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) October 30, 1998
GENTLE DENTAL SERVICE CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 000-23673 91-1577891
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(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
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Item 2. Acquisition or Disposition of Assets
On October 30, 1998, Gentle Dental Service Corporation (the "Company")
completed the acquisition of all of the outstanding stock of Capitol Dental
Care, Inc. ("CDC") and substantially all of the assets of Dental Maintenance of
Oregon, P.C. ("DMO"). CDC is a dental care organization which has a contract
with the state of Oregon to provide capitated dental services under the Oregon
Health Plan. CDC in turn contracts with dental care providers, including DMO, to
provide dental care to Oregon Health Plan participants. The assets acquired from
DMO consist of 9 dental offices in Western Oregon, all outside of the Portland
metropolitan area.
The purchase price paid at closing for the stock of CDC consisted of
three-year 9% promissory notes for a total of $737,500. The purchase price paid
at closing for DMO's assets consisted of $6,087,500 in cash, assumption of
$167,000 in debt, a three-year 9% promissory note for $1,095,500 and an
eighteen-month 9% promissory note for $350,000. In addition, the Company has
agreed to make cash earnout payments as set forth in the DMO agreement based on
the EBITDA of the acquired businesses for the first three years following the
closing. The cash paid at closing was borrowed under the Company's senior credit
facility.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Audited Combined Balance Sheets of DMO and CDC as of December 31, 1996
and 1997, and related audited Combined Statements of Income,
Shareholders' Equity and Cash Flows of DMO and CDC for the years ended
December 31, 1996 and 1997. Incorporated by reference to pages F-75 to
F-85 of Amendment No. 1 to the Registration Statement on Form S-4 of
Wisdom Holdings, Inc., Registration No. 333-66475, filed on December
31, 1998.
Unaudited Combined Balance Sheets of DMO and CDC as of September 30,
1998, and related unaudited Combined Statements of Income and Cash
Flows of DMO and CDC for the nine-months ended September 30, 1997 and
1998. Incorporated by reference to pages F-86 to F-89 of Amendment No.
1 to the Registration Statement on Form S-4 of Wisdom Holdings, Inc.,
Registration No. 333-66475, filed on December 31, 1998.
(b) Pro forma financial information. Pro forma Balance Sheet as of
September 30, 1998 and pro forma Statements of Operations for the year
ended December 31, 1997 and the nine-month period ended September 30,
1998. Included as pages F-1 to F-5 of this Form 8-K/A Amendment No. 1.
2
(c) Exhibits.
2.1 Asset Purchase Agreement, dated as of October 30, 1998, between
the Company and Dental Maintenance of Oregon, P.C. (Included with
original Form 8-K filed by the Company on November 12, 1998.)
2.2 Stock Purchase Agreement, dated as of October 30, 1998, between
the Company and the shareholders of Capitol Dental Care, Inc.
(Included with original Form 8-K filed by the Company on November
12, 1998.)
23.1 Consent of KPMG 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 13, 1999
GENTLE DENTAL SERVICE CORPORATION
By NORMAN R. HUFFAKER
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Norman R. Huffaker,
Chief Financial Officer
3
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1998
(in thousands)
(unaudited)
(a) (b)
CDC/ Pro Forma Pro Forma
Assets Company DMO Adjustments Consolidated
------ --------- --------- ----------- ------------
Cash and cash equivalents $ 1,817 $ 3,452 $ (3,275) (e) $ 1,994
Accounts receivable, net 9,376 185 - 9,561
Other current assets 4,832 1,682 (1,631) (f) 4,883
--------- --------- --------- ---------
Total current assets 16,025 5,319 (4,906) 16,438
Property and equipment, net 14,850 657 (357) (g) 15,150
Intangible assets, net 72,840 19 7,879 (h) 80,738
Other long-term assets 1,209 842 (301) (i) 1,750
--------- --------- --------- ---------
Total assets $ 104,924 $ 6,837 $ 2,315 $ 114,076
========= ========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities $ 13,803 $ 714 $ 76 (j) 15,378
785 (k)
Long term debt and capital leases, net of
current portion 15,855 91 7,486 (k) 23,432
Convertible senior subordinated debt 30,000 - - 30,000
Other long-term liabilities 132 - - 132
Redeemable common stock 2,095 - - 2,095
Shareholders' equity 43,039 6,032 (6,032) (l) 43,039
--------- --------- --------- ---------
Total liabilities and shareholders' equity $ 104,924 $ 6,837 $ 2,315 $ 114,076
========= ========= ========= =========
