U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number: 333-13529
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GENTLE DENTAL SERVICE CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 91-1577891
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Washington Street, Suite 1100, Vancouver, WA 98660
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(Address of principal executive offices)
Issuer's telephone number (360) 750-7975
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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of August 12, 1997, 3,144,304 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Gentle Dental Service Corporation
Balance Sheets
(In thousands, except share data)
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December 31, June 30,
1996 1997
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(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 229 $ 745
Accounts receivable, net 2,678 1,961
Receivables from affiliates and other receivables 1,223 2,070
Income taxes receivable 170 170
Supplies 363 435
Prepaid expenses and other current assets 708 372
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Total current assets 5,371 5,753
Property and equipment, net 4,163 4,826
Intangible assets, net 3,225 4,853
Other assets 68 49
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Total assets $ 12,827 $ 15,481
========== =========
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders Equity
Current liabilities:
Accounts payable $ 1,256 $ 919
Accrued payroll and payroll related costs 364 527
Other accrued liabilities 477 385
Short-term borrowings 2,097 -
Current portion of long-term debt and capital lease obligations 917 405
---------- ---------
Total current liabilities 5,111 2,236
Deferred rent 88 113
Deferred income taxes 3 113
Long-term debt, less current portion 1,822 529
Capital lease obligations, less current portion 441 422
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Total liabilities 7,465 3,413
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Commitments and contingent liabilities
Redeemable common stock, no par value, 190,302 and 183,686 shares
issued and outstanding, respectively 2,199 2,115
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Nonredeemable shareholders' equity:
Preferred stock, 30,000,000 shares authorized, no shares issued
and outstanding - -
Common stock, no par value, 50,000,000 shares authorized, 1,351,579
and 2,960,618 shares issued and outstanding, respectively 2,888 9,562
Additional paid-in capital 446 474
Retained deficit (171) (83)
---------- ---------
Total nonredeemable shareholders' equity 3,163 9,953
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Total liabilities, redeemable common stock and
nonredeemable shareholders' equity $ 12,827 $ 15,481
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2
Gentle Dental Service Corporation
Statements of Operations
(Unaudited, in thousands, except per share data)
Six Months Ended June 30, Three Months Ended June 30,
1996 1997 1996 1997
----------- ----------- ----------- -----------
Support services revenue $ 5,157 $ 6,444 $ 2,677 $ 3,499
Branch costs 3,476 4,251 1,725 2,395
Operating expenses 1,912 1,853 1,011 929
----------- ----------- ----------- -----------
Operating income (loss) (231) 340 (59) 175
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Nonoperating income (expense):
Interest expense (299) (130) (193) (32)
Other income, net 80 7 63 7
----------- ----------- ----------- -----------
Nonoperating expense, net (219) (123) (130) (25)
----------- ----------- ----------- -----------
Income (loss) before income taxes (450) 217 (189) 150
Provision (benefit) for income taxes (47) 110 15 76
----------- ----------- ----------- -----------
Net income (loss) (403) 107 (204) 74
Accretion of redeemable
common stock (68) (19) (13) (9)
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Net income (loss) attributable to common stock $ (471) $ 88 $ (217) $ 65
=========== =========== =========== ===========
Net income (loss) per share of common stock $ (0.33) $ 0.03 $ (0.14) $ 0.02
=========== =========== =========== ===========
Weighted average number of shares outstanding 1,447 2,738 1,510 3,149
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3
Gentle Dental Service Corporation
Statements of Cash Flows
(Unaudited, in thousands)
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Six Months Ended June 30, Three Months Ended June 30,
1996 1997 1996 1997
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Cash flows from operating activities:
Net income (loss) $ (403) $ 107 $ (204) $ 74
Adjustments to reconcile change in net cash
provided by (used in) operating activities:
Depreciation and amortization 363 442 186 237
Loss on disposal of assets - 24 - 19
Stock options granted to nonemployees 50 28 45 14
Deferred income taxes 6 110 72 76
Amortization of warrants 81 - 81 -
Deferred rent 5 25 (3) 9
Changes in certain assets and liabilities,
net of acquisitions:
Accounts receivable, net (306) 1,186 (36) 826
Receivables from affiliates and other receivables (35) (934) (291) (857)
Income taxes receivable (53) - (53) -
Supplies (167) (72) (24) (53)
Prepaid expenses and other current assets (95) (121) (15) (42)
Other assets 8 19 (16) 1
Accounts payable 369 (337) 165 449
Accrued liabilities (364) (42) (276) (115)
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Net cash provided by (used in) operating
activities (541) 435 (369) 638
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment,
excluding acquisitions (396) (921) (240) (417)
Proceeds from sale of property and equipment - 22 - 22
Cash paid for acquisitions, including other direct
costs, net of cash acquired (663) (973) (275) -
----------- ----------- ----------- -----------
Net cash used in investing activities (1,059) (1,872) (515) (395)
----------- ----------- ----------- -----------
Cash flows from financing activities, excluding acquisitions:
Net proceeds (payments) on short-term borrowings 988 (2,097) 600 -
Proceeds from issuance of notes payable 349 - 179 -
Payments of notes payable (140) (2,449) (48) (70)
Payments of capital lease obligations (40) (54) (21) (23)
Proceeds from issuance of common stock 974 7,500 974 -
Common stock issuance costs - (844) - (79)
Exercise of put rights (90) (103) (90) (103)
Exercise of options 2 - 2 -
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Net cash provided by (used in) financing
activities 2,043 1,953 1,596 (275)
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 443 516 712 (32)
Cash and cash equivalents, beginning of period 689 229 420 777
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 1,132 $ 745 $ 1,132 $ 745
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4
Gentle Dental Service Corporation
Notes to Unaudited Financial Statements
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1. Organization and Significant Accounting Policies
Gentle Dental Service Corporation (the "Company"), incorporated on December
14, 1992, is a Washington corporation headquartered in Vancouver,
Washington. The Company, as part of a multi-specialty dental care delivery
network, provides support services to dental professional corporations in
California, Oregon and Washington. During the period January 1, 1997
through June 30, 1997 the Company provided management support to three
professional corporations under long-term support services agreements:
Gentle Dental of Oregon, P.C. and Tse, Saiget, Watanabe & McClure, Inc.,
P.S., a.k.a., Gentle Dental of Washington, P.C., and Arena Dental
Corporation, a California Professional Corporation (together, the "PCs").
Under the terms of the service agreements, the Company, among other things,
bills and collects patient receivables and provides all administrative
support services to the PCs in exchange for support services fees.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price
per share in the Offering was $5.00, resulting in gross offering proceeds
of $7,500,000. Net of underwriters' discount and total offering expenses
the Company received approximately $6,205,000 in proceeds from the
Offering. The effects of the Offering and related transactions have been
included in the accompanying financial statements as of June 30, 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". In accordance with this pronouncement, the
Company will adopt the new standard for periods ending after December 15,
1997. Management does not expect the adoption of this pronouncement to have
a significant effect on reported earnings per share information.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of the
consolidation of professional corporation revenues and the accounting for
business combinations. The Company is unable to predict the impact, if any,
that this review may have on the Company's acquisition strategy, allocation
of purchase price related to acquisitions, and amortization life assigned
to intangible assets.
The accompanying unaudited interim financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and note disclosures
normally included in annual financial statements have been condensed or
omitted pursuant to those rules and regulations. In the opinion of
management, all adjustments, consisting only of normal, recurring
adjustments considered necessary for a fair presentation, have been
included. Although management believes that the disclosures made are
adequate to insure that the information presented is not misleading, it is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual
report for the fiscal year ended December 31, 1996. The results for the six
months ended June 30, 1997 are not necessarily indicative of the results of
operations for the entire year.
5
Gentle Dental Service Corporation
Notes to Unaudited Financial Statements
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2. Revenues
Revenues consist primarily of support services fees charged to the PCs
based on an agreed-upon percentage of PC revenues under support services
agreements, net of provisions for contractual adjustments and doubtful
accounts. Such fees are recognized when earned.
Six Months Ended June 30, Three Months Ended June 30,
1996 1997 1996 1997
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(In thousands)
PC dental revenue, net of provisions
for contractual adjustments and
doubtful accounts $ 10,313 $ 12,192 $ 5,353 $ 6,623
Less amounts retained by the PCs (5,156) (5,837) (2,676) (3,165)
Retail sales - 89 - 41
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Support services revenue $ 5,157 $ 6,444 $ 2,677 $ 3,499
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3. Employee Stock Purchase Plan and Professional Corporation Employee Stock
Purchase Plan
The Company has adopted the Employee Stock Purchase Plan ("ESPP") and the
Professional Corporation Employee Stock Purchase Plan ("PC ESPP") covering
200,000 and 300,000 shares of the Company's common stock, respectively. The
ESPP and the PC ESPP were effective May 1, 1997. All full-time employees of
the Company and the PCs can purchase common stock under these plans through
payroll withholding at a 10% discount to the market price of the stock on
the last day of each calendar quarter.
4. Subsequent Event
On July 31, 1997 the Company acquired certain operating assets of the
dental practices of Pacific Medical Center in Seattle, Washington. The
acquisition was accounted for as a taxable purchase under which the
Company's depreciable basis in the acquired assets was "stepped-up" to the
purchase price paid for the assets. The purchase price paid was
approximately $600,000 which included $500,000 in cash and $100,000 in a
promissory note.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company provides facilities, equipment, staffing, management support
and other ancillary services to the PCs that employ the dental services
providers of the Gentle Dental Network. The Company intends to rapidly expand
the Gentle Dental Network through acquisitions in both its existing markets as
well as new geographic markets. The PCs are exclusively in control of all
aspects of the practice of dentistry and the delivery of dental services.
The Company's revenues consist of fees received for services provided under
three Support Services Agreements between the Company and the PCs (the "Support
Services Agreements"). The Company's support services revenue ("Support Services
Revenue") is equal to a percentage of the net revenue of the PCs ("Net PC
Revenue"). Net PC Revenue equals the gross billings of the PCs less provisions
for contractual discounts and doubtful accounts.
During the first six months of 1997, the Company acquired one dental
practice in the Seattle, Washington metropolitan area and one dental practice in
the Sacramento, California metropolitan area.
In connection with the acquisition of dental practices, the Company
capitalizes a portion of the purchase price as intangible assets relating to
noncompetition covenants and the cost of purchasing the right to provide
management support services to the acquired practices under the Support Services
Agreements. These intangible assets are amortized on a straight-line basis over
25 years. The resulting amortization expense reduces net income, but not cash
flow, and the size of this expense will increase as the Company completes more
acquisitions.
Results of Operations
The following table shows the derivation of the Company's revenues from the
net revenues of the PCs for the periods indicated.
Six Months Ended June 30, Three Months Ended June 30,
1996 1997 1996 1997
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(In thousands)
PC dental revenue, net of provisions
for contractual adjustments and
doubtful accounts $ 10,313 $ 12,192 $ 5,353 $ 6,623
Less amounts retained by the PCs (5,156) (5,837) (2,676) (3,165)
Retail sales - 89 - 41
----------- ----------- ----------- ---------
Support services revenue $ 5,157 $ 6,444 $ 2,677 $ 3,499
=========== =========== =========== =========
7
Comparison of the Three Months Ended June 30, 1997 to the Three Months Ended
June 30, 1996
Revenue. Net PC Revenue increased 23.7% from $5.4 million for the three
months ended June 30, 1996 to $6.6 million for the three months ended June 30,
1997. Revenues increased 6.8% for branch offices in operation during both
periods. Additional growth was attributed to three practice acquisitions during
the period of June 1, 1996 through June 30, 1997.
Support Services Revenue increased 30.7% from $2.7 million for the three
months ended June 30, 1996 to $3.5 million for the three months ended June 30,
1997. This higher rate of growth compared with the growth of Net PC Revenue was
primarily the result of the increase in the percentage of Net PC Revenue payable
under the Support Services Agreements from 50% to 51% and 50% to 53% for the
Washington and Oregon PCs, respectively. In addition 1.2% of the Support
Services Revenue or 5.0% of the growth was attributed to the introduction of the
retail sale of toothbrushes.
Branch Costs. Branch costs include all staff compensation and related
payroll costs at the dental facilities, other than dentists, hygienists, and
dental assistants, and all dental supplies, facilities, equipment depreciation,
and general branch administrative expense. Branch costs increased 38.8% from
$1.7 million for the three months ended June 30, 1996 to $2.4 million for the
three months ended June 30, 1997. Branch costs as a percentage of Net PC Revenue
increased from 32.2% to 36.2% for the three months ended June 30, 1996 and 1997,
respectively. This increase is primarily attributed to increases in staff
compensation, laboratory, dental supply, depreciation and amortization expenses.
Operating Expenses. The Company's operating expenses decreased 8.1% from
$1.0 million for the three months ended June 30, 1996 to $929,000 for the three
months ended June 30, 1997. Operating expenses as a percentage of Net PC Revenue
decreased from 18.9% to 14.0% for the three months ended June 30, 1996 and 1997,
respectively. This decrease in operating expenses as a percentage of Net PC
Revenue is consistent with the Company's strategy to increase the growth rate of
revenue at a rate higher than the growth rate in overall operating expenses.
Nonoperating Expense, Net. Nonoperating expense, net decreased from
$130,000 for the three months ended June 30, 1996 to $25,000 for the three
months ended June 30, 1997. This decrease is attributed to a decrease in other
income of $56,000 offset by a decrease in interest expense of $161,000.
Provision (Benefit) for Income Taxes. For the three months ended June 30,
1996 the Company recognized a tax benefit resulting from its taxable loss for
the period. Because the Company has in the past made some practice acquisitions
under a tax-free merger structure, the amortization of intangible assets from
those acquisitions reduces earnings but is not deductible for tax purposes.
Accordingly, for the three months ended June 30, 1997, the effective tax rate
was higher than the applicable statutory tax rate.
8
Comparison of the Six Months Ended June 30, 1997 to the Six Months Ended June
30, 1996
Revenue. Net PC Revenue increased 18.2% from $10.3 million for the six
months ended June 30, 1996 to $12.2 million for the six months ended June 30,
1997. Revenues increased 7.0% for branch offices in operation during both
periods. Additional growth was attributed to three practice acquisitions during
the period of June 1, 1996 and June 30, 1997.
Support Services Revenue increased 25% from $5.2 million for the six months
ended June 30, 1996 to $6.5 million for the six months ended June 30, 1997. This
higher rate of growth compared with the growth of Net PC Revenue was also
primarily the result of the increase in the percentage of Net PC Revenue payable
under the Support Services Agreements from 50% to 51% and 50% to 53% for the
Washington and Oregon PCs, respectively. In addition 1.4% of the Support
Services Revenue or 6.9% of the growth was attributed to the introduction of the
retail sale of toothbrushes.
Branch Costs. Branch costs include all staff compensation and related
payroll costs at the dental facilities, other than dentists, hygienists, and
dental assistants, and all dental supplies, facilities, equipment depreciation,
and general branch administrative expense. Branch costs increased 22.6% from
$3.5 million for the six months ended June 30, 1996 to $4.3 million for the six
months ended June 30, 1997. Branch costs as a percentage of Net PC Revenue
increased from 33.7% to 34.9% for the six months ended June 30, 1996 and 1997,
respectively. This increase is primarily attributed to an increase in staff
compensation, laboratory, dental supply, depreciation and amortization expenses.
Operating Expenses. The Company's operating expenses decreased 3.1% from
$1.91 million for the six months ended June 30, 1996 to $1.85 million for the
six months ended June 30, 1997. Operating expenses as a percentage of Net PC
Revenue decreased from 18.5% to 15.2% for the six months ended June 30, 1996 and
1997, respectively. This decrease in operating expenses as a percentage of Net
PC Revenue is consistent with the Company's strategy to increase the growth rate
of revenue at a rate higher than the growth rate in overall operating expenses.
Nonoperating Expense, Net. Nonoperating expense, net decreased from
$219,000 for the six months ended June 30, 1996 to $123,000 for the six months
ended June 30, 1997. This decrease is attributed to a decrease in other income
of $73,000 offset by a decrease in interest expense of $169,000.
Provision (Benefit) for Income Taxes. For the six months ended June 30,
1996 the Company recognized a tax benefit resulting from its taxable loss for
the period. Because the Company has in the past made some practice acquisitions
under a tax-free merger structure, the amortization of intangible assets from
those acquisitions reduces earnings but is not deductible for tax purposes.
Accordingly, for the six months ended June 30, 1997, the effective tax rate was
higher than the applicable statutory tax rate.
9
Liquidity and Capital Resources
At June 30, 1997, the Company's cash and cash equivalents were $745,000 and
working capital was $3.5 million. Net cash provided by (used in) operating and
investing activities was ($884,000) and $243,000 for the three month periods
ending June 30, 1996 and 1997, respectively. Net cash provided by (used in)
financing activities was $1.6 million and ($275,000) for the three month periods
ending June 30, 1996 and 1997, respectively.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price per
share in the Offering was $5.00, resulting in gross offering proceeds of
$7,500,000. Net of underwriters' discounts and total offering expenses the
Company received approximately $6,205,000 in proceeds from the Offering. The net
proceeds from the Offering have been used primarily to repay indebtedness and
for acquisitions and working capital.
The Company's current credit facility with its principal bank provides
access to up to $1.5 million. No amount was outstanding as of June 30, 1997.
This facility carries an interest rate of prime plus 1.0% and matures October
31, 1997. The Company is currently in negotiations for a significant increase in
its borrowing capacity. Although the Company's financial position has improved
subsequent to its initial public offering in February 1997, there can be no
assurance as to the credit terms and amount that the Company will be able to
secure.
The Company believes that its existing cash balances, amounts available
under the credit facility and cash from operations will be sufficient to fund
its operations for at least the next 12 months. However, to execute its long
term business strategy, the Company will require substantial additional funding
to acquire new practices and to expand and maintain practices within the Gentle
Dental Network. The Company will seek to obtain needed funds through additional
long-term or short-term borrowing arrangements or through the public or private
issuance of additional debt or equity securities. There can be no assurance that
any such financing will be available to the Company or will be available on
terms acceptable to the Company.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 26, 1996, Donald E. Janoff, D.D.S., a former employee of Gentle
Dental of Oregon, P.C. filed a complaint in the circuit court of the state of
Oregon for the county of Multnomah against Gentle Dental of Oregon, P.C. for
breach of contract. The complaint alleged that Gentle Dental of Oregon, P.C.
breached Dr. Janoff's employement contract by wrongfully terminating the
contract and sought damages of $375,000. On April 25, 1997, the court entered a
summary judgement against Dr. Janoff on all claims. Dr. Janoff has appealed.
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 Annual Meeting of Shareholders of the Company was held on May 30,
1997. Kenneth D. Hooten, Paul H. Keckley and Craig W. Wong were re-elected as
directors for a three-year term. Gerald R. Aaron was re-elected as a director
for a two-year term. The terms of office of directors Richard A. Armstrong,
Daniel P. Hunt, Jerald L. Willbur and Dany Y. Tse continued after the meeting.
The directors elected at the meeting were elected by the following votes:
Name of Director Votes For Votes Withheld
---------------- --------- --------------
Kenneth D. Hooten 2,249,582 1,750
Paul H. Keckley 2,249,582 1,750
Craig W. Wong 2,249,642 1,690
Gerald R. Aaron 2,249,682 1,650
Item 6. Exhibits and Reports on Form 8
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 14, 1997, the Company filed a Current Report on Form
8-K to report under Item 2 the acquisition on March 31, 1997 of
substantially all of the assets of Blue Oak Dental Group. No
financial statements were included in the report.
11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GENTLE DENTAL SERVICE CORPORATION
---------------------------------
(Registrant)
Date: August 12, 1997 By: L. THEODORE VAN EERDEN
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L. Theodore Van Eerden
Chief Financial Officer
12
EXHIBIT INDEX
Exhibit
No. Description
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27 Financial Data Schedule