-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U2VmHYQer4Xrar7pXxNeGs6ZnOYrt3rioXVJSPKMl8li5viWE1GO2oGFCEKhjSTg ZuAfL74AShfpDq5M+gFLZA== 0000950147-01-501210.txt : 20010710 0000950147-01-501210.hdr.sgml : 20010710 ACCESSION NUMBER: 0000950147-01-501210 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010706 FILER: COMPANY DATA: COMPANY CONFORMED NAME: E-DENTIST COM INC CENTRAL INDEX KEY: 0001042291 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 760545043 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13725 FILM NUMBER: 1676176 BUSINESS ADDRESS: STREET 1: 2999 NORTH 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 BUSINESS PHONE: 6029521200 MAIL ADDRESS: STREET 1: 2999 N 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 FORMER COMPANY: FORMER CONFORMED NAME: PENTEGRA DENTAL GROUP INC DATE OF NAME CHANGE: 19970822 10-K 1 e-7105.txt ANNUAL REPORT FOR THE YEAR ENDED 3/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2001. [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________ to _________. Commission file number 1-13725 e-dentist.com, Inc. (Exact name of Registrant as specified in its charter) Delaware 76-0545043 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 (Address of principal executive offices) (602) 952-1200 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during the preceding 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 [ ] The number of shares of Common Stock of the Registrant, par value $.001 per share, outstanding at June 18, 2001 was 10,572,548. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of the Registrant's Common Stock held by non-affiliates of the Registrant at June 18, 2001 was approximately $3,902,496 based upon the closing price per share of the Registrant's Common Stock as reported on the American Stock Exchange of $0.50. As of June 18, 2001, there were 10,572,548 outstanding shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement relating to the Annual Meeting of Stockholders of the Registrant to be held on August 2, 2001 are incorporated by reference into Part III of this Report. ================================================================================ FORM 10-K REPORT INDEX PART I Items 1. and 2. Business and Properties........................................... 4 Item 3. Legal Proceedings................................................. 10 Item 4. Submission of Matters to a Vote of Security Holders............... 11 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters............................................... 12 Item 6. Selected Financial Data........................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 14 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 21 Item 8. Financial Statements and Supplementary Data....................... 22 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.......................................... 45 PART III Item 10. Directors and Executive Officers of the Registrant................ 45 Item 11. Executive Compensation ........................................... 45 Item 12. Security Ownership of Certain Beneficial Owners and Management ....................................................... 45 Item 13. Certain Relationships and Related Party Transactions.............. 45 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 45 2 FORWARD-LOOKING STATEMENTS Statements contained in this Report, which are not historical in nature, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are included in Item 1. "Business", Item 5. "Market for Registrant's Common Stock and Related Shareholder Matters" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, forward looking information is provided regarding the development of an eBusiness strategy, the modifications of Management Services Agreements with Affiliated Practices, projections of the Company's future earnings, funding of the Company's operations and capital expenditures, payment or nonpayment of dividends and liquidity needed for the future. Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include, but are not limited to, risks associated with affiliations, fluctuation in operating results because of affiliations, changes in government regulations, competition, growth of existing and new affiliated dental practices and the potential need for additional funding. These risks and other factors as may be identified from time to time are described in further detail in the Company's reports filed with the Securities and Exchange Commission or in the Company's press releases. 3 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES HISTORICAL OVERVIEW e-dentist.com, Inc. (the "Company") began in March of 1998 as a dental practice management company ("DMSO") under the name Pentegra Dental Group, Inc. (Amex:PEN). Its formation included the simultaneous rollup of 50 dental practices and an initial public offering ("IPO"). The capital raised at the IPO was used to fund acquisitions of dental practices and the working capital needs of the Company. Since the IPO, the Company has been headquartered in Phoenix, Arizona. As a part of the IPO, the Company acquired the assets of a consulting firm, Pentegra, Ltd., which was founded in 1988, and a seminar company, Napili International ("Napili"), which was founded in 1963. The clinical, administrative and marketing training developed and provided by these companies to practicing dentists and their teams were the foundation for the Company's historical approach to dental practice management ("the Pentegra Dental Program"). The Pentegra Dental Program was available exclusively to Affiliated Practices. To provide communication to its remote affiliated offices, the Company developed a proprietary user interface and database driven communication system, which employed Internet and browser technology. Growing from the original 50 Affiliated Practices at the IPO, the Company grew to over 100 Affiliated Practices, which included approximately 140 dentists and 107 dental offices located in 31 states. The Company's early mission was to provide management, administrative, development and other services to its Affiliated Practices through long-term Service Agreements ("Service Agreements") in exchange for the payment of management service fees. These service fees were based upon a percentage of dental practice collections. The Company's historical net revenue included both the reimbursement of practice expenses as well as Service Fees. Prior to the transition toward eBusiness, the Company processed all payments to vendors and employed the staff of Affiliated Practices. The modified Service Agreements caused the staff to cease working as employees for the Company and they have become employees of the individual Affiliated Practices. In addition, processing of payments to practice vendors is now performed at the practice level, by practice employees. The Company no longer pays or is reimbursed for expenses paid on the practices' behalf. As a result, the components of net revenues and expenses have changed and decreased significantly with the modified Service Agreements. In the fourth quarter of fiscal year 2000, the Company announced that it would be implementing a new business strategy to change from its historical practice management business to a focus on an eBusiness and e-Learning strategy. The Company's new strategic direction includes Business-to-Business (B2B) online services and e-Learning services through its Internet or online portal found at www.e-dentist.com. This shift in business model and focus was approved by the shareholders at the annual shareholder meeting held in Phoenix, Arizona on August 25, 2000. The shareholders also approved the Company's name change to e-dentist.com, Inc. The Company is proposing to change its name from e-dentist.com, Inc. to "EDT Learning, Inc." to more accurately reflect its current business model and the expansion of the scope of its business offering which focuses on providing e-Learning tools and systems to corporate clients inside and outside of the dental industry. A name change of the Company to "EDT Learning, Inc." was approved by the Board in June 2001. The name change will be submitted to a shareholder vote at the August 2, 2001 Annual Shareholders Meeting. As a part of the new business plan approved by shareholders, the Company modified the Affiliated Service Agreements, which were acceptable to both the Company and the Affiliated Practices. The new modified Service Agreements provide in general that: 1. The term of the Service Agreement has been reduced from its original term of 30 to 40 years to a new term of only five (5) years from the original date of execution. 2. All dental practice employees have become employees of the dental practice, and accordingly the associated payroll and practice expenses are being paid by the dentist and not the Company. 3. Service Fees have been reduced to a level approximating 90% of fiscal year 2000 fees and fixed in amount for the balance of the Service Agreement term. 4. All accounts receivable outstanding were either paid or converted to an interest-bearing promissory note (average three-year term with an annual interest rate of 10%). 5. The tangible practice assets originally contributed by the dental practice will be transferred back to the dental practice at the end of the amended Management Services Agreement term for a nominal value. 4 6. The Company be released by the dentist and dental practice of all known and unknown claims by the dentist including breach of the Service Agreement, securities claims or other claims related to the affiliation transaction. As of March 31, 2001, all but one of the active Service Agreements have been modified or terminated. As a result of the modifications and terminations of the Service Agreements, the Company prepared an impairment analysis to determine the recoverability of the Management Services Agreement intangible assets and fixed assets grouped at the practice level. The Company prepared the analysis by calculating the expected discounted future cash flows under modified contracts less the carrying amount of the intangible asset and fixed assets to determine the impairment charge. Based on the modified and terminated Service Agreements, the Company recorded a charge due to impairment of approximately $23 million for the year ended March 31, 2001. The fair value of the remaining intangible assets associated with the Service Agreements will be amortized over the remaining term of the modified Service Agreements. LIQUIDITY AND MANAGEMENT PLANS During fiscal 2001, the Company incurred a net loss of $24.9 million and had an accumulated deficit of $31.3 million at March 31, 2001. In addition, the Company had a working capital deficit of $1.4 million at March 31, 2001. At March 31, 2001, the Company was not in compliance with certain of the financial covenants of the line of credit. At March 31, 2001, $9.3 million was outstanding under the line of credit. In conjunction with the extension discussed below, the bank has waived non-compliance of certain financial ratios at March 31, 2001. On June 29, 2001, Bank One, Texas, NA extended the terms of the credit facility through July 2, 2002. In connection with the extension, the Company will issue 393,182 warrants to acquire shares of the Company's common stock at $0.42 per share. Until the credit facility is paid in full, the bank will have the right to maintain a 3% fully diluted interest in the Company through the issuance of additional warrants. The Company also paid $61,000 in fees to the bank as part of the extension. Terms of the extension include monthly principal payments of $25,000 and modification of the financial covenants. The Company has prepared financial projections through the term of the extension and believes it will be in compliance with the financial covenants. As discussed above, the bank credit facility due date has been extended to July 2, 2002. Based upon its current strategy, the Company projects to have sufficient funds to meet its operating capital requirements through fiscal 2002, however, there would not be sufficient cash flow to fund the credit facility obligation due July 2, 2002. Management believes it will be able to replace the credit facility with other bank financing alternatives or refinancing of its current line of credit. There is no assurance that other financing will be available to refinance the current line of credit in sufficient amounts, if at all, and there can be no assurance that the related terms and conditions will be acceptable to the Company. Failure of the Company to obtain such alternative financing or refinancing of its current line of credit would have a material and adverse effect on the Company's financial position. In order to increase its liquidity, the Company has developed the following strategies; (i) implement its revised eCommerce and e-Learning based strategic alternative described above, (ii) reducing costs in the Company's corporate office, and (iii) raising additional capital through a private placement. However, there can be no assurance that the Company's strategies will be achieved. EXPANSION OF MODEL AND FOCUS As an extension of its educational and training background, the Company has broadened its reach to focus on the larger growing e-Learning and corporate training market. With the launch of the Company's state of the art learning management system (LMS) and its e-Learning engine, the Company now provides a comprehensive array of e-Learning content, hosting and delivery services to corporations, inside and outside the dental and healthcare industries. The Company's synchronous and asynchronous content delivery solutions provide an array of e-Learning products that are customized to each corporate client. The Company is positioning itself in the corporate training sector of the e-Learning marketplace leveraging its existing infrastructure and using scale provided by an integrated product. The Company's initial business model required that it be able to communicate with 107 remote locations using the Intranet and low 5 bandwidth dial up modem connections. These systems required that sensitive financial information for 100 businesses be transmitted in a secure environment. To communicate with its Affiliated Practices, the Company built a proprietary Intranet (virtual private network), which processed secure transactions over the Internet. From that experience and using existing technology and systems, the Company created an e-Learning engine and LMS, which provides an integrated solution for corporate clients. The Company's learning management system was created to be a web based, low bandwidth, cross browser compatible content delivery and data management system. The Company's LMS delivers web enabled content through a series of server side components. Additionally, system navigation uses basic HTML and JavaScript as its foundation. The user interface is providing information on the "look and feel," navigation and learning content from a centrally located database. Information on course navigation and testing is captured by the interface and delivered to the database. Because of this design, the interface can be optimized to use less than 20K of bandwidth and can deliver any web-enabled content (from Word documents and Power Point presentations to Real Video and MPEG video streams). The testing system is database enabled, which provides the flexibility for the administrator to create test questions and determine their testing requirements. The system has the ability to provide multiple test environments to meet user needs and questions can be changed by the administrator. The administrator can select from open book tests, closed book tests, timed tests, random question tests, or smart tests (test questions by category or lessons that are designed to identify skill weaknesses). There are pre and post tests for each lesson and for the entire course and all testing activity is recorded into the testing database. In addition to interactive web based asynchronous training, the Company offers a complete synchronous (live instructor led Web based) learning solution utilizing advanced audio-graphics. The student is provided this instructor-led classroom experience through the use of third party software and a Java-enabled application. This live online classroom enables the student to interact with instructors and other students and offers advanced features such as real-time surveys, un-interrupted questioning of the instructor, and chat with other students. Visual content is delivered over the Internet using a computer while voice portions are delivered using an analog phone line to maximize bandwidth connections. The Company maintains a broadcast studio in Phoenix, Arizona, permitting instructors to either be located in the studio or remotely while they deliver content, manage the classroom and interact with students. This live delivery is fault tolerant using redundant systems, redundant data connections, and smart routing to ensure the fastest response times. Content is developed using internal teams, which enhance the learning experience from basic "slide" delivery to engage the student with interactive presentation including 3D graphics, animations, and streaming video. INDUSTRY OVERVIEW The Company employs a two-prong approach, which includes a B2B Internet commerce Web site, and a second prong, which includes the provision of e-Learning services to corporate clients. The Company launched its commerce driven Web site in November 2000. Through it the Company also provides access to online services in a Business-to-Business ("B2B") as well as consumer market sectors. The Company also provides a broad range of services to dental practices and dental vendors across the United States. TRAINING Magazine estimates the corporate online training market to be approximately $63 billion in 1999 and growing at an annual rate of 40%. Most educational or training systems offered today by corporate America still utilize instructor led classrooms and in person meetings. Today's in-house systems typically: * Do not offer user centric or personalized focused learning. They tend to be singular in design and delivery with no consideration for a particular student's needs. * Use old technology usually focused on CD-Rom or other computer based training (CBT) style delivery systems. Those systems do not permit data gathering, which can be used to re-shape the delivery systems or measure performance. * Do not measure or address skills analysis or the gap caused by student disparity in an organized fashion. Skills gap analysis is informally performed by HR teams and mid-level managers without a comprehensive framework across the entire corporate enterprise. 6 * Do not share information about the content being distributed or the results of student testing among individual departments or segments within departments. * Do not allow users to receive information outside the course content, which is supportive and provides post study organization and learning. * Are diverse in scope and large in number making the investment decision difficult, wasting resources, time and money. * Are not easily deployed and often cause a "re-tooling" of the learning system as they upgrade and make advancements in core content. In contrast, today's e-Learning offers Internet solutions as an answer to those shortcomings. Companies are continuing the shift from traditional instructor-led training and CBT toward online learning and individual skills assessment. Outsourcing corporate training needs provides an opportunity to obtain cost competitive solutions. Efficiencies offered by new Internet or web-based systems permit a reduction in corporate training costs while increasing student (worker) productivity. The corporate training and education market is highly fragmented with no clear or dominant player. The Company's primary competition comes from those providing online and CBT solutions as well as from corporations internally developing their own content. The market for outside training can be further segmented into the delivery of live instructor led programs or asynchronous interactive web based programs. Many corporations prefer a blended approach consisting of both instructor led live programs and web based e-Learning solutions. While many companies have entered the e-Learning market they provide a wide variety of services and tend to specialize in one or more of the following areas: * Learning Tools -- Off The Shelf software used to create learning courses. * Delivery Services-- Hosting and delivery of training applications in an Application Service Provider (ASP) or behind-the-firewall corporate Intranet. * Content Development (Custom & Off The Shelf)-- Courses created which are either custom built using a proprietary tool or Off The Shelf tool which may be web based or delivered with more traditional video or CD-Rom technology. SERVICES AND OPERATIONS E-LEARNING SERVICES AND NEW SALES MODEL The Company's sales and marketing strategy includes a plan to grow sales through partnered sales channels, leveraging existing customer relationships, and development of Off The Shelf course content. Additionally, the Company plans to raise capital to consolidate the fragmented e-Learning sector through acquisition of existing e-Learning companies. The core focus of the Company's revenue driver exists in product and procedure training. This model provides the corporate client with training on its existing products providing revenues to the Company without the need for end-user marketing. The Company expects to obtain re-seller and marketing agreements with companies to broaden the reach of its products and services through those company's existing sales forces. Additionally, the Company is developing an internal sales force, which is rooted in targeted market segments. The Company's initial focus was within the dental industry however, the Company is also targeting the pharmaceutical industry through relationships driven from the dental industry. Finally, the Company seeks to expand its sales and marketing efforts by and through the channels and sales force opportunities provided by acquisitions of target companies in strategic industries. Fees or revenues are generated through one of two means: The first are fees from the development and delivery of custom course content for an individual customer on a case-by-case basis depending upon the complexity of the course and the features chosen by the customer. The second revenue source is provided from usage of the Company's learning management systems. Revenues are earned on a per user per month basis. However, the pricing, expense and revenue model for the Company's e-Learning network has not been broadly tested in the marketplace, and may not yield results sufficient for the Company's business to succeed or be sustainable. If the pricing, expense and revenue model is not acceptable to users, customers, or content providers, the Company's e-Learning initiative may not be commercially successful. This would have an adverse effect on the Company's business. 7 CURRENT TECHNOLOGY, E-LEARNING SYSTEMS AND TECHNOLOGY INFRASTRUCTURE Management believes the current software and hardware utilized by the Company is sufficient to host the current Web site and support the e-Learning operations and services. Further, it has sufficient capacity to perform the anticipated growth in transaction volume. The Company currently hosts its own Web site, and such hosting will not bring any significant incremental costs. The Company has already invested considerable time on system development, including the development associated with the creation of the proprietary e-Learning engine and learning management systems. To date, development has focused on providing e-Learning services through customized user interfaces. The Company has developed an LMS that delivers web-enabled content through a cross browser compatible interface. The user interface is providing information on a "look and feel" navigation and learning content from a centrally located database. Information on course navigation and testing is captured by the interface and delivered to the database. Because of this design, the interface can be optimized to use less than 20K of bandwidth and can deliver any web-enabled content (from Word documents and Power Point presentations to Real Video and MPEG video streams). The testing system is database enabled, which provides the flexibility for the learning administrator to create test questions and determine their testing requirements. The system has the ability to provide multiple test environments to meet user needs and questions can be changed by the administrator. There are pre and post tests for each lesson and for the entire course and all testing activity is recorded into the testing database. The user interface and course environment is completely customizable by the administrator. Using the administrative tools provided, courses can be created more quickly and updated with little to no programming required. Administrative functions allow both the student and company to manage their own profiles, view learning reports, administer students, deliver course materials, create discussion groups and send user or class specific messages. The systems are designed to create an online learning environment - not simply deliver content. In addition to interactive web based asynchronous training, the Company offers a complete synchronous (live instructor led) learning solution utilizing advanced audio graphics. This live online classroom enables the student to interact with instructors and other students and offers advanced features such as real-time surveys, un-interrupted questioning of the instructor, and chat with other students. Visual components are delivered over the Internet while voice portions are delivered using an analog phone line to maximize bandwidth connections. Classes can be delivered using the Company's studio in Phoenix, Arizona, or remotely without the need for instructors to be in any certain location. Course content is enhanced beyond basic "slide" delivery to engage the student with interactive slides, 3D graphics, animations, and streaming video where appropriate. The e-Learning market is in the early stages of development, and may not grow to a sufficient size or at sufficient rate for the Company's business to succeed. Corporate training and education historically has been conducted primarily through classroom instruction and traditionally has been performed by internal personnel. Although technology-based training applications have been available for several years, they currently account for only a small portion of the overall training market. Accordingly, the Company's success will depend on the extent to which companies migrate from traditional training methods to technology-based solutions and use the Internet in connection with their training activities. In addition, the Company's success will depend upon the extent to which companies utilize the products or services of third-party providers and whether companies adopt hosted solutions delivered over the Internet, including e-Learning sites hosted by third parties, such as those on the Company's e-Learning network. The systems that support the Company's e-Learning network may be unable to accommodate an increased volume of traffic or additional content if growth out paces current estimates. As a result, the Company's e-Learning systems may experience slower response times or other problems. In addition, the Company depends on Internet service providers, telecommunications companies and the efficient operation of their computer networks and other computer equipment for the operation of the Company's e-Learning network. Each of these has experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to the Company's systems. Any delays in response time or performance problems could cause users to perceive the Company's e-Learning network as not functioning properly and therefore not use it for their training needs. 8 COMPETITION The Company is aware of several publicly traded and many privately held e-Learning companies that have similar products and services which compete directly with the Company's products and services. Certain of these competitors have greater financial and other resources than the Company and have existing clients and operations in areas where the Company may seek to expand in the future. Additional e-Learning companies with similar objectives are expected to enter the Company's markets and compete with the Company. There can be no assurance that the Company will be able to compete effectively with their respective competitors, that additional competitors will not enter their markets or that additional competition will not have a material adverse effect on the Company. Although these competitors have a head start in the development of online e-Learning systems, the Company believes that its products and services are competitive and that its e-Learning systems that are currently in place provide an equivalent or better product than its competitors. Even if businesses implement technology-based training or e-Learning solutions, they may still choose to design, develop, deliver or manage all or a part of their education and training internally. If technology-based learning and the use of the Internet for learning do not become widespread, or if businesses do not use the products and services of third parties to develop, deliver or manage their training needs, then the Company's e-Learning products and services may not achieve commercial success. EMPLOYEES As of March 31, 2001, the Company employed 27 persons at its corporate offices and 6 persons at one Affiliated Practice office. None of the Company's employees are represented by collective bargaining agreements. The Company considers its employee relations to be good. Management believes that by the end of July 2001, all dental practice employees located on dental practice premises will be re-employed by the Affiliated Practice and accordingly no longer be an employee of the Company. SERVICE AGREEMENTS AND DENTIST AGREEMENTs The Company continues to provide services to its Affiliated Practices in accordance with the modified Service Agreements and derive revenues. The actual terms of the various Service Agreements vary slightly on a case-by-case basis, depending on negotiations with the individual Affiliated Practices. Those Modified Agreements require in general that the Company provide: access to online practice enhancement services; access to online tools and payroll services; access to certain on-site consulting and seminar programs, and the use of the tangible assets owned by the Company located at each affiliated dental practice location. The service fees payable under the modified Service Agreements are guaranteed by the owner-dentists. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations.") The new modified Service Agreements provide in general that: 1. The term of the Service Agreement has been reduced from its original term of 30 to 40 years to a new term of only five (5) years from the original date of execution. 2. All dental practice employees have become employees of the dental practice, and accordingly the associated payroll and practice expenses are being paid by the dentist and not the Company. 3. Service Fees have been reduced to a level approximating 90% of fiscal year 2000 fees and fixed in amount for the balance of the Service Agreement term. 4. All accounts receivable outstanding were either paid or converted to an interest-bearing promissory note (average three-year term with an annual interest rate of 10%). 5. The tangible practice assets originally contributed by the dental practice will be transferred back to the dental practice at the end of the amended Management Services Agreement term for a nominal value. 6. The Company be released by the dentist and dental practice of all known and unknown claims by the dentist including breach of the Service Agreement, securities claims or other claims related to the affiliation transaction. Substantially all of the dentist-owners of the Affiliated Practices entered into a dentist agreement, which provides the Company such dentist's guarantee (for the initial five years and for so long thereafter as he or she owns any interest in the Affiliated Practice) of the Affiliated Practice's obligations under the applicable Service Agreement. In addition, such agreement provides that the dentist may not sell his or her ownership interest during the dentist's five-year employment term without the Company's prior written consent. In the event of a default under the Service Agreement by the Affiliated Practice, the dentist agreement provides that the Company may, at its option, require the 9 Affiliated Practice to convey its patient records and the capital stock of the Affiliated Practice to the Company's authorized designee, who, in any such case, the Company anticipates will be a dentist affiliated with an Affiliated Practice. INSURANCE The Affiliated Practices provide dental services to the public and are exposed to the risk of professional liability and other claims. Each Affiliated Practice maintains its own malpractice insurance. Although the Company does not control the practice of dentistry by the Affiliated Practices, it could be asserted that the Company should be held liable for malpractice of a dentist employed by an Affiliated Practice. Each Affiliated Practice has undertaken steps to comply with all applicable regulations and legal requirements. There can be no assurance, however, that a future claim or claims will not be successful or, if successful, will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs. GOVERNMENT REGULATION AND FEE-SPLITTING RESTRICTIONS The dental services industry is regulated extensively at both the state and federal levels. Regulatory oversight includes, but is not limited to, prohibition of fee-splitting, corporate practice of dentistry, prohibitions on fraud and abuse, restrictions on referrals and self-referrals, advertising restrictions, restrictions on delegation and state insurance regulation. The laws of many states permit a dentist to conduct a dental practice only as an individual, a member of a partnership or an employee of a professional corporation, professional association, limited liability company or limited liability partnership. These laws prohibit business corporations such as the Company from engaging in the practice of dentistry or employing dentists to practice dentistry. The specific restrictions against the corporate practice of dentistry, as well as the interpretation of those restrictions by state regulatory authorities, vary from state to state. The restrictions are generally designed to prohibit a non-dental entity (such as the Company) from controlling the professional assets of a dental practice (such as patient records and payor contracts), employing dentists to practice dentistry (or, in certain states, employing dental hygienists or dental assistants) or controlling the content of a dentist's advertising or professional practice. The laws of many states also prohibit dentists from sharing professional fees with non-dental entities. The Company believes that its operations will not contravene any restriction on the corporate practice of dentistry, but there can be no assurance that interpretation by courts or regulatory authorities will not result in determinations that could prohibit or otherwise adversely affect the operations of the Company under the Service Agreements. There can be no assurance that the legality of the business relationship with the Affiliated Practices will not be successfully challenged or that the enforceability of the provisions of any Service Agreement will not be limited which may result in the reduction or elimination of Service Fee revenues. ITEM 3. LEGAL PROCEEDINGS The Company has pending lawsuits against five Affiliated Practices for defaulting in the payment of the required Service Fees. In each of those cases, the Company is seeking damages equal to past due and remaining service fees, consequential damages equal to the value of the intangible practice asset and attorney's fees. Three Affiliated Practices have in response filed a counter-claim alleging breach of contract, misrepresentation and securities violations. The Company believes that those counter-claims are without merit and that the Company will prevail both in the recovery of damages from the Affiliated Practices as well as a defense to the alleged counter-claims. The Company is also the defendant in a recently filed lawsuit in which the plaintiff claims breach of the premises lease associated with an Affiliated Practice. The Company as a defendant tenant is seeking indemnity from the Affiliated Practice and believes that it will recover any damages suffered from the responsible Affiliated Practice. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2001. ITEM S-K 401(b). EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Instruction 3 to Item 401(6) of Regulation S-K and General Instruction G (3) to Form 10-K, the following information is included in Part I of this Form 10-K. The following table sets forth certain information concerning the executive officers of the Company (ages are as of March 31, 2001): James M. Powers, Jr. 45 Chairman, President and Chief Executive Officer Charles M. Sanders 44 Senior Vice President, Chief Operation Officer, Chief Financial Officer James L. Dunn, Jr. 39 Senior Vice President, General Counsel and Chief Development Officer Glenn J. Bonagura 43 Senior Vice President, eBusiness Omer K. Reed, D.D.S. 69 Clinical Officer JAMES M. POWERS, JR., DDS, MBA CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Dr. James Powers, Jr., has served as Chairman, President and CEO of the Company since December 1998. Dr. Powers guided the Company through its initial growth and acquisition phase and subsequent transformation from a dental practice management company to a provider of uniquely effective and efficient custom e-Learning solutions supporting companies in multi-industries. Dr. Powers joined the Company through the merger with Liberty Dental Alliance, Inc., a Nashville based company where he was the Founder, Chairman and President. Prior to founding Liberty, he was a Founder and Chairman of Clearidge, Inc., a privately held bottled water company in Nashville, Tennessee, that became one of the largest, independent bottlers in the Southeast and was sold to Suntory, Inc. Powers also is a Founder and Director of Barnhill's Country Buffet, Inc., a chain of 34 restaurants in the Southeast. He received a Doctor of Dental Surgery Degree from The University of Tennessee and received his MBA from Vanderbilt University's Owen Graduate School of Management. CHARLES SANDERS SENIOR VICE PRESIDENT, CHIEF OPERATING OFFICER & CHIEF FINANCIAL OFFICER Charles Sanders, joined the Company as Senior Vice President, Chief Operating Officer in October 1999 and accepted the Chief Financial Officer responsibilities in August 2000. Mr. Sanders is an integration specialist and an experienced veteran of over 20 years in the healthcare industry. He most recently was president of a $250 million division of a large physician management company where he substantially increased profitability and was responsible for marketing, operations, finance, human resources, and information systems serving over 3875 employed and affiliated physicians located in five states. Mr. Sanders' extensive background in operations, finance and information technology includes experience as the CFO of a $75 million multi-site medical facility and the regional IT director of a national HMO. Mr. Sanders received a B.S.B.A. from Northern Arizona University in 1979. JAMES L. DUNN, JR., JD, CPA GENERAL COUNSEL, SENIOR VICE PRESIDENT, AND CHIEF DEVELOPMENT OFFICER James L. Dunn, Jr., assisted with the formation of the Company and was an integral part of the road show management team during the Company's initial public offering. While the Company's focus was as a consolidator of dental practices in the dental industry, Mr. Dunn was responsible for all development and consolidation activities including the acquisition of dental practices and dental practice management companies. In the first twelve months of operation, he managed the acquisition of over fifty (50) dental practices thereby doubling the Company's annual revenue run rate to $75 Million. Mr. Dunn assumed the role of General Counsel in March of 2000 and managed the legal transition of the Company from its dental management beginnings to its current e-learning focus. He is an attorney and CPA receiving his law degree from Southern Methodist University School of Law in 1987 and his Bachelor's Degree in Business Administration-Accounting from Texas A & M University in 1984. 11 GLENN J. BONAGURA SENIOR VICE PRESIDENT, EBUSINESS Glenn joined e-dentist as Senior Vice President, eBusiness, in July 2000. Mr. Bonagura has over 20 years of expanding responsibilities in several fields including; Internet start up (Dexpo.com), consumer products (Gillette and Unilever) and the dental industry (Oral B Laboratories). He most recently was executive Vice President of Dexpo.com, the first Internet site where dental professionals could purchase dental supplies. Prior to that, he has international executive experience as a General Manager for the Gillette Company where he was responsible for operations in 13 countries. Mr. Bonagura is also a veteran of the dental industry where he held positions as Region sales manager, National sales manager and VP of Sales for Oral B Laboratories. Mr. Bonagura's employment agreement expires in July of 2001 and is not expected to be renewed. OMER K. REED, D.D.S. CLINICAL OFFICER Dr. Reed has served as Clinical Officer since May 1997 and as a Director from May 1997 until December 2000. He founded Pentegra, Ltd. in 1988 and Napili International in 1963, and is a practicing dentist with one of the Company's Affiliated Practices. Dr. Reed resigned from his position as a Director to pursue personal interests and focus on his dental practice. His employment with the Company ceased upon the expiration of his employment agreement in March of 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION, HOLDERS AND DIVIDEND The Company's Common Stock has been traded on the American Stock Exchange system under the symbol "EDT" since August 25, 2000, prior to that the Company's Common Stock was traded on the American Stock Exchange System under the symbol "PEN". The following table sets forth the range of the reported high and low sales prices of the Company's Common Stock for the year, ended March 31, 2001 and 2000: 2001 HIGH LOW - ---- ---- --- First Quarter $1.63 $0.50 Second Quarter $0.63 $0.38 Third Quarter $0.44 $0.19 Fourth Quarter $0.73 $0.22 2000 HIGH LOW - ---- ---- --- First Quarter $2.81 $1.38 Second Quarter $2.13 $1.56 Third Quarter $1.88 $1.00 Fourth Quarter $1.88 $0.88 As of June 18, 2001, there were approximately 242 holders of record of Common Stock, as shown on the records of the transfer agent and registrar of Common Stock. The number of record holders does not bear any relationship to the number of beneficial owners of the Common Stock. The last reported sale price of the Common Stock on the American Stock Exchange as of March 31, 2001 was $0.45 per share. The Company has not paid any cash dividends on its Common Stock in the past and does not plan to pay any cash dividend on its Common Stock in the foreseeable future. In addition, the terms of the Company's revolving credit facility prohibit it from paying dividends or making other payments with respect to its Common Stock without the lenders' consent. The Company's Board of Directors intends, for the foreseeable future, to retain earnings to finance the continued operation and expansion of the Company's business. 12 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report. STATEMENT OF OPERATIONS DATA