F-1
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(in thousands, except per share amounts)
(unaudited)
(c) (d)
CDC/ Pro Forma Pro Forma
Company DMO Adjustments Consolidated
--------- --------- ----------- ------------
Dental practice net patient service revenue $ 29,327 $ 18,261 $ - $ 47,588
Net management fees 14,076 - - 14,076
--------- --------- --------- ---------
Net revenues 43,403 18,261 - 61,664
Costs and expenses
Clinical salaries and benefits 13,701 13,212 - 26,913
Practice nonclinical salaries and benefits 8,177 951 - 9,128
Dental supplies and lab expenses 6,271 613 - 6,884
Practice occupancy expenses 3,527 309 - 3,836
Practice selling, general and administrative expenses 4,912 1,270 (448) (m) 5,734
Corporate selling, general and administrative expenses 5,700 - - 5,700
Corporate restructure and merger costs 1,809 - - 1,809
Depreciation and amortization 1,847 101 264 (n) 2,212
--------- --------- --------- ---------
Operating income (loss) (2,541) 1,805 184 (552)
Nonoperating income (expense):
Interest income (expense), net (653) 265 (729) (o) (1,382)
(265) (p)
Other income (expense) (74) 17 (17) (q) (74)
--------- --------- --------- ---------
(727) 282 (1,011) (1,456)
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Income (loss) before income taxes (3,268) 2,087 (827) (2,008)
Income tax (benefit) expense (81) 556 (433) (r) 42
--------- --------- --------- ---------
Net income (loss) (3,187) 1,531 (394) (2,050)
Dividends on redeemable convertible preferred stock - Series B (932) - - (932)
Accretion of redeemable common stock (34) - - (34)
--------- --------- --------- ---------
Net income (loss) attributable to common stock $ (4,153) $ 1,531 $ (394) $ (3,016)
========= ========= ========= =========
Loss per share attributable to common stock - basic and diluted $ (0.91) $ (0.66)
========= =========
Weighted average number of shares 4,559 4,559
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F-2
GENTLE DENTAL SERVICE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 1998
(in thousands, except per share amounts)
(unaudited)
(a) (b)
CDC/ Pro Forma Pro Forma
Company DMO Adjustments Consolidated
--------- --------- ----------- ------------
Dental practice net patient service revenue $ 67,534 $ 13,309 $ - $ 80,843
Net management fees 1,408 - - 1,408
--------- --------- --------- ---------
Net revenues 68,942 13,309 - 82,251
Costs and expenses
Clinical salaries and benefits 30,762 8,742 - 39,504
Practice nonclinical salaries and benefits 10,028 713 - 10,741
Dental supplies and lab expenses 8,000 533 - 8,533
Practice occupancy expenses 3,814 245 - 4,059
Practice selling, general and administrative expenses 6,434 987 (375) (m) 7,046
Corporate selling, general and administrative expenses 4,531 - - 4,531
Depreciation and amortization 2,877 94 180 (n) 3,151
--------- --------- --------- ---------
Operating income 2,496 1,995 195 4,686
Nonoperating income (expense):
Interest expense, net (1,820) 170 (547) (o) (2,367)
(170) (p)
Other income (expense) (11) 15 (15) (q) (11)
--------- --------- --------- ---------
(1,831) 185 (732) (2,378)
--------- --------- --------- ---------
Income (loss) before income taxes 665 2,180 (537) 2,308
Income tax (benefit) expense 19 545 (392) (r) 172
--------- --------- --------- ---------
Net income (loss) 646 1,635 (145) 2,136
Dividends on redeemable convertible preferred stock - Series B - - - -
Accretion of redeemable common stock (15) - - (15)
--------- --------- --------- ---------
Net income (loss) attributable to common stock $ 631 $ 1,635 $ (145) $ 2,121
========= ========= ========= =========
Income per share attributable to common stock - basic $ 0.08 $ 0.26
========= =========
Income per share attributable to common stock - diluted $ 0.07 $ 0.22
========= =========
Weighted average number of shares - basic 8,196 8,196
========= =========
Weighted average number of shares - diluted 9,500 9,500
========= =========
F-3
Gentle Dental Service Corporation
Notes to Pro Forma Consolidated Financial Information
September 30, 1998 and December 31, 1997
(amounts in thousands)
The accompanying pro forma consolidated financial information presents the Pro
Forma Consolidated Statement of Operations of Gentle Dental Service Corporation
(the "Company") for the year ended December 31, 1997 and nine months ended
September 30, 1998, as if the acquisition of the stock of Capitol Dental Care,
Inc. ("CDC") and assets of Dental Maintenance of Oregon, P.C. ("DMO") had
occurred on January 1, 1997, and the Pro Forma Condensed Consolidated Balance
Sheet of the Company as of September 30, 1998 as if the acquisition of CDC and
DMO had occurred on that date.
The pro forma adjustments reflected in the Pro Forma Condensed Consolidated
Balance Sheet and the Pro Forma Consolidated Statement of Operations are as
follows:
(a) Condensed consolidated balance sheet and consolidated statement of
operations of the Company as of and for the nine months ended September 30,
1998.
(b) Condensed combined balance sheet and combined statement of income of CDC
and DMO as of and for the nine months ended September 30, 1998.
(c) Consolidated statement of operations of the Company for the year ended
December 31, 1997.
(d) Combined statement of income of CDC and DMO for the year ended December 31,
1997.
(e) Reflects adjustment to CDC and DMO Cash and cash equivalents for amounts
not acquired.
(f) Reflects adjustment to CDC and DMO Other Current Assets for $1,573 of
investments and $58 of prepaid income taxes not acquired.
(g) Reflects adjustment to record equipment acquired at fair market value.
(h) Reflects adjustment to record Intangible assets at excess of purchase price
over the fair market value of CDC and DMO net assets acquired.
(i) Reflects adjustment to CDC and DMO Other long-term assets for $301 of
shareholder notes receivable not acquired.
(j) Reflects adjustment to CDC Current liabilities for $24 of deferred income
taxes not assumed and a $100 increase to accrued expenses for additional
costs related to the acquisition.
(k) Reflects adjustment to the long term and current portions of Long term debt
and capital lease for $2,183 of promissory notes given as part of the
purchase price of CDC and DMO and the assumed borrowing of $6,088 to
finance the cash portion of the purchase price of DMO.
(l) Reflects elimination of CDC and DMO Shareholder's equity in accordance with
purchase accounting treatment.
F-4
(m) Reflects adjustment of employee compensation expense for three key
employees, one of which will no longer work for CDC and DMO, and two
employees who will continue working for CDC and DMO pursuant to employment
contracts.
(n) Reflects adjustment for Depreciation and amortization expense related to
the fixed assets and intangibles recorded as a result of the purchase of
CDC and DMO. The following table reconciles the two components to the total
adjustment:
Nine months ended Year ended
September 30, 1998 December 31, 1997
------------------ -----------------
Reduction in depreciation expense ($ 56) ($ 51)
Increase in amortization expense 236 315
---- ----
$180 $264
==== ====
Depreciation expense decreased since the Company recorded equipment at fair
market values which were less than book values. Depreciation of property
and equipment is recorded using the straight-line method over the shorter
of the related lease term or the estimated useful lives, which are as
follows:
Range of Lives
--------------
Dental equipment...................................... 3-15 years
Computer equipment .................................. 3 years
Furniture, fixtures and equipment..................... 3-15 years
Leasehold improvements................................ 3-20 years
Vehicles ............................................. 5 years
Buildings............................................. 25 years
Amortization expense increased due to intangible assets recorded as a
result of the acquisition. The amortization of intangible assets on a pro
forma combined basis is over the lesser of the life of the contract or 25
years, whichever is shorter. The amortization period will be reviewed
periodically to determine its appropriateness.
(o) Reflects adjustment for Interest expense resulting from assumed borrowing
of $6,088, as of January 1, 1997, to finance the purchase of CDC and DMO at
an estimated interest rate of 8.75% and the issuance of $2,183 of
promissory notes at an interest rate of 9.00%.
(p) Reflects the elimination of CDC and DMO interest income related to assets
not acquired.
(q) Reflects the elimination of CDC and DMO Other income related to assets not
acquired.
(r) Reflects adjustment of Income tax expense to the estimated tax on the pro
forma consolidated profit (loss) before income tax.
F-5
EXHIBIT INDEX
Exhibit Description
- ------- -----------
2.1 Asset Purchase Agreement, dated as of October 30, 1998, between the
Company and Dental Maintenance of Oregon, P.C. (Included with
original Form 8-K filed by the Company on November 12, 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 Promissory Notes
Exhibit B Assumption Agreement
Exhibit C Assignment and Bill of Sale to GD SUB
Exhibit D Assignment to Professional Corporation
Exhibit E Jackson Employment Agreement
Exhibit F Duffin 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 3.25 Consents and Approvals
2.2 Stock Purchase Agreement, dated as of October 30, 1998, between the
Company and the shareholders of Capitol Dental Care, Inc. (Included
with original Form 8-K filed by the Company on November 12, 1998.)
The following exhibits and schedules to the Stock Purchase Agreement
have been omitted and will be provided to the Securities and Exchange
Commission upon request:
Exhibit A Redemption Agreement
Exhibit B Promissory Note
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 3.21 Restrictions
Schedule 3.25 Consents and Approvals
23.1 Consent of KPMG LLP.