaker,
Chief Financial Officer
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<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Pro forma Consolidated Balance sheet
As of September 30, 1997
(in thousands, except share amounts)
(unaudited)
Assets
Pooling Proforma
Company GMS Adjustments Consolidated
-------- -------- ----------- ------------
(A)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 79 $ 68 $ 147
Accounts receivable, net 2,742 3,244 5,986
Receivables from affiliates 1,603 - 1,603
Income taxes receivable 134 - 134
Supplies 476 359 835
Prepaid and other current assets 520 637 1,157
-------- -------- ---------- ---------
Total current assets 5,554 4,308 - 9,862
Property and equipment, net 4,911 3,354 159 (B) 8,424
Intangibles assets, net 5,549 14,444 (148)(B) 19,845
Other assets 54 454 (5)(C) 503
-------- -------- ---------- ---------
Total assets $ 16,068 $ 22,560 $ 6 $ 38,634
======== ======== ========== =========
Liabilities, Redeemable Convertible Preferred and Common Stock
and Shareholders' Equity
Current liabilities:
Accounts payable $ 787 $ 441 $ 1,228
Accrued payroll and payroll related costs 785 1,293 2,078
Other current liabilities 630 1,216 1,846
Current portion of long-term debt and capital lease obligations 441 246 687
-------- -------- ---------- ---------
Total current liabilities 2,643 3,196 - 5,839
Long-Term liabilities:
Obligations under capital leases, net of current portion 314 327 641
Long-term debt, net of current portion 577 7,394 7,971
Other long-term liabilities 349 181 530
-------- -------- ---------- ---------
Total long-term liabilities 1,240 7,902 - 9,142
-------- -------- ---------- ---------
Total liabilities 3,883 11,098 - 14,981
Redeemable convertible preferred stock- Series B,
.001 par value, 9,270,000 authorized; 6,287,142 shares
issued and outstanding, no shares outstanding pro forma 12,072 (12,072)(D) -
Redeemable common stock, no par value, 183,686 shares issued
and outstanding 2,123 2,123
Shareholders' equity
Preferred stock, 30,000,000 shares authorized, no shares issued
and outstanding - - -
Convertible preferred stock-Series A, $.001 par value;
395,000 shares authorized; 395,000 shares issued and
outstanding, no shares outstanding pro forma 1 (1)(D) -
Convertible preferred stock-Series C, $.001 par value;
5,000 shares authorized; 2,753 shares issued and outstanding,
no shares outstanding pro forma - 1 (1)(D) -
Common stock, no par value, 50,000,000 shares authorized,
2,971,772 shares issued and outstanding, 7,658,925 shares
outstanding pro forma 9,543 3 12,074 (D) 21,620
Additional paid-in capital 488 2,438 2,926
Notes receivable from stockholders - (300) (300)
Accumulated earnings/(deficit) 31 (2,753) 6 (2,716)
-------- -------- ---------- ---------
Total shareholders' equity 10,062 (610) 12,078 21,530
-------- -------- ---------- ---------
Total liabilities, redeemable convertible preferred and
common stock and shareholders' equity $ 16,068 $ 22,560 $ 6 $ 38,634
======== ======== ========== =========
See accompanying notes to proforma consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Pro forma Consolidated Statement of Operations
For the nine months ended September 30, 1997
(In thousands, except per share amounts)
(unaudited)
Pooling Proforma
Company GMS Adjustments Consolidated
-------- --------- ----------- ------------
(A)
<S> <C> <C> <C> <C>
Dental group net patient service revenue $ - $ 19,348 $ 19,348
Net support service revenue (management fees) 10,269 - - 10,269
-------- -------- ---------- ---------
Net revenues 10,269 19,348 - 29,617
Clinical salaries & benefits - 6,571 6,571
Practice nonclinical salaries & benefits 2,712 5,410 8,122
Dental supplies and lab expenses 2,219 2,205 4,424
Practice occupancy expenses 1,248 1,202 2,450
Practice selling, general and administrative expenses 1,040 2,159 3,199
Corporate selling, general and administrative expenses 1,820 2,025 3,845
Depreciation & amortization 699 583 13 (B) 1,295
-------- -------- ---------- ---------
Total operating expenses 9,738 20,155 13 29,906
-------- -------- ---------- ---------
Operating loss 531 (807) (13) (289)
Interest expense, net (135) (227) (362)
Other income (expense) 52 (68) (16)
-------- -------- ---------- ---------
Income (loss) before taxes 448 (1,102) (13) (667)
Income taxes (benefit) 219 (134) (5) (C) 80
-------- -------- ---------- ---------
Net income (loss) 229 (968) (8) (747)
Dividends on redeemable convertible preferred stock-Series B (829) 829 (E) -
Accretion of redeemable common stock (27) - (27)
-------- -------- ---------- ---------
Net income/(loss) attributable to common stock $ 202 $ (1,797) $ 821 $ (774)
======== ======== ========== =========
Primary earnings (loss) per share $ 0.07 $ (0.10)
======== =========
Weighted average common and equivalent shares outstanding 2,952 7,500
======== =========
Fully diluted earnings per share $ 0.06
========
Weighted average fully diluted shares outstanding 3,288
========
See accompanying notes to consolidated financial statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Pro forma Consolidated Statement of Operations
For the year ended December 31, 1996
(In thousands, except per share amounts)
(unaudited)
Pooling Proforma
Company GMS Adjustments Consolidated
-------- --------- ----------- ------------
(A)
<S> <C> <C> <C> <C>
Dental group net patient service revenue $ - $ 3,701 $ 3,701
Net support service revenue (management fees) 10,712 - - 10,712
-------- -------- ---------- ---------
Net revenues 10,712 3,701 - 14,413
Clinical salaries & benefits - 1,493 1,493
Practice nonclinical salaries & benefits 3,148 1,131 4,279
Dental supplies and lab expenses 2,332 498 2,830
Practice occupancy expenses 1,298 265 1,563
Practice selling, general and administrative expenses 1,336 469 1,805
Corporate selling, general and administrative expenses 2,372 626 2,998
Depreciation & amortization 853 161 (24) (B) 990
-------- -------- ---------- ---------
Total operating expenses 11,339 4,643 (24) 15,958
-------- -------- ---------- ---------
Operating loss (627) (942) 24 (1,545)
Interest expense, net (742) (7) (749)
Other income (expense) 39 (87) (48)
-------- -------- ---------- ---------
Income (loss) before taxes (1,330) (1,036) 24 (2,342)
Income taxes (benefit) (345) (320) 10 (C) (655)
-------- -------- ---------- ---------
Net income (loss) (985) (716) 14 (1,687)
Dividends on redeemable convertible preferred stock- Series B (240) 240 (E) -
Accretion of redeemable common stock (91) - (91)
-------- -------- ---------- ---------
Net income/(loss) attributable to common stock $ (1,076) $ (956) $ 254 $ (1,778)
======== ======== ========== =========
Primary and fully diluted earnings (loss) per share $ (0.71) $ (0.70)
======== =========
Weighted average number of shares 1,524 2,533
======== =========
See accompanying notes to consolidated financial statements
</TABLE>
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<PAGE>
Gentle Dental Service Corporation
Notes to Proforma Consolidated Financial Statements
December 31, 1996 and September 30, 1997
The following proforma adjustments are prepared to reflect the consolidated
balance sheet as of September 30, 1997 and results of operations for the year
ended December 31, 1996 and the nine months ended September 30, 1997 as if the
merger of GMS with and into the Company had occurred on January 1, 1996. The
merger is being accounted for as a pooling of interests. The results of
operations for the year ended December 31, 1995 would have been the same as that
previously reported by the Company since GMS did not begin operations until
October 11, 1996. The proforma adjustments do not include the effect of merger
expenses and restructuring charges incurred in the fourth quarter of 1997 as a
result of the merger, which management has estimated to be $1,478.
(A) Reflects the financial statements of GMS for the period from October 11,
1996 (inception) to December 31, 1996, and for the nine months ended and as
of September 30, 1997 before any adjustments brought about by the merger of
GMS and the Company on November 4, 1997.
(B) Reflects the reduction in depreciation expense for property and equipment
and the increase in amortization expense for intangible assets of GMS. The
changes conform the accounting policies of GMS to those of the Company. The
following amounts reflect the impact to the consolidated statement of
operations for the year ended December 31,1996 and the nine months ended
September 30, 1997 and the net impact to the consolidated balance sheet at
September 30, 1997:
<TABLE>
<CAPTION>
Year 9/30/97
Ended 9 Mos Balance
1996 1997 Sheet
------ ------ -------
<S> <C> <C> <C>
Depreciation Expense/Increase to Property and equipment $ (24) $ (135) $ 159
Amortization Expense/Decrease to Intangible assets - 148 (148)
------ ------ -------
Net change before taxes (24) 13 11
Increase(decrease) to income tax expense/Increase to Other
assets for deferred income taxes 10 (5) (5)
------ ------ -------
Net change after taxes $ (14) $ 8 $ 6
====== ====== =======
</TABLE>
(C) Reflects the increase(decrease) in income taxes as a result of the
adjustments to depreciation expense and amortization expense.
(D) Reflects the conversion of GMS redeemable convertible preferred stock and
GMS convertible preferred stock to GMS common stock which was then
converted into Company common stock in connection with the merger.
(E) Reflects the elimination of the dividend on GMS redeemable convertible
preferred stock.
8
<PAGE>
EXHIBIT INDEX
Exhibit Description
2.1 Agreement and Plan of Merger, dated as of October 30, 1997, between
the Company and GMS Dental Group, Inc. (Included with original Form
8-K filed by the Company on November 19, 1997.)
The following exhibits and schedules to the Agreement and Plan of
Merger have been omitted and will be provided to the Securities and
Exchange Commission upon request:
Exhibit A Opinion of GMS's Counsel
Exhibit B Employment Agreements
Exhibit C-1 Shareholder Representation Letter
Exhibit C-2 Shareholder Consent
Exhibit D Affiliate Representation Letter
Exhibit E Tax Opinion
Exhibit F Opinion of GDSC's Counsel
Schedule 2.06 GDSC Litigation
Schedule 2.08-2 GDSC Employee Benefits
Schedule 2.08-3 GDSC Employment Agreements
Schedule 2.11 GDSC Changes or Events
Schedule 2.12 GDSC Leases
Schedule 2.13 GDSC Contracts
Schedule 2.23 GDSC Consents
Schedule 3.01 GMS Subsidiaries
Schedule 3.03 GMS Capitalization
Schedule 3.06 GMS Litigation
Schedule 3.08-1 GMS Collective Bargaining Agreements
Schedule 3.08-2 GMS Employee Benefits
Schedule 3.08-3 GMS Employment Agreements
Schedule 3.11 GMS Changes or Events
Schedule 3.12 GMS Leases
Schedule 3.13 GMS Contracts
Schedule 3.18 GMS Certain Interests
Schedule 3.20 GMS Permit Issues
Schedule 3.23 GMS Consents
Schedule 7.09 GMS Affiliates
23.1 Consent of KPMG Peat Marwick LLP.
EXHIBIT 23.1
CONSENT OF 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) and in this Form 8-K/A of Gentle Dental
Service Corporation of our report dated November 14, 1997, relating to the
consolidated balance sheets of GMS Dental Group, Inc. and subsidiaries as of
December 31, 1996 and September 30, 1997 and the related consolidated statements
of operations, stockholders' deficit and cash flows for the period from October
11, 1996 (inception) through December 31, 1996 and the nine-month period ended
September 30, 1997, which report appears on page F-24 of the Registration
Statement on Form SB-2 of Gentle Dental Service Corporation, Registration No.
333-44037 and is incorporated herein by reference.
KPMG PEAT MARWICK LLP
Orange County, California
January 20, 1998