FOR THE PERIOD FROM INCEPTION, THREE MONTHS FEBRUARY 21, 1997 YEAR ENDED YEAR ENDED YEAR ENDED ENDED THROUGH MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 DECEMBER 31, 1997 -------------- -------------- -------------- -------------- ----------------- Net revenue ................................ $ 12,458 $ 56,988 $ 38,824 $ -- $ -- Operating expenses ......................... 36,846 59,476 36,940 1,800 1,354 -------- -------- -------- -------- -------- Earnings (loss) from operations ............ (24,388) (2,488) 1,884 (1,800) (1,354) -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item .............. (24,987) (3,497) 1,717 (1,960) (1,354) Income tax expense (benefit) ............... -- 2,213 (525) -- -- -------- -------- -------- -------- -------- Net income (loss) before extraordinary item ........................ (24,987) (5,710) 2,242 (1,960) (1,354) Extraordinary item, net .................... 70 350 -- -- -- -------- -------- -------- -------- -------- Net income (loss) .......................... (24,917) (5,360) 2,242 (1,960) (1,354) Preferred stock dividend ................... -- -- -- (1,070) -- -------- -------- -------- -------- -------- Income (loss) attributable to common stock .............................. (24,917) (5,360) 2,242 (3,030) (1,354) ======== ======== ======== ======== ======== Basic and diluted earnings per share: Earnings (loss) before extraordinary item..................................... $ (2.38) $ (0.55) $ 0.29 Extraordinary item ....................... .01 0.03 -- -------- -------- -------- Net earnings (loss) ...................... $ (2.37) $ (0.52) $ 0.29 ======== ======== ======== BALANCE SHEET DATA Cash and cash equivalents .................. $ 1,051 $ 553 $ 1,047 $ 6,708 -- Working capital (deficit) .................. (1,440) 1,330 4,224 3,640 -- Total assets ............................... 9,191 37,906 37,127 10,633 -- Long-term debt, less current maturities .... 11,461 14,829 13,134 368 -- Total shareholder's equity (deficit) ....... (6,654) 19,007 20,760 6,996 --
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF E-DENTIST.COM AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND RISKS DETAILED IN E-DENTIST.COM'S SEC FILINGS. HISTORICAL OVERVIEW e-dentist.com, Inc. (the "Company") began in March of 1998 as a dental practice management company ("DMSO") under the name Pentegra Dental Group, Inc. (Amex:PEN). Its formation included the simultaneous rollup of 50 dental practices and an initial public offering ("IPO"). The capital raised at the IPO was used to fund acquisitions of dental practices and the working capital needs of the Company. Since the IPO, the Company has been headquartered in Phoenix, Arizona. As a part of the IPO, the Company acquired the assets of a consulting firm, Pentegra, Ltd., which was founded in 1988, and a seminar company, Napili International ("Napili"), which was founded in 1963. The clinical, administrative and marketing training developed and provided by these companies to practicing dentists and their teams were the foundation for the Company's historical approach to dental practice management ("the Pentegra Dental Program"). The Pentegra Dental Program was available exclusively to Affiliated Practices. To provide communication to its remote affiliated offices, the Company developed a proprietary user interface and database driven communication system, which employed Internet and browser technology. Growing from the original 50 Affiliated Practices at the IPO, the Company grew to over 100 Affiliated Practices, which included approximately 140 dentists and 107 dental offices located in 31 states. The Company's early mission was to provide management, administrative, development and other services to its Affiliated Practices through long-term Service Agreements ("Service Agreements") in exchange for the payment of management service fees. These service fees were based upon a percentage of dental practice collections. The Company's historical net revenue included both the reimbursement of practice expenses as well as Service Fees. Prior to the transition toward eBusiness, the Company processed all payments to vendors and employed the staff of Affiliated Practices. The modified Service Agreements caused the staff to cease working as employees for the Company and they have become employees of the individual Affiliated Practices. In addition, processing of payments to practice vendors is now performed at the practice level, by practice employees. The Company no longer pays or is reimbursed for expenses paid on the practices' behalf. As a result, the components of net revenues and expenses have changed and decreased significantly with the modified Service Agreements. In the fourth quarter of fiscal year 2000, the Company announced that it would be implementing a new business strategy to change from its historical practice management business to a focus on an eBusiness and e-Learning strategy. The Company's new strategic direction includes Business-to-Business (B2B) online services and e-Learning services through its Internet or online portal found at www.e-dentist.com. This shift in business model and focus was approved by the shareholders at the annual shareholder meeting held in Phoenix, Arizona on August 25, 2000. The shareholders also approved the Company's name change to e-dentist.com, Inc. A name change of the Company to "EDT Learning, Inc." was approved by the Board in June 2001. The name change will be submitted to a shareholder vote at the August 2, 2001 Annual Shareholders Meeting. As a part of the new business plan approved by shareholders, the Company modified the Affiliated Service Agreements, which were acceptable to both the Company and the Affiliated Practices. The new modified Service Agreements provide in general that: 14 1. The term of the Service Agreement has been reduced from its original term of 30 to 40 years to a new term of only five (5) years from the original date of execution. 2. All dental practice employees have become employees of the dental practice, and accordingly the associated payroll and practice expenses are being paid by the dentist and not the Company. 3. Service Fees have been reduced to a level approximating 90% of fiscal year 2000 fees and fixed in amount for the balance of the Service Agreement term. 4. All accounts receivable outstanding were either paid or converted to an interest-bearing promissory note (average three-year term with an annual interest rate of 10%).rage three-year term with an annual interest rate of 10%).y note (average three-year term with an annual interest rate of 10%). 5. The tangible practice assets originally contributed by the dental practice will be transferred back to the dental practice at the end of the amended Management Services Agreement term for a nominal value. 6. The Company be released by the dentist and dental practice of all known and unknown claims by the dentist including breach of the Service Agreement, securities claims or other claims related to the affiliation transaction. As of March 31, 2001, all but one of the active Service Agreements have been modified or terminated. As a result of the modifications and terminations of the Service Agreements, the Company prepared an impairment analysis to determine the recoverability of the Management Services Agreement intangible assets and fixed assets grouped at the practice level. The Company prepared the analysis by calculating the expected discounted future cash flows under modified contracts less the carrying amount of the intangible asset and fixed assets to determine the impairment charge. Based on the modified and terminated Service Agreements, the Company recorded a charge due to impairment of approximately $23 million for the year ended March 31, 2001. The fair value of the remaining intangible assets associated with the Service Agreements will be amortized over the remaining term of the modified Service Agreements. EXPANSION OF MODEL AND FOCUS As an extension of its educational and training background, the Company has broadened its reach to focus on the larger growing e-Learning and corporate training market. With the launch of the Company's state of the art learning management system (LMS) and its e-Learning engine, the Company now provides a comprehensive array of e-Learning content, hosting and delivery services to corporations, inside and outside the dental and healthcare industries. The Company's synchronous and asynchronous content delivery solutions provide an array of e-Learning products that are customized to each corporate client. The Company is positioning itself in the corporate training sector of the e-Learning marketplace leveraging its existing infrastructure and using scale provided by an integrated product. The Company's initial business model required that it be able to communicate with 107 remote locations using the Intranet and low bandwidth dial up modem connections. These systems required that sensitive financial information for 100 businesses be transmitted in a secure environment. To communicate with its Affiliated Practices, the Company built a proprietary Intranet (virtual private network), which processed secure transactions over the Internet. From that experience and using existing technology and systems, the Company created an e-Learning engine and LMS, which provides an integrated solution for corporate clients. The Company's learning management system was created to be a web based, low bandwidth, cross browser compatible content delivery and data management system. The Company's LMS delivers web enabled content through a series of server side components. Additionally, system navigation uses basic HTML and JavaScript as its foundation. The user interface is providing information on the "look and feel," navigation and learning content from a centrally located database. Information on course navigation and testing is captured by the interface and delivered to the database. Because of this design, the interface can be optimized to use less than 20K of bandwidth and can deliver any web-enabled content (from Word documents and Power Point presentations to Real Video and MPEG video streams). The testing system is database enabled, which provides the flexibility for the administrator to create test questions and determine their testing requirements. The system has the ability to provide multiple test environments to meet user needs and questions can be changed by the administrator. The administrator can select from open book tests, closed book tests, timed tests, random question tests, or smart tests (test questions by category or lessons that are designed to identify skill weaknesses). There are pre and post tests for each lesson and for the entire course and all testing activity is recorded into the testing database. In addition to interactive web based asynchronous training, the Company offers a complete synchronous (live instructor led Web based) learning solution utilizing advanced audio-graphics. The student is provided this instructor-led 15 classroom experience through the use of third party software and a Java-enabled application. This live online classroom enables the student to interact with instructors and other students and offers advanced features such as real-time surveys, un-interrupted questioning of the instructor, and chat with other students. Visual content is delivered over the Internet using a computer while voice portions are delivered using an analog phone line to maximize bandwidth connections. The Company maintains a broadcast studio in Phoenix, Arizona, permitting instructors to either be located in the studio or remotely while they deliver content, manage the classroom and interact with students. This live delivery is fault tolerant using redundant systems, redundant data connections, and smart routing to ensure the fastest response times. Content is developed using internal teams, which enhance the learning experience from basic "slide" delivery to engage the student with interactive presentation including 3D graphics, animations, and streaming video. During fiscal 2001, the Company incurred a net loss of $24.9 million and had an accumulated deficit of $31.3 million at March 31, 2001. In addition, the Company had a working capital deficit of $1.4 million at March 31, 2001. At March 31, 2001, the Company was not in compliance with certain of the financial covenants of the line of credit. At March 31, 2001, $9.3 million was outstanding under the line of credit. In conjunction with the extension discussed below, the bank has waived non-compliance of certain financial ratios at March 31, 2001. On June 29, 2001, Bank One, Texas, NA extended the terms of the credit facility through July 2, 2002. In connection with the extension, the Company will issue 393,182 warrants to acquire shares of the Company's common stock at $0.42 per share. Until the credit facility is paid in full, the bank will have the right to maintain a 3% fully diluted interest in the Company through the issuance of additional warrants. The Company also paid $61,000 in fees to the bank as part of the extension. Terms of the extension include monthly principal payments of $25,000 and modification of the financial covenants. The Company has prepared financial projections through the term of the extension and believes it will be in compliance with the financial covenants. As discussed above, the bank credit facility due date has been extended to July 2, 2002. Based upon its current strategy, the Company projects to have sufficient funds to meet its operating capital requirements through fiscal 2002, however, there would not be sufficient cash flow to fund the credit facility obligation due July 2, 2002. Management believes it will be able to replace the credit facility with other bank financing alternatives or refinancing of its current line of credit. There is no assurance that other financing will be available to refinance the current line of credit in sufficient amounts, if at all, and there can be no assurance that the related terms and conditions will be acceptable to the Company. Failure of the Company to obtain such alternative financing or refinancing of its current line of credit would have a material and adverse effect on the Company's financial position. In order to increase its liquidity, the Company has developed the following strategies; (i) implement its revised eCommerce and e-Learning based strategic alternative described above, (ii) reducing costs in the Company's corporate office, and (iii) raising additional capital through a private placement. However, there can be no assurance that the Company's strategies will be achieved. RESULTS OF OPERATIONS Following completion of the IPO, the Company began operations effective April 1, 1998. Prior to April 1, 1998, the Company was not an operating entity and therefore had no net revenue and incurred only minor pre-operating expenses. In May 1998, the Company changed its fiscal year end from December 31 to March 31, effective for the year beginning April 1, 1998. Management service fee recognition and related expenses began April 1, 1998, and the Company began managing 50 dental practices in 18 states. At March 31, 2000, Pentegra managed 96 practices in 106 offices in 29 states. At March 31, 2001, the Company managed 85 practices in 95 offices in 28 states. COMPONENTS OF REVENUES AND EXPENSES The Company has embarked upon a strategy focusing on eBusiness primarily in the dental industry. Prior to the transition toward eBusiness, the Company processed all payments to vendors and employed the staff of Affiliated Practices. The modified Service Agreements caused the staff to cease working as employees for the Company and they have become employees of the individual 16 Affiliated Practices. In addition, processing of payments to practice vendors is now performed at the practice level, by practice employees. The Company no longer pays or is reimbursed for expenses paid on the practices' behalf. As a result, the components of net revenues and expenses have changed and decreased significantly with the modified Service Agreements. Under the terms of the original Services Agreement with an Affiliated Practice, the Company served as the exclusive manager and administrator of all non-dental services relating to the operation of an Affiliated Practice. The obligations of the Company included assuming responsibility for the operating expenses incurred in connection with managing the dental centers. These expenses included salaries, wages and related costs of non-dental personnel, dental supplies and laboratory fees, rental and lease expenses, promotion and marketing costs, management information systems and other operating expenses incurred at the Affiliated Practices. In addition, the Company incurred general and administrative expenses related to the financial and administrative management of dental operations, insurance, training and development and other typical corporate expenditures. As compensation for its services under the original Services Agreement and subject to applicable law, the Company was paid a management fee comprised of two components: (1) the costs incurred by it on behalf of the Affiliated Practice, and (2) a management fee either fixed in amount, an amount usually approximating 35% of the Affiliated Practice's operating profit, before dentist compensation or 15% of the affiliated practice's collected gross revenue ("Service Fee"). Therefore, net revenues represented amounts earned by the Company under the terms of its Service Agreements with the Affiliated Practices, which generally equated to the sum of the Service Fees and the operating expenses that the Affiliated Practices paid to the Company under the Service Agreements. NET REVENUE Fiscal 2001 net revenue was $12.5 million, a $44.5 million decrease from fiscal 2000 net revenue of $57 million. The decrease is due to the modification of the Service Agreements and the resulting elimination of pass through revenue and expense reporting and the termination of 11 Affiliated Practices during fiscal 2001. Net revenue generated by paying the operating expenses of the Affiliated Practices was $4.2 million in fiscal 2001 and $46.4 million in fiscal 2000, a decrease of $42.2 million. Net revenue generated from service fees was $8.3 million in fiscal 2001 compared with $10.6 million in fiscal 2000, a decrease of $2.3 million. Fiscal 2000 net revenue was $57 million, an $18.2 million increase over fiscal 1999 net revenue of $38.8 million. The increase resulted from practice affiliations with 12 additional dental practices in conjunction with the acquisition of Omega Orthodontics, Inc. In addition, fiscal 2000 contains a full twelve-months of revenue generated from the acquisitions of practices during fiscal 1999. OPERATING EXPENSES Operating expenses consist primarily of salaries, wages and benefits, dental supplies and laboratory fees, rent, advertising and marketing, and general and administrative expenses. Fiscal 2001 operating expenses were $36.8 million, a $22.7 million decrease from fiscal 2000 operating expenses of $59.5 million. The elimination of pass through revenue and expense reporting caused by the modification and terminations of the Service Agreements decreased operating expenses by $42.2 million in fiscal 2001. General and administrative expenses decreased by $3.3 million and depreciation and amortization expenses decreased by $136,000 during fiscal 2001. These decreases were offset by the impairment charge of $23 million recorded in fiscal 2001. Fiscal 2000 operating expenses were $59.5 million, an increase of $22.6 million over fiscal 1999 operating expenses of $36.9 million. The increase is due to the affiliation with the 12 additional practices in conjunction with the acquisition of Omega Orthodontics Inc. and the full years expenses of the fiscal 1999 Practice Affiliations. General and administrative expenses consist of the corporate expenses of the Company. These corporate expenses include salaries, wages and benefits, bad debt expenses, rent, consulting fees, travel (primarily related to practice development and practice enhancement), office costs and other general corporate expenses. General and administrative expenses represented 58.9%, 18.6% and 11.6% of net revenue for fiscals 2001, 2000 and 1999 respectively. Fiscal 2001 general and administrative expenses were $7.3 million, a $3.3 million decrease from fiscal 2000 operating expenses of $10.6 million. The decrease is primarily due to decreases in bad debt expense of $2.8 million, professional fees of $209,000, seminars and education of $156,000, and salaries and wages of $97,000. 17 Fiscal 2000 general and administrative expenses were $10.6 million, an increase of $6.1 million over fiscal 1999 general and administrative of $4.5 million. The increase in general and administrative costs was primarily due to the provision for uncollectible accounts and notes receivable of $4.5 million. In addition, the Company incurred higher general and administrative expenses because it provided services to the increased number of practices in fiscal 2000 over fiscal 1999. In fiscal 2001, accounts receivable are amounts due from Affiliated Practices related to management services fees not yet paid. Notes receivable represent conversion of accounts receivable from Affiliated Practices, past advances made to practices for a practice acquisition by the Affiliated Practice, or past advances made for working capital. At March 31, 2001, the Company provided $1.7 million for accounts receivable and notes receivable deemed uncollectible. In fiscal 2000 and 1999, accounts receivable are amounts due from Affiliated Practices related to expenses paid on their behalf by the Company, or management fees not yet paid. Notes receivable represent advances made to practices for a practice acquisition by the Affiliated Practice, or advances made for working capital. At March 31, 2000 and 1999, the Company provided $4.5 million and approximately $125,000 respectively for accounts receivable and notes receivable deemed uncollectible. The increase in the provision for uncollectible receivables during 2000 resulted from experiencing adequate operating history to determine required reserves for accounts and notes deemed uncollectible. The provision for uncollectible accounts includes the amounts deemed uncollectible as a result of the settlements with these practices. Depreciation and amortization expenses represented 19.0%, 4.4% and 3.1% of net revenue for fiscal 2001, 2000 and 1999, respectively. Fiscal 2001 depreciation and amortization expenses were $2,368,000, a $136,000 decrease from fiscal 2000 depreciation and amortization expenses of $2,504,000. The decrease is primarily due to the modification and terminations of the Service Agreements. Fiscal 2000 depreciation and amortization expenses were $2.5 million, an increase of $1.3 million over fiscal 1999 depreciation and amortization expenses of $1.2 million. The increase is due primarily to the acquisition of fixed assets and Management Services Agreements in conjunction with Practice Affiliations. INCOME TAX EXPENSE The Company recorded no tax benefit during fiscal 2001 because it concluded it is not likely it would be able to recognize the tax asset created due to the lack of operating history of its eBusiness plan. At March 31, 2001, the Company has a net deferred tax asset of $9.6 million with a corresponding valuation allowance. Additionally, the Company also has $6.1 million of available deductions related to the increase in tax basis of the assets acquired in the Affiliations. Any tax benefits will be recognized over a period of seven to fifteen years. Income tax expense for fiscal 2000 totaled $2.2 million. The expense arose primarily because the Company recorded a valuation allowance for its entire deferred tax asset. The Company recorded the valuation allowance because it concluded it is not likely it would be able to recognize the tax assets because of no operating history of its new implementation of eBusiness plan, modification of its Management Services Agreements and maturity of its line of credit. Income tax benefit for fiscal 1999 was $525,000. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had a working capital deficit of $1.4 million. Current assets included $1.1 million in cash and $500,000 in accounts and notes receivable from the Affiliated Practices. Current liabilities consisted of $1.1 million of deferred revenue, $816,000 of current maturities of long-term debt and capital leases and $959,000 in accounts payable and accrued liabilities. On June 1, 1998, the Company closed a revolving bank credit facility with Bank One, Texas, and N.A., which provide the Company with a revolving line of credit of up to $15.0 million, to be used for general corporate purposes including financing of acquisitions, capital expenditures and working capital. The credit facility is collateralized by liens on certain of the Company's assets, including its rights under the Management Services Agreements and accounts and notes receivable. The credit facility contains restrictions on the incurrence of additional indebtedness and payment of dividends on the Company's common stock. Additionally, compliance with certain financial covenants is 18 required and the lender has approval rights with respect to acquisitions exceeding certain limits. At March 31, 2001, $9.3 million was outstanding under the revolving line of credit. On June 29, 2001, Bank One, Texas, NA extended the terms of the credit facility through July 2, 2002. In connection with the extension, the Company will issue 393,182 warrants to acquire shares of the Company's common stock at $0.42 per share. Until the credit facility is paid in full, the bank will have the right to maintain a 3% fully diluted interest in the Company through the issuance of additional warrants. The Company also paid $61,000 in fees to the bank as part of the extension. Terms of the extension include monthly principal payments of $25,000 and modification of the financial covenants. The Company has prepared financial projections through the term of the extension and believes it will be in compliance with the financial covenants. As discussed above, the bank credit facility due date has been extended to July 2, 2002. Based upon its current strategy, the Company projects to have sufficient funds to meet its operating capital requirements through fiscal 2002, however, there would not be sufficient cash flow to fund the credit facility obligation due July 2, 2002. Management believes it will be able to replace the credit facility with other bank financing alternatives or refinancing of its current line of credit. There is no assurance that other financing will be available to refinance the current line of credit in sufficient amounts, if at all, and there can be no assurance that the related terms and conditions will be acceptable to the Company. Failure of the Company to obtain such alternative financing or refinancing of its current line of credit would have a material and adverse effect on the Company's financial position. Cash generated from investing activities resulted from the collection of notes receivable of $533,000 and $116,000 in fiscal 2001 and 2000, respectively. Cash used in investing activities was $138,000, $347,000 and $1.4 million for the purchases of capital equipment, mostly for assets acquired in new practice affiliations in fiscal 2001, 2000 and 1999, respectively. The Company invested $0, $472,000 and $10.3 million in fiscal 2001, 2000 and 1999, respectively for the purchase of intangibles associated with acquisitions. Uses of cash also include the issuance of notes receivable to Affiliated Practices of $24,000, $279,000 and $1.3 million in fiscal 2001, 2000 and 1999, respectively. During fiscal 2001 and 2000, $1.2 million and $984,000 was used to repay long-term debt. No repayment of long-term debt occurred in fiscal 1999. There were no draws on the line of credit in fiscal 2001. Cash generated from financing activities in fiscal 2000 and 1999 included draws on the revolving line of credit of $2.1 million and $8 million respectively. The Company received $2.9 million from the issuance of common and redeemable preferred stock in fiscal 1999. In fiscal 2001 and 2000, the Company entered into capital lease agreements for the purchase of dental equipment, $22,000 and $1.4 million, respectively. E-LEARNING SERVICES AND NEW SALES MODEL The Company's sales and marketing strategy includes a plan to grow sales through partnered sales channels, leveraging existing customer relationships, and development of Off The Shelf course content. Additionally, the Company plans to raise capital to consolidate the fragmented e-Learning sector through acquisition of existing e-Learning companies. The core focus of the Company's revenue driver exists in product and procedure training. This model provides the corporate client with training on its existing products providing revenues to the Company without the need for end-user marketing. The Company expects to obtain re-seller and marketing agreements with companies to broaden the reach of its products and services through those company's existing sales forces. Additionally, the Company is developing an internal sales force, which is rooted in targeted market segments. The Company's initial focus was within the dental industry however; the Company is also targeting the pharmaceutical industry through relationships driven from the dental industry. Finally, the Company seeks to expand its sales and marketing efforts by and through the channels and sales force opportunities provided by acquisitions of target companies in strategic industries. Fees or revenues are generated through one of two means: The first are fees from the development and delivery of custom course content for an individual customer on a case-by-case basis depending upon the complexity of the course and the features chosen by the customer. The second revenue source is provided from usage of the Company's learning management systems. Revenues are earned on a per user per month basis. However, the pricing, expense and revenue model for the Company's e-Learning network has not been broadly tested in the marketplace, and may not yield results sufficient for the Company's business to succeed or be sustainable. If the pricing, expense and revenue model 19 is not acceptable to users, customers, or content providers, the Company's e-Learning initiative may not be commercially successful. This would have an adverse effect on the Company's business. ACQUISITION OF LIBERTY DENTAL ALLIANCE On November 13, 1998 the Company and Liberty Dental Alliance, Inc. ("Liberty") entered into an Agreement and Plan of Merger (the "Liberty Merger Agreement"), pursuant to which Liberty became a wholly owned subsidiary of the Company, and James M. Powers, Jr., D.D.S. was named President of the Company. The Liberty Merger Agreement provided the Company pay Liberty common stockholders, consideration for completed Liberty affiliations. In connection with the Liberty Merger Agreement, the Company has agreed to pay investment-banking fees of up to $100,000 to SunTrust Equitable Securities Corporation. This amount was paid in fiscal 2002. The Company issued an aggregate of 145,000 options to acquire the Company's common stock to certain consultants of the Company with an exercise price of $6.125 per share, in the same proportions and upon completion of Liberty Affiliations as the Additional Common Merger Consideration. As of March 31, 2000, the Company had completed all Liberty Affiliations with 17 dental practices of which all were completed during fiscal 1999. These dental practices generated aggregate annual patient revenue of approximately $13 million during their most recently completed fiscal year, and include dentists treating patients in 17 dental offices. The aggregate consideration paid by the Company for these practices consisted of approximately $5.6 million in cash, 1,295,268 shares of the Company's common stock and approximately $3.6 million aggregate principal amount of 6% Series A convertible subordinated notes, one-half payable November 2002 and one-half payable November 2003, and $160,000 aggregate principal amount of 6% of Series B convertible subordinated notes, one-half payable April 2003 and one-half payable April 2004. The consideration paid pursuant to the Liberty merger on the Liberty affiliations consisted of approximately $444,000 in cash, 423,356 shares of the Company's common stock, the assumption of approximately $350,000 in liabilities of Liberty and 92,550 options to purchase the Company's common stock. ACQUISITION OF OMEGA ORTHODONTICS On July 1, 1999, the Company executed a merger agreement with Omega Orthodontics, Inc. ("Omega"). In exchange for the approximately 5.0 million shares outstanding of Omega, the Company issued approximately 1.8 million shares of the Company's stock, and assumed approximately $1.1 million in debt. The merger was accounted for under the purchase method of accounting. The twelve Omega practices represent approximately $11.0 million in annualized practice revenues in fiscal 2000. ASSET PURCHASE On October 13, 2000, the Company entered into an Asset Purchase Agreement with Dexpo.com, Inc. The consideration for the purchase of assets is 750,000 shares of the Company's common stock with an additional 500,000 shares to be hold in escrow and paid contingent upon certain performance criteria of the Company's common stock. RECENT PRONOUNCEMENTS In June 2000, FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," (as amended by SFAS No. 137) and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements require recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss). Appropriate accounting for changes in fair value of derivatives held is dependent on whether the derivative transaction qualifies as an accounting hedge and on the classification of the hedge transaction. Management believes that the adoption of SFAS No. 133 and 138 will not have a material effect on the Company's financial statements. In March 2000, the Emerging Issue Task Force (EITF) reached a consensus on Issue 00-2, "Accounting for the Costs of Developing a Web Site." EITF 00-2 states that for specific web site development costs, the accounting for such 20 costs should be based generally on a model consistent with the American Institute of Certified Public Accountants Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of the pronouncement did not have an impact on the Company's position or the results of the operations. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements"(as amended by SAB 101A and 101B) that provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies and was adopted by the Company. The adoption of the pronouncement did not have an impact on the Company's position or the result of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on borrowed funds, which could affect its results of operations and financial condition. At March 31, 2001, the Company has $9.3 million in variable rate debt outstanding and, as such, the risk is immaterial based upon a 10% increase or decrease in interest rates from their March 31, 2001 levels. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE(S) ------- FINANCIAL STATEMENTS: Report of Independent Accountants......................................... 23 Consolidated Balance Sheets at March 31, 2001 and 2000.................... 24 Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999............................................. 25 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended March 31, 2001, 2000 and 1999......................... 26 Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999............................................. 27 Notes to Consolidated Financial Statements................................ 28-44 FINANCIAL STATEMENTS SCHEDULE: Report of Independent Accountants......................................... 47 Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2001, 2000 and 1999..................................... 48 All other schedules are omitted because they are not applicable 22 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Shareholders of e-dentist.com, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of e-dentist.com, Inc. and its Subsidiaries (the "Company") at March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 and Note 10, the terms of the Company's credit agreement call for a principal maturity date of July 2, 2002. Management's current projections indicate that the Company will have sufficient funds to meet its operating capital requirements through fiscal year ending March 31, 2002; however, there would not be sufficient cash flow to fund the credit agreement obligations due at July 2, 2002. Management is currently seeking other financing arrangements that would enable the Company to repay amounts outstanding under the credit agreement before July 2, 2002. Absent the Company's ability to obtain additional sources of funding or refinance its line of credit, it is unlikely the Company would be able to pay the principal payment due on the credit agreement on July 2, 2002, which could have a material and adverse effect on the Company. /s/ PricewaterhouseCoopers LLP Phoenix, Arizona June 22, 2001, except for Notes 1 and 10, as to which the date is June 29, 2001 23 E-DENTIST.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, MARCH 31, 2001 2000 -------- -------- ASSETS Current Assets: Cash and cash equivalents ............................................. $ 1,051 $ 553 Receivables from Affiliated Practices, net of allowance for doubtful accounts of $1,147 and $3,269, respectively ............. 195 2,966 Prepaid expenses and other current assets ............................. 128 499 Notes receivable from Affiliated Practices-current, net of allowance for doubtful accounts of $323 and $427, respectively.... 261 421 -------- -------- Total current assets ............................................. 1,635 4,439 Property and equipment, net ........................................... 3,279 6,886 Intangible assets, net ................................................ 3,107 25,786 Notes receivable from Affiliated Practices, net of allowance for doubtful accounts of $1,766 and $1,287, respectively ............ 1,059 709 Other assets .......................................................... 111 86 -------- -------- Total assets ..................................................... $ 9,191 $ 37,906 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long term debt ..................................... $ 471 $ 492 Accounts payable and accrued liabilities .............................. 959 1,702 Current portion of deferred revenue ................................... 1,052 206 Accrued employment agreement .......................................... 248 400 Current portion of capital lease liabilities .......................... 345 309 -------- -------- Total current liabilities ........................................ 3,075 3,109 Long term debt, less current maturities ................................. 11,461 14,829 Capital lease liabilities ............................................... 643 961 Deferred revenue ........................................................ 666 -- Commitments and contingencies Shareholders' equity (deficit): Common stock, $.001 par value 40,000,000 shares authorized, 11,721,664 and 10,820,783 issued, respectively ....................... 12 11 Additional paid-in capital ............................................ 25,809 25,604 Accumulated deficit ................................................... (31,349) (6,432) Less: Treasury shares at cost: 1,149,116, and 154,748, respectively ........................................................ (1,126) (176) -------- -------- Total shareholders' equity (deficit) ............................. (6,654) 19,007 -------- -------- Total liabilities and shareholders' equity (deficit) ............. $ 9,191 $ 37,906 ======== ========
The accompanying notes are an integral part of the consolidated financial statements 24 E-DENTIST.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2001 2000 1999 -------- -------- -------- Net revenue ................................................................. $ 12,458 $ 56,988 $ 38,824 Operating expenses: Clinical salaries, wages and benefits ..................................... 3,452 22,957 14,735 Dental supplies and lab fees .............................................. 285 10,134 7,133 Rent ...................................................................... 176 3,922 2,963 Advertising and marketing ................................................. 33 1,380 785 General and administrative ................................................ 7,340 10,586 4,497 Other operating expenses .................................................. 192 7,993 5,627 Impairment of assets ...................................................... 23,0000 -- -- Depreciation and amortization ............................................. 2,368 2,504 1,200 -------- -------- -------- Total operating expenses ............................................. 36,846 59,476 36,940 -------- -------- -------- Earnings (loss) from operations ............................................. (24,388) (2,488) 1,884 Interest expense ............................................................ 1,358 1,310 399 Interest income ............................................................. (352) (208) (188) Other income ................................................................ (407) (93) (44) -------- -------- -------- 599 1,009 167 Income (loss) before income taxes and extraordinary item .................... (24,987) (3,497) 1,717 Income tax expense (benefit) ................................................ -- 2,213 (525) -------- -------- -------- Income (loss) before extraordinary item ..................................... (24,987) (5,710) 2,242 Extraordinary item--gain on debt forgiveness (net of tax effect of $0)....... 70 350 -- -------- -------- -------- Net income (loss) .................................................... $(24,917) $ (5,360) $ 2,242 ======== ======== ======== Basic and diluted earnings per share: Earnings (loss) before extraordinary item ................................. $ (2.38) $ (0.55) $ 0.29 Extraordinary item ........................................................ .01 .03 -- -------- -------- -------- Net earnings (loss) ....................................................... $ (2.37) $ (0.52) $ 0.29 ======== ======== ======== Weighted average number of shares outstanding--basic and diluted ............ 10,496 10,356 7,803 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements 25 E-DENTIST.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
COMMON ADDITIONAL TOTAL ------------------ PAID IN ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY (DEFICIT) ------ ------ ------- ------- ----- ---------------- Balances, April 1, 1998 ....................... 6,442 $ 6 $ 10,304 $ (3,314) $ $ 6,996 Issuance of common stock ...................... 375 1 2,870 -- -- 2,871 Issuance of common stock to Affiliated Practices .................................... 2,286 2 8,494 -- -- 8,496 Tax benefit related to assets acquired in affiliations.................................. -- -- 155 -- -- 155 Net income .................................... -- -- -- 2,242 -- 2,242 ------ ----- -------- -------- -------- -------- Balances, March 31, 1999 ...................... 9,103 9 21,823 (1,072) 20,760 Issuance of common stock ...................... 1,893 2 3,836 -- 3,838 Shares repurchased ............................ (175) -- (297) -- (176) (473) Issuance of options for compensation .......... -- -- 54 -- -- 54 Net loss ...................................... -- -- -- (5,360) -- (5,360) Tax benefit related to assets acquired in affiliations.................................. -- -- 188 -- -- 188 ------ ----- -------- -------- -------- -------- Balances, March 31, 2000 ...................... 10,821 11 25,604 (6,432) (176) 19,007 Issuance of common stock ...................... 998 1 307 -- -- 308 Shares repurchased ............................ (97) -- (102) -- (950) (1,052) Net loss ...................................... -- -- -- (24,917) -- (24,917) ------ ----- -------- -------- -------- -------- Balances, March 31, 2001 ...................... 11,722 $ 12 $ 25,809 $(31,349) $ (1,126) $ (6,654) ====== ===== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements 26 E-DENTIST.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, 2001 2000 1999 -------- -------- -------- Cash flows from operating activities: Net income (loss) .................................................... $(24,917) $ (5,360) $ 2,242 Adjustment to net income (loss): Provision for bad debts ............................................ 1,705 4,505 125 Impairment of assets ............................................... 23,000 -- -- Depreciation and amortization ...................................... 2,368 2,504 1,200 Stock options compensation ......................................... -- 54 -- Gain on debt forgiveness ........................................... (70) (350) -- Deferred income taxes (benefit) .................................... -- 2,161 (525) Changes in operating assets and liabilities: Receivables from Affiliated Practices ............................ 110 (2,383) (5,784) Prepaid expenses and other current assets ........................ 111 (168) (364) Other assets ..................................................... 75 -- -- Accounts payable and accrued liabilities ......................... (773) (1,401) (63) Deferred revenue ................................................. (85) -- -- Accrued employment agreement ..................................... (152) (190) (310) -------- -------- -------- Net cash provided by (used in) operating activities ........ 1,372 (628) (3,479) -------- -------- -------- Cash flows from investing activities: Repayment of notes receivable ...................................... 533 116 -- Capital expenditures ............................................... (138) (347) (1,424) Acquisitions, net of cash acquired ................................. -- (472) (10,326) Issuance of notes receivable ....................................... (24) (279) (1,257) -------- -------- -------- Net cash provided by (used in) investing activities ........ 371 (982) (13,007) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common and redeemable preferred stock..... -- -- 2,930 Proceeds from line of credit ....................................... -- 2,100 8,000 Repayment of long-term debt ........................................ (1,245) (984) -- Offering and financing costs ....................................... -- -- (105) -------- -------- -------- Net cash provided by (used in) financing activities ........ (1,245) 1,116 10,825 -------- -------- -------- Net change in cash and cash equivalents .................... 498 (494) (5,661) Cash and cash equivalents, beginning of period ....................... 553 1,047 6,708 -------- -------- -------- Cash and cash equivalents, end of period ............................. $ 1,051 $ 553 $ 1,047 ======== ======== ========
The accompanying notes are an integral part of the financial statements 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION RECENT EVENTS In the fourth quarter of fiscal year 2000, the Company announced that it would be implementing a new business strategy to change from its historical practice management business to a focus on an eBusiness and e-Learning strategy. The Company's new strategic direction includes Business-to-Business (B2B) online services and e-Learning services through its Internet or online portal found at www.e-dentist.com. This shift in business model and focus was approved by the shareholders at the annual shareholder meeting held in Phoenix, Arizona on August 25, 2000. The shareholders also approved the Company's name change to e-dentist.com, Inc. The Company is proposing to change its name from e-dentist.com, Inc. to "EDT Learning, Inc." to more accurately reflect its current business model and the expansion of the scope of its business offering which focuses on providing e-Learning tools and systems to corporate clients inside and outside of the dental industry. A name change of the Company to "EDT Learning, Inc." was approved by the Board in June 2001. The name change will be submitted to a shareholder vote at the August 2, 2001 Annual Shareholders Meeting. As a part of the new business plan approved by shareholders, the Company modified the Affiliated Service Agreements, which were acceptable to both the Company and the Affiliated Practices. The new modified Service Agreements provide in general that: 1. The term of the Service Agreement has been reduced from its original term of 30 to 40 years to a new term of only five (5) years from the original date of execution. 2. All dental practice employees have become employees of the dental practice, and accordingly the associated payroll and practice expenses are being paid by the dentist and not the Company. 3. Service Fees have been reduced to a level approximating 90% of fiscal year 2000 fees and fixed in amount for the balance of the Service Agreement term. 4. All accounts receivable outstanding were either paid or converted to an interest-bearing promissory note (average three-year term with an annual interest rate of 10%). 5. The tangible practice assets originally contributed by the dental practice will be transferred back to the dental practice at the end of the amended Management Services Agreement term for a nominal value. 6. The Company be released by the dentist and dental practice of all known and unknown claims by the dentist including breach of the Service Agreement, securities claims or other claims related to the affiliation transaction. As of March 31, 2001, all but one of the active Service Agreements have been modified or terminated. As a result of the modifications and terminations of the Service Agreements, the Company prepared an impairment analysis to determine the recoverability of the Management Services Agreement intangible assets and fixed assets grouped at the practice level. The Company prepared the analysis by calculating the expected discounted future cash flows under modified contracts less the carrying amount of the intangible asset and fixed assets to determine the impairment charge. Based on the modified and terminated Service Agreements, the Company recorded a charge due to impairment of approximately $23 million for the year ended March 31, 2001. The fair value of the remaining intangible assets associated with the Service Agreements is being amortized over the remaining term of the modified Service Agreements. EXPANSION OF MODEL AND FOCUS As an extension of its educational and training background, the Company has broadened its reach to focus on the larger growing e-Learning and corporate training market. With the launch of the Company's state of the art learning management system (LMS) and its e-Learning engine, the Company now provides a comprehensive array of e-Learning content, hosting and delivery services to corporations across industry boundaries. The Company's synchronous and asynchronous content delivery solutions provide an array of e-Learning products that are customized to each corporate client. The Company's initial business model required that it be able to communicate with 107 remote locations using the Intranet through low bandwidth dial up modems in a secure environment. To communicate with its Affiliated Practices the Company built a proprietary Intranet (virtual private network), which processed secure financial transactions. From that experience and using existing technology and systems, 28 the Company created the e-Learning engine and LMS, which provides an integrated solution for corporate clients. The Company's learning management system was created to be a web based, low bandwidth, cross browser compatible content delivery and data management system. The Company's LMS delivers web enabled content through a series of server side components. Because of its design, the interface can be optimized to use less than 20K of bandwidth and can deliver any web-enabled content (from documents and presentations to video.) The testing system is database enabled, which provides the flexibility to create test questions according to testing requirements. The system has the ability to provide multiple test environments to meet user needs and questions that can be changed by the administrator. Testing options include open book tests, closed book tests, timed tests, random question tests, or smart tests (test questions by category or lessons that are designed to identify skill weaknesses). Lessons and courses are designed with pre and post tests and all testing activity is recorded into a database. LIQUIDITY AND MANAGEMENT PLANS During fiscal 2001, the Company incurred a net loss of $24.9 million and had an accumulated deficit of $31.3 million at March 31, 2001. In addition, the Company had a working capital deficit of $1.4 million at March 31, 2001. As discussed in Note 10, at March 31, 2001, the Company was not in compliance with certain of the financial covenants of the line of credit. At March 31, 2001, $9.3 million was outstanding under the line of credit. In conjunction with the extension discussed below, the bank has waived non-compliance of certain financial ratios at March 31, 2001. On June 29, 2001, Bank One, Texas, NA extended the terms of the credit facility through July 2, 2002. In connection with the extension, the Company will issue 393,182 warrants to acquire shares of the Company's common stock at $0.42 per share. Until the credit facility is paid in full, the bank will have the right to maintain a 3% fully diluted interest in the Company through the issuance of additional warrants. The Company also paid $61,000 in fees to the bank as part of the extension. Terms of the extension include monthly principal payments of $25,000 and modification of the financial covenants. The Company has prepared financial projections through the term of the extension and believes it will be in compliance with the financial covenants. As discussed above, the bank credit facility due date has been extended to July 2, 2002. Based upon its current strategy, the Company projects to have sufficient funds to meet its operating capital requirements through fiscal 2002, however, there would not be sufficient cash flow to fund the credit facility obligation due July 2, 2002. Management believes it will be able to replace the credit facility with other bank financing alternatives or refinancing of its current line of credit. There is no assurance that other financing will be available to refinance the current line of credit in sufficient amounts, if at all, and there can be no assurance that the related terms and conditions will be acceptable to the Company. Failure of the Company to obtain such alternative financing or refinancing of its current line of credit would have a material and adverse effect on the Company's financial position. In order to increase its liquidity, the Company has developed the following strategies; (i) implement its revised eCommerce and e-Learning based strategic alternative described above, (ii) reducing costs in the Company's corporate office, and (iii) raising additional capital through a private placement. However, there can be no assurance that the Company's strategies will be achieved. ORGANIZATION AND BASIS OF PRESENTATION Pentegra Dental Group, Inc. (the "Company") together with its wholly owned subsidiary, Pentegra Investments, Inc. ("PII"), provides practice management services to dental practices throughout the United States. In July 1997, Pentegra Dental Group, Inc., changed its name to Pentegra Investments, Inc. and formed a new wholly owned subsidiary named Pentegra Dental Group, Inc. ("Pentegra Dental" or "the Company"). On March 30, 1998, simultaneously with the Company's initial public offering, PII repurchased (the "Share Repurchase") from the stockholders of PII, on a pro rata basis, at a purchase price of $0.015 per share, that number of shares as was necessary so that the aggregate number of shares of Pentegra Dental common stock, par value $.001 per share (the "Common 29 Stock"), issued in connection with the Affiliations (as defined below) and the Share Exchange (as defined below) would not exceed 3,941,898 shares. Pursuant to that agreement, PII repurchased 909,237 shares for $14,000 and exchanged on a share-for-share basis, shares of PII common stock, par value $0.015 per share, for 1,756,667 shares of Common Stock (the "Share Exchange"). On March 30, 1998, Pentegra Dental acquired (the "Affiliations") simultaneously with the closing of its initial public offering (the "Offering" or "IPO"), substantially all of the tangible and intangible assets, and assumed the liabilities, of 50 dental practices (collectively, the "Founding Affiliated Practices") in exchange for 3.1 million shares of Common Stock, $6.5 million in cash and net assets assumed of approximately $300,000. The net proceeds of the 2.5 million shares of Common Stock issued in the IPO (after deducting the underwriting discounts and commissions) were $19.8 million. Total related offering costs were $3.4 million. The acquisitions of the Founding Affiliated Practices have been accounted for in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 48, "Transfers of Non-monetary Assets by Promoters or Shareholders". In accordance with SAB No. 48, the acquisition of the assets and assumption of certain liabilities for all of the Founding Affiliated Practices pursuant to the Affiliations has been accounted for by the Company at the transferors' historical cost basis, with the shares of Common Stock issued in those transactions being valued at the historical cost of the non-monetary assets acquired net of liabilities assumed. The cash consideration of approximately $6.5 million, paid at closing on March 30, 1998, less net assets acquired of approximately $300,000, is reflected as a dividend by the Company to the owners of the Founding Affiliated Practices in the quarter ended March 31, 1998. SAB No. 48 is not applicable to any acquisitions made by the Company subsequent to the IPO. Acquisitions of certain of the assets and liabilities of practices that affiliate with the Company after the IPO have been accounted for as purchases, and resulted in substantial annual non-cash amortization charges for intangible assets in the Company's statements of operations. In April 1998, the over allotment option to sell 375,000 shares of Common Stock was exercised at a price of $8.50 per share, yielding additional net proceeds to the Company of approximately $2.9 million. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated upon consolidation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt investments with original maturities of three months or less at the date of acquisition to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of depreciable assets, ranging from three to seven years. Maintenance and repairs are charged to expense whereas renewals and major replacements are capitalized. Gains and losses from dispositions are included in operations. INTANGIBLE ASSETS The Company's acquisitions involve the purchase of tangible and intangible assets and the assumption of certain liabilities of the affiliated dental practices. As part of the purchase allocation, the Company allocated the purchase price to the tangible assets acquired and liabilities assumed, based on estimated fair market values. In connection with each acquisition, the Company entered into a long-term Management Services Agreement with each affiliated dental practice, which cannot be terminated individually by either party without cause. The cost of the Management Services Agreement was originally being amortized on a straight-line basis over the lessor of its term or 25 years. As discussed in Note 1, the Management Services Agreements were modified during fiscal 2001 and are now being amortized over the remaining term of the modified Service Agreements (not more than five years). In connection with the allocation of the purchase price to identifiable intangible assets, the Company analyzes the nature of the group with which a Management Services Agreement is entered into, including the number of dentists in each group, number of dental centers and ability to recruit additional 30 dentists, the affiliated dental practice's relative market position, the length of time each affiliated dental practice has been in existence, and the term and enforceability of the Management Services Agreement. Because the Company does not practice dentistry, maintain patient relationships, hire dentists, enter into employment and non-compete agreements with the dentist, or directly contract with payors, the intangible asset created in the purchase allocation process is associated primarily with the Management Services Agreement with the affiliated dental practice. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If this review indicates that the carrying amount of the asset may not be recoverable, as determined based on the undiscounted cash flows of the related operations over the remaining amortization period, the carrying value of the asset is reduced to estimated fair value. Among the factors that the Company will continually evaluate are unfavorable changes in each affiliated dental practice's relative market share and local market competitive environment, current period and forecasted operating results and cash flows of the affiliated dental practice and its impact on the management fee earned by the Company, and legal factors governing the practice of dentistry. REVENUE RECOGNITION Under the terms of the original Services Agreement with an Affiliated Practice, the Company served as the exclusive manager and administrator of all non-dental services relating to the operation of an Affiliated Practice. The obligations of the Company included assuming responsibility for the operating expenses incurred in connection with managing the dental centers. These expenses included salaries, wages and related costs of non-dental personnel, dental supplies and laboratory fees, rental and lease expenses, promotion and marketing costs, management information systems and other operating expenses incurred at the Affiliated Practices. In addition, the Company incurred general and administrative expenses related to the financial and administrative management of dental operations, insurance, training and development and other typical corporate expenditures. As compensation for its services under the original services agreement and subject to applicable law, the Company was paid a management fee comprised of two components: (1) the costs incurred by it on behalf of the Affiliated Practice, and (2) a management fee either fixed in amount, an amount usually approximating 35% of the Affiliated Practice's operating profit, before dentist compensation or 15% of the Affiliated Practice's collected gross revenue ("Service Fee"). Therefore, net revenues represented amounts earned by the Company under the terms of its Service Agreements with the Affiliated Practices, which generally equated to the sum of the Service Fees and the operating expenses that the Affiliated Practices paid to the Company under the Service Agreements. The Company has embarked upon a new strategy focusing on eCommerce and e-Learning. Prior to the transition, the Company processed all payments to vendors and employed the team members of Affiliated Practices. The modified Management Services Agreements caused the team members to cease working as employees for the Company and they became employees of the individual Affiliated Practices. In addition, processing of payments to practice vendors is being performed at the practice level, by practice employees. The Company is no longer being reimbursed for expenses paid on the practices' behalf. As a result, the components of net revenues have changed and decreased significantly with the new Management Services Agreements. INCOME TAXES The Company utilizes the liability method of accounting for income taxes. Under this method, deferred taxes are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted marginal tax rates currently in effect when the differences reverse. EARNINGS PER SHARE Basic earnings per share are computed based upon the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Diluted earnings per share are not separately presented because such amounts would be the same as amounts computed for basic earnings per share. As of March 31, 2001 and 2000, options to purchase 1,643,173 and 1,147,327 shares of Common Stock at exercise prices above the market value of Common Stock were excluded from the calculation of earnings per share because their effect would have been antidilutive. As of March 31, 2001 and 2000, shares of 266,180 and 559,656 convertible from the Company's convertible subordinated notes were excluded from the calculation because their effects would have been antidilutive. 31 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. NEW PRONOUNCEMENTS In June 2000, FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," (as amended by SFAS No. 137) and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements require recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss). Appropriate accounting for changes in fair value of derivatives held is dependent on whether the derivative transaction qualifies as an accounting hedge and on the classification of the hedge transaction. Management believes that the adoption of SFAS No. 133 and 138 will not have a material effect on the Company's financial statements. In March 2000, the Emerging Issue Task Force (EITF) reached a consensus on Issue 00-2, "Accounting for the Costs of Developing a Web Site." EITF 00-2 states that for specific web site development costs, the accounting for such costs should be based generally on a model consistent with the American Institute of Certified Public Accountants Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of the pronouncement did not have an impact on the Company's position or the results of the operations. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements"(as amended by SAB 101A and 101B) that provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies and was adopted by the Company. The adoption of the pronouncement did not have an impact on the Company's position or the result of operations. RECLASSIFICATIONS Certain prior year balances in the consolidated financial statements have been reclassified to confirm with the fiscal 2001 presentation. 3. NOTES RECEIVABLE Notes receivable consisted of the following: MARCH 31, -------------------- 2001 2000 ------- ------- (IN THOUSANDS) Notes receivable ................................. $ 3,409 $ 2,844 Less: allowance for doubtful accounts ............ (2,089) (1,714) ------- ------- 1,320 1,130 Notes receivable, current ........................ 261 421 ------- ------- $ 1,059 $ 709 ======= ======= Notes receivables are with Affiliated Practices and are uncollateralized, ranging in length from one to thirteen years. The notes bear interest at March 31, 2001 at fixed rates ranging from 5% to 10% with interest and principal payments due monthly. 32 The collection schedule of notes receivable for each of the next five years subsequent to March 31, 2001 were as follows (in thousands): 2002 ......................................................... $ 798 2003 ......................................................... 1,057 2004 ......................................................... 477 2005 ......................................................... 226 2006 ......................................................... 234 Thereafter ................................................... 617 ------ $3,409 ====== 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: MARCH 31, --------------------- 2001 2000 ------ ------ (IN THOUSANDS) Furniture & Fixtures ............................. $1,447 $2,732 Equipment ........................................ 2,454 3,662 Computer Equipment ............................... 1,704 2,103 Leasehold Improvements ........................... 185 371 ------ ------ Total property and equipment .................. 5,790 8,868 Less: accumulated depreciation ................... 2,511 1,982 ------ ------ Property and equipment, net ................... $3,279 $6,886 ====== ====== Depreciation expense for the years ended March 31, 2001 and 2000 was $1.1 million and $1.3 million, respectively. 5. INTANGIBLE ASSETS Intangible assets consisted of the following: MARCH 31, ----------------------- 2001 2000 ------- ------- (IN THOUSANDS) Management Services Agreements ................. $ 5,528 $26,905 Other .......................................... 286 504 ------- ------- 5,814 27,409 Less: accumulated amortization ................. 2,707 1,623 ------- ------- Intangible assets, net ......................... $ 3,107 $25,786 ======= ======= Amortization expense for the years ended March 31, 2001 and 2000 was $1.3 million and $1.2 million, respectively. As discussed in Note 1, the Company modified the terms of its existing Management Services Agreements. The Company recognized an impairment charge of $23 million in fiscal 2001 related to the modifications. 33 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following: MARCH 31, ----------------- 2001 2000 ------ ------ (IN THOUSANDS) Accounts payable trade ............................... $ 508 $1,111 Amounts payable to Affiliated Practices .............. -- 332 Accrued interest ..................................... 344 73 Other ................................................ 107 186 ------ ------ Total accounts payable and accrued liabilities .... $ 959 $1,702 ====== ====== 7. DEFERRED REVENUE Deferred revenue consisted of the following: MARCH 31, ----------------- 2001 2000 ------ ------ (IN THOUSANDS) Deferred revenue, current ............................ $1,052 $ 206 Deferred revenue, noncurrent ......................... 666 -- ------ ------ $1,718 $ 206 ====== ====== Deferred revenue results primarily from Affiliated Practices prepaying their future service fees with either cash payments or forgiveness of debt owed to them by the Company. During fiscal 2001 and 2000, the Company recorded deferred revenue from cash payments of $563,000 and $100,000 and from canceling debt of $1,500,000 and $59,000, respectively. 8. EXTRAORDINARY ITEM In January 2001, former Liberty stockholders forgave $70,000 previously due from the Liberty Merger Agreement (See Note 9). In December 1999, a former member of the Board of Directors forgave $350,000 previously due from the Company (See Note 15). 9. AFFILIATIONS On July 1, 1999, the Company executed a merger agreement with Omega Orthodontics, Inc. ("Omega"). In exchange for the approximately 5.0 million shares outstanding of Omega, the Company issued approximately 1.8 million shares of the Company's stock, and assumed approximately $1.1 million in debt. The merger was accounted for under the purchase method of accounting. The following unaudited pro forma summary of financial information presents the Company's combined results of operations as if the acquisition of Omega Orthodontics, Inc. had occurred at the beginning of the periods presented, after 34 including the impact of certain adjustments including: (i) the elimination of nonrecurring merger related costs, and (ii) reduced amortization expense reflecting in value assigned to intangible assets, (in thousands, except per share data). FISCAL YEARS ENDED MARCH 31, ----------------------- 2000 1999 --------- --------- PRO FORMA PRO FORMA UNAUDITED UNAUDITED -------- -------- Revenues ........................................ $ 59,063 $ 46,645 Expenses ........................................ 61,752 44,216 -------- -------- Net income (loss) ............................... $ (2,689) $ 2,429 ======== ======== Net income (loss) per basic and diluted share before extraordinary item ................ $ (.26) $ 0.25 -------- -------- Weighted average number of basic and diluted share outstanding .............................. 10,356 9,546 ======== ======== The pro forma financial information presented does not purport to indicate what the combined results of operations would have been had the merger occurred at the beginning of the periods presented or the results of operations that may be obtained in the future. Additionally, the pro forma financial information presented does not reflect the anticipated cost savings resulted from the integration of the Company's and Omega's operations. ACQUISITION OF LIBERTY DENTAL ALLIANCE On November 13, 1998 the Company and Liberty Dental Alliance, Inc. ("Liberty") entered into an Agreement and Plan of Merger (the "Liberty Merger Agreement"), pursuant to which Liberty became a wholly owned subsidiary of the Company, and James M. Powers, Jr., D.D.S. was named President of the Company. The Liberty Merger Agreement provided the Company pay Liberty common stockholders consideration for completed Liberty affiliations. In connection with the Liberty Merger Agreement, the Company has agreed to pay investment-banking fees of up to $100,000 to SunTrust Equitable Securities Corporation. This amount was paid in fiscal 2002. The Company issued an aggregate of 145,000 options to acquire the Company's common stock to certain consultants of the Company with an exercise price of $6.125 per share, in the same proportions and upon completion of Liberty Affiliations as the Additional Common Merger Consideration. As of March 31, 2000, the Company had completed all Liberty Affiliations with 17 dental practices of which all were completed during fiscal 1999. These dental practices generated aggregate annual patient revenue of approximately $13 million during their most recently completed fiscal year, and include dentists treating patients in 17 dental offices. The aggregate consideration paid by the Company for these practices consisted of approximately $5.6 million in cash, 1,295,268 shares of the Company's common stock and approximately $3.6 million aggregate principal amount of 6% Series A convertible subordinated notes, one-half payable November 2002 and one-half payable November 2003, and $160,000 aggregate principal amount of 6% of Series B convertible subordinated notes, one-half payable April 2003 and one-half payable April 2004. The consideration paid pursuant to the Liberty merger on the Liberty affiliations consisted of approximately $444,000 in cash, 423,356 shares of the Company's common stock, the assumption of approximately $350,000 in liabilities of Liberty and 92,550 options to purchase the Company's common stock. For the year ended March 31, 1999, the Company completed new dentist affiliations with 34 practices. Total consideration paid by the Company for the new affiliations consisted of 2,286,000 shares of Common Stock, $4.6 million aggregate principal amount of Convertible Subordinated Debt Securities, $537,000 in notes and $10.3 million of cash. 35 The assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The aggregate purchase price and related expenses that exceeded the fair market value of net assets, have been assigned to Management Services Agreements. Management fees and related costs are included in the financial statements from their acquisition dates. The allocations were as follows (in thousands): 2000 1999 ------- ------- Property and equipment, net ......................... $ 500 $ 1,955 Management services agreements ...................... 4,938 21,970 Deferred tax asset .................................. 1,212 -- Net liabilities acquired ............................ (2,340) -- ------- ------- 4,310 23,925 Less: Common stock issued ........................... 3,838 8,496 Less: Notes payable and convertible subordinated notes issued ....................................... -- 5,103 ------- ------- Cash purchase price ................................. $ 472 $10,326 ======= ======= ASSET PURCHASE On October 13, 2000, the Company entered into an Asset Purchase Agreement with Dexpo.com, Inc. The consideration for the purchase of assets is 750,000 shares of the Company's common stock with an additional 500,000 shares to be held in escrow and paid contingent upon certain performance criteria of the Company's common stock. 10. LONG-TERM DEBT Long-term debt consisted of the following: MARCH 31, --------------------- 2001 2000 ------- ------- (IN THOUSANDS) Credit facility ................................. $ 9,302 $10,100 Convertible subordinated notes, Series A ........ 1,812 3,546 Convertible subordinated notes, Series B ........ -- 288 Shareholders' notes payable ..................... 442 559 Notes payable ................................... 376 828 ------- ------- 11,932 15,321 Less: Current portion of long-term debt ........ 471 492 ------- ------- Long-term debt .................................. $11,461 $14,829 ======= ======= The credit facility provided the Company with a revolving line of credit of up to $15.0 million, to be used for general corporate purposes including financing of acquisitions, capital expenditures and working capital. The credit facility bears interest at an adjustable rate based on LIBOR. At March 31, 2001 and 2000 the interest rate on outstanding amounts was 10.94% and 10.68%, respectively. The credit facility is collateralized by liens on certain of the Company's assets, including its rights under the Management Services Agreements and accounts and notes receivable. The credit facility contains restrictions on the incurrence of additional indebtedness and payment of dividends on the Common Stock. At March 31, 2001, the Company was not in compliance with certain of the financial covenants of the line of credit. At March 31, 2001, $9.3 million was outstanding under the line of credit. In connection with the extension discussed below, the bank waived non-compliance of certain financial ratios at March 31, 2001. On June 29, 2001, Bank One, Texas, NA extended the terms of the credit facility through July 2, 2002. In connection with the extension, the Company will issue 393,182 warrants to acquire shares of the Company's common stock at $0.42 per share. Until the credit facility is paid in full, the bank will have the right to maintain a 3% fully diluted interest in the Company through the issuance of additional warrants. The Company also paid $61,000 in fees to the bank as part of the extension. 36 Terms of the extension include monthly principal payments of $25,000 and modification of the financial covenants. The Company has prepared financial projections through the term of the extension and believes it will be in compliance with the financial covenants. As discussed above, the bank credit facility due date has been extended to July 2, 2002. Based upon its current strategy, the Company projects to have sufficient funds to meet its operating capital requirements through fiscal 2002, however, there would not be sufficient cash flow to fund the credit facility obligation due July 2, 2002. Management believes it will be able to replace the credit facility with other bank financing alternatives or refinancing of its current line of credit. There is no assurance that other financing will be available to refinance the current line of credit in sufficient amounts, if at all, and there can be no assurance that the related terms and conditions will be acceptable to the Company. Failure of the Company to obtain such alternative financing or refinancing of its current line of credit would have a material and adverse effect on the Company's financial position. The Convertible Subordinated Notes Series A Securities (Series A Securities) were issued in connection with the acquisition of certain Affiliated Practices. The Series A Securities bear interest at 6% and can be converted to Common Stock of the Company at conversion prices ranging from $6.75 to $7.00 per share. The conversion period began on November 1, 1999 and ends on November 1, 2003. The principal amount of the Series A Securities, if not converted, is payable one-half on November 1, 2002 and one-half on November 1, 2003. The Convertible Subordinated Notes Series B Securities (Series B Securities) were issued in connection with the acquisition of certain Affiliated Practices. The Series B Securities bear interest at 6% and can be converted to Common Stock of the Company at a conversion price of $6.75 per share. The conversion period began on April 1, 2000 and ends on April 1, 2004. During fiscal 2001, $1,734,000 of previously issued Series A Securities and $242,000 of the remaining Series B Securities, respectively, were returned by the holders to offset amounts owed to the Company and prepay future service fees. During fiscal 2000, $665,000 and $67,000 of previously issued Series A Securities and Series B Securities, respectively, were returned by the holders to offset amounts owed to the Company. In connection with the merger with Omega Orthodontics, Inc., (see Note 9), the Company assumed certain notes payable to Affiliated Practices. The notes were originally issued in connection with the affiliation agreements at the time the assets of the practices were acquired. At March 31, 2001 and 2000, the remaining principal on these notes was $331,000 and $828,000, respectively. During fiscal 2001, $355,000 of these notes were returned by the holders to offset amounts owed to the Company and prepay future service fees. The notes are due in monthly installments ranging from $1,213 to $4,860 through December 2003, and bear interest at 8.5%. In connection with the IPO; the Company issued $468,000 of notes payable to certain shareholders formerly owning preferred stock. The notes bear 6% interest and are payable on the earlier of March 30, 2003 or the date upon which the Company offers and sells an amount of equity securities equal or greater to the gross proceeds of the IPO. During fiscal 2001, $17,500 of these notes payable were returned by the holders to offset amounts owned to the Company. During fiscal 2000, the Company made a payment of $9,000 to the shareholders. The Company entered into an agreement with an officer to purchase substantially all the assets and the operations of Pentegra, Ltd. and Napili, International for total consideration of $200,000, consisting of an aggregate of $100,000 in cash and a $100,000 principal amount 9.0% promissory note. During fiscal 2001, the $100,000 promissory note was transferred to deferred revenue for payment of future management service fees. In March 1999, the Company issued $537,000 of notes payable to owners of affiliated dental practices. These notes were paid in April 1999. 37 The aggregate maturities of long-term debt excluding capital leases for each of the next five years subsequent to March 31, 2001 were as follows (in thousands): 2002 ...................................................... $ 471 2003 ...................................................... 10,057 2004 ...................................................... 1,358 2005 ...................................................... 23 2006 ...................................................... 23 ------- $11,932 ======= 11. CAPITALIZATION PREFERRED STOCK The Company has the authority to issue ten million shares of preferred stock, par value $.001 per share. At March 31, 2001 and 2000 no shares of preferred stock were issued or outstanding. COMMON STOCK As of March 31, 2001, the Company is authorized to issue forty million shares of common stock. The Company has acquired treasury stock from certain Affiliated Practices for the payment of receivables and purchase of property and equipment. 12. INCOME TAXES Significant components of the Company's deferred tax assets (liabilities) were as follows (in thousands): MARCH 31 -------------------- 2001 2000 ------- ------- Deferred tax assets: Reserves for uncollectible accounts .............. $ 1,215 $ 1,931 Net operating loss carryforward .................. 8,665 2,472 Organizational costs ............................. 241 352 Property and equipment ........................... 56 -- Other ............................................ 7 26 ------- ------- Total deferred tax assets ................... 10,184 4,781 Deferred tax liabilities: Excess book basis over tax basis of accrued revenues and expenses .......................... (591) (1,183) Property and equipment ........................... -- (204) Management services agreement .................... -- (155) ------- ------- Total deferred tax liabilities .............. (591) (1,542) Net deferred tax asset ............................. 9,593 3,239 Less valuation allowance ......................... (9,593) (3,239) ------- ------- Net deferred tax asset ........................... $ -- $ -- ------- ------- Less current portion ............................. -- -- ------- ------- Noncurrent assets ................................ $ -- $ -- ======= ======= 38 Significant components of the provision for income taxes were as follows: YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2001 2000 1999 ------ ------ ------ Current tax expense (benefit): Federal ............................... $ -- $ 52 $ -- State ................................. -- -- -- ------ ------ ------ Total current .................... -- 52 -- Deferred tax expense (benefit): Federal ............................... -- 1,984 (462) State ................................. -- 177 (63) ------ ------ ------ Total deferred ................... -- 2,161 (525) ------ ------ ------ Expense (benefit) for income taxes ...... $ -- $2,213 $ (525) ====== ====== ====== The differences between the statutory federal tax rate and the Company's effective tax rate on continuing operations were as follows (in thousands): YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2001 2000 1999 ------- ------- ------- (IN THOUSANDS) Tax (benefit) at U.S. Statutory rate (34%).............................. $(8,472) $(1,070) $ 584 State income taxes (benefit), net of federal tax ............................ (1,012) (106) 82 Nondeductible expenses and other ........ 3,130 150 118 Change in valuation allowance ........... 6,354 3,239 (1,309) ------- ------- ------- Total tax expense (benefit) ...... $ -- $ 2,213 $ (525) ======= ======= ======= At March 31, 2001, the Company had net operating loss carry-forwards available to reduce future taxable income of approximately $22.8 million, expiring beginning in 2018. The Company recorded a valuation allowance for its entire deferred tax asset because it concluded it is not likely it would be able to recognize the tax assets due to the lack of operating history of its implementation of the eBusiness plan. In addition, approximately $0.2 million of the valuation allowance will be allocated to shareholder equity when that portion of the deferred tax asset is recognized in the future. The Company also has $6.1 million of available deductions related to the increase in tax basis of the assets acquired in the Affiliations. The tax benefits will be recognized over a period of seven to fifteen years. 13. STOCK OPTION PLANS The Company grants stock options under the 1997 Stock Compensation Plan, stock-based incentive compensation (the "Plan"). The Company recognizes stock-based compensation issued to employees at the intrinsic value between the exercise price of options granted and the fair value of stock for which the options may be exercised. However, pro forma disclosures as if the Company recognized stock-based compensation at the fair value of the options themselves are presented below. Under the Plan, the Company is authorized to issue 2,000,000 shares of Common Stock pursuant to "Awards" granted to officers and key employees in the form of stock options. There were 1,643,173 and 1,147,327 options granted under the Plan, at March 31, 2001 and 2000, respectively. The Compensation Committee administers the Plan. These stock options have contractual terms of 10 years and have an exercise price no less than the fair market value of the stock at grant date. The options vest at varying rates over a one to five year period. 39 Following is a summary of the status of the Company's stock options as of March 31, 2001 and for the three years then ended: NUMBER OF WEIGHTED SHARES OF AVERAGE UNDERLYING EXERCISE OPTIONS PRICES ------- ------ Outstanding at April 1, 1998 ..................... 671,666 $8.50 ---------- ----- Exercisable at April 1, 1998 ..................... -- -- ---------- ----- Granted .......................................... 358,000 4.94 Exercised ........................................ -- -- Forfeited ........................................ (433,000) 8.46 Expired .......................................... -- -- ---------- ----- Outstanding at March 31, 1999 .................... 596,666 6.40 ---------- ----- Exercisable at March 31, 1999 .................... 136,333 6.69 ---------- ----- Granted .......................................... 608,994 3.17 Exercised ........................................ -- -- Forfeited ........................................ (58,333) 7.06 Expired .......................................... -- -- ---------- ----- Outstanding at March 31, 2000 .................... 1,147,327 4.74 ---------- ----- Exercisable at March 31, 2000 .................... 267,263 6.41 ---------- ----- Granted .......................................... 804,901 0.68 Exercised ........................................ -- Forfeited ........................................ (309,055) 5.76 Expired .......................................... -- ---------- ----- Outstanding at March 31, 2001 .................... 1,643,173 2.50 ---------- ----- Exercisable at March 31, 2001 .................... 488,749 4.08 ---------- ----- Weighted average fair value of options granted during the period: Fiscal 1999 ................................... $2.77 Fiscal 2000 ................................... $1.00 Fiscal 2001 ................................... $0.26 The fair value of each stock option granted by the Company is estimated on the date of grant using the Black-Scholes option pricing model for the three years ended March 31, 2001 with the following weighted-average assumptions: dividend yield of 0% for each year; expected volatility of 61.4% for the year ended March 31, 1999, 67% for the year ended March 31, 2000 and 65% for the year ended March 31, 2001; risk-free interest rates are 5.7% for the year ended March 31, 1999, 6.2% for the year ended March 31, 2000 and 4.93%-6.29% for the year ended March 31, 2001; the expected average lives of the options range from seven to ten years. The following table summarizes information about stock options outstanding at March 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- --------------------------- WEIGHTED WEIGHTED AVERAGE REMAINING NUMBER OF AVERAGE CONTRACTUAL LIFE NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE (YEARS) SHARES EXERCISE PRICE ------ -------------- ------- ------ -------------- (SHARE DATA IN THOUSANDS) $0.01 $0.99 616,436 0.50 9.45 61,124 0.50 $1.00 $1.99 210,000 1.27 9.15 50,000 1.56 $2.00 $2.99 445,000 2.21 8.29 165,000 2.34 $3.00 $8.50 371,737 6.83 7.31 212,625 7.00 --------- --------- 1,643,173 488,749 ========= =========
40 Had the compensation cost for the company's stock based compensation plans been determined using the fair value rather than the intrinsic value of the options, the Company's net income (loss) and diluted net income (loss) per share for 2001, 2000 and 1999 would approximate $(24.9) million or $(2.37), $(5.4) million or $(0.52) and $1.9 million, or $0.25 per share, respectively. The effects of applying fair value accounting in this pro forma disclosure are not indicative of future amounts. WARRANTS Omega Orthodontics, Inc. (See Note 9) had warrants outstanding to purchase 2,430,000 shares of Omega common stock. As a result of the merger with the Company on July 1, 2000, these warrants now constitute warrants to acquire, on the same terms and conditions as were applicable under the original Omega warrants, 865,343 shares of the Company's common stock exercisable at prices ranging from $18.53 to $27.80 per share. 14. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases a portion of its property and equipment under the terms of capital and operating leases. The capital leases bear interest at varying rates ranging from 8.9% to 12.6% and require monthly payments. Assets recorded under capital leases, at March 31, 2001, consisted of the following (in thousands): Cost ........................................................... $1,190 Less accumulated amortization .................................. 330 ------ Total .......................................................... $ 860 ====== Future minimum lease payments under capital leases and noncancelable operating leases with initial or remaining terms of one or more years consisted of the following at March 31, 2001 (in thousands): CAPITAL OPERATING ------- --------- 2002 ................................................ $ 437 $ 378 2003 ................................................ 336 282 2004 ................................................ 277 167 2005 ................................................ 115 3 2006 ................................................ -- -- Thereafter .......................................... -- -- ------ ------ Total minimum obligations ........................... $1,165 $ 830 ====== Less amount representing interest ................ 177 ------ Present value of minimum obligations ................ 988 Less current portion ............................. 345 ------ Long-term obligation at March 31, 2001 .............. $ 643 ====== The Company incurred rent expense of $253,000, $264,000 and $214,000 in fiscal 2001, 2000 and 1999, respectively. LITIGATION The Company has pending lawsuits against five Affiliated Practices for defaulting in the payment of the required Service Fees. In each of those cases, the Company is seeking damages equal to past due and remaining service fees, consequential damages equal to the value of the intangible practice asset and attorney's fees. Three Affiliated Practices have in response filed a counter-claim alleging breach of contract, misrepresentation and securities violations. The Company believes that those counter-claims are without merit and that the Company will prevail both in the recovery of damages from the Affiliated Practices as well as a defense to the alleged counter-claims. The Company is also the defendant in a recently filed lawsuit in which the plaintiff claims breach of the premises lease associated with an Affiliated Practice. The Company as a defendant tenant is seeking indemnity from the 41 Affiliated Practice and believes that it will recover any damages suffered from the responsible Affiliated Practice. 15. RELATED PARTY TRANSACTIONS An employment bonus of $1,250,000 to a member of the Board of Directors and Chief Dental Officer of the Company was recorded prior to fiscal 1999. During fiscal 2001, 2000 and 1999, $152,000, $190,000 and $310,000 was paid respectively to this board member. In December 1999, the officer forgave $350,000 due him by the Company. The net extraordinary gain to the Company after a tax effect was $350,000. Pursuant to the terms of the Company's employment agreement with the Chief Dental Officer as amended, the remaining employment bonus must be paid in full by July 31, 2001. At March 31, 2001, $248,000 remained outstanding. During the year ended March 31, 2001, the Company made a severance payment of $64,000 to the former Chief Financial Officer. During the year ended March 31, 2000, the Company made a severance payment of $30,000 to the former Chief Operating Officer. The Company also agreed to pay the former Chief Operating Officer $72,000 under the terms of the separation. During the year ended March 31, 1999, the Company made a severance payment of $350,000 to the former Chief Executive Officer. During fiscal 2001, the Company recognized $10,000 of legal expense to a law firm of which a member of the Company's Board of Directors is a partner. At March 31, 2000 and 1999, the Company had notes and accounts receivable from Affiliated Practices who also serve as members of the Board of Directors. At March 31, 2000 and 1999, the total notes receivable from board members were approximately $361,000 and $109,000 respectively, net of an allowance for doubtful accounts of $136,000 and $0, respectively. The accounts receivable from board members at March 31, 2000 and 1999 were approximately $430,000 and $386,000 respectively, net of allowance for doubtful accounts of $198,000 and $0, respectively. 16. CREDIT RISK The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company's accounts at these institutions may, at times, exceed the federally insured limits. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, receivables from Affiliated Practices, and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying amounts of the Company's long-term borrowings, and revolving line of credit and notes receivables from Affiliated Practices as of March 31, 2001 and 2000, approximate their fair value based on the Company's current incremental borrowing rates for similar type of borrowing arrangements. RECEIVABLES AND NOTES RECEIVABLES FROM AFFILIATED PRACTICES Receivables from Affiliated Practices represents payment for services rendered by the Company for the Affiliated Practices. The Company does not perform periodic credit reports or provide collateral related to the receivables from Affiliated Practices. As of March 31, 2001 and 2000, the Company had on allowance for doubtful accounts of $3.3 million and $5.0 million respectively, for its accounts and notes receivables from Affiliated Practices. In the years ended March 31, 2001 and 2000, the Company recorded a $1.7 million and $4.5 million charge in bad debt expense resulting from its inability to collect receivables from Affiliated Practices after exhausting various payment plans with the Affiliated Practices and settlement of litigation with certain practices. Although management believes the remaining receivables are collectable at March 31, 2001, it is reasonably possible that what the Company will collect may materially differ. During the years ended March 31, 2001 and 2000, the Company converted approximately $1.9 million and $971,000 in receivables from Affiliated Practices into interest bearing notes receivables. 42 17. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2001 2000 1999 ------ ------ ------ (IN THOUSANDS) Cash paid during the period for: Interest ............................................................... $1,088 $1,571 $ 55 Income taxes ........................................................... -- -- 85 Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock in connection with acquisitions ............... 308 3,838 8,496 Issuance of convertible subordinated notes in connection with practice affiliations ........................................... -- -- 4,566 Issuance of notes payable in connection with practice affiliations ......................................................... -- -- 537 Convertible subordinated notes offset against receivables from Affiliated Practices ............................................ 808 732 -- Conversion of receivables from Affiliated Practices to notes receivables .......................................................... 1,911 971 -- Capital leases incurred for equipment .................................. 22 1,448 -- Treasury stock acquired for payment of receivable from Affiliated Practices and purchase of property and equipment ..................... 1,052 473 -- Notes payable offset against future management service fees ............ 1,500 -- --
43 18. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth summary quarterly results of operations for the Company for the years ended March 31, 2001 and 2000:
FIRST SECOND THIRD FOURTH 2001 QUARTER QUARTER QUARTER QUARTER - ---- -------- -------- -------- ------- Net revenue ......................................... $ 6,357 $ 2,210 $ 1,966 $ 1,925 Operating expenses .................................. 11,539 21,972 1,479 1,856 Earnings (loss) from operations ..................... (5,182) (19,762) 487 69 Earnings (loss) before income taxes ................. (5,508) (19,973) 266 228 Income taxes ........................................ -- -- -- -- Extraordinary items, net ............................ -- -- -- 70 Net (loss) earnings ................................. $ (5,508) $(19,973) $ 266 $ 298 Net earnings (loss) per share:(1) Earnings (loss) before extraordinary item ......... $ (.54) $ (2.00) $ .03 $ .02 Extraordinary item ................................ -- -- -- .01 Net earnings (loss) ............................... $ (.54) $ (2.00) $ .03 $ .03 Weighted average common shares outstanding: Basic and diluted ................................. 10,175 9,969 10,463 10,630 FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER - ---- -------- -------- -------- ------- Net revenue ......................................... $ 12,449 $ 15,609 $ 14,967 $ 13,963 Operating expenses .................................. 11,544 14,920 14,761 18,251 Earnings (loss) from operations ..................... 905 689 206 (4,288) Earnings (loss) before income taxes ................. 698 525 8 (4,728) Income taxes ........................................ 279 250 49 1,635 Extraordinary items, net ............................ 217 133 Net (loss) earnings ................................. $ 419 $ 275 $ 176 $ (6,230) Net earnings (loss) per share:(1) Basic and diluted earnings per share Earnings (loss) before extraordinary item........ $ .05 $ .03 $ -- $ (.60) Extraordinary item .............................. -- -- .02 .01 Net earnings (loss) ............................. $ .05 $ .03 $ .02 $ (0.58) Weighted average common share outstanding: Basic and diluted ................................. 9,103 10,844 10,802 10,675
- ---------- (1) Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share dues not equal the total computed for the year due to stock transactions that occurred. 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is set forth under the captions "Election of Directors" and "Section 16 Reports" will be set forth in the Company's definitive Proxy Statement (the "2001 Proxy Statement") for its 2001 annual meeting of stockholders, which sections are incorporated herein by reference. Pursuant to Item 401 (b) of Regulation S-K, the information required by this item with respect to executive officers of the Company is set forth in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth in the section entitled "Executive Compensation" in the 2001 Proxy Statement, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 2001 Proxy Statement, which section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED THIRD PARTY TRANSACTIONS The information required by this item will be set forth in the section entitled "Certain Transactions" in the 2001 Proxy Statement, which section is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS Report of Independent Accountants Consolidated Balance Sheets as of March 31, 2001 and 2000 Consolidated Statements of Operations for the Years Ended March 31, 2001, 2000 and 1999. Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended March 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the Years Ended March 31, 2001, 2000 and 1999. Notes to the Consolidated Financial Statements (a)(2) FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants The following financial statement schedule is filed as a part of this Report under Schedule II on page 48. Schedule II -- Valuation and Qualifying Accounts for the three fiscal years ended March 31, 2001. All other schedules called for by Form 10-K are omitted because they are inapplicable or the required information is shown in the financial statements, or notes thereto, included herein. 45 (a)(3) EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 3.1(1) Restated Certificate of Incorporation of Pentegra Dental Group, Inc. 3.2(1) Bylaws of Pentegra Dental Group, Inc. 3.3 Restated Certificate of Incorporation of Pentegra Dental Group, Inc. 3.4 Amendment of Bylaws of Pentegra Dental Group, Inc. 4.1(1) Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc. 4.2(1) Form of Registration Rights Agreement for Owners of Founding Affiliated Practices 4.3(1) Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named therein 4.4(2) Form of Stockholders' Agreement for Owners of Affiliated Practices 4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust Company of Texas, N.A., as Trustee relating to the Convertible Debt Securities 4.6 Form of certificate evidencing ownership of Common Stock of e-dentist.com, Inc. +10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan +10.2(1) Form of Service Agreement 10.3(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A. and Pentegra Dental Group, Inc. 10.4(5) Modification to Credit Agreement between Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated September 9, 1998 10.5(5) Agreement and Plan of Merger among Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as of November 13, 1998 10.6(2) First Amendment to Credit Agreement by and among Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated as of February 9, 1999 10.7(2) First Amendment to the Agreement and Plan of Merger by and among Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as of January 29, 1999 10.8(6) Third Amendment to Credit Agreement +10.9 Employment Agreement dated November 12, 2000 between e-dentist.com and James M. Powers, Jr. +10.10 Employment Agreement dated February 15, 2001 between e-dentist.com and Charles Sanders +10.11 Employment Agreement dated February 15, 2001 between e-dentist.com and James Dunn, Jr. +10.12 Employment Agreement dated July 16, 2000 between e-dentist.com and Glenn J. Bonagura 10.13 Asset Purchase Agreement by and among e-dentist.com, Inc. and Dexpo.com, Inc. 10.14 Fourth Amendment of Credit Agreement 12 Ratio of Earnings to Fixed Changes 21.1 Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP - ---------- (1) Previously filed as an exhibit to e-dentist.com's Registration Statement on Form S-1 (No. 333-37633), and incorporated herein by reference. (2) Previously filed as an exhibit to e-dentist.com's Registration Statement on Form S-4 (No. 333-78535), and incorporated herein by reference. (3) Previously filed as an exhibit to e-dentist.com's Registration Statement on Form S-4 (No. 333-64665), and incorporated herein by reference. (4) Previously filed as an exhibit to e-dentist.com's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (5) Previously filed as an exhibit to e-dentist.com's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998. (6) Previously filed as an exhibit to e-dentist.com's Annual Report on Form 10-K for the year ended March 31, 2000. + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. (b) NO CURRENT REPORTS ON FORM 8-K WERE FILED DURING THE FOURTH QUARTER 2001. 46 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Shareholders of e-dentist.com Inc. and Subsidiaries: Our audits of the consolidated financial statements referred to in our report dated June 22, 2001 except for Note 1 and Note 10 as to which the date is June 29, 2001 appearing in the 2001Annual Report to Shareholders of e-dentist.com, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Phoenix, Arizona June 22, 2001 47 E-DENTIST.COM, INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
ADDITIONS ----------------------- BALANCE AT THE CHARGED TO CHARGED TO WRITE-OFFS BALANCE AT FISCAL BEGINNING OF BAD DEBT OTHER CHARGED TO END OF YEAR DESCRIPTION PERIOD EXPENSE ACCOUNTS ALLOWANCE PERIOD ---- ----------- ------ ------- -------- --------- ------ 2001 Receivables from Affiliated Practices-allowance for doubtful accounts......................... $ 3,269 $ 1,172 $ -- $ 3,294 $ 1,147 2000 Receivables from Affiliated Practices-allowance for doubtful accounts......................... $ 125 $ 3,244 $ -- $ 100 3,269 1999 Receivables from Affiliated Practices-allowance for doubtful accounts......................... $ -- $ 125 $ -- $ -- 125 2001 Notes receivable-allowance for doubtful accounts................ $ 1,714 $ 533 $ -- $ 158 2,089 2000 Notes receivable-allowance for doubtful accounts................ $ -- $ 1,261 $ 453(a) $ -- 1,714 1999 Notes receivable-allowance for doubtful accounts............... $ -- $ -- $ -- $ -- --
(a) Relates to the allowance for doubtful accounts that was recorded as for the Omega acquisition. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Phoenix, State of Arizona, on July 5, 2001. e-dentist.com, Inc. By: /s/ James M. Powers, Jr., D.D.S. ------------------------------------- James M. Powers, Jr., D.D.S. Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. NAME CAPACITY DATE - ---- -------- ---- /s/ James M. Powers, Jr., D.D.S. Chairman of the Board, July 5, 2001 - -------------------------------- President and Chief James M. Powers, Jr., D.D.S. Executive Officer (Principal Executive Officer) /s/ James H. Collins Director July 5, 2001 - -------------------------------- James H. Collins /s/ David A. Little, D.D.S. Director July 5, 2001 - -------------------------------- David A. Little, D.D.S. /s/ Daniel T. Robinson, Jr. Director July 5, 2001 - -------------------------------- Daniel T. Robinson, Jr. /s/ George M. Siegel Director July 5, 2001 - -------------------------------- George M. Siegel 49 EX-3.3 2 ex3-3.txt RESTATED CERTIFICATE OF INCORPORATION - PENTEGRA Exhibit 3.3 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF PENTEGRA DENTAL GROUP, INC. Pentegra Dental Group, Inc. (the "Corporation"), a corporation organized under and by virtue of the General Corporation Law of the State of Delaware (the "DGCL"), hereby adopts this Certificate of Amendment (this "Certificate of Amendment"), which amends its Certificate of Incorporation (the "Certificate of Incorporation"), as described below, and does hereby further certify that: FIRST: The name of the Corporation is Pentegra Dental Group, Inc. SECOND: The Board of Directors of the Corporation duly adopted a resolution proposing and declaring advisable the amendment to the Certificate of Incorporation as described herein, and the holders of at least a majority of the stock of the Corporation duly adopted and approved this Certificate of Amendment, and written notice has been given, all in accordance with the provisions of Sections 242 and 228 of the DGCL. THIRD: The Article "FIRST" of the Corporation's Restated Certificate of Incorporation is amended to read in its entirety as follows: "FIRST. THE NAME OF THE CORPORATION IS E-DENTIST.COM, INC." FOURTH: This Certificate of Amendment shall be effective when filed with the Secretary of State for the State of Delaware. IN WITNESS WHEREOF, Pentegra Dental Group, Inc. has caused this Certificate of Amendment of Certificate of Incorporation to be executed by Dr. James M. Powers, Jr. its President and Chief Executive Officer, on this 25th day of August, 2000. Pentegra Dental Group, Inc. By: /s/ James Powers ------------------------------------ Dr. James M. Powers, Jr., President and Chief Executive Officer EX-3.4 3 ex3-4.txt AMENDMENT OF BYLAWS - PENTEGRA Exhibit 3.4 EXHIBIT "C" RESOLUTIONS ADOPTED BY BOARD OF DIRECTORS OF PENTEGRA DENTAL GROUP, INC. AT SPECIAL CALLED MEETING ON JUNE 7, 2000 AMENDMENT OF BYLAWS REMOVAL OF MAJORITY DENTIST REQUIREMENT WHEREAS, the current Bylaws require that a majority of the members of the Board of Directors be dentists affiliated with dental practices of the Company; and WHEREAS, the Directors have reviewed and discussed the new requirements of the American Stock Exchange and more importantly the recent changes promulgated by AMEX and the Securities and Exchange Commission related to the requirement that a certain number of the Directors of the Company have certain qualifications and independence; and, WHEREAS, the Company's management and Board believe that the requirement of a majority of dentists on the Board no longer suites the needs of the Company; IT IS THEREFORE, RESOLVED, in accordance with Article 7, Section 11 (Amendment of Bylaws), that Article Three, Section 2 (Directors Qualification, Election and Term) of the Corporation's Bylaws shall be amended and restated so that it reads in its entirety as follows: "SECTION 2. QUALIFICATION; ELECTION; TERM. None of the Directors need be a stockholder of the Corporation or a resident of the State of Delaware. The Directors shall be classified, with respect to the time for which they severally hold office, into three classes (Class A, Class B and Class C), as nearly equal in number as possible, as determined by the Board of Directors, one class to hold office initially for a term expiring at the Annual Meeting of stockholders to be held in 1998, another class to hold office initially for a term expiring at the Annual Meeting of stockholders to be held in 1999 and another class to hold office for a term expiring at the Annual Meeting of stockholders to be held in 2000, with members of each Class to hold office until whichever of the following occurs first: his successor is elected and qualified, his resignation, his removal from office by the stockholders or his death. At each Annual Meeting of stockholders of the Corporation, the successors to the Class of Directors whose term expires at the meeting shall be elected to hold office for a term expiring at the Annual Meeting of stockholders held in the third year following the year of their election. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote on the election of Directors at any annual or special meeting of stockholders. Such election shall be by written ballot." EX-4.6 4 ex4-6.txt STOCK CERTIFICATE Exhibit 4.6 NUMBER SHARES EDT __________ __________ COMMON STOCK PAR VALUE $.001 PER SHARE THIS CERTIFICATE IS TRANSFERABLE CUSIP 26841E 10 7 IN NEW YORK, NEW YORK AND SEE REVERSE FOR CERTAIN JERSEY CITY, NEW JERSEY DEFINITIONS AND LEGENDS [LOGO] E-DENTIST.COM, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE This Certifies that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.001 PER SHARE, OF E-DENTIST.COM, INC. (hereinafter referred to as the "Corporation"), transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued under and shall be held subject to the provisions of the State of Delaware and all of the provisions of the Restated Certificate of Incorporation and Bylaws of the Corporation and any amendments thereto (copies of which are on file at the office of the Corporation), to all of which the holder, by acceptance hereof, assents. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. [CORPORATE SEAL] Dated: COUNTERSIGNED AND REGISTERED: CONTINENTAL STOCK TRANSFER & TRUST COMPANY /s/ /s/ (Jersey City, NJ) PRESIDENT SECRETARY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED OFFICER [LOGO] e-dentist.com, Inc. The Corporation is authorized to issue Common Stock, par value $.001 per share, and Preferred Stock, par value $.001 per share. The Board of Directors of the Corporation has authority to fix the number of shares and the designation of any series of Preferred Stock and to determine the powers, designations, preferences and relative, participating, optional or other rights between classes of stock or series thereof of the Corporation, and the qualifications, limitations or restrictions of such preferences and/or rights. The Corporation will furnish without charge to each stockholder who so requests a full statement of the foregoing as established from time to time by the Restated Certificate of Incorporation of the Corporation and by any certificate of designations. Any such request shall be made to the Secretary of the Corporation at the offices of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with the right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- ______________ Custodian ______________ (Cust) (Minor) under Uniform Gifts to Minors Act ______________ (State) UNIF TRF MIN ACT -- ______________ Custodian (until age ___) (Cust) ______________ under Uniform Transfers to Minors Act ______________ (Minor) (State) Additional abbreviations may also be used though not in the above list. ASSIGNMENT For Value Received, ____________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________________________ Attorney to register the transfer of the said shares of Common Stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated ________________ NOTICE THE SIGNATURE(S) TO X ______________________________________ THIS ASSIGNMENT MUST (SIGNATURE) CORRESPOND WITH THE NAME(S) AS WRITTEN --> UPON THE FACE OF THE X ______________________________________ CERTIFICATE IN EVERY (SIGNATURE) PARTICULAR WITHOUT ALTERATION OR ANY THE SIGNATURE(S) MUST BE GURANTEED BY AN CHANGE WHATEVER. ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GURANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. SIGNATURE GURANTEED BY: EX-10.9 5 ex10-9.txt JAMES M. POWERS, JR. EMPLOYMENT AGREEMENT Exhibit 10.9 EMPLOYMENT AGREEMENT Employment Agreement (the "Agreement"), dated as hereinafter indicated to be effective on November 12, 2000 (the "Effective Date"), by and between e-dentist.com, Inc., a Delaware corporation (the "Company"), and James M. Powers, Jr. ("Employee"). WHEREAS, the parties hereto had entered into that certain Employment Agreement, dated November 13, 1998 among the Company and Employee (the "Prior Agreement"); and, WHEREAS, the Company and Employee wish to continue the employment of Employee on the terms and conditions described herein with this Agreement superceding and wholly replacing the Prior Agreement in its entirety; NOW THEREFORE, in consideration of the mutual premises and conditions contained herein, the parties hereto agree as follows: SECTION 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and Employee hereby accepts employment by the Company, upon the terms and subject to the conditions hereinafter set forth. SECTION 2. DUTIES. Employee shall serve as the President, Chief Executive Officer and Chairman of the Board of the Company (the "Position"). Employee's duties and powers shall be those consistent with the office of President and the Company's Bylaws, as established and amended from time to time by the Board of Directors (the "Board"). Employee agrees to devote his full time and best efforts to the performance of his duties to the Company. All of the Employee's powers and authorities shall be subject to the reasonable direction and control of the Company's Board of Directors. Employee acknowledges that the executive offices of the Company will be located in Phoenix, Arizona and he shall perform his duties under this Agreement from such executive offices. SECTION 3. TERM. Except as otherwise provided in Section 6 hereof, the term of this Agreement shall be for two (2) years ("Term"), commencing on the date hereof (the "Commencement Date"). Unless earlier terminated as provided for herein, this Agreement shall automatically extend on each annual anniversary of the Effective Date by adding one (1) year to the Term from year to year until terminated. SECTION 4. COMPENSATION AND BENEFITS. In consideration for the services of the Employee hereunder, the Company will compensate Employee as follows: (a) BASE SALARY. Commencing on January 1, 2001, Employee shall be entitled to receive a base salary of $225,000 per annum or as increased from time to time by the Board of Directors of the Company or the Compensation Committee of the Board of Directors ("Compensation Committee"). (b) BONUS. Commencing with the fiscal year beginning April 1, 2000 and continuing from year to year until this Agreement is terminated, Employee shall be eligible to receive a bonus each year during the term of this Page 1 of 18 Agreement in accordance with the Management Incentive Compensation Plan as amended from time to time, a copy of which is attached as Exhibit "A". Such bonus shall be payable by the Company to Employee as provided for in the Management Incentive Compensation Plan. (c) BENEFITS. The Company shall grant Employee options to purchase shares of the Company's Common Stock in such amounts, with such vesting and at such prices as determined by the Compensation Committee of the Board or the Board itself. In addition, during the term of this Agreement, Employee shall be entitled to participate in and receive benefits under any and all employee benefit plans and programs which are from time to time generally made available to the executive employees of the Company, subject to approval and grant by the appropriate committee of the Board of Directors of the Company with respect to programs calling for such approvals or grants. Additionally, Employee shall be entitled to medical insurance, dental insurance, life insurance and other benefits as are generally made available to the executive employees of the Company. Company has the right to purchase life insurance with a face value up to $5 Million and with Company as owner and beneficiary. Employee shall be entitled to reimbursement of any out of pocket costs associated with an annual physical exam administered by a physician mutually agreed upon by Employee and Company. Employee will provide to Company a comfort letter from a physician indicating that Employee is physically fit to perform the task and duties required herein. Employee shall be entitled to three (3) weeks vacation and such other days for personal use as reasonably determined by the Company. SECTION 5. EXPENSES; AUTOMOBILE. It is acknowledged by the parties that Employee, in connection with the services to be performed by him pursuant to the terms of this Agreement, will be required to make payments for travel, entertainment of business associates, mobile telephone and similar expenses. The Company will reimburse Employee for all reasonable expenses of types authorized by the Company and incurred by Employee in the performance of his duties hereunder. Employee will comply with such budget limitations, approval and reporting requirements with respect to such expenses as the Company may establish from time to time. The Company shall provide Employee with a suitable automobile for business use, or at the Company's option, Company shall provide Employee with an automobile allowance and Company shall pay all costs and expenses reasonably incurred by Employee in connection with the business use thereof; provided that the cost to Company for such automobile costs and expenses shall not exceed $750 per month. SECTION 6. TERMINATION. Employee's employment hereunder will commence on the Commencement Date and continue until the end of the Term, except that the employment of Employee hereunder will terminate upon the occurrence of the following events: Page 2 of 18 (a) DEATH OR DISABILITY. Employee's employment will terminate immediately upon the death of Employee during the term of his employment hereunder or, at the option of the Company, in the event of Employee's disability, upon 30 days notice to Employee. Employee will be deemed disabled if, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been absent from his duties with the company on a full-time basis for 120 consecutive business days and Employee shall not reasonably be expected to be able to resume his duties within 60 days of the end of such 120 day period. In the event of the termination of this Agreement pursuant to this subsection, Employee will not be entitled to any severance pay or other compensation except for any portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof or for expenses incurred in the performance of his duties hereunder prior to termination. (b) FOR CAUSE. The Company may terminate the Employee's employment for "Cause" immediately upon written notice by the Company to Employee. For purposes of this Agreement, a termination will be for Cause if: (i) Employee willfully and continuously fails to perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness); (ii) Employee willfully engages in gross misconduct materially and demonstrably injurious to the Company; or (iii) Employee has been convicted of a felony. In the event of the termination of this Agreement pursuant to this Section, Employee will not be entitled to any severance or further consideration, except for any portion of the base salary accrued but unpaid from the last monthly payment date to the date of Termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. (c) BY COMPANY WITHOUT CAUSE. The Company may terminate this Agreement during the Term at any time for any reason without cause. It shall be deemed a termination without cause if Company changes the Position of Employee without Employee's prior written consent. In the event of the termination of this Agreement pursuant to this subsection, the Company will pay Employee, as Employee's sole remedy in connection with such termination, severance pay in the amount determined by multiplying Employee's monthly base salary at the rate in effect immediately preceding the termination of Employee's employment by twelve (12) months (the "Severance Amount"). The Company will also pay Employee the portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. The Company will pay the Severance Amount provided for in this subsection (other than in the foregoing sentence) in a lump sum amount concurrent with Employee's termination of employment. The Company will not be entitled to offset or mitigate the amount due under this subsection by any other amounts payable to Employee, including amounts payable or paid to Employee by third parties for Employee's services after the date of termination, except as provided for otherwise in Section 10(b) hereinafter. Page 3 of 18 (d) CHANGE OF CONTROL. Notwithstanding anything to the contrary contained in this Section 6, in the event Employee's employment with the Company terminates for any reason (other than death or disability) within the twelve (12) month period following a Change of Control (as defined hereafter), then the Company will pay Employee a lump sum payment (the "Termination Payment") in cash equal to the amount of the Severance Amount; plus, the amount of Employee's base salary accrued but unpaid and any expense reimbursement for expenses incurred in the performance of the duties described herein prior to the termination date. A "Change of Control" shall be deemed to have occurred: (i) when in a single transaction or a series of transactions a change of stock ownership of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any successor item of a similar nature has occurred; or (ii) upon the acquisition of beneficial ownership, directly or indirectly, by any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act of securities of the Company) in a single transaction or a series of transactions representing 33% or more of the combined voting power of the Company's then outstanding securities; or (iii) sale of substantially all of the assets of the Company in a single transaction or a series of transactions; or (iv) removal by the Board of Employee from the Position or title identified herein without Employee's prior written consent; provided that a Change in Control will not be deemed to have occurred for purposes of clauses (i) and (ii) hereof with respect to any person meeting the requirements of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended. The Company shall pay the Termination Payment to Employee upon written notice by Employee. The Termination Payment due under this Section will not be affected by the manner in which Employee's employment is terminated and accordingly will be whether the Change of Control occur after termination of this Agreement and whether Employee's termination of employment is voluntary, involuntary, for cause, or without cause. SECTION 7. EFFECT OF TERMINATION ON OPTIONS. The Employee has been granted options to purchase shares of the Company's Common Stock pursuant to the terms of a Stock Option Agreement the form of which is attached as Exhibit "B", and may continue to be granted such options from time to time. If Employee is terminated "for cause" under Section 6(b) above, then the effect of the termination of the Employee's employment on such options shall be determined by the terms of the option plan under which the options are issued and the option agreement related to such options. Notwithstanding anything to the contrary herein or in any option agreement, in the event of: (a) a Change of Control, or (b) termination of this Agreement for any reason (except if "for cause" under Section 6(b)), then the Options issued and outstanding to Employee shall immediately vest (100%), and the Employee may exercise his options at any time during the original term of the option agreement (as defined therein), and such termination of this Agreement shall not cause termination or expiration of the options. SECTION 8. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges that certain assets of the Company and its affiliates, including without limitation information regarding customers, pricing policies, methods of operation, proprietary computer programs, sales, products, profits, costs, markets, key personnel, formulae, product applications, technical processes, and trade secrets (herein called "Confidential Information") are valuable, special Page 4 of 18 and unique assets of the Company and its affiliates. Employee will not, during or after the term of his employment, disclose any of the Confidential Information to any person, firm, corporation, association, or any other entity for any reason or purpose whatsoever, directly or indirectly, except as may be required pursuant to his employment hereunder, unless and until such Confidential Information becomes publicly available other than as a consequence of the breach by Employee of his confidentiality obligations hereunder. In the Event of the termination of his employment, whether voluntary or involuntary, and whether by the Company or Employee, Employee will deliver to the Company all documents and data pertaining to the Confidential Information and will not take with him any documents or data of any kind or any reproductions (in whole or in part) of any items relating to the Confidential Information. SECTION 9. NONCOMPETITION. Until one year after termination of Employee's employment with the Company for any reason, whether voluntary or involuntary, Employee will not: (i) engage directly or indirectly, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in any business activities which are directly competitive with the Company and which were either conducted by the Company at the time of Employee's termination or "Proposed to be Conducted" (as defined herein) by the Company at the time of such termination (the "Designated Industry"); (ii) divert to any competitor of the Company in the Designated Industry any customer of Employee or, (iii) solicit or encourage any officer, employee, or consultant of the Company to leave its employ for employment by or with any competitor of the Company in the Designated Industry. The parties hereto acknowledge that Employee's non-competition obligations hereunder will not preclude Employee from (i) owning less than 5% of the common stock of any publicly traded corporation conducting business activities in the Designated Industry or (ii) serving as an officer, director, stockholder or employee of an entity engaged in the healthcare industry whose business operations are not competitive with those of the Company. "Proposed to be Conducted," as used herein, shall mean those business activities which are the subject of a formal, written business plan approved by the Board of Directors prior to termination of Employee's employment and which the Company takes material action to implement within 12 months of the termination of Employee's employment. Employee will continue to be bound by the provisions of this Section 9 until their expiration and will not be entitled to any compensation from the Company with respect thereto. If at any time the provisions of this Section 9 are determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 9 will be considered divisible and will become and be immediately amended to only such area, duration, scope of activity as will be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Employee agrees that this Section 9 as so amended will be valid and binding as though any invalid or unenforceable provision had not been included herein. SECTION 10. GENERAL. (a) NOTICES. All notices and other communications hereunder will be in writing or by written telecommunication, and will be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication will have specified to the other party hereto in accordance with this Section 10(a): Page 5 of 18 If to the Company, to: With a copy to: e-dentist.com, Inc. Jackson Walker, L.L.P. 2999 N. 44th Street, Suite 650 901 Main Street, Suite 6000 Phoenix, Arizona 85018 Dallas, Texas 75202 Attn: CHIEF EXECUTIVE OFFICER Attn: James S. Ryan, III Fax No.: (602) 952-0544 Fax No. (214) 953-5822 If to Employee, to: James M. Powers, Jr. 6331 E. Vista Drive Paradise Valley, AZ 85253 (b) WITHHOLDING AND OFFSET. All payments required to be made by the Company under this Agreement to Employee will be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. No payment under this Agreement will be subject to offset or reduction attributable to any amount Employee may owe to the Company or any other person. (c) EQUITABLE REMEDIES. Each of the parties hereto acknowledges and agrees that upon any breach by Employee of his obligations under any of the Sections 8 and 9 hereof, the Company will have no adequate remedy at law, and accordingly will be entitled to specific performance and other appropriate injunctive and equitable relief. (d) SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision will be fully severable and this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. Any and all covenants and obligations of either party hereto which by their terms or by reasonable implication are to be performed, in whole or in part, after the termination of this Agreement, shall survive such termination, including specifically the obligations arising under Sections: 6, 7, 8 and 9. (e) WAIVERS. No delay or omission by either party hereto in exercising any right, power or privilege hereunder will impair such right, power or privilege, nor will any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. Page 6 of 18 (f) COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument. (g) CAPTIONS. The captions in this Agreement are for convenience of reference only and will not limit or otherwise affect any of the terms or provisions hereof. (h) REFERENCE TO AGREEMENT. Use of the words "herein," "hereof," "hereto" and the like in this Agreement refer to this Agreement only as a whole and not to any particular subsection or provision of this Agreement, unless otherwise noted. (i) BINDING AGREEMENT. This Agreement will be binding upon and inure to the benefit of the parties and will be enforceable by the personal representatives and heirs of Employee and the successors of the Company. If Employee dies while any amounts would still be payable to him hereunder, such amounts will be paid to Employee's estate. This Agreement is not otherwise assignable by Employee. (j) ENTIRE AGREEMENT. Except as provided in the benefit plans and programs referenced herein, this Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed by each of the parties hereto. (k) GOVERNING LAW. This Agreement and the performance hereof will be construed and governed in accordance with the laws of the State of Arizona, without regard to its choice of law principles. Any modification of this Agreement shall be effective only if it is in writing and signed by the parties hereto. SECTION 11. BINDING ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or breach thereof, shall be settled exclusively by arbitration in Phoenix, Arizona, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator(s) may be entered in, and enforced by, any court having jurisdiction thereof. Page 7 of 18 EXECUTED as of the date and year first written above. E-DENTIST.COM, INC. By: /s/ Charles Sanders ------------------------------------ Its: Sr. VP, COO & CFO ------------------------------- EMPLOYEE: /s/ James Powers ---------------------------------------- James M. Powers, Jr. Date: February 8, 2001 ---------------------------------- Page 8 of 18 Exhibit "A" Current Form of Management Incentive Compensation Plan Page 9 of 18 E-DENTIST.COM, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN The e-dentist.com, Inc. ("e-dentist") Management Incentive Compensation Plan (the "Plan") is designed to offer incentive compensation to key employees ("Associates") by rewarding the achievement of corporate goals, specifically measured individual goals that are consistent with and support the overall corporate goals. The Management Incentive Compensation Plan will create an environment which will focus key Associates on the achievement of objectives. Since cooperation between departments and Associates will be required to achieve corporate objectives which will represent a significant portion of the Compensation Plan, the Plan should help foster improved teamwork and a more cohesive management team. The Company reserves the right to revise or discontinue the Plan at any time. Key Associates (as hereinafter defined) who may be eligible to participate in the plan shall be selected at the sole discretion of the Company. PURPOSE OF THE PLAN The E-dentist Management Incentive Compensation Plan (the "Plan") is designed to: >> Provide an incentive program to achieve overall corporate objectives and to enhance shareholder value >> Reward those individuals who significantly impact corporate results >> Encourage increased teamwork among all disciplines within the Company >> Incorporate an incentive program in E-dentist's overall compensation program to help attract and retain key Associates PLAN GOVERNANCE The Plan will be governed by the Compensation Committee of the Board of Directors. The President and CEO will be responsible for administration of the Plan. The Compensation Committee will be responsible for approving any incentive awards to the President and CEO. CORPORATE AND INDIVIDUAL PERFORMANCE Prior to the beginning of the Plan year, the President and CEO will present to the Board a list of overall corporate objectives for the coming year, which are subject to approval by the Board. All participants in the Plan will then develop a list of key individual objectives which will be approved by the responsible Vice President and by the President and CEO. The Plan will call for incentive awards based on the achievement of annual corporate and individual objectives that have been approved as indicated above. The relative weight between corporate and individual performance factors will vary based on levels within the organization. The weighing will be reviewed annually and be adjusted as necessary or appropriate. The weighing for the year 2000 will be as follows: Page 10 of 18 CORPORATE INDIVIDUAL --------- ---------- President and CEO 100% Senior Vice Presidents/Officers 75% 25% Vice Presidents/Directors & Corporate Controller 50% 50% Practice Administrators/Managers/ Practice Advisors/Practice Consultants (employed) 50% 50% TARGET AWARDS MULTIPLIER Incentive awards will be determined by applying an "achievement multiplier" to the base salary of Associates in the Plan. The following target award multipliers will be used in implementing the Plan: POSITION TARGET AWARD MULTIPLIER - -------- ----------------------- President and CEO 35% Senior Vice Presidents/Officers 25% Vice Presidents/Directors & Corporate Controller 15% Practice Administrators/Managers/ Practice Advisors/Practice Consultants (employed) 10% The target award multiplier will be used to establish the target cash award at the beginning of each year. The target award multiplier will be equal to the actual award multiplier used at year-end in situations where corporate and individual objectives have been met for the year. Page 11 of 18 PERFORMANCE MEASUREMENT The following scale will be used to determine the actual award multiplier based upon measurement of corporate and individual performance versus objectives. Separate payment multipliers will be established for both the individual and the corporate components of each award. The same payment multiplier for the corporate component of each participant's annual award shall be used for all Plan participants in any given year. Performance Category Award Multiplier -------------------- ---------------- 1. Performance for the year met or exceeded objectives or was excellent in view of prevailing conditions 100% 2. Performance generally met the year's objectives or was very acceptable in view of prevailing conditions 75% 3. Performance for the year met some but not all objectives 25% 4. Performance for the year was not acceptable in view of prevailing conditions 0% CALCULATION OF AWARD Example I shows a sample cash award calculation under the Plan. First, a total target award is calculated by multiplying the Associates base salary by the target award multiplier. This dollar figure is then divided between its corporate component and its individual component based on the performance factor mix for that specific position. This calculation establishes specific dollar target awards for the performance period for both the individual and corporate components of the award. At the end of the performance period, corporate and individual award multipliers will be established using the criteria described above. The corporate award multiplier, which is based on overall corporate performance, is used to calculate actual corporate performance awards for all Plan participants. This is done by multiplying the target corporate award established for each individual at the beginning of the performance period by the actual award multiplier. The individual award multiplier, which is based on an individual's performance against objectives, is used in the same way to calculate the actual individual performance award. Page 12 of 18 EXAMPLE 1: CASH AWARD CALCULATION Position Vice President Base salary $100,000 Year 2000 target award multiplier 15% Year 2000 target award $15,000 Target award components (based on performance factor mix) Target award based on Corporate performance (50%) 7,500 Target award based on Individual performance (50%) 7,500 ACTUAL YEAR 2000 CASH AWARD CALCULATION: Assumed payment multipliers based on assessment of Corporate and Individual performance: Corporate multiplier 75% - performance generally met year's objectives Individual multiplier 100% - performance generally exceeded objectives Year 2000 Cash Award: Corporate component $5,625 ($7,500 X 75%) Individual component $7,500 ($7,500 X 100%) Total 2000 Cash Award $13,125 PAYMENT OF THE AWARD Annual performance reviews will be completed by May 15th and payment of Awards will be made after receipt of the Company's audited financial statements and after review and approval by the President and CEO and the Compensation Committee of the Board of Directors. Page 13 of 18 Exhibit "B" Form of Stock Option Agreement Page 14 of 18 E-DENTIST.COM, INC. INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement (the "Agreement") is entered into between e-dentist.com, Inc. ("e-dentist"), a Delaware corporation (the "Company"), and __________________________(the "Optionee") as of ______________________ (the "Effective Date"). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. GRANT OF OPTION. Under the terms and conditions of the Company's 1997 Stock Compensation Plan, as amended (the "Plan"), the terms of which are incorporated herein by reference, the Company grants to the Optionee an option (the "Option") to purchase from the Company all or any part of a total of ____________ (________) shares of the Company's Common Stock, par value $.001 per share, at an exercise price of _______________ ($________) per share (the "Purchase Price"). The Option is granted as of _________________________ (the "Date of Grant"). 2. CHARACTER OF OPTION. [The Option is an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").] [Delete Prior and Insert Language for Non-Qualified Option: This Option is a non-qualified stock option and is therefore not an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").] 3. TERM. The Option will expire on the day prior to the tenth anniversary of the Date of Grant, or such earlier date as may be provided in (i) Section 1.16 of the Plan regarding Employee (as defined in the Plan) termination or (ii) Section 11 below. 4. VESTING. Subject to the provisions of Section 1.12 and Section 1.16 of the Plan, the Option may be exercised according to the following schedule: [Example Only: Beginning on _____________, _____ percent (_____%) shall vest on the first day of each month, from month to month, until fully vested.] The unexercised portion of the Option from one period may be carried over to a subsequent period or periods, and the right of the Optionee to exercise the Option as to such unexercised portion shall continue for the entire term. Upon exercise the actual number of shares purchased shall be rounded to the nearest whole share. Page 15 of 18 5. PROCEDURE FOR EXERCISE. Exercise of the Option or a portion thereof shall be effected by the giving of written notice to the Company by the Optionee in accordance with Section 1.13 of the Plan and payment of the Purchase Price for the shares to be acquired pursuant to the exercise. 6. PAYMENT OF PURCHASE PRICE. Payment of the Purchase Price for any shares purchased pursuant to the Option shall be in accordance with the provisions of Section 1.11(b) of the Plan. 7. TRANSFER OF OPTIONS. This option is not assignable or transferable by the Optionee otherwise than by will or the laws of descent and distribution and during the lifetime of the Optionee may only by exercised by the Optionee or his legally authorized representative. 8. ACCEPTANCE OF THE PLAN. The Option is granted subject to all of the applicable terms and provisions of the Plan, and such terms and provisions are incorporated by reference herein. The Optionee hereby accepts and agrees to be bound by all the terms and conditions of the Plan. 9. AMENDMENT. This Agreement may be amended by an instrument in writing signed by both the Company and the Optionee. 10. MISCELLANEOUS. This Agreement will be construed and enforced in accordance with the laws of the State of Arizona and will be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guarantor or other legal representative of the Optionee. 11. RIGHTS OF OPTIONEE UPON TERMINATION OF EMPLOYMENT. In the event an Optionee ceases to serve as an Employee by reason of death, retirement, permanent disability, termination for cause, or resignation by the Optionee (as hereinafter defined), then the Options may be exercised as follows: (a) DEATH. If the Optionee dies while serving as an Employee or within three (3) months after ceasing to become an Employee, the Option shall become fully vested and exercisable during the period beginning with the date of the Employee's death and ending twelve (12) months thereafter, unless by its terms it expires sooner. During such period, the Option may be fully exercised, to the extent that it remains unexercised on the date of death, by the Optionee's personal representative or by the distributees to whom the Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. Page 16 of 18 (b) RETIREMENT. If the Optionee ceases to serve as an Employee as a result of retirement, then (i) the Company's Compensation Committee shall have the ability to accelerate the vesting of the Option, in its sole discretion, or (ii) the Option shall be exercisable (to the extent exercisable and vested on the effective date of such Retirement or, if the vesting of such Option has been accelerated, to the extent exercisable following such acceleration) at any time during the period beginning with the effective date of the retirement and ending three (3) months thereafter, unless by its terms it expires sooner. (c) DISABILITY. If the Optionee ceases to serve as an Employee as a result of permanent disability (as defined in the Plan or the Employee's employment agreement), the Option shall become fully vested and exercisable during the period beginning with the date Employee is determined to be permanently disabled and ending twelve (12) months thereafter, unless by its terms it expires sooner. (d) CAUSE. If the Optionee ceases to be employed by the Company because the Optionee's relationship with the Company is terminated by the Company for cause (as defined in the employment agreement), the Option shall be exercisable (to the extent exercisable and vested on the effective date of such termination) during the period beginning with the date of such termination and ending three (3) months thereafter, unless by its term the Option expires earlier. If any facts that would constitute Cause for termination of an Optionee are discovered after the Optionee's relationship with the Company has ended, the Options may be immediately terminated by the Company's Compensation Committee. Notwithstanding the foregoing, if an Optionee is employed pursuant to a written employment agreement with the Company, the Optionee's relationship with the Company shall be deemed terminated for Cause for the purposes of this Agreement only if the Optionee is considered under the circumstances to have been terminated "for cause" for purposes of such written agreement or the Optionee voluntarily ceases to be an employee in breach of such Optionee's employment agreement with the Company. (e) VOLUNTARY BREACH. If the Optionee ceases to be an Employee voluntarily by resignation or in breach of the Optionee's employment agreement, the Options shall automatically expire on the date of such termination of the employment relationship. (f) WITHOUT CAUSE. If the Optionee is terminated as an Employee Without Cause, the Option shall be exercisable (to the extent exercisable and vested on the effective date of such termination) at any time within three (3) months after the effective date of such termination, unless by its term the Option expires earlier. Without Cause shall be defined as termination for any reason other than for Cause. [Signatures on following page.] Page 17 of 18 Executed as of the 28th day of September, 2000. E-DENTIST.COM, INC. By: ------------------------------------ James M. Powers, President ACKNOWLEDGED AND AGREED: THE OPTIONEE: ---------------------------------------- ---------------------------------------- Optionee's Social Security Number Page 18 of 18 EX-10.10 6 ex10-10.txt CHARLES SANDERS EMPLOYMENT AGREEMENT Exhibit 10.10 EMPLOYMENT AGREEMENT Employment Agreement (the "Agreement"), dated as hereinafter indicated to be effective on February 15, 2001 (the "Effective Date"), by and between e-dentist.com, Inc., a Delaware corporation (the "Company"), and Charles Sanders ("Employee"). WHEREAS, the parties hereto had entered into that certain Employment Agreement, dated October 13, 1999 as amended and replaced by new agreement on December 17, 1999, among the Company and Employee (the "Prior Agreement"); and, WHEREAS, the Company and Employee wish to continue the employment of Employee on the terms and conditions described herein with this Agreement superceding and wholly replacing the Prior Agreement including subsequent Amendments in its entirety; NOW THEREFORE, in consideration of the mutual premises and conditions contained herein, the parties hereto agree as follows: SECTION 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and Employee hereby accepts employment by the Company, upon the terms and subject to the conditions hereinafter set forth. SECTION 2. DUTIES. Employee shall serve as the Senior Vice President, Chief Operating Officer and Chief Financial Officer of the Company (the "Position") reporting to the Company's President. Employee's duties and powers shall be those consistent with the office of the Position, with such additional duties or titles as mutually determined necessary or appropriate from time to time by the Company's President. Employee agrees to devote his full time and best efforts to the Company in the performance of his duties. All of the Employee's powers and authorities shall be subject to the reasonable direction and control of the President. Employee acknowledges that the executive offices of the Company will be located in Phoenix, Arizona and he shall perform his duties under this Agreement from those executive offices. SECTION 3. TERM. Except as otherwise provided in Section 6 hereof, the term of this Agreement shall be for two (2) years ("Term"), beginning on the Effective Date (also referred to as the "Commencement Date"). Unless and until terminated as provided for in Section 6, this Agreement shall automatically extend and renew on each annual anniversary of the Effective Date by adding one (1) year to the Term from year to year until terminated. SECTION 4. COMPENSATION AND BENEFITS. In consideration for the services of the Employee hereunder, the Company will compensate Employee as follows: (a) BASE SALARY. During the Term of this Agreement and until terminated, Employee shall receive a monthly minimum base salary (the "Base Salary") equal to the greater of: (i) fourteen thousand five hundred eighty three and 33/100 dollars ($14,583.33) per month; or (ii) such amount as determined by the President in writing. Employee's Base Salary shall be paid in accordance with Company's standard policy regarding payment of compensation to employees but no less frequently than monthly. Page 1 of 18 (b) BONUS. Commencing with the fiscal year beginning April 1, 2000 and continuing from year to year until this Agreement is terminated, Employee shall be eligible to receive a cash bonus each year during the term of this Agreement determined in accordance with the Management Incentive Compensation Plan as amended from time to time, a copy of which is attached as Exhibit "A". Such bonus shall be payable by the Company to Employee as provided for in the Management Incentive Compensation Plan. (c) BENEFITS. The Company shall grant Employee options to purchase shares of the Company's Common Stock in such amounts, with such vesting and at such prices as determined by the President all in accordance with the terms of a Stock Option Agreement, and in the general form of option agreement attached as Exhibit "B". In addition, during the term of this Agreement, Employee shall be allowed to participate in, and be entitled to benefits, plans and programs, including improvements or modifications of the same, which are now, or may hereafter be, those available to officers or employees of a like position ("Executives"). Employee shall be entitled to medical, dental and retirement benefits which are generally made available to Executives, provided further that Employer will pay the total premium costs associated with the medical and dental insurance, not including deductibles and/or co-payments, covering the health of Employee, Employee's spouse and Employee's dependants. Medical, dental and disability insurance already effective shall remain in force, or if not shall become effective on the first day of the month following the Commencement Date. During each year of his employment Employee shall be entitled to three (3) weeks of vacation, and such other days of compensated absences, (i.e. sick leave or personal days) in accordance with the Company's policies and procedures as determined from time to time by the President. SECTION 5. EXPENSES. It is acknowledged by the parties that Employee, in connection with the services to be performed by him pursuant to the terms of this Agreement, will be required to make payments for travel, entertainment of business associates, mobile telephone and similar expenses (the "Out of Pocket Expenses"). The Company will reimburse Employee for all reasonable and necessary Out of Pocket Expenses incurred by Employee in the performance of his duties. Employee will comply with such budget limitations, approval and reporting requirements with respect to such Out of Pocket Expenses as the Company may establish from time to time. In the event that the Company relocates its corporate offices or Employee is asked to move to other corporate offices outside of the Phoenix, Arizona area, then Employee shall be entitled to reimbursement of the costs of relocation described on Exhibit "C". SECTION 6. TERMINATION. Employee's employment hereunder will commence on the Commencement Date and continue until the end of the Term including any renewals thereof, except that the employment of Employee hereunder will terminate upon the occurrence of the following events: (a) Death or Disability. Employee's employment will terminate immediately upon the death of Employee during the term of his employment hereunder or, at the option of the Company, in the event of Employee's disability, upon 30 days notice to Employee. Employee will be deemed "disabled" if, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been continuously absent from his duties with the company on a full-time basis for 120 consecutive business days, and Employee shall not reasonably be expected to be able to resume his duties within 60 days of the end of such 120 day period. In the event of the termination of this Agreement pursuant to this subsection 6(a), Employee will not be entitled to any Severance Amount (as hereinafter defined) or other compensation except for any portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof or for expenses incurred in the performance of his duties hereunder prior to termination. Page 2 of 18 (b) For Cause. The Company may terminate the Employee's employment for "Cause" immediately upon written notice by the Company to Employee. For purposes of this Agreement, a termination will be for Cause if: (i) Employee willfully and continuously fails to perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness); (ii) Employee willfully engages in gross misconduct materially and demonstrably injurious to the Company; or (iii) Employee has been convicted of a felony which the President reasonably believes will result in injury to the Company or which would disqualify employee for coverage by the Company's surety bond. In the event of the termination of this Agreement pursuant to this sub-section 6(b), Employee will not be entitled to any Severance Amount (as hereinafter defined) or further consideration, except for any portion of the base salary accrued but unpaid from the last monthly payment date to the date of Termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. (c) By Company Without Cause. The Company may terminate this Agreement during the Term at any time for any reason without cause. It shall be deemed a termination without cause if Company changes the Position of Employee without Employee's prior written consent. In the event of the termination of this Agreement pursuant to this subsection, the Company will pay Employee, as Employee's sole remedy in connection with such termination, severance in the amount determined by multiplying Employee's monthly base salary at the rate in effect immediately preceding the termination of Employee's employment by twelve (12) months (the "Severance Amount"). The Company will also pay Employee the portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. The Company will pay the Severance Amount in a lump sum and within thirty (30) days of the Employee's last day of employment. The Company will not be entitled to offset or mitigate the amount due under this subsection by any other amounts payable to Employee, including amounts payable or paid to Employee by third parties for Employee's services after the date of termination, except as provided for otherwise in Section 10(b) hereinafter. (d) CHANGE OF CONTROL. Notwithstanding anything to the contrary contained in this Section 6, in the event Employee's employment with the Company terminates for any reason (other than death or disability) within the twelve (12) month period following a Change of Control (as defined hereafter), then the Company will pay Employee a lump sum payment (the "Termination Payment") in cash equal to the amount of the Severance Amount; plus, the amount of Employee's base salary accrued but unpaid and any expense reimbursement for expenses incurred in the performance of the duties described herein prior to the termination date. A "Change of Control" shall be deemed to have occurred: (i) when in a single transaction or a series of transactions a change of stock ownership of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any successor item of a similar nature has occurred; or (ii) upon the acquisition of beneficial ownership, directly or indirectly, by any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act of securities of the Company) in a single transaction or a series of transactions representing 33% or more of the combined voting power of the Company's then outstanding securities; or (iii) sale of substantially all of the assets of the Company in a single transaction or a series of transactions; or (iv) removal by the Company from the Position identified herein without Employee's prior written consent; provided that a Change in Control will not be deemed to have occurred for purposes of clauses (i) and (ii) hereof with respect to any Page 3 of 18 person meeting the requirements of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended. The Company shall pay the Termination Payment to Employee upon written notice by Employee. The Termination Payment due under this Section will not be affected by the manner in which Employee's employment is terminated and accordingly will be whether the Change of Control occur after termination of this Agreement and whether Employee's termination of employment is voluntary, involuntary, for cause, or without cause. SECTION 7. EFFECT OF TERMINATION ON OPTIONS. If Employee is terminated "for cause" under Section 6(b) above, then the effect of the termination of the Employee's employment on such options shall be determined by the terms of the option plan under which the options are issued and the option agreement related to such options, except that Employee shall retain those options which are already vested and shall have ninety (90) days to exercise those vested options. Notwithstanding anything to the contrary herein or in any option agreement, in the event of: (a) a Change of Control, or (b) termination of this Agreement for any reason (except if "for cause"), then the Options issued and outstanding to Employee shall immediately vest (100%), and the Employee may exercise his options at any time during the original term of the option agreement (as defined therein), and such termination of this Agreement shall not cause termination or expiration of the options. SECTION 8. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges that certain assets of the Company and its affiliates, including without limitation information regarding customers, pricing policies, methods of operation, proprietary computer programs, sales, products, profits, costs, markets, key personnel, formulae, product applications, technical processes, and trade secrets (herein called "Confidential Information") are valuable, special and unique assets of the Company and its affiliates. Employee will not, during or after the term of his employment, disclose any of the Confidential Information to any person, firm, corporation, association, or any other entity for any reason or purpose whatsoever, directly or indirectly, except as may be required pursuant to his employment hereunder, unless and until such Confidential Information becomes publicly available other than as a consequence of the breach by Employee of his confidentiality obligations hereunder. In the Event of the termination of his employment, whether voluntary or involuntary, and whether by the Company or Employee, Employee will deliver to the Company all documents and data pertaining to the Confidential Information and will not take with him any documents or data of any kind or any reproductions (in whole or in part) of any items relating to the Confidential Information. SECTION 9. NONCOMPETITION. Until one year after termination of Employee's employment with the Company for any reason, whether voluntary or involuntary, Employee will not: (i) engage directly or indirectly, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in any business activities which are directly competitive with the Company and which were either conducted by the Company at the time of Employee's termination or "Proposed to be Conducted" (as defined herein) by the Company at the time of such termination (the "Designated Industry"); (ii) divert to any competitor of the Company in the Designated Industry any customer of Employee or, (iii) solicit or encourage any officer, employee, or consultant of the Company to leave its employ for employment by or with any competitor of the Company in the Designated Industry. The parties hereto acknowledge that Employee's non-competition obligations hereunder will not preclude Employee from (i) owning less than 5% of the common stock of any publicly traded corporation conducting business activities in the Designated Industry or (ii) serving as an officer, director, stockholder or employee of an entity engaged in the healthcare industry whose business operations are not competitive with those of the Company. "Proposed to be Conducted," as used herein, shall mean those business activities which are the subject of a formal, written business plan approved by the Board of Directors prior to termination of Employee's employment and which the Company takes material action to implement within 12 months of the Page 4 of 18 termination of Employee's employment. Employee will continue to be bound by the provisions of this Section 9 until their expiration and will not be entitled to any compensation from the Company with respect thereto. If at any time the provisions of this Section 9 are determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 9 will be considered divisible and will become and be immediately amended to only such area, duration, scope of activity as will be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Employee agrees that this Section 9 as so amended will be valid and binding as though any invalid or unenforceable provision had not been included herein. SECTION 10. GENERAL. (a) NOTICES. All notices and other communications hereunder will be in writing or by written telecommunication, and will be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication will have specified to the other party hereto in accordance with this Section 10(a): If to the Company, to: With a copy to: e-dentist.com, Inc. Jackson Walker, L.L.P. 2999 N. 44th Street, Suite 650 901 Main Street, Suite 6000 Phoenix, Arizona 85018 Dallas, Texas 75202 Attn: CHIEF EXECUTIVE OFFICER Attn: James S. Ryan, III Fax No.: (602) 952-0544 Fax No. (214) 953-5822 If to Employee, to: With a copy to: Charles Sanders Charles Sanders 5227 E. Thomas Road. #266 1070 W. Schafer Dr. Phoenix, Arizona 85018 Tucson, Arizona 85705 (b) WITHHOLDING AND OFFSET. All payments required to be made by the Company under this Agreement to Employee will be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. No payment under this Agreement will be subject to offset or reduction attributable to any amount Employee may owe to the Company or any other person. (c) EQUITABLE REMEDIES. Each of the parties hereto acknowledges and agrees that upon any breach by Employee of his obligations under any of the Sections 8 and 9 hereof, the Company will have no adequate remedy at law, and accordingly will be entitled to specific performance and other appropriate injunctive and equitable relief. (d) SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision will be fully severable and this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and Page 5 of 18 enforceable. Any and all covenants and obligations of either party hereto which by their terms or by reasonable implication are to be performed, in whole or in part, after the termination of this Agreement, shall survive such termination, including specifically the obligations arising under Sections: 6, 7, 8 and 9. (e) WAIVERS. No delay or omission by either party hereto in exercising any right, power or privilege hereunder will impair such right, power or privilege, nor will any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. (f) COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument. (g) CAPTIONS. The captions in this Agreement are for convenience of reference only and will not limit or otherwise affect any of the terms or provisions hereof. (h) REFERENCE TO AGREEMENT. Use of the words "herein," "hereof," "hereto " and the like in this Agreement refer to this Agreement only as a whole and not to any particular subsection or provision of this Agreement, unless otherwise noted. (i) BINDING AGREEMENT. This Agreement will be binding upon and inure to the benefit of the parties and will be enforceable by the personal representatives and heirs of Employee and the successors of the Company. If Employee dies while any amounts would still be payable to him hereunder, such amounts will be paid to Employee's estate. This Agreement is not otherwise assignable by Employee. (j) ENTIRE AGREEMENT. Except as provided in the benefit plans and programs referenced herein, this Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed by each of the parties hereto. (k) GOVERNING LAW. This Agreement and the performance hereof will be construed and governed in accordance with the laws of the State of Arizona, without regard to its choice of law principles. Any modification of this Agreement shall be effective only if it is in writing and signed by the parties hereto. (l) ATTORNEY'S FEES. If legal action is commenced by either party to enforce or defend its rights under this Agreement, the prevailing party in such action shall be entitled to recover its costs and reasonable attorneys' fees in addition to any other relief granted. If either party commences legal action or arbitration to enforce or defend its rights under this Agreement, the prevailing party in such action shall be entitled to recover its costs, including travel, lodging and meals for itself, counsel and witnesses, actual witness fees paid and legal fees actually paid, including costs of associating local counsel with regular counsel, if actually paid. SECTION 11. BINDING ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or breach thereof, shall be settled exclusively by arbitration in Phoenix, Arizona, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. A sole arbitrator shall conduct Arbitration and he or she shall render his or her award within forty-five (45) days of appointment. Judgment upon the award rendered by the arbitrator may be entered in, and enforced by, any court having jurisdiction thereof. The award of the arbitrator may grant any relief available to the parties in law or in equity; and the award may contain a provision for payment of costs and attorney's fees to the prevailing party, if any. Page 6 of 18 EXECUTED as of the date and year first written above. E-DENTIST.COM, INC. By: /s/ James Powers ------------------------------------ Its: President ------------------------------- EMPLOYEE: /s/ Charles Sanders ---------------------------------------- Charles Sanders Date: February 16, 2001 ---------------------------------- Page 7 of 18 Exhibit "A" Current Form of Management Incentive Compensation Plan [The remainder of this page intentionally left blank.] Page 8 of 18 E-DENTIST.COM, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN The e-dentist.com, Inc. ("e-dentist") Management Incentive Compensation Plan (the "Plan") is designed to offer incentive compensation to key employees ("Associates") by rewarding the achievement of corporate goals, specifically measured individual goals that are consistent with and support the overall corporate goals. The Management Incentive Compensation Plan will create an environment which will focus key Associates on the achievement of objectives. Since cooperation between departments and Associates will be required to achieve corporate objectives which will represent a significant portion of the Compensation Plan, the Plan should help foster improved teamwork and a more cohesive management team. The Company reserves the right to revise or discontinue the Plan at any time. Key Associates (as hereinafter defined) who may be eligible to participate in the plan shall be selected at the sole discretion of the Company. PURPOSE OF THE PLAN The E-dentist Management Incentive Compensation Plan (the "Plan") is designed to: >> Provide an incentive program to achieve overall corporate objectives and to enhance shareholder value >> Reward those individuals who significantly impact corporate results >> Encourage increased teamwork among all disciplines within the Company >> Incorporate an incentive program in E-dentist's overall compensation program to help attract and retain key Associates PLAN GOVERNANCE The Plan will be governed by the Compensation Committee of the Board of Directors. The President and CEO will be responsible for administration of the Plan. The Compensation Committee will be responsible for approving any incentive awards to the President and CEO. CORPORATE AND INDIVIDUAL PERFORMANCE Prior to the beginning of the Plan year, the President and CEO will present to the Board a list of overall corporate objectives for the coming year, which are subject to approval by the Board. All participants in the Plan will then develop a list of key individual objectives which will be approved by the responsible Vice President and by the President and CEO. The Plan will call for incentive awards based on the achievement of annual corporate and individual objectives that have been approved as indicated above. The relative weight between corporate and individual performance factors will vary based on levels within the organization. The weighing will be reviewed annually and be adjusted as necessary or appropriate. The weighing for the year 2000 will be as follows: Page 9 of 18 CORPORATE INDIVIDUAL --------- ---------- President and CEO 100% Senior Vice Presidents/Officers 75% 25% Vice Presidents/Directors & Corporate Controller 50% 50% Practice Administrators/Managers/ Practice Advisors/Practice Consultants (employed) 50% 50% TARGET AWARDS MULTIPLIER Incentive awards will be determined by applying an "achievement multiplier" to the base salary of Associates in the Plan. The following target award multipliers will be used in implementing the Plan: POSITION TARGET AWARD MULTIPLIER - -------- ----------------------- President and CEO 35% Senior Vice Presidents/Officers 25% Vice Presidents/Directors & Corporate Controller 15% Practice Administrators/Managers/ Practice Advisors/Practice Consultants (employed) 10% The target award multiplier will be used to establish the target cash award at the beginning of each year. The target award multiplier will be equal to the actual award multiplier used at year-end in situations where corporate and individual objectives have been met for the year. Page 10 of 18 PERFORMANCE MEASUREMENT The following scale will be used to determine the actual award multiplier based upon measurement of corporate and individual performance versus objectives. Separate payment multipliers will be established for both the individual and the corporate components of each award. The same payment multiplier for the corporate component of each participant's annual award shall be used for all Plan participants in any given year. Performance Category Award Multiplier -------------------- ---------------- 1. Performance for the year met or exceeded objectives or was excellent in view of prevailing conditions 100% 2. Performance generally met the year's objectives or was very acceptable in view of prevailing conditions 75% 3. Performance for the year met some but not all objectives 25% 4. Performance for the year was not acceptable in view of prevailing conditions 0% CALCULATION OF AWARD Example I shows a sample cash award calculation under the Plan. First, a total target award is calculated by multiplying the Associates base salary by the target award multiplier. This dollar figure is then divided between its corporate component and its individual component based on the performance factor mix for that specific position. This calculation establishes specific dollar target awards for the performance period for both the individual and corporate components of the award. At the end of the performance period, corporate and individual award multipliers will be established using the criteria described above. The corporate award multiplier, which is based on overall corporate performance, is used to calculate actual corporate performance awards for all Plan participants. This is done by multiplying the target corporate award established for each individual at the beginning of the performance period by the actual award multiplier. The individual award multiplier, which is based on an individual's performance against objectives, is used in the same way to calculate the actual individual performance award. EXAMPLE 1: CASH AWARD CALCULATION Position Vice President Base salary $100,000 Year 2000 target award multiplier 15% Year 2000 target award $15,000 Target award components (based on performance factor mix) Target award based on Corporate performance (50%) 7,500 Target award based on Individual performance (50%) 7,500 Page 11 of 18 ACTUAL YEAR 2000 CASH AWARD CALCULATION: Assumed payment multipliers based on assessment of Corporate and Individual performance: Corporate multiplier 75% - performance generally met year's objectives Individual multiplier 100% - performance generally exceeded objectives Year 2000 Cash Award: Corporate component $5,625 ($7,500 X 75%) Individual component $7,500 ($7,500 X 100%) Total 2000 Cash Award $13,125 PAYMENT OF THE AWARD Annual performance reviews will be completed by May 15th and payment of Awards will be made after receipt of the Company's audited financial statements and after review and approval by the President and CEO and the Compensation Committee of the Board of Directors. Page 12 of 18 Exhibit "B" Form of Stock Option Agreement [The remainder of this page intentionally left blank.] Page 13 of 18 E-DENTIST.COM, INC. INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement (the "Agreement") is entered into between e-dentist.com, Inc. ("e-dentist"), a Delaware corporation (the "Company"), and __________________________(the "Optionee") as of ______________________ (the "Effective Date"). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. GRANT OF OPTION. Under the terms and conditions of the Company's 1997 Stock Compensation Plan, as amended (the "Plan"), the terms of which are incorporated herein by reference, the Company grants to the Optionee an option (the "Option") to purchase from the Company all or any part of a total of ____________ (________) shares of the Company's Common Stock, par value $.001 per share, at an exercise price of _______________ ($________) per share (the "Purchase Price"). The Option is granted as of _________________________ (the "Date of Grant"). 2. CHARACTER OF OPTION. [The Option is an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").] [Delete Prior and Insert Language for Non-Qualified Option: This Option is a non-qualified stock option and is therefore not an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").] 3. TERM. The Option will expire on the day prior to the tenth anniversary of the Date of Grant, or such earlier date as may be provided in (i) Section 1.16 of the Plan regarding Employee (as defined in the Plan) termination or (ii) Section 11 below. 4. VESTING. Subject to the provisions of Section 1.12 and Section 1.16 of the Plan, the Option may be exercised according to the following schedule: [Example Only: Beginning on _____________, _____ percent (_____%) shall vest on the first day of each month, from month to month, until fully vested.] The unexercised portion of the Option from one period may be carried over to a subsequent period or periods, and the right of the Optionee to exercise the Option as to such unexercised portion shall continue for the entire term. Upon exercise the actual number of shares purchased shall be rounded to the nearest whole share. 5. PROCEDURE FOR EXERCISE. Exercise of the Option or a portion thereof shall be effected by the giving of written notice to the Company by the Optionee in accordance with Section 1.13 of the Plan and payment of the Purchase Price for the shares to be acquired pursuant to the exercise. 6. PAYMENT OF PURCHASE PRICE. Payment of the Purchase Price for any shares purchased pursuant to the Option shall be in accordance with the provisions of Section 1.11(b) of the Plan. 7. TRANSFER OF OPTIONS. This option is not assignable or transferable by the Optionee otherwise than by will or the laws of descent and distribution and during the lifetime of the Optionee may only by exercised by the Optionee or his legally authorized representative. Page 14 of 18 8. ACCEPTANCE OF THE PLAN. The Option is granted subject to all of the applicable terms and provisions of the Plan, and such terms and provisions are incorporated by reference herein. The Optionee hereby accepts and agrees to be bound by all the terms and conditions of the Plan. 9. AMENDMENT. This Agreement may be amended by an instrument in writing signed by both the Company and the Optionee. 10. MISCELLANEOUS. This Agreement will be construed and enforced in accordance with the laws of the State of Arizona and will be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guarantor or other legal representative of the Optionee. 11. RIGHTS OF OPTIONEE UPON TERMINATION OF EMPLOYMENT. In the event an Optionee ceases to serve as an Employee by reason of death, retirement, permanent disability, termination for cause, or resignation by the Optionee (as hereinafter defined), then the Options may be exercised as follows: (a) DEATH. If the Optionee dies while serving as an Employee or within three (3) months after ceasing to become an Employee, the Option shall become fully vested and exercisable during the period beginning with the date of the Employee's death and ending twelve (12) months thereafter, unless by its terms it expires sooner. During such period, the Option may be fully exercised, to the extent that it remains unexercised on the date of death, by the Optionee's personal representative or by the distributees to whom the Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. (b) RETIREMENT. If the Optionee ceases to serve as an Employee as a result of retirement, then (i) the Company's Compensation Committee shall have the ability to accelerate the vesting of the Option, in its sole discretion, or (ii) the Option shall be exercisable (to the extent exercisable and vested on the effective date of such Retirement or, if the vesting of such Option has been accelerated, to the extent exercisable following such acceleration) at any time during the period beginning with the effective date of the retirement and ending three (3) months thereafter, unless by its terms it expires sooner. (c) DISABILITY. If the Optionee ceases to serve as an Employee as a result of permanent disability (as defined in the Plan or the Employee's employment agreement), the Option shall become fully vested and exercisable during the period beginning with the date Employee is determined to be permanently disabled and ending twelve (12) months thereafter, unless by its terms it expires sooner. (d) CAUSE. If the Optionee ceases to be employed by the Company because the Optionee's relationship with the Company is terminated by the Company for cause (as defined in the employment agreement), the Option shall be exercisable (to the extent exercisable and vested on the effective date of such termination) during the period beginning with the date of such termination and ending three (3) months thereafter, unless by its term the Option expires earlier. If any facts that would constitute Cause for termination of an Optionee are discovered after the Optionee's relationship with the Company has ended, the Options may be immediately terminated by the Company's Compensation Committee. Notwithstanding the foregoing, if an Page 15 of 18 Optionee is employed pursuant to a written employment agreement with the Company, the Optionee's relationship with the Company shall be deemed terminated for Cause for the purposes of this Agreement only if the Optionee is considered under the circumstances to have been terminated "for cause" for purposes of such written agreement or the Optionee voluntarily ceases to be an employee in breach of such Optionee's employment agreement with the Company. (e) VOLUNTARY BREACH. If the Optionee ceases to be an Employee voluntarily by resignation or in breach of the Optionee's employment agreement, the Options shall automatically expire on the date of such termination of the employment relationship. (f) WITHOUT CAUSE. If the Optionee is terminated as an Employee Without Cause, the Option shall be exercisable (to the extent exercisable and vested on the effective date of such termination) at any time within three (3) months after the effective date of such termination, unless by its term the Option expires earlier. Without Cause shall be defined as termination for any reason other than for Cause. [Signatures on following page.] Page 16 of 18 Executed as of the ________ day of _________________, 2001. E-DENTIST.COM, INC. By: ------------------------------------ James M. Powers, President ACKNOWLEDGED AND AGREED: THE OPTIONEE: ---------------------------------------- ---------------------------------------- Optionee's Social Security Number Page 17 of 18 Exhibit "C" RELOCATION EXPENSES Upon relocation to offices outside of the Phoenix, Arizona area, Employee shall be entitled to receive reimbursement of all reasonable moving and relocation expenses associated with Employee's relocation outside of Phoenix, Arizona. The term "reasonable moving and relocation expenses" shall mean the following: 1. Expenses in the form of closing costs incurred by Employee in connection with the purchase by Employee of a new principal residence in the new location; 2. Expenses incurred by Employee for the packing and moving of personal property and automobiles of Employee located in the present principal residence to the Employee's new residence; 3. Expenses incurred by Employee for a period of up to three (3) months, as housing reimbursement, if necessary, to provide temporary housing while Employee locates and obtains permanent housing; 4. Expenses incurred by Employee for up to two (2) trips to the relocation area for Employee and Employee's spouse in connection with Employee's efforts to locate a new residence (with those expenses to be consistent with reasonable travel and expenses related to Executive business travel); 5. Expenses incurred in the re-registration and re-licensing of Employee's automobiles in the new jurisdiction; and, 6. Payments of subparagraphs (1) - (5) above shall be paid net of withholding for taxes and grossed up in an amount calculated to negate the adverse income tax consequences to Employee of the reimbursement of the relocation expenses. Provided however that the total expenses to be reimbursed by Company to Employee as set forth in this exhibit shall not exceed the total sum of $40,000. Page 18 of 18 EX-10.11 7 ex10-11.txt JAMES DUNN, JR. EMPLOYMENT AGREEMENT Exhibit 10.11 EMPLOYMENT AGREEMENT Employment Agreement (the "Agreement"), dated as hereinafter indicated to be effective on February 15, 2001 (the "Effective Date"), by and between e-dentist.com, Inc., a Delaware corporation (the "Company"), and James Dunn, Jr. ("Employee"). WHEREAS, the parties hereto had entered into that certain Employment Agreement, dated July 12, 1997 as amended on April 22, 1998, among the Company and Employee (the "Prior Agreement"); and, WHEREAS, the Company and Employee wish to continue the employment of Employee on the terms and conditions described herein with this Agreement superceding and wholly replacing the Prior Agreement including subsequent Amendments in its entirety; NOW THEREFORE, in consideration of the mutual premises and conditions contained herein, the parties hereto agree as follows: SECTION 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and Employee hereby accepts employment by the Company, upon the terms and subject to the conditions hereinafter set forth. SECTION 2. DUTIES. Employee shall serve as the Senior Vice President, General Counsel and Chief Development Officer of the Company (the "Position") reporting to the Company's President. Employee's duties and powers shall be those consistent with the office of the Position, with such additional duties or titles as mutually determined necessary or appropriate from time to time by the Company's President. Employee agrees to devote his full time and best efforts to the Company in the performance of his duties. All of the Employee's powers and authorities shall be subject to the reasonable direction and control of the President. Employee acknowledges that the executive offices of the Company will be located in Phoenix, Arizona and he shall perform his duties under this Agreement from those executive offices. SECTION 3. TERM. Except as otherwise provided in Section 6 hereof, the term of this Agreement shall be for two (2) years ("Term"), beginning on the Effective Date (also referred to as the "Commencement Date"). Unless and until terminated as provided for in Section 6, this Agreement shall automatically extend and renew on each annual anniversary of the Effective Date by adding one (1) year to the Term from year to year until terminated. SECTION 4. COMPENSATION AND BENEFITS. In consideration for the services of the Employee hereunder, the Company will compensate Employee as follows: (a) BASE SALARY. During the Term of this Agreement and until terminated, Employee shall receive a monthly minimum base salary (the "Base Salary") equal to the greater of: (i) twelve thousand five hundred and 00/100 dollars ($12,500.00) per month; or (ii) such amount as determined by the President in writing. Employee's Base Salary shall be paid in accordance with Company's standard policy regarding payment of compensation to employees but no less frequently than monthly. Page 1 of 19 (b) BONUS. Commencing with the fiscal year beginning April 1, 2000 and continuing from year to year until this Agreement is terminated, Employee shall be eligible to receive a cash bonus each year during the term of this Agreement determined in accordance with the Management Incentive Compensation Plan as amended from time to time, a copy of which is attached as Exhibit "A". Such bonus shall be payable by the Company to Employee as provided for in the Management Incentive Compensation Plan. (c) BENEFITS. The Company shall grant Employee options to purchase shares of the Company's Common Stock in such amounts, with such vesting and at such prices as determined by the President all in accordance with the terms of a Stock Option Agreement, and in the general form of option agreement attached as Exhibit "B". In addition, during the term of this Agreement, Employee shall be allowed to participate in, and be entitled to benefits, plans and programs, including improvements or modifications of the same, which are now, or may hereafter be, those available to officers or employees of a like position ("Executives"). Employee shall be entitled to medical, dental and retirement benefits which are generally made available to Executives, provided further that Employer will pay the total premium costs associated with the medical and dental insurance, not including deductibles and/or co-payments, covering the health of Employee, Employee's spouse and Employee's dependants. Medical, dental and disability insurance already effective shall remain in force, or if not shall become effective on the first day of the month following the Commencement Date. During each year of his employment Employee shall be entitled to three (3) weeks of vacation, and such other days of compensated absences, (i.e. sick leave or personal days) in accordance with the Company's policies and procedures as determined from time to time by the President. SECTION 5. EXPENSES. It is acknowledged by the parties that Employee, in connection with the services to be performed by him pursuant to the terms of this Agreement, will be required to make payments for travel, entertainment of business associates, mobile telephone and similar expenses (the "Out of Pocket Expenses"). The Company will reimburse Employee for all reasonable and necessary Out of Pocket Expenses incurred by Employee in the performance of his duties. Employee will comply with such budget limitations, approval and reporting requirements with respect to such Out of Pocket Expenses as the Company may establish from time to time. The Company Prior to execution of this Agreement will obtain and maintain, for so long as Employee is employed by the Company and provides legal services to the Company, legal malpractice insurance which will indemnify and protect Employee and Employer from claims by persons that Employee committed errors, omissions, or malpractice during the delivery of legal services to the Company or any other person. The premiums associated with such malpractice insurance shall be paid by the Company. The Company may select the insurance carrier provided that the policy limits meet or exceed existing policy terms and limits and the insurance covers claims which occur while Employee is associated with the Company. Upon termination of this Agreement, Employee shall be permitted to obtain tail coverage if available from the insurance carrier. The Company agrees to provide notice to Employee if that malpractice insurance is going to be canceled or lapse. In the event that the Company relocates its corporate offices or Employee is asked to move to other corporate offices outside of the Phoenix, Arizona area, then Employee shall be entitled to reimbursement of the costs of relocation described on Exhibit "C". SECTION 6. TERMINATION. Employee's employment hereunder will commence on the Commencement Date and continue until the end of the Term including any renewals thereof, except that the employment of Employee hereunder will terminate upon the occurrence of the following events: (a) Death or Disability. Employee's employment will terminate immediately upon the death of Employee during the term of his employment hereunder or, at the option of the Company, in the event of Employee's Page 2 of 19 disability, upon 30 days notice to Employee. Employee will be deemed "disabled" if, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been continuously absent from his duties with the company on a full-time basis for 120 consecutive business days, and Employee shall not reasonably be expected to be able to resume his duties within 60 days of the end of such 120 day period. In the event of the termination of this Agreement pursuant to this subsection 6(a), Employee will not be entitled to any Severance Amount (as hereinafter defined) or other compensation except for any portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof or for expenses incurred in the performance of his duties hereunder prior to termination. (b) For Cause. The Company may terminate the Employee's employment for "Cause" immediately upon written notice by the Company to Employee. For purposes of this Agreement, a termination will be for Cause if: (i) Employee willfully and continuously fails to perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness); (ii) Employee willfully engages in gross misconduct materially and demonstrably injurious to the Company; or (iii) Employee has been convicted of a felony which the President reasonably believes will result in injury to the Company or which would disqualify employee for coverage by the Company's surety bond. In the event of the termination of this Agreement pursuant to this sub-section 6(b), Employee will not be entitled to any Severance Amount (as hereinafter defined) or further consideration, except for any portion of the base salary accrued but unpaid from the last monthly payment date to the date of Termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. (c) By Company Without Cause. The Company may terminate this Agreement during the Term at any time for any reason without cause. It shall be deemed a termination without cause if Company changes the Position of Employee without Employee's prior written consent. In the event of the termination of this Agreement pursuant to this subsection, the Company will pay Employee, as Employee's sole remedy in connection with such termination, severance in the amount determined by multiplying Employee's monthly base salary at the rate in effect immediately preceding the termination of Employee's employment by twelve (12) months (the "Severance Amount"). The Company will also pay Employee the portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. The Company will pay the Severance Amount in a lump sum and within thirty (30) days of the Employee's last day of employment. The Company will not be entitled to offset or mitigate the amount due under this subsection by any other amounts payable to Employee, including amounts payable or paid to Employee by third parties for Employee's services after the date of termination, except as provided for otherwise in Section 10(b) hereinafter. (d) CHANGE OF CONTROL. Notwithstanding anything to the contrary contained in this Section 6, in the event Employee's employment with the Company terminates for any reason (other than death or disability) within the twelve (12) month period following a Change of Control (as defined hereafter), then the Company will pay Employee a lump sum payment (the "Termination Payment") in cash equal to the amount of the Severance Amount; plus, the amount of Employee's base salary accrued but unpaid and any expense reimbursement for expenses incurred in the performance of the duties described herein prior to the termination date. A "Change of Control" shall be deemed to have occurred: (i) when in a single transaction or a series of transactions a change of stock ownership of the Company of a Page 3 of 19 nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any successor item of a similar nature has occurred; or (ii) upon the acquisition of beneficial ownership, directly or indirectly, by any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act of securities of the Company) in a single transaction or a series of transactions representing 33% or more of the combined voting power of the Company's then outstanding securities; or (iii) sale of substantially all of the assets of the Company in a single transaction or a series of transactions; or (iv) removal by the Company from the Position identified herein without Employee's prior written consent ; provided that a Change in Control will not be deemed to have occurred for purposes of clauses (i) and (ii) hereof with respect to any person meeting the requirements of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended. The Company shall pay the Termination Payment to Employee upon written notice by Employee. The Termination Payment due under this Section will not be affected by the manner in which Employee's employment is terminated and accordingly will be whether the Change of Control occur after termination of this Agreement and whether Employee's termination of employment is voluntary, involuntary, for cause, or without cause. SECTION 7. EFFECT OF TERMINATION ON OPTIONS. If Employee is terminated "for cause" under Section 6(b) above, then the effect of the termination of the Employee's employment on such options shall be determined by the terms of the option plan under which the options are issued and the option agreement related to such options, except that Employee shall retain those options which are already vested and shall have ninety (90) days to exercise those vested options. Notwithstanding anything to the contrary herein or in any option agreement, in the event of: (a) a Change of Control, or (b) termination of this Agreement for any reason (except if "for cause"), then the Options issued and outstanding to Employee shall immediately vest (100%), and the Employee may exercise his options at any time during the original term of the option agreement (as defined therein), and such termination of this Agreement shall not cause termination or expiration of the options. SECTION 8. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges that certain assets of the Company and its affiliates, including without limitation information regarding customers, pricing policies, methods of operation, proprietary computer programs, sales, products, profits, costs, markets, key personnel, formulae, product applications, technical processes, and trade secrets (herein called "Confidential Information") are valuable, special and unique assets of the Company and its affiliates. Employee will not, during or after the term of his employment, disclose any of the Confidential Information to any person, firm, corporation, association, or any other entity for any reason or purpose whatsoever, directly or indirectly, except as may be required pursuant to his employment hereunder, unless and until such Confidential Information becomes publicly available other than as a consequence of the breach by Employee of his confidentiality obligations hereunder. In the Event of the termination of his employment, whether voluntary or involuntary, and whether by the Company or Employee, Employee will deliver to the Company all documents and data pertaining to the Confidential Information and will not take with him any documents or data of any kind or any reproductions (in whole or in part) of any items relating to the Confidential Information. SECTION 9. NONCOMPETITION. Until one year after termination of Employee's employment with the Company for any reason, whether voluntary or involuntary, Employee will not: (i) engage directly or indirectly, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in any business activities which are directly competitive with the Company and which were either conducted by the Company at the time of Employee's termination or "Proposed to be Conducted" (as defined herein) by the Company at the time of such termination (the "Designated Industry"); (ii) divert to any Page 4 of 19 competitor of the Company in the Designated Industry any customer of Employee or, (iii) solicit or encourage any officer, employee, or consultant of the Company to leave its employ for employment by or with any competitor of the Company in the Designated Industry. The parties hereto acknowledge that Employee's non-competition obligations hereunder will not preclude Employee from (i) owning less than 5% of the common stock of any publicly traded corporation conducting business activities in the Designated Industry or (ii) serving as an officer, director, stockholder or employee of an entity engaged in the healthcare industry whose business operations are not competitive with those of the Company. "Proposed to be Conducted," as used herein, shall mean those business activities which are the subject of a formal, written business plan approved by the Board of Directors prior to termination of Employee's employment and which the Company takes material action to implement within 12 months of the termination of Employee's employment. Employee will continue to be bound by the provisions of this Section 9 until their expiration and will not be entitled to any compensation from the Company with respect thereto. If at any time the provisions of this Section 9 are determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 9 will be considered divisible and will become and be immediately amended to only such area, duration, scope of activity as will be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Employee agrees that this Section 9 as so amended will be valid and binding as though any invalid or unenforceable provision had not been included herein. SECTION 10. GENERAL. (a) NOTICES. All notices and other communications hereunder will be in writing or by written telecommunication, and will be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication will have specified to the other party hereto in accordance with this Section 10(a): If to the Company, to: With a copy to: e-dentist.com, Inc. Jackson Walker, L.L.P. 2999 N. 44th Street, Suite 650 901 Main Street, Suite 6000 Phoenix, Arizona 85018 Dallas, Texas 75202 Attn: CHIEF EXECUTIVE OFFICER Attn: James S. Ryan, III Fax No.: (602) 952-0544 Fax No. (214) 953-5822 If to Employee, to: James Dunn Jr. 6902 East Evans Scottsdale, AZ 85254 (b) WITHHOLDING AND OFFSET. All payments required to be made by the Company under this Agreement to Employee will be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. No payment under this Agreement will be subject to offset or reduction attributable to any amount Employee may owe to the Company or any other person. (c) EQUITABLE REMEDIES. Each of the parties hereto acknowledges and agrees that upon any breach by Employee of his obligations under any of the Sections 8 and 9 hereof, the Company will have no adequate remedy at law, and accordingly will be entitled to specific performance and other appropriate injunctive and equitable relief. Page 5 of 19 (d) SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision will be fully severable and this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. Any and all covenants and obligations of either party hereto which by their terms or by reasonable implication are to be performed, in whole or in part, after the termination of this Agreement, shall survive such termination, including specifically the obligations arising under Sections: 6, 7, 8 and 9. (e) WAIVERS. No delay or omission by either party hereto in exercising any right, power or privilege hereunder will impair such right, power or privilege, nor will any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. (f) COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument. (g) CAPTIONS. The captions in this Agreement are for convenience of reference only and will not limit or otherwise affect any of the terms or provisions hereof. (h) REFERENCE TO AGREEMENT. Use of the words "herein," "hereof," "hereto " and the like in this Agreement refer to this Agreement only as a whole and not to any particular subsection or provision of this Agreement, unless otherwise noted. (i) BINDING AGREEMENT. This Agreement will be binding upon and inure to the benefit of the parties and will be enforceable by the personal representatives and heirs of Employee and the successors of the Company. If Employee dies while any amounts would still be payable to him hereunder, such amounts will be paid to Employee's estate. This Agreement is not otherwise assignable by Employee. (j) ENTIRE AGREEMENT. Except as provided in the benefit plans and programs referenced herein, this Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed by each of the parties hereto. (k) GOVERNING LAW. This Agreement and the performance hereof will be construed and governed in accordance with the laws of the State of Arizona, without regard to its choice of law principles. Any modification of this Agreement shall be effective only if it is in writing and signed by the parties hereto. (l) ATTORNEY'S FEES. If legal action is commenced by either party to enforce or defend its rights under this Agreement, the prevailing party in such action shall be entitled to recover its costs and reasonable attorneys' fees in addition to any other relief granted. If either party Page 6 of 19 commences legal action or arbitration to enforce or defend its rights under this Agreement, the prevailing party in such action shall be entitled to recover its costs, including travel, lodging and meals for itself, counsel and witnesses, actual witness fees paid and legal fees actually paid, including costs of associating local counsel with regular counsel, if actually paid. SECTION 11. BINDING ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or breach thereof, shall be settled exclusively by arbitration in Phoenix, Arizona, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. A sole arbitrator shall conduct Arbitration and he or she shall render his or her award within forty five (45) days of appointment. Judgment upon the award rendered by the arbitrator may be entered in, and enforced by, any court having jurisdiction thereof. The award of the arbitrator may grant any relief available to the parties in law or in equity; and the award may contain a provision for payment of costs and attorney's fees to the prevailing party, if any. Page 7 of 19 EXECUTED as of the date and year first written above. E-DENTIST.COM, INC. By: /s/ James Powers ------------------------------------ Its: President ------------------------------- EMPLOYEE: /s/ James Dunn Jr. ---------------------------------------- James Dunn Jr. Date: February 16, 2001 ---------------------------------- Page 8 of 19 Exhibit "A" Current Form of Management Incentive Compensation Plan [The remainder of this page intentionally left blank.] Page 9 of 19 E-DENTIST.COM, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN The e-dentist.com, Inc. ("e-dentist") Management Incentive Compensation Plan (the "Plan") is designed to offer incentive compensation to key employees ("Associates") by rewarding the achievement of corporate goals, specifically measured individual goals that are consistent with and support the overall corporate goals. The Management Incentive Compensation Plan will create an environment which will focus key Associates on the achievement of objectives. Since cooperation between departments and Associates will be required to achieve corporate objectives which will represent a significant portion of the Compensation Plan, the Plan should help foster improved teamwork and a more cohesive management team. The Company reserves the right to revise or discontinue the Plan at any time. Key Associates (as hereinafter defined) who may be eligible to participate in the plan shall be selected at the sole discretion of the Company. PURPOSE OF THE PLAN The E-dentist Management Incentive Compensation Plan (the "Plan") is designed to: >> Provide an incentive program to achieve overall corporate objectives and to enhance shareholder value >> Reward those individuals who significantly impact corporate results >> Encourage increased teamwork among all disciplines within the Company >> Incorporate an incentive program in E-dentist's overall compensation program to help attract and retain key Associates PLAN GOVERNANCE The Plan will be governed by the Compensation Committee of the Board of Directors. The President and CEO will be responsible for administration of the Plan. The Compensation Committee will be responsible for approving any incentive awards to the President and CEO. CORPORATE AND INDIVIDUAL PERFORMANCE Prior to the beginning of the Plan year, the President and CEO will present to the Board a list of overall corporate objectives for the coming year, which are subject to approval by the Board. All participants in the Plan will then develop a list of key individual objectives which will be approved by the responsible Vice President and by the President and CEO. The Plan will call for incentive awards based on the achievement of annual corporate and individual objectives that have been approved as indicated above. The relative weight between corporate and individual performance factors will vary based on levels within the organization. The weighing will be reviewed annually and be adjusted as necessary or appropriate. The weighing for the year 2000 will be as follows: Page 10 of 19 CORPORATE INDIVIDUAL --------- ---------- President and CEO 100% Senior Vice Presidents/Officers 75% 25% Vice Presidents/Directors & Corporate Controller 50% 50% Practice Administrators/Managers/ Practice Advisors/Practice Consultants (employed) 50% 50% TARGET AWARDS MULTIPLIER Incentive awards will be determined by applying an "achievement multiplier" to the base salary of Associates in the Plan. The following target award multipliers will be used in implementing the Plan: POSITION TARGET AWARD MULTIPLIER - -------- ----------------------- President and CEO 35% Senior Vice Presidents/Officers 25% Vice Presidents/Directors & Corporate Controller 15% Practice Administrators/Managers/ Practice Advisors/Practice Consultants (employed) 10% The target award multiplier will be used to establish the target cash award at the beginning of each year. The target award multiplier will be equal to the actual award multiplier used at year-end in situations where corporate and individual objectives have been met for the year. Page 11 of 19 PERFORMANCE MEASUREMENT The following scale will be used to determine the actual award multiplier based upon measurement of corporate and individual performance versus objectives. Separate payment multipliers will be established for both the individual and the corporate components of each award. The same payment multiplier for the corporate component of each participant's annual award shall be used for all Plan participants in any given year. Performance Category Award Multiplier -------------------- ---------------- 1. Performance for the year met or exceeded objectives or was excellent in view of prevailing conditions 100% 2. Performance generally met the year's objectives or was very acceptable in view of prevailing conditions 75% 3. Performance for the year met some but not all objectives 25% 4. Performance for the year was not acceptable in view of prevailing conditions 0% CALCULATION OF AWARD Example I shows a sample cash award calculation under the Plan. First, a total target award is calculated by multiplying the Associates base salary by the target award multiplier. This dollar figure is then divided between its corporate component and its individual component based on the performance factor mix for that specific position. This calculation establishes specific dollar target awards for the performance period for both the individual and corporate components of the award. At the end of the performance period, corporate and individual award multipliers will be established using the criteria described above. The corporate award multiplier, which is based on overall corporate performance, is used to calculate actual corporate performance awards for all Plan participants. This is done by multiplying the target corporate award established for each individual at the beginning of the performance period by the actual award multiplier. The individual award multiplier, which is based on an individual's performance against objectives, is used in the same way to calculate the actual individual performance award. EXAMPLE 1: CASH AWARD CALCULATION Position Vice President Base salary $100,000 Year 2000 target award multiplier 15% Year 2000 target award $15,000 Target award components (based on performance factor mix) Target award based on Corporate performance (50%) 7,500 Target award based on Individual performance (50%) 7,500 Page 12 of 19 ACTUAL YEAR 2000 CASH AWARD CALCULATION: Assumed payment multipliers based on assessment of Corporate and Individual performance: Corporate multiplier 75% - performance generally met year's objectives Individual multiplier 100% - performance generally exceeded objectives Year 2000 Cash Award: Corporate component $5,625 ($7,500 X 75%) Individual component $7,500 ($7,500 X 100%) Total 2000 Cash Award $13,125 PAYMENT OF THE AWARD Annual performance reviews will be completed by May 15th and payment of Awards will be made after receipt of the Company's audited financial statements and after review and approval by the President and CEO and the Compensation Committee of the Board of Directors. Page 13 of 19 Exhibit "B" Form of Stock Option Agreement [The remainder of this page intentionally left blank.] Page 14 of 19 E-DENTIST.COM, INC. INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement (the "Agreement") is entered into between e-dentist.com, Inc. ("e-dentist"), a Delaware corporation (the "Company"), and __________________________(the "Optionee") as of ______________________ (the "Effective Date"). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. GRANT OF OPTION. Under the terms and conditions of the Company's 1997 Stock Compensation Plan, as amended (the "Plan"), the terms of which are incorporated herein by reference, the Company grants to the Optionee an option (the "Option") to purchase from the Company all or any part of a total of ____________ (________) shares of the Company's Common Stock, par value $.001 per share, at an exercise price of _______________ ($________) per share (the "Purchase Price"). The Option is granted as of _________________________ (the "Date of Grant"). 2. CHARACTER OF OPTION. [The Option is an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").] [Delete Prior and Insert Language for Non-Qualified Option: This Option is a non-qualified stock option and is therefore not an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").] 3. TERM. The Option will expire on the day prior to the tenth anniversary of the Date of Grant, or such earlier date as may be provided in (i) Section 1.16 of the Plan regarding Employee (as defined in the Plan) termination or (ii) Section 11 below. 4. VESTING. Subject to the provisions of Section 1.12 and Section 1.16 of the Plan, the Option may be exercised according to the following schedule: [Example Only: Beginning on _____________, _____ percent (_____%) shall vest on the first day of each month, from month to month, until fully vested.] The unexercised portion of the Option from one period may be carried over to a subsequent period or periods, and the right of the Optionee to exercise the Option as to such unexercised portion shall continue for the entire term. Upon exercise the actual number of shares purchased shall be rounded to the nearest whole share. 5. PROCEDURE FOR EXERCISE. Exercise of the Option or a portion thereof shall be effected by the giving of written notice to the Company by the Optionee in accordance with Section 1.13 of the Plan and payment of the Purchase Price for the shares to be acquired pursuant to the exercise. 6. PAYMENT OF PURCHASE PRICE. Payment of the Purchase Price for any shares purchased pursuant to the Option shall be in accordance with the provisions of Section 1.11(b) of the Plan. 7. TRANSFER OF OPTIONS. This option is not assignable or transferable by the Optionee otherwise than by will or the laws of descent and distribution and during the lifetime of the Optionee may only by exercised by the Optionee or his legally authorized representative. Page 15 of 19 8. ACCEPTANCE OF THE PLAN. The Option is granted subject to all of the applicable terms and provisions of the Plan, and such terms and provisions are incorporated by reference herein. The Optionee hereby accepts and agrees to be bound by all the terms and conditions of the Plan. 9. AMENDMENT. This Agreement may be amended by an instrument in writing signed by both the Company and the Optionee. 10. MISCELLANEOUS. This Agreement will be construed and enforced in accordance with the laws of the State of Arizona and will be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guarantor or other legal representative of the Optionee. 11. RIGHTS OF OPTIONEE UPON TERMINATION OF EMPLOYMENT. In the event an Optionee ceases to serve as an Employee by reason of death, retirement, permanent disability, termination for cause, or resignation by the Optionee (as hereinafter defined), then the Options may be exercised as follows: (a) DEATH. If the Optionee dies while serving as an Employee or within three (3) months after ceasing to become an Employee, the Option shall become fully vested and exercisable during the period beginning with the date of the Employee's death and ending twelve (12) months thereafter, unless by its terms it expires sooner. During such period, the Option may be fully exercised, to the extent that it remains unexercised on the date of death, by the Optionee's personal representative or by the distributees to whom the Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. (b) RETIREMENT. If the Optionee ceases to serve as an Employee as a result of retirement, then (i) the Company's Compensation Committee shall have the ability to accelerate the vesting of the Option, in its sole discretion, or (ii) the Option shall be exercisable (to the extent exercisable and vested on the effective date of such Retirement or, if the vesting of such Option has been accelerated, to the extent exercisable following such acceleration) at any time during the period beginning with the effective date of the retirement and ending three (3) months thereafter, unless by its terms it expires sooner. (c) DISABILITY. If the Optionee ceases to serve as an Employee as a result of permanent disability (as defined in the Plan or the Employee's employment agreement), the Option shall become fully vested and exercisable during the period beginning with the date Employee is determined to be permanently disabled and ending twelve (12) months thereafter, unless by its terms it expires sooner. (d) CAUSE. If the Optionee ceases to be employed by the Company because the Optionee's relationship with the Company is terminated by the Company for cause (as defined in the employment agreement), the Option shall be exercisable (to the extent exercisable and vested on the effective date of such termination) during the period beginning with the date of such termination and ending three (3) months thereafter, unless by its term the Option expires earlier. If any facts that would constitute Cause for termination of an Optionee are discovered after the Optionee's relationship with the Company has ended, the Options may be immediately terminated by the Company's Compensation Committee. Notwithstanding the foregoing, if an Page 16 of 19 Optionee is employed pursuant to a written employment agreement with the Company, the Optionee's relationship with the Company shall be deemed terminated for Cause for the purposes of this Agreement only if the Optionee is considered under the circumstances to have been terminated "for cause" for purposes of such written agreement or the Optionee voluntarily ceases to be an employee in breach of such Optionee's employment agreement with the Company. (e) VOLUNTARY BREACH. If the Optionee ceases to be an Employee voluntarily by resignation or in breach of the Optionee's employment agreement, the Options shall automatically expire on the date of such termination of the employment relationship. (f) WITHOUT CAUSE. If the Optionee is terminated as an Employee Without Cause, the Option shall be exercisable (to the extent exercisable and vested on the effective date of such termination) at any time within three (3) months after the effective date of such termination, unless by its term the Option expires earlier. Without Cause shall be defined as termination for any reason other than for Cause. [Signatures on following page.] Page 17 of 19 Executed as of the ________ day of _________________, 2001. E-DENTIST.COM, INC. By: ------------------------------------ James M. Powers, President ACKNOWLEDGED AND AGREED: THE OPTIONEE: ---------------------------------------- ---------------------------------------- Optionee's Social Security Number Page 18 of 19 Exhibit "C" RELOCATION EXPENSES Upon relocation to offices outside of the Phoenix, Arizona area, Employee shall be entitled to receive reimbursement of all reasonable moving and relocation expenses associated with Employee's relocation outside of Phoenix, Arizona. The term "reasonable moving and relocation expenses" shall mean the following: 1. Expenses in the form of closing costs incurred by Employee in connection with the purchase by Employee of a new principal residence in the new location; 2. Expenses incurred by Employee for the packing and moving of personal property and automobiles of Employee located in the present principal residence to the Employee's new residence; 3. Expenses incurred by Employee for a period of up to three (3) months, as housing reimbursement, if necessary, to provide temporary housing while Employee locates and obtains permanent housing; 4. Expenses incurred by Employee for up to two (2) trips to the relocation area for Employee and Employee's spouse in connection with Employee's efforts to locate a new residence (with those expenses to be consistent with reasonable travel and expenses related to Executive business travel); 5. Expenses incurred in the re-registration and re-licensing of Employee's automobiles in the new jurisdiction; and, 6. Payments of subparagraphs (1) - (5) above shall be paid net of withholding for taxes and grossed up in an amount calculated to negate the adverse income tax consequences to Employee of the reimbursement of the relocation expenses. Provided however that the total expenses to be reimbursed by Company to Employee as set forth in this exhibit shall not exceed the total sum of $40,000. Page 19 of 19 EX-10.12 8 ex10-12.txt GLENN J. BONAGURA EMPLOYMENT AGREEMENT Exhibit 10.12 EMPLOYMENT AGREEMENT Employment Agreement (the "Agreement"), dated to be effective as hereinafter provided, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and Glenn J. Bonagura ("Employee"). In consideration of the mutual premises and conditions contained herein, the parties hereto agree as follows: SECTION 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and Employee hereby accepts employment by the Company, upon the terms and subject to the conditions hereinafter set forth. SECTION 2. DUTIES. Employee is employed in accordance with the terms and conditions of this Agreement. Employee will have the duties associated with the title and position of Sr. Vice President - Sales and Marketing, with such other duties or titles as determined necessary or appropriate from time to time by the Company's President. Employee agrees to devote his full time and best efforts to the performance of his duties to Employer. Employee will not seek or obtain employment with or by any other employer while this Agreement remains in effect, provided however that Employee may seek employment during the ninety (90) day period prior to the expiration of the Term or any renewal thereof. All of the Employee's powers and authorities shall be subject to the direction and control of the Company's President. SECTION 3. TERM. Unless earlier terminated as provided for herein, the term of this Agreement shall be the one (1) year period beginning on July 16, 2000 (the "Commencement Date") and ending on the first annual anniversary of the Commencement Date (the "Term"). SECTION 4. COMPENSATION AND BENEFITS. In consideration for the services of the Employee hereunder, the Company will compensate Employee as follows: (a) During the Term of this Agreement and until terminated, Employee shall receive monthly compensation equal to the greater of: (i) Fourteen Thousand Five Hundred Eighty Three and 33/100 Dollars ($14,583.33) (the "Base Salary")per month, or (ii) such amount as determined by the President in writing. Employee's Base Salary shall be paid in accordance with Company's standard policy regarding payment of compensation to employees but no less frequently than monthly. (b) Beginning with the Commencement Date, Employee shall be eligible to receive a cash bonus of up to One Hundred Thousand and 00/100 Dollars ($100,000.00) (the "Bonus"). One half (1/2) of the Employee's Bonus will not be based upon any performance criteria and will be paid in two installments, the first installment on the six (6) month anniversary of the Commencement Date and the second installment on the annual anniversary of the Commencement Date. The other one half (1/2) of the Employee's Bonus will be conditioned upon certain annual targets and performance criteria established from time to time by the Company's President. (c) Employee shall be allowed to participate in, and be entitled to benefits, plans and programs, including improvements or modifications of the same, which are now, or may hereafter be, those available to employees of a like position. Specifically Company will be responsible for payment of the total premium costs associated with the Employee's medical and dental insurance, (not including deductibles and/or co-payments) covering the Employee and the Employee's spouse and Page 1 of 7 children. The effective date of medical and dental insurance coverage shall be the first (1st) of the month following the Commencement Date. Employee will be entitled to compensated absences in accordance with the Company's policies and procedures which are available to employees of a like position. Specifically Employee shall be entitled to (15) days of vacation and fourteen (14) days of other compensated absences, (like sick leave and personal day benefits), with the accrual and credit of such compensated absences always in accordance with the Company's policies and procedures as determined from time to time by the Company's President. SECTION 5. EXPENSES. It is acknowledged by the parties that Employee, in connection with the services to be performed by Employee pursuant to the terms of this Agreement, may be required to make payments for travel, entertainment of business associates, mobile telephone and similar expenses (the "Out of Pocket Expenses"). The Company will reimburse Employee for all reasonable Out of Pocket Expenses incurred by Employee in the performance of Employee's duties. Employee will comply with such budget limitations and approval and reporting requirements with respect to any Out of Pocket Expenses as the Company may establish from time to time. In addition to reimbursement of Out of Pocket Expenses, the Company will provide to Employee an auto allowance for use of Employee's automobile in an amount equal to six hundred and 00/100 dollars ($600.00) per month. SECTION 6. TERMINATION BY COMPANY FOR CAUSE. The Company may terminate this Agreement for cause if Employee: (a) willfully fails to perform his duties with the Company or materially breaches any provision of this Agreement (other than any such failure resulting from incapacity due to physical or mental illness); (b) willfully engages in misconduct which is injurious to the Company; or, (c) is convicted of a felony or charged with a crime involving, theft, fraud, dishonesty or moral turpitude which the President reasonably believes will result in injury to the Company or which would disqualify employee for coverage by the Company's surety bond. The Company will provide notice of termination in writing (or provided orally confirmed in writing within fourteen (14) days), specifying the reasons for termination as well as the date upon which the termination is to become effective (the "Termination Date"). In the event of the termination of this Agreement pursuant to this Section, then Employee will not be entitled to any Bonus, Severance or any other consideration, except for any portion of the Base Salary accrued but unpaid from the last monthly payment date to the Termination Date, together with any Out of Pocket Expenses incurred but unpaid prior to the Termination Date. SECTION 7. TERMINATION OTHER THAN FOR CAUSE. This Agreement shall terminate upon the happening of any of the following events: (a) death of Employee (with the "Termination Date" being Employee's date of death); (b) the physical or mental disability of Employee which prevents a return to the performance of his duties for a period of ninety (90) days (with the "Termination Date" being the date that Employee is determined to be disabled; or, (c) Employee gives notice of his intention to terminate this Agreement either in writing, (or orally and then confirmed in writing within three (3) days of the date of such oral notice), specifying the reasons for termination as well as the date upon which the termination is to become effective (the "Termination Date"); or, (d) the Company gives notice of its intention to terminate this Agreement either in writing, (or orally and then confirmed in writing within three (3) days of the date of such oral notice), specifying the reasons for termination as well as the date upon which the termination is to become effective (the "Termination Date"). In the event of the termination of this Agreement, the Company will pay Employee the portion of his Base Salary accrued but unpaid from the last monthly payment date to the Termination Date, and any Out of Pocket Expenses incurred in the performance of his duties hereunder prior to the Termination Date, but shall not be responsible for the payment of any accrued but unpaid Bonus. In the event of the termination of this Agreement by the Company pursuant to Subsection (d) of this Section (termination without cause by Company), and only in that event, then the Company will additionally pay Employee, as Employee's sole and exclusive remedy in connection with such termination, liquidated damages in the Page 2 of 7 form of severance pay (the "Severance Pay") as follows: (a) if before the expiration of the six (6) months from the Commencement date, then an amount equal to Employee's monthly base salary in effect on the Termination Date multiplied by three (3) months; or (b) if after the expiration of six (6) months from the Commencement date, then an amount equal to Employee's monthly base salary in effect on the Termination Date multiplied by six (6) months. Additionally and notwithstanding the foregoing, if the acquisition between the Company and Dexpo.com, Inc. ("Dexpo") does not close with the Company and Dexpo terminating their Letter of Understanding, then either Company or Employee may terminate this Agreement and the Company will pay Employee the portion of his Base Salary accrued but unpaid from the last monthly payment date to the Termination Date, and any Out of Pocket Expenses incurred in the performance of his duties hereunder prior to the Termination Date, but shall not be responsible for the payment of any accrued but unpaid Bonus. The Company will be entitled to offset or mitigate the amount due under this subsection by any amounts due to the Company from the Employee. SECTION 8. STOCK OPTIONS. Employee will receive the right to purchase 100,000 shares of Pentegra's common stock (the "Stock Options"), with an exercise price of $1.00 per share. Company will provide an Employee Stock Option Agreement and Incentive Stock Option Agreement contemporaneously with the execution of this Agreement. The effect of the termination of the Employee's employment on such options shall be determined by the terms of the option plan under which the options are issued and the option agreement related to such options. Specifically however the Stock Option Agreement will contain a provision which provides vesting of ten percent (10%) of the options each six (6) month period beginning with the Commencement Date. One half of the total options will be issued as "non-qualified stock options" and one half as "employee incentive stock options." The stock option agreement of Employee shall provide that Employee upon termination of this Agreement shall retain those options which are vested and shall have ninety (90) days to exercise those vested options or such option shall expire. SECTION 9. REPRESENTATIONS AND COVENANTS. (a) COVENANT NOT TO SOLICIT: Employee covenants, warrants and represents that during the Term of this Agreement and for the one (1) year period beginning with the Termination Date, that Employee (either personally, or through any individual, association, partnership, corporation or other entity) shall not: (i) solicit, induce or attempt to induce directly or indirectly any dental practice affiliated with the Company (a "Practice) for the purpose of having that Practice cease or alter its relationship with the Company; (ii) solicit, induce or attempt to induce directly or indirectly any employee of the Company or any employee of a Practice for the purpose of having that employee cease their employment with the Company or a Practice. (b) COVENANT NOT-TO-COMPETE. Employee covenants, warrants and represents that during the Term of this Agreement and for the two (2) year period beginning with the Termination Date, that Employee (either personally, or through any individual, association, partnership, corporation or other entity) shall not: (i) engage directly or indirectly in any business activities which relate to the acquisition or management of dental practices (the "Designated Industry"); (ii) divert to any competitor of the Company in the Designated Industry any potential dentist affiliate or potential employee of the Company; or, (iii) accept employment by any company which is a competitor of the Company in the Designated Industry. The parties hereto acknowledge that Employee's non-competition obligations hereunder will not preclude Employee from owning less than 5% of the common stock of any publicly traded corporation conducting business activities in the Designated Industry. Employee will continue to be bound by the provisions of this Section until their expiration and will not be entitled to any compensation from the Company with respect thereto. If at any time the Page 3 of 7 provisions of this Section are determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section will be considered divisible and will become and be immediately amended to only such area, duration and scope of activity as will be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter. Employee agrees that the restrictions, time period and geographic scope contained in these restrictions are reasonable, valid and binding. Employee acknowledges and recognizes that enforcement of these convents will not interfere with his ability to pursue a proper livelihood. Employee recognizes and agrees that the enforcement of this Agreement is necessary to ensure the preservation and continuity of the business and goodwill of the Company. (c) COVENANT OF CONFIDENTIALITY. Employee recognizes the proprietary interest of any confidential and proprietary information of the Company (or its successor, assigns and affiliated dental practices) (together the "Employer Group"). The term " Confidential and Proprietary Information" means all trade secrets and other confidential and/or proprietary information of the Employer, including, without limitation, information derived from reports, investigations, research, work in progress, codes, marketing and sales programs, financial projections, cost summaries, pricing formula, contracts analyses, financial information, projections, confidential filings with any state or federal agency, and all other confidential concepts, methods of doing business, ideas, materials or information prepared or performed for, by or on behalf of the Company by its employees, officers, directors, agents, representatives, or consultants. Employee acknowledges and agrees that any and all Confidential and Proprietary Information communicated to, learned of, developed or otherwise acquired by him during the Term shall be the property of the Company. Employee further acknowledges and understands that his disclosure of any Confidential and Proprietary Information will result in irreparable injury and damage to the Company. Employee acknowledges and agrees that the Company is entitled to prevent the disclosure of Confidential and Proprietary Information. Employee agrees at all times during the Term and thereafter to hold in strictest confidence and not to disclose to any person any Confidential and Proprietary Information, other than in the course of performing his duties hereunder and with the consent of Company, which consent shall not unreasonably be withheld, in accordance with Company's policies and regulations, as established from time to time, for the protection of Company's Confidential and Proprietary Information. The term "Confidential and Proprietary Information" does not include, and there shall be no obligation hereunder with respect to (i) information that is obvious, or that may readily be determined by any person reasonably knowledgeable in the industry in which Company operates by diligent review and examination of public sources, or that becomes generally available to the public other than as a result of a disclosure by Employee or any agent or other representative thereof, and (ii) office practices and procedures applicable to Company's business. Employee shall not have any obligation hereunder to keep confidential any Confidential and Proprietary Information to the extent disclosure of any thereof is required by law, or determined in good faith by Employee to be necessary or appropriate to comply with any legal or regulatory order, regulation or requirement; provided, however, that in the event disclosure is required by law, Employee shall provide Company with reasonable notice of such requirement so that Company may seek an appropriate protective order. Upon termination of employment, all tangible evidence of such confidential or proprietary information in the possession of Employee shall be returned to Company, and Employee shall not make or retain any copies or excerpts thereof except that Employee may retain copies of all materials that may be of a personal nature to Employee. Page 4 of 7 (d) PROHIBITION ON DISPARAGING REMARKS. Employee covenants, warrants and represents that Employee shall not make disparaging, negative or other similar remarks concerning the Company to any third party, except to the extent that Employee; (i) is required to make such remarks by applicable law or regulation or judicial or regulatory process or (ii) makes such remarks in or in connection with any pending or threatened litigation or other legal proceeding. Employee agrees that, in addition to monetary damages, the Company shall have the right to prevent any breach of this provision by means of injunctive relief. (e) REFORMATION AND SURVIVAL. In the event that any one or more of provisions contained in this Section shall, for any reason, be held to be too broad as to duration, geographical scope, activity or subject, such provision shall be construed as limiting and reducing it as determined by a court of competent jurisdiction and shall be enforceable to the extent compatible with applicable law. Notwithstanding anything to the contrary in this Agreement, the covenants, warranties and representations of Employee contained in this Section, and the obligations arising therefrom, shall survive the termination of this Agreement and the Employee's employment under this Agreement regardless of the reason for termination. The covenants, warranties and representations contained in this Section are hereby deemed to be independent of any other provision of this Agreement, and the existence of any claim or cause of action by against , whether predicated on this Agreement or otherwise, shall not constitute a defense to these representations, covenants and warranties. SECTION 10. GENERAL. (a) NOTICES. All notices and other communications hereunder will be in writing or by written telecommunication, and will be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication will have specified to the other party hereto in accordance with this Section 10(a): TO THE COMPANY AT: Pentegra Dental Group, Inc. 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 Fax (602) 952-0544 Attn: CHIEF EXECUTIVE OFFICER TO EMPLOYEE AT: -------------------------- -------------------------- -------------------------- -------------------------- (b) WITHHOLDING AND OFFSET. All payments required to be made by the Company under this Agreement to Employee will be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law or governmental regulation or ruling ("Payroll Taxes") and all other normal employee deductions made with respect to Company's employees generally. Any payments or compensation arising under this Agreement will be subject to offset or reduction by any amount Employee may owe to the Company. Page 5 of 7 (c) SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision will be fully severable and this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. (d) WAIVERS. No delay or omission by either party hereto in exercising any right, power or privilege hereunder will impair such right, power or privilege, nor will any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. (e) COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument. (f) CAPTIONS. The captions in this Agreement are for convenience of reference only and will not limit or otherwise affect any of the terms or provisions hereof. (g) REFERENCE TO AGREEMENT. Use of the words "herein," "hereof," "hereto" and the like in this Agreement refer to this Agreement only as a whole and not to any particular subsection or provision of this Agreement, unless otherwise noted. (h) BINDING AGREEMENT. This Agreement will be binding upon and inure to the benefit of the parties and will be enforceable by the personal representatives and heirs of Employee and the successors of the Company. If Employee dies while any amounts would still be payable to him hereunder, such amounts will be paid to Employee's estate. This Agreement is not otherwise assignable by Employee. (i) ENTIRE AGREEMENT. Except as provided in the benefit plans and programs referenced herein, this Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed by each of the parties hereto. (j) GOVERNING LAW. This Agreement and the performance hereof will be construed and governed in accordance with the laws of the State of Arizona, without regard to its choice of law principles. Any modification of this Agreement shall be effective only if it is in writing and signed by the Parties hereto. (k) ATTORNEY'S FEES. If legal action is commenced by either party to enforce or defend its rights under this Agreement, the prevailing party in such action shall be entitled to recover its costs and reasonable attorneys' fees in addition to any other relief granted. If either party commences legal action or arbitration to enforce or defend its rights under this Agreement, the prevailing party in such action shall be entitled to recover its costs, including travel, lodging and meals for itself, counsel and witnesses, actual witness fees paid and legal fees actually paid, including costs of associating local counsel with regular counsel, if actually paid. Page 6 of 7 SECTION 11. DISPUTE RESOLUTION. (a) MEDIATION. If any dispute arises between the parties which arises out of or relates to this contract, or the breach thereof, and if such dispute cannot be settled by negotiation between the parties, the parties agree first to try to settle the dispute by mediation to be conducted by one mediator as the parties may agree pursuant to the Commercial Mediation Rules of the American Arbitration Association. If the parties are unable to agree upon a mediator, the American Arbitration Association will select a mediator pursuant to its Commercial Mediation Rules. Once a mediator is appointed, he/she will be required to conclude mediation efforts within forty-five (45) days of appointment. (b) BINDING ARBITRATION. In the event that Mediation fails to resolve such dispute, then the Parties agree that such dispute arising from this Agreement, or the breach thereof, shall be settled exclusively by binding arbitration in Phoenix, Arizona, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator(s) may be entered in, and enforced by, any court having jurisdiction thereof. EXECUTED by the undersigned parties as indicated below to be effective as indicated above. EMPLOYER: PENTEGRA DENTAL GROUP, INC. By: /s/ James Powers ------------------------------------ James M. Powers, Jr., President Date: June 30, 2000 ---------------------------------- EMPLOYEE: Glenn J. Bonagura /s/ Glenn J. Bonagura ---------------------------------------- Glenn J. Bonagura Date: June 30, 2000 ---------------------------------- Page 7 of 7 EX-10.13 9 ex10-13.txt ASSET PURCHASE AGREEMENT Exhibit 10.13 ASSET PURCHASE AGREEMENT BY AND AMONG PENTEGRA DENTAL GROUP, INC. AND DEXPO.COM, INC. TABLE OF CONTENTS PAGE ---- Section 1 Terms of the Sale and Purchase of the Assets......................4 1.1 Conveyance of Assets..............................................4 1.2 Excluded Assets...................................................5 1.3 Purchase Price....................................................5 1.4 Subsequent Actions................................................6 Section 2 Representations and Warranties of Seller..........................7 2.1 Corporate Existence; Good Standing................................7 2.2 Power and Authority for Transactions..............................7 2.3 Permits, Licenses and Governmental Authorizations.................8 2.4 Corporate Records.................................................8 2.5 Consents..........................................................8 2.6 Seller's Financial Information....................................8 2.7 Leases............................................................8 2.8 Condition of Assets...............................................8 2.9 Title to and Encumbrances on Property.............................8 2.10 Inventories.......................................................9 2.11 Intellectual Property Rights; Names...............................9 2.12 Payroll Information; Employees....................................9 2.13 Legal Proceedings.................................................9 2.14 Contracts........................................................10 2.15 Subsequent Events................................................10 2.16 Accounts Receivable/Payable......................................11 2.17 Taxes............................................................11 2.18 Liabilities; Debt................................................12 2.19 Insurance Policies...............................................12 2.20 Employee Benefit Plans...........................................13 2.21 Adverse Agreements...............................................13 2.22 Compliance with Laws in General..................................13 2.23 No Untrue Representations........................................13 2.24 Customers........................................................13 2.25 Banking Relations................................................13 2.26 Economic Risk; Sophistication....................................14 2.27 Lock-Up Agreement................................................14 2.28 Broker Fee.......................................................14 Section 3 Representations and Warranties of Purchaser......................15 3.1 Corporate Existence: Good Standing...............................15 3.2 Power and Authority..............................................15 3.3 Valid Issuance of the Securities.................................15 3.4 Governmental Authorities; Consents...............................15 3.5 SEC Filings; Listing Requirements................................15 3.6 Brokerage........................................................16 3.7 No Untrue Representations........................................16 Section 4 Covenants of Seller..............................................16 4.1 Consummation of Agreement........................................16 4.2 Business Operations..............................................16 4.3 Access and Notice................................................16 4.4 Approvals of Third Parties and Permits and Consents..............17 4.5 Acquisition Proposals............................................17 4.6 Funding of Accrued Employee Benefits.............................17 4.7 Employee Matters.................................................17 4.8 Requirements to Effect Transaction...............................17 4.9 Accounting and Tax Matters.......................................17 Section 5 Covenants of Purchaser...........................................18 5.1 Covenants Between Date of Execution and Closing Date.............18 5.2 Covenants Relating to Operation of Website Between Date of Delivery of Computer Equipment and Closing Date .................18 5.3 Covenants After Closing..........................................18 Section 6 Purchaser Conditions Precedent...................................19 6.1 Representations and Warranties...................................19 6.2 Covenants and Conditions.........................................19 6.3 Proceedings......................................................19 6.4 No Material Adverse Change.......................................19 6.5 Approval by the Board of Directors and Corporate Lenders.........19 6.6 Consents and Approvals...........................................19 6.7 Closing Deliveries...............................................19 6.8 Employees and Agents.............................................19 Section 7 Seller Conditions Precedent......................................19 7.1 Representations and Warranties..................................19 7.2 Covenants and Conditions.........................................19 7.3 Proceedings......................................................20 7.4 Closing Deliveries...............................................20 Section 8 Closing Deliveries...............................................20 8.1 Deliveries of Seller.............................................20 8.2 Deliveries of Purchaser..........................................21 Section 9 Nature and Survival of Representations and Warranties; Settlement Relating to Seller Payables ..........................22 9.1 Nature and Survival..............................................22 9.2 Indemnification by Seller........................................22 9.3 Indemnification Procedure........................................23 9.4 Right of Setoff; Limitation of Seller's Indemnification Obligation.......................................................23 Section 10 Termination......................................................24 Section 11 Noncompetition...................................................24 11.1 Seller's Covenant not to Compete.................................24 11.2 Goodman's Covenant Not to Compete................................25 11.3 Reasonable Restraint.............................................25 11.4 Severability; Reformation........................................25 11.5 Term.............................................................26 11.6 Definitions......................................................26 Section 12 Nondisclosure of Confidential Information........................26 Section 13 Miscellaneous....................................................27 13.1 Notices..........................................................27 13.2 Further Assurances...............................................27 13.3 Each Party to Bear Costs.........................................27 13.4 Public Disclosures...............................................28 13.5 GOVERNING LAW....................................................28 13.6 Captions.........................................................28 13.7 Integration of Exhibits..........................................28 13.8 ENTIRE AGREEMENT/AMENDMENT.......................................28 13.9 Counterparts.....................................................28 13.10 Binding Effect/Assignment........................................28 13.11 No Rule of Construction..........................................28 13.12 Costs of Enforcement.............................................29 13.13 Amendments; Waivers..............................................29 13.14 Choice of Forum..................................................29 13.15 Service of Process...............................................29 13.16 Severability.....................................................29 13.17 Third Party Beneficiaries........................................29 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT, ("Agreement") made and executed as of the 9th day of August, 2000, is by and among PENTEGRA DENTAL GROUP, INC., a Delaware corporation ("Purchaser"), and DEXPO.COM, INC., a Delaware corporation ("Seller"). WITNESSETH: WHEREAS, Seller operates a business-to-business Internet marketing company providing an online auction, product promotion and other services to dental practices and other businesses in the dental services industry (the "Business"); and WHEREAS, Seller wishes to sell to Purchaser, and Purchaser wishes to acquire from Seller, all of the Assets (defined herein) of the Seller, all upon the terms and subject to the conditions set forth herein; NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1 - TERMS OF THE SALE AND PURCHASE OF THE ASSETS. The sale of the Assets of Purchaser shall occur on the 11th day of August, 2000 ("Closing Date"), unless another date is mutually agreed upon by Purchaser and Seller in writing, shall be based on the respective representations, warranties and agreements of Purchaser and Seller contained herein and shall be subject to the terms and conditions herein stated. 1.1 CONVEYANCE OF ASSETS. Subject to and upon the terms and conditions contained herein, on the Closing Date, Seller shall sell, convey, transfer, deliver and assign to Purchaser all of Seller's right, title and interest in and to the Assets (personal, tangible and intangible), including, without limitation, all items of personal property and other assets used in connection with Seller's Business (except as otherwise provided herein) (the "Assets"). Without limiting the foregoing, the Assets specifically include: (a) All of the personal property, plant, furniture, fixtures, equipment and goodwill of the Business, as set forth in EXHIBIT 1.1(A) to this Agreement; (b) The name "Dexpo.com, Inc.," including all derivations thereof, together with any and all other names, slogans, trademarks, service marks and logos used by Seller and appearing on Seller's website and as set forth in EXHIBIT 1.1(B) to this Agreement; (c) All inventories maintained by Seller for use in the Business, as set forth in EXHIBIT 1.1(C) to this Agreement; (d) Contracts (as defined herein) pertaining to or entered into by Seller in connection with the Business (excluding this Agreement and the agreements, instruments and documents executed and delivered by Seller pursuant to this Agreement), as set forth in EXHIBIT 1.1(D) to this Agreement; 4 (e) Accounts Receivable (as defined herein) of the Business, as set forth in EXHIBIT 1.1(E) to this Agreement; (f) The books and records of Seller; (g) All transferable licenses and other regulatory approvals necessary for or incident to the operation of the Business, as described in EXHIBIT 1.1(G) to this Agreement; (h) All administrative policy and procedure manuals, trade secrets, trademarks, service marks, marketing and promotional materials (including audiotapes, videotapes and printed materials) and all other property rights required for or incident to the marketing of the products and services of the Business, and all books and records relating to the Business, as described in EXHIBIT 1.1(H) to this Agreement; and (i) The domain name "www.dexpo.com" and all other affiliated domains listed on EXHIBIT 1.1(I) used in the Business. 1.2 EXCLUDED ASSETS. There shall be excluded from the Assets to be transferred and conveyed hereunder, and Seller shall retain all of its right, title and interest in and to all cash and cash equivalents in the amount set forth on Seller's balance sheet as of the Closing Date. The amount of cash and cash equivalents retained by Seller until the Closing Date shall be no less than $5,000. 1.3 PURCHASE PRICE. Assumption of Liabilities. (a) PURCHASE PRICE. As consideration for the sale of the Assets by Seller, Purchaser shall, on the Closing Date, deliver to the Seller, or such party or parties designated in writing prior to the Closing Date by the Seller (a "Designee" or "Designees"), an aggregate of 750,000 shares of the common stock, $0.001 par value, of Purchaser (the "Common Stock"). The Common Stock shall have been duly authorized, validly issued and non-assessable at the time of delivery. The value of each share of Common Stock shall be the closing price per share of Purchaser's common stock as of the day prior to the Closing Date as reported by the American Stock Exchange, for a total value to be determined as of the day prior to the Closing Date (the "Purchase Price"). In addition, on the Closing Date Purchaser shall deposit an additional 500,000 shares of common stock of Purchaser into an escrow account (the "Escrow Shares") in accordance with the terms and conditions set forth in the an escrow agreement, substantially in the form attached hereto as EXHIBIT 8.1(H) (the "Escrow Agreement"), which Escrow Shares shall be released from the escrow to Designees (subject to such limitations as are set forth in SECTION 9.4 of this Agreement) on the six month and one year anniversaries of the Closing Date (the "Six Month Date" and "One Year Date," respectively) as follows: (i) on the Six Month Date, 100,000 Escrow Shares, if any 15 Day Average Trading Price of Purchaser's common stock (as such term is defined in the Escrow Agreement, and the highest 15 Day Average Trading Price, the "Trigger Amount") between the Closing Date and the Six Month Date was equal to at least $2.00 per share, plus an additional 100,000 Escrow Shares for any 15 Day Average Trading Price that is $0.50 over the previously described $2.00 level, and (ii) on the One Year Date, 100,000 Escrow Shares, if any 15 Day Average Trading Price of Purchaser's common stock between 5 the Six Month Date and the One Year Date was equal to at least $2.00 per share, plus an additional 100,000 Escrow Shares for any 15 Day Average Trading Price that is $0.50 over the Trigger Amount, with distributions of Escrow Shares to Designees not to exceed the total number of Escrow Shares; provided, however, if Purchaser has released Escrow Shares pursuant to SECTION 1.3(a)(i), Purchaser shall only be obligated to release Escrow Shares pursuant to SECTION 1.3(A)(II) in the event that the 15 Day Average Trading Price for Purchaser's common stock has risen to a $0.50 increment over the Trigger Amount (i.e., to $2.50, $3.00, $3.50 and $4.00). In the event that the 15 Day Average Trading Price during any point following the Closing Date but before the One Year Date does not exceed $2.00 per share, then all Escrow Shares shall be returned to Purchaser. (b) TAX EFFECTS. The Purchase Price shall be allocated for federal income tax purposes as set forth in EXHIBIT 1.3(B). (c) ASSUMPTION OF LIABILITIES. Purchaser shall assume only those liabilities, commitments or obligations of Seller listed on EXHIBIT 1.3(C). Seller shall extinguish all accounts payable and all other liabilities of the Seller, except those listed on EXHIBIT 1.3(C), prior to the Closing Date. Purchaser shall not assume any other liabilities, commitments or obligations of Seller, including, without limitation, Seller's liabilities, obligations or commitments for: (i) employee or independent contractor salaries, wages or bonuses, payroll taxes or benefits payable to employees or independent contractors for services rendered in connection with the Business; (ii) any liability based upon or arising out of any tortious or wrongful actions related to the Business, its employees or agents occurring prior to the Closing Date; (iii) except as set forth on EXHIBIT 1.3(c), any liability for the payment of any taxes imposed by law on Seller arising from or by reason of the operation of the Business prior to the Closing Date or the transactions contemplated by this Agreement; nor (iv) any liability incurred or to be incurred pursuant to any claims, suits or actions based on the operation of the Business, its employees or agents prior to the Closing Date, whether or not pending or threatened against Seller as of the Closing Date, except as listed on EXHIBIT 1.3(C). 1.4 SUBSEQUENT ACTIONS. (a) REGISTRATION RIGHTS. The parties shall enter into a registration rights agreement, substantially in the form attached hereto as EXHIBIT 1.4(A) (the "Registration Rights Agreement"), which shall include, inter alia, requirements that Purchaser file a registration statement covering the resale of the Common Stock to be issued to Designees within 75 calendar days of the Closing Date and that Purchaser use its best efforts to cause such registration statement to be declared effective as promptly thereafter as possible. (b) FURTHER ASSURANCES. If, at any time after the Closing Date, Purchaser shall be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in Purchaser its right, title or interest in, to or under any of the Assets or otherwise to carry out this Agreement, in return for the consideration set forth in this Agreement, the 6 officers and directors of Seller shall be authorized to execute and deliver, in the name and on behalf of Seller or otherwise, to carry out all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of Seller or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under the Assets in Purchaser or otherwise to carry out this Agreement. SECTION 2 - REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to Purchaser the following: 2.1 CORPORATE EXISTENCE; GOOD STANDING. Seller is a corporation duly organized and validly existing under the laws of the State of Delaware. As of the date of this Agreement, Seller is not in good standing under the laws of the State of Delaware. Upon payment of certain franchise taxes owed to the State of Delaware, which payment shall be made prior to Closing, Seller will be a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller has all necessary corporate powers to own the Assets and to carry on the Business as it is now being conducted. Seller is qualified to do business as a foreign corporation in each other state or jurisdiction where qualification is required in connection with the Business, and in which the failure to do so would have a material adverse effect on the financial condition of the Business or the Assets. 2.2 POWER AND AUTHORITY FOR TRANSACTIONS. Seller has the corporate power to execute, deliver and perform this Agreement and all agreements and other documents executed and delivered by it pursuant to this Agreement or to be executed and delivered on the Closing Date, and has taken all action required by law, its Certificate of Incorporation, its Bylaws or otherwise, to authorize the execution, delivery and performance of this Agreement and such related documents. Seller has the corporate power to enter into and perform this Agreement and the other agreements to be executed and delivered in connection herewith. Seller has obtained the approval of its stockholders necessary to the consummation of the transactions contemplated herein. This Agreement and all agreements and documents executed and delivered in connection herewith have been, or will be as of the Closing Date, duly executed and delivered by Seller, and constitute or will constitute the legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. The execution and delivery of this Agreement, and the agreements executed and delivered pursuant to this Agreement or to be executed and delivered on the Closing Date, do not, and the consummation of the actions contemplated hereby will not, violate any provision of the Certificate of Incorporation or Bylaws of Seller or any provisions of, or result in the acceleration of, any obligation under any mortgage, lien, lease, agreement, rent, instrument, order, arbitration award, judgment or decree to which Seller is a party or by which Seller is bound, or violate any material restrictions of any kind to which Seller is subject, or result in any lien or encumbrance on any of Seller's assets. 7 2.3 PERMITS, LICENSES AND GOVERNMENTAL AUTHORIZATIONS. All permits, concessions, grants, franchises, licenses and other governmental authorizations and approvals required to be maintained by Seller and, individually or in the aggregate, material to the Business, (collectively, "Permits") have been obtained and are in full force and effect and are listed on EXHIBIT 2.3. There are no proceedings pending or, to the knowledge of Seller, threatened, which may result in the revocation, cancellation or suspension, or any adverse modification, of any Permits listed on EXHIBIT 2.3. 2.4 CORPORATE RECORDS. True and correct copies of the Certificate of Incorporation, Bylaws and minutes of Seller relating to the Business and all amendments thereto of Seller have been delivered to Purchaser. The minute books of Seller contain all accurate minutes of the meetings of and consents to actions taken without meetings of the Board of Directors and stockholders of Seller, with regard to the Business, since its formation. The books of account of the Business have been kept accurately in the ordinary course of business and the revenues, expenses, assets and liabilities of Seller have been properly recorded in such books. 2.5 CONSENTS. Except as set forth in EXHIBIT 2.5, no consent, authorization, permit, license or filing with any governmental authority, any lender, lessor, any manufacturer or supplier or any other person or entity is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement. 2.6 SELLER'S FINANCIAL INFORMATION. Seller has heretofore furnished Purchaser with financial information about the Business, which information is set forth in the financial statements on EXHIBIT 2.6 attached hereto (the "Financial Statements"), including the unaudited Balance Sheet ("Balance Sheet") as of March 31, 2000 ("Balance Sheet Date") and the Statements of Operations ("Statements of Operations") as of the dates set forth therein. The Financial Statements for the periods have been prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"), reflect all contingent liabilities of the Business required to be reported in accordance with GAAP as of their respective dates and present fairly, in all material respects, the financial position of the Business as of such dates and the Statements of Operations and cash flows for the period or periods reflected therein. 2.7 LEASES. A list of all leases pursuant to which Seller leases, as lessor or lessee, personal property used in operating the Business is attached as EXHIBIT 2.7. All such leases listed are valid and enforceable in accordance with their respective terms, and there is not under any such lease any existing default by Seller, as lessor or lessee, or any condition or event of which Seller has knowledge which with notice or lapse of time, or both, would constitute a default, in respect of which Seller has not taken adequate steps to cure such default or to prevent a default from occurring. 2.8 CONDITION OF ASSETS. All tangible assets transferred to Purchaser under this Agreement are, or when delivered to Purchaser were, in all material respects in good condition and repair subject to normal wear and tear and conform with all applicable ordinances, regulations and other laws, and Seller has no knowledge of any latent defects therein. 2.9 TITLE TO AND ENCUMBRANCES ON PROPERTY. Seller does not own any real property. Seller has good, valid and marketable title to all of the Assets, free 8 and clear of any liens, claims, charges, exceptions or encumbrances, except for those, if any, which are set forth in EXHIBIT 2.9 attached hereto. 2.10 INVENTORIES. All inventories of Seller used in the conduct of the Business are reflected on the Balance Sheet in accordance with GAAP. Such items of Seller's inventory have been acquired in the ordinary course of its business, are adequate for the reasonable requirements of its business and may be used for their intended purposes. All of said inventory is in good, current, standard and merchantable condition and is not obsolete or defective. 2.11 INTELLECTUAL PROPERTY RIGHTS; NAMES. Except as set forth on EXHIBIT 2.11, Seller has no right, title or interest in or to patents, patent rights, corporate names, domain names, URLs, assumed names, manufacturing processes, trade names, trademarks, service marks, inventions, copyrights, formulas, trade secrets or similar items, in connection with the conduct of the Business and all such items as set forth on EXHIBIT 2.11 are the only such items necessary for the conduct of the Business. Set forth in EXHIBIT 2.11 is a listing of all names of all predecessor companies of Seller that relate to the Business, including the names of any entities from whom Seller previously acquired significant assets. Except for off-the-shelf software licenses and except as set forth on EXHIBIT 2.11, Seller is not a licensee in respect of any patents, trademarks, service marks, trade names, copyrights or applications therefor in connection with the conduct of the Business and no such licenses are necessary for the conduct of the Business. No claim is pending or, to Seller's knowledge, has been made or threatened to the effect that the present or past operations of Seller in connection with the conduct of the Business infringe upon or conflict with the asserted rights of others to any patents, patent rights, trade names, trademarks, service marks, inventions, licenses, copyrights, know-how and trade secrets. Seller has the sole and exclusive right to use all such proprietary rights without infringing or violating the rights of any third parties and no consents of any third parties are required for the use thereof by Purchaser. 2.12 PAYROLL INFORMATION; EMPLOYEES. In connection with the conduct of the Business: (a) Seller is in compliance with all applicable laws, rules, regulations and ordinances regarding employment and employment practices; (b) Seller has not engaged in any unfair labor practices; (c) there are no unfair labor practices charges or complaints pending or threatened against Seller; and (d) Seller has never been a party to any agreement with any union, labor organization or collective bargaining unit. 2.13 LEGAL PROCEEDINGS. Other than as set forth on EXHIBIT 2.13, neither Seller, nor the Business, nor any of the Assets are subject to any pending, nor does Seller have knowledge of any threatened, litigation, governmental investigation, condemnation or other proceeding against or relating to or affecting the Business, or any of the Assets, the operations, business or prospects of the Business or the transactions contemplated by this Agreement, 9 and, to the knowledge of Seller, no basis for any such action exists, nor is there any legal impediment of which Seller has knowledge to the continued operation of the Business in its ordinary course. 2.14 CONTRACTS. Seller has delivered to Purchaser true copies of all written, and disclosed to Purchaser all oral, outstanding contracts, obligations and commitments of Seller relating to the Business ("Contracts"), all of which are listed or incorporated by reference on EXHIBIT 2.7 (in the case of leases) and EXHIBIT 1.1(D) (in the case of Contracts other than leases) attached hereto. Except as otherwise indicated on such Exhibits, all of such Contracts are valid, binding and enforceable in accordance with their terms and are in full force and effect, and no defenses, offsets or counterclaims have been asserted or may be made by any party thereto. Except as indicated on such Exhibits, there is not under any such Contract any existing default by Seller, or any condition or event of which Seller has knowledge which with notice or lapse of time, or both, would constitute a default. There are no outstanding balances under any such Contracts and Seller has extinguished all of its liabilities thereunder. All creditors of the Business have been paid in full and, to Seller's knowledge, all potential claims have been satisfied. Except as indicated on EXHIBIT 2.5, there is not under any such Contract a requirement that a party to such Contract other than Seller consent to the assignment of such Contract to Purchaser in connection with the consummation of the transactions contemplated by this Agreement. Seller has no knowledge of any default by any other party to such Contracts. Seller has not received notice of the intention of any party to any Contract to cancel or terminate any Contract and has no reason to believe that any amendment or change to any Contract is contemplated by any party thereto. Other than those Contracts, obligations and commitments of Seller listed on EXHIBIT 2.7 and EXHIBIT 1.1(D), Seller is not a party to any material written or oral agreement contract, lease or arrangement that relates in any way to the Business. 2.15 SUBSEQUENT EVENTS. Except as set forth on EXHIBIT 2.15, Seller has not, in connection with the Business, since the Balance Sheet Date: (a) Incurred any material obligation or liability (absolute, accrued, contingent or otherwise) or entered into any contract, lease, license or commitment, or incurred any indebtedness relating to the Business, except in connection with the performance of this Agreement, other than in the ordinary course of business; (b) Discharged or satisfied any material lien or encumbrance, or paid or satisfied any material obligation or liability in connection with the Business (absolute, accrued, contingent or otherwise) other than (i) liabilities shown or reflected on the Balance Sheet or (ii) liabilities incurred since the Balance Sheet Date in the ordinary course of business; (c) Lost or terminated any employee, customer or supplier of the Business, that has, individually or in the aggregate, had a material adverse effect on its business; (d) Mortgaged, pledged or subjected to any lien, charge or other encumbrance any of the Assets; 10 (e) Sold or contracted to sell or transferred or contracted to transfer any of the Assets used in the conduct of the Business, or canceled any debts or claims or waived any rights, except in the ordinary course of business; (f) Except in the ordinary course of business consistent with past practices, granted any increase in the rates of pay of employees, independent contractors or agents whose employment relates to the Business, or by means of any bonus or pension plan, contract or other commitment, increased the compensation of such person; (g) Authorized or incurred any capital expenditures in excess of $5,000 relating to the Business; (h) Except for this Agreement and any other agreement executed and delivered pursuant to this Agreement, entered into any material transaction related to the Business other than in the ordinary course of business or permitted hereunder; (i) Experienced damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the Business, or experienced any other material adverse change in the financial condition, assets, prospects or liabilities of the Business; or (j) Suffered any material adverse change related to the Business or to the Assets. 2.16 ACCOUNTS RECEIVABLE/PAYABLE. The Balance Sheet reflects the amount, as of the Balance Sheet Date and determined in conformity with GAAP and the past practices employed by Seller, of Seller's (i) accounts receivable, net of allowances for uncollectible and doubtful amounts, related to the Business ("Accounts Receivable") and (ii) current accounts payable and current accrued liabilities related to the Business ("Accounts Payable"). EXHIBIT 2.16 contains a true and accurate (i) statement of all Accounts Receivable related to the Business, (ii) statement of all Accounts Payable related to the Business and (iii) statement of the working capital related to the Business ("Working Capital") of Seller as of the Balance Sheet Date. Seller maintains its accounting records in sufficient detail to substantiate the Accounts Receivable reflected on the Balance Sheet and has given and will give to Purchaser full and complete access to those records, including the right to make copies therefrom. Since the Balance Sheet Date, Seller has not changed any principle or practice with respect to the recordation of accounts receivable or the calculation of reserves therefor, or any material collection, discount or write-off policy or procedure. 2.17 TAXES. Seller has filed all tax returns (including tax reports and other statements) required to be filed by it, and made all payments of taxes (including any interest, penalty or addition thereto) required to be made by it, on or before the date of this Agreement, with respect to income taxes, real and personal property taxes, sales taxes, use taxes, employment taxes, excise taxes and other taxes. All such tax returns are complete and accurate in all respects and properly reflect the relevant taxes for the periods covered thereby. Seller has no tax liability, except for real and personal property taxes for the current period not yet due and payable and sales, use, employment and similar 11 taxes for periods as to which such taxes have not yet become due and payable. The unpaid taxes of Seller did not, as of the Balance Sheet Date, exceed the reserve for taxes (rather than any reserve for deferred taxes established to reflect timing differences between book and taxable income) set forth on the face of the Balance Sheet (rather than in any notes thereto), as adjusted for the passage of time through the Closing Date (in accordance with the past custom and practice of Seller). Seller has not received any notice that any tax deficiency or delinquency has been asserted against Seller. There are no audits relating to taxes of Seller threatened, pending or in process. Seller is not currently the beneficiary of any waiver of any statute of limitations in respect of taxes nor of any extension of time within which to file any tax return or to pay any tax assessment or deficiency. There are no liens or encumbrances relating to taxes on or threatened against any of the assets of Seller. Seller has withheld and paid all taxes required by law to have been withheld and paid by it. Neither Seller nor any predecessor of Seller is or has been a party to any tax allocation or sharing agreement or a member of an affiliated group of corporations filing a consolidated federal income tax return. Seller has delivered to Purchaser correct and complete copies of Seller's three most recently filed annual state and federal income tax returns, together with all examination reports and statements of deficiencies assessed against or agreed to by Seller during the three calendar year period preceding the date of this Agreement. Seller has neither made any payments, nor, to its knowledge, is obligated to make any payments nor is a party to any agreement that under any circumstance could obligate it to make any payments that will not be deductible under the Internal Revenue Code of 1986, as amended (the "Code"), section 280G. 2.18 LIABILITIES; DEBT. Except to the extent reflected or reserved against on the Balance Sheet, and, except as set forth in EXHIBIT 2.18, Seller did not have, as of the Balance Sheet Date, and has not incurred since that date and will not have occurred as of the Closing Date, any liabilities or obligations of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, related to the Business, other than those incurred in the ordinary course of business. Seller does not know, or have grounds to know, of any basis for the assertion against Seller as of the Balance Sheet Date, of any claim or liability of any nature related to the Business in any amount not fully reflected or reserved against on the Balance Sheet, or of any claim or liability of any nature arising since that date other than those incurred in the ordinary course of business or contemplated by this Agreement. All indebtedness of Seller related to the Business (including without limitation, indebtedness for borrowed money, guaranties and capital lease obligations) is described on EXHIBIT 2.18 attached hereto. 2.19 INSURANCE POLICIES. EXHIBIT 2.19 lists all insurance policies in effect as of the date hereof relating to the Business or the Assets. Valid and enforceable policies are outstanding and duly in force and will remain duly in force through the Closing Date. All such policies related to the Business, including coverage amounts, are described in EXHIBIT 2.19 attached hereto and true and correct copies have been delivered to Purchaser. Seller has not received notice or other communication from the issuer of any such insurance policy canceling or amending such policy or threatening to do so. Seller does not have any outstanding claims, settlements or premiums owed against any insurance policy. 12 2.20 EMPLOYEE BENEFIT PLANS. Except as set forth on EXHIBIT 2.20 attached hereto, Seller has neither established, nor maintains, nor is obligated to make contributions to or under or otherwise participate in, with regard to the Business, (a) any bonus or other type of compensation or employment plan, program, agreement, policy, commitment, contract or arrangement (whether or not set forth in a written document); (b) any pension, profit-sharing, retirement or other plan, program or arrangement; or (c) any other employee benefit plan, fund or program, including, but not limited to, those described in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). All such plans listed on EXHIBIT 2.20 have been operated and administered in all material respects in accordance with all applicable laws, rules and regulations, including without limitation, ERISA, the Code, Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended, the Age Discrimination in Employment Act of 1967, as amended, and the related rules and regulations adopted by those federal agencies responsible for the administration of such laws. 2.21 ADVERSE AGREEMENTS. Seller is not, and will not be as of the Closing Date, a party to any agreement or instrument or subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree, rule or regulation that materially and adversely affects the condition (financial or otherwise), operations, assets, liabilities, business or prospects of the Business. 2.22 COMPLIANCE WITH LAWS IN GENERAL. In connection with the conduct of the Business, Seller is not in default under any applicable law, rule, regulation and licensing requirements, including, without limitation, the Federal Environmental Protection Act, the Occupational Safety and Health Act, the Americans with Disabilities Act and any environmental laws that individually, or, in the aggregate, could have a material adverse effect on the Business or the Assets. Seller has not received any notice of a violation of any federal, state and local laws, regulations and ordinances relating to the operations of the Business and the Assets and no notice of any pending inspection or violation of any such law, regulation or ordinance has been received by Seller. 2.23 NO UNTRUE REPRESENTATIONS. No representation or warranty by Seller in this Agreement, and no Exhibit or certificate issued or executed by, or information furnished by, officers or directors of Seller and furnished or to be furnished to Purchaser pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained therein not misleading. 2.24 CUSTOMERS. A complete and accurate list of substantially all of the customers of the Business showing, with respect to each, the name, physical address, e-mail address and aggregate dollar volume of business from such customer has been delivered by Seller to Purchaser. 2.25 BANKING RELATIONS. Set forth in EXHIBIT 2.25 is a complete and accurate list of all arrangements that Seller has with any bank or other financial institution related to the Business, indicating with respect to each relationship the type of arrangement maintained (such as checking account, borrowing arrangements, safe deposit box, etc.) and the person or persons authorized in respect thereof. 2.26 ECONOMIC RISK; SOPHISTICATION. Seller or any Designee who shall receive stock hereunder (such Seller or Designee may referred to hereunder individually as the "Receiving Party"), has executed an investor questionnaire, the form of which is attached hereto as EXHIBIT 2.26 (the "Investor Questionnaire"), representing the following: 13 (a) they have had an adequate opportunity to ask questions of and receive answers from the officers of Purchaser concerning any and all matters relating to the background and experience of the officers and directors of Purchaser, the plans for the operations of the business of Purchaser and any plans for additional acquisitions and the like; (b) they have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to its satisfaction; (c) Purchaser's common stock being acquired by the Receiving Party in connection with this transaction is being acquired by the Receiving Party for its own investment purposes only and not with a view to resale or distribution; (d) they understand that the shares of Purchaser's common stock acquired pursuant to this Agreement have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), the securities laws of any state thereof or the securities laws of any other jurisdiction; (e) they understand and agree that the shares of Purchaser's common stock must be held indefinitely unless they are subsequently registered under the Securities Act and state securities laws or an exemption from registration under the Securities Act and state securities laws covering the sale of shares of Purchaser's common stock is available; (f) they understand that legends stating that the shares of Purchaser's common stock have not been registered under the Securities Act nor state securities laws and setting out or referring to the restrictions on the transferability and resale of the shares of Purchaser's common stock will be placed on the shares of Purchaser's common stock; and (g) they are each an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. 2.27 LOCK-UP AGREEMENT. Each Receiving Party has executed an agreement, attached hereto as EXHIBIT 2.27 (the "Lock-Up Agreement"), whereby the Receiving Party has agreed not to sell, assign or otherwise transfer the Purchaser's common stock except as described in the Lock-Up Agreement. 2.28 BROKER FEE. No third party shall be entitled to receive any brokerage commissions, finder's fees, fees for financial advisory services or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Seller or its Designees. 14 SECTION 3 - REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents and warrants to Seller the following: 3.1 CORPORATE EXISTENCE: GOOD STANDING. Purchaser is a corporation duly organized and existing and in good standing under the laws of the State of Delaware. Purchaser has authorized common stock and has issued common stock in the amounts set forth on EXHIBIT 3.1 hereto. 3.2 POWER AND AUTHORITY. Purchaser has corporate power to execute, deliver and perform this Agreement and all agreements and other documents executed and delivered by it pursuant to this Agreement, and has taken all actions required by law, its Certificate or Articles of Incorporation, its Bylaws or otherwise, to authorize the execution, delivery and performance of this Agreement and such related documents. Except as set forth in EXHIBIT 3.2, the execution and delivery of this Agreement and the agreements related hereto executed and delivered pursuant to this Agreement do not and, subject to the receipt of consents to assignments of leases and other contracts where required and the receipt of regulatory approvals where required, the consummation of the transactions contemplated hereby will not, violate any provision of the Certificate of Incorporation or Bylaws of Purchaser or any provisions of, or result in the acceleration of, any obligation under any mortgage, lien, lease, agreement instrument, order, arbitration award, judgment or decree to which Purchaser is a party or by which it is bound, or violate any restrictions of any kind to which Purchaser is subject. 3.3 VALID ISSUANCE OF THE SECURITIES. When issued, sold and delivered to Seller or Designees in accordance with this Agreement, the Common Stock of the Purchaser shall be duly and validly issued, fully paid and non-assessable. Assuming the accuracy of Seller's representations and warranties, the offer, issuance and delivery to Seller or the Designees pursuant to this Agreement of the Common Stock, and, assuming compliance by Seller and the Designees with the terms of this Agreement and applicable law, the Common Stock is exempt from registration under the Securities Act. 3.4 GOVERNMENTAL AUTHORITIES; CONSENTS. Except for filings under federal and applicable state securities laws as may be required pursuant to this Agreement or the Registration Rights Agreement, Purchaser is not required to submit any notice, report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or the consummation of the transactions contemplated hereby or the offer, issuance and delivery of the Purchaser's Common Stock. No consent, approval or authorization of any governmental or regulatory authority or any other party or person is required to be obtained by Purchaser in connection with its execution, delivery and performance of this Agreement or the transactions contemplated hereby. 3.5 SEC FILINGS; LISTING REQUIREMENTS. Purchaser has made all filings required to be made by it under the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the securities laws of any state, and any rules and regulations promulgated thereunder. Purchaser's reports and other documents filed with the Securities Exchange Commission ("SEC") pursuant to the Exchange Act conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the SEC thereunder, and none of such documents 15 contained any untrue statement of material fact or omitted to state a material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. Purchaser is in material compliance with all reporting requirements under the Exchange Act and has maintained material listing requirements for the continued listing of its Common Stock on the American Stock Exchange. 3.6 BROKERAGE. No third party shall be entitled to receive any brokerage commissions, finder's fees, fees for financial advisory services or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Purchaser. 3.7 NO UNTRUE REPRESENTATIONS. No representation or warranty by Purchaser in this Agreement, and no Exhibit or certificate issued by officers or directors of Purchaser and furnished or to be furnished to Seller pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained therein not misleading. SECTION 4 - COVENANTS OF SELLER. Seller agrees that between the date hereof and the Closing Date: 4.1 CONSUMMATION OF AGREEMENT. Seller shall use its best efforts to cause the consummation of the transactions contemplated hereby in accordance with their terms and conditions. 4.2 BUSINESS OPERATIONS. The Business is closed and is no longer operating and will remain closed pending the Closing. Seller shall not enter into any lease, contract, indebtedness, commitment, purchase or sale or acquire or dispose of any capital asset related to the Business except in the ordinary course of business. Seller shall preserve the business and assets of the Business intact and shall not take any action that would have an adverse effect on the business or assets of the Business, including without limitation, any action the primary purpose or effect of which is to generate or preserve cash; provided that Seller may continue to operate in the ordinary course of business. Seller shall preserve intact the relationships with customers, suppliers and others having significant business relations with the Business. Seller shall collect its receivables and pay its trade payables related to the Business in the ordinary course of business. Seller shall not introduce any new method of management, operations or accounting in the Business. 4.3 ACCESS AND NOTICE. Seller shall permit Purchaser and its authorized representatives access to, and make available for inspection, at reasonable times and during normal business hours, all of the Assets and business of the Business, including employees, independent contractors, customers and suppliers and permit Purchaser and its authorized representatives to inspect and make copies of all documents, records and information with respect to the business or Assets of the Business as Purchaser or its representatives may request. Seller shall promptly notify Purchaser in writing of (a) any notice or communication relating to a default or event that, with notice or lapse of time or both, could become a default, under any contract, commitment or obligation to which Seller 16 is a party that is related to the Business and (b) any adverse change in the business or financial condition of the Business or the conditions of the Assets. 4.4 APPROVALS OF THIRD PARTIES AND PERMITS AND CONSENTS. Seller shall use its best efforts to secure all necessary approvals and consents of third parties to the consummation of the transactions contemplated hereby, which consents are described on EXHIBIT 2.5. Seller shall use its best efforts to obtain all licenses, permits, approvals or other authorizations required under any law, rule, regulation or otherwise to enable Purchaser to conduct the business of Seller. 4.5 ACQUISITION PROPOSALS. Seller shall not, and shall cause Seller's employees, agents and representatives not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer that materially affects the transaction contemplated hereby, including without limitation, a merger, acquisition, consolidation or similar transaction involving, or the purchase of all or any significant portion of the Assets or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to such proposal or offer, and Seller will immediately cease any such activities, discussions or negotiations heretofore conducted with respect to any of the foregoing. Seller shall immediately notify Purchaser if any such inquiries or proposals are received. 4.6 FUNDING OF ACCRUED EMPLOYEE BENEFITS. Seller hereby covenants and agrees that it has or will take whatever steps are necessary to pay or fund completely for any accrued benefits, where applicable, or vested accrued benefits for which Seller or any entity might have any liability whatsoever arising from any insurance, pension plan, severance plan, employment tax or similar liability of Seller to any employee or other person or entity allocable to services performed in connection with the Business prior to the Closing Date. Seller acknowledges that the purpose and intent of this covenant is to assure that Purchaser shall have no liability whatsoever at any time after the Closing Date with respect to any of Seller's employees or similar persons or entities. 4.7 EMPLOYEE MATTERS. Seller shall not, without the prior written approval of Purchaser, increase the cash compensation of an employee or an independent contractor of Seller who works in the Business, adopt, amend or terminate any compensation plan, employment agreement, independent contractor agreement, employee policies and procedures or employee benefit plan, take any action that could deplete the assets of any employee benefit, or fail to pay any premium or contribution due or file any report with respect to any employee benefit plan, or take any other actions with respect to its employees or employee matters who work in the Business, which might have an adverse effect upon Seller, its business, assets or prospects. 4.8 REQUIREMENTS TO EFFECT TRANSACTION. Seller shall use its best efforts to take, or cause to be taken, all actions necessary to effect the transaction contemplated hereby under applicable law, including, without limitation, the filing with the appropriate government officials of all necessary documents in form approved by counsel for the parties to this Agreement. 4.9 ACCOUNTING AND TAX MATTERS. Seller will not change in any material respect the accounting methods or practices followed by Seller related to the Business (including any material change in any assumption underlying, or any method of calculating, any bad debt, contingency or other reserve), except as 17 may be required by GAAP. Seller will not make any material tax election except in the ordinary course of business consistent with past practice, change any material tax election already made, adopt any tax accounting method related to the Business except in the ordinary course of business consistent with past practice, change any tax accounting method, enter into any closing agreement, settle any tax claim or assessment or consent to any tax claim or assessment or any waiver of the statute of limitations for any such claim or assessment. Seller will duly, accurately and timely (without regard to any extensions of time) file all returns, information statements and other documents relating to taxes of Seller required to be filed by it, and pay all taxes required to be paid by it, on or before the Closing Date. SECTION 5 - COVENANTS OF PURCHASER. 5.1 COVENANTS BETWEEN DATE OF EXECUTION AND CLOSING DATE. Purchaser agrees that between the date hereof and the Closing Date: (a) CONSUMMATION OF AGREEMENT. Purchaser shall use its best efforts to cause the consummation of the transactions contemplated hereby in accordance with its terms and provisions. Purchaser will use its best efforts to take, or cause to be taken, all actions necessary to effect the transaction contemplated hereby, under applicable law, including, without limitation, the filing with the appropriate government officials all necessary documents in form approved by counsel for the parties to this Agreement. (b) APPROVALS OF THIRD PARTIES AND PERMITS AND CONSENTS. Purchaser shall use its best efforts to secure all necessary approvals and consents of third parties to the consummation of the transactions contemplated hereby. 5.2 COVENANTS RELATING TO OPERATION OF WEBSITE BETWEEN DATE OF DELIVERY OF COMPUTER EQUIPMENT AND CLOSING DATE.(a) For the period between July 10, 2000 and the Closing Date Purchaser has hosted and will continue to host Seller's websites operated at the domain names "www.dexpo.com" and "www.dexpo.net" other affiliated domains; provided, however, that Seller assumes all responsibility for, and all claims, obligations and liabilities that may arise from the operation of the websites operated at the domain names "www.dexpo.com" and "www.dexpo.net" and other affiliated domains, including, but not limited to, any orders placed thereat in the ordinary course of business or any violations of intellectual property rights of third parties up to and until the Closing Date. 5.3 COVENANTS AFTER CLOSING. Purchaser agrees that following the Closing: (a) FILING OF FORM D. Purchaser shall file a Form D with respect to the Common Stock as required under Regulation D and to provide a copy thereof to Seller or the Designees promptly after such filing. (b) REGISTRATION OF COMMON STOCK. Purchaser shall file a registration statement covering the resale of the Common Stock to be issued to Designees within 75 days of the Closing Date and shall use its best efforts to cause such registration statement to be declared effective as promptly thereafter as possible. 18 SECTION 6 - PURCHASER CONDITIONS PRECEDENT. The obligations of Purchaser hereunder are subject to the fulfillment at or prior to the Closing Date of each of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller contained herein shall have been true and correct in all respects when initially made and shall be true and correct in all respects as of the Closing Date. 6.2 COVENANTS AND CONDITIONS. Seller shall have performed and complied with all covenants and conditions required by this Agreement to be performed and complied with by Seller prior to the Closing Date. 6.3 PROCEEDINGS. No action, proceeding or order by any court or governmental body shall have been threatened orally or in writing, asserted, instituted or entered to restrain or prohibit the carrying out of the transactions contemplated hereby. 6.4 NO MATERIAL ADVERSE CHANGE. No material adverse change in the condition (financial or otherwise), operations, Assets, liabilities, business or prospects of Seller relating to the Business shall have occurred since the Balance Sheet Date. 6.5 APPROVAL BY THE BOARD OF DIRECTORS AND CORPORATE LENDERS. This Agreement and the transactions contemplated hereby shall have been approved by the Board of Directors of Purchaser or a committee thereof and, if necessary, Purchaser's corporate lenders. 6.6 CONSENTS AND APPROVALS. Seller shall have obtained all necessary government and other third-party approvals and consents, including, without limitation, the consents listed on EXHIBIT 2.5. 6.7 CLOSING DELIVERIES. Purchaser shall have received all documents, duly executed in form satisfactory to Purchaser and its counsel, referred to in SECTION 8.1. 6.8 EMPLOYEES AND AGENTS. As of the Closing Date, Seller shall have terminated all employees, consultants and independent contractors identified on EXHIBIT 6.8(A). Seller shall be responsible for any and all payments due to such employees, including, but not limited to, any severance payments due and accrued vacation payments. Seller shall have each employee listed on EXHIBIT 6.8(A) execute a termination agreement, substantially in the form attached hereto as EXHIBIT 6.8(B) (the "Termination Agreement"), releasing all claims against Seller related to their employment. SECTION 7 - SELLER CONDITIONS PRECEDENT. The obligations of Seller hereunder are subject to fulfillment at or prior to the Closing Date of each of the following conditions: 7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of Purchaser contained herein shall have been true and correct in all respects when initially made and shall be true and correct in all respects as of the Closing Date. 7.2 COVENANTS AND CONDITIONS. Purchaser shall have performed and complied with all covenants and conditions required by this Agreement to be performed and complied with by Purchaser prior to the Closing Date. 19 7.3 PROCEEDINGS. No action, proceeding or order by any court or governmental body shall have been threatened orally or in writing, asserted, instituted or entered to restrain or prohibit the carrying out of the transactions contemplated hereby. 7.4 CLOSING DELIVERIES. Seller shall have received all documents, duly executed in form satisfactory to Seller and its counsel, referred to in SECTION 8.2. SECTION 8 - CLOSING DELIVERIES. 8.1 DELIVERIES OF SELLER. At the closing of the transactions contemplated hereby (the "Closing"), Seller shall deliver to Purchaser the following, all of which shall be in a form satisfactory to counsel to Purchaser: (a) a copy of the resolutions of the Board of Directors of Seller authorizing the execution, delivery and performance of this Agreement and all related documents and agreements; (b) a certificate of the Secretary of Seller certifying as to the incumbency of the directors and officers of Seller, certifying as to the signatures of such directors and officers who have executed documents delivered at the Closing on behalf of Seller, and certifying that certain documents provided to Purchaser, including Seller's incorporation documents, Bylaws and the resolutions referred to in subsection (a) above, are true and correct copies of the originals thereof; (c) a certificate of the President of Seller, dated as of the Closing Date, as to (i) the truth and correctness of the representations and warranties of Seller contained herein; (ii) the performance of and compliance by Seller with all covenants contained herein; and (iii) the satisfaction of all conditions precedent of Seller contained herein; (d) a certificate, dated within 10 days of the Closing Date, of the Secretary of the State of Delaware establishing that Seller is in existence and is in good standing to transact business in its state of incorporation; (e) an opinion of counsel to Seller opining as to the execution and delivery of this Agreement and the other documents and agreements to be executed pursuant hereto, the good standing and authority of Seller, the enforceability of this Agreement and the other agreements and documents to be executed in connection herewith, and other matters reasonably requested by Purchaser; (f) a Bill of Sale in the form of EXHIBIT 8.1(F); (g) an Assignment and Assumption Agreement in the form of EXHIBIT 8.1(G); (h) an Escrow Agreement substantially in the form of EXHIBIT 8.1(H) and subject to the mutual agreement of the parties thereto; (i) all authorizations, consents, approvals, permits and licenses referred to in SECTIONS 2.3 and 2.5; 20 (j) an Investor Questionnaire and Lock-Up Agreement executed by each Receiving Party; (k) the Registration Rights Agreement in the form of EXHIBIT 1.4(A); and (l) such other instruments and documents as reasonably requested by Purchaser to carry out and effect the purpose and intent of this Agreement. 8.2 DELIVERIES OF PURCHASER. At the Closing, or as soon as practicable thereafter with respect to the Common Stock representing the Purchase Price, Purchaser shall deliver to Seller the following, all of which shall be in a form satisfactory to counsel to Seller: (a) 750,000 shares of Common Stock, representing the Purchase Price, with such shares being issued to Seller or its Designees as set forth on EXHIBIT 8.2(A); (b) a copy of the resolutions of the Board of Directors of Purchaser (or a committee thereof) authorizing the execution, delivery and performance of this Agreement and all related documents and agreements each certified by the Secretary as being true and correct copies of the original thereof; (c) a certificate of the Chief Executive Officer of Purchaser, dated as of the Closing Date, as to (i) the truth and correctness of the representations and warranties of Purchaser contained herein; (ii) the performance of and compliance by Purchaser with all covenants contained herein; and (iii) satisfaction of all conditions precedent of Purchaser contained herein; (d) a certificate of the Secretary of Purchaser certifying as to the incumbency of the directors and officers of Purchaser and as to the signatures of such directors and officers who have executed documents delivered at the Closing on behalf of Purchaser; (e) certificates, dated within 10 days of the Closing Date, of the Secretary of the State of Delaware establishing that Purchaser is in existence and is in good standing to transact business in the State of Delaware; (f) an opinion of counsel to Purchaser opining as to the execution and delivery of this Agreement and the other documents and agreements to be executed pursuant hereto, the good standing and authority of Purchaser, the enforceability of this Agreement and the other agreements and documents to be executed in connection herewith, and other matters reasonably requested by Seller; (g) an Assignment and Assumption Agreement in the form of EXHIBIT 8.1(G); (h) an Escrow Agreement substantially in the form of EXHIBIT 8.1(H) and subject to the mutual agreement of the parties thereto; 21 (i) the Registration Right Agreement in the form of EXHIBIT 1.4(A); and (j) such other instruments and documents as reasonably requested by Seller to carry out and effect the purpose and intent of this Agreement. SECTION 9 - NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES; SETTLEMENT RELATING TO SELLER PAYABLES. 9.1 NATURE AND SURVIVAL. All statements contained in this Agreement or in any Exhibit attached hereto, any agreement executed pursuant hereto, and any certificate executed and delivered by any party pursuant to the terms of this Agreement, shall constitute representations and warranties of Seller or of Purchaser as the case may be. All such representations and warranties, and all representations and warranties expressly labeled as such in this Agreement shall survive for a period of six months following the Closing Date. 9.2 INDEMNIFICATION BY SELLER. SELLER SHALL INDEMNIFY AND HOLD PURCHASER AND ITS RESPECTIVE OFFICERS, DIRECTORS, STOCKHOLDERS, AGENTS AND EMPLOYEES (EACH OF THE FOREGOING, FOR PURPOSES OF THIS SECTION 9.2 AND, TO THE EXTENT APPLICABLE, SECTION 9.3, AN "INDEMNIFIED PERSON") HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, LOSSES, CLAIMS, DAMAGES, ACTIONS, SUITS, COSTS, DEFICIENCIES AND EXPENSES (INCLUDING, BUT NOT LIMITED TO, REASONABLE FEES AND DISBURSEMENTS OF COUNSEL THROUGH APPEAL) ARISING FROM OR BY REASON OF OR RESULTING FROM ANY BREACH BY SELLER OF ANY REPRESENTATION, WARRANTY, AGREEMENT OR COVENANT CONTAINED IN THIS AGREEMENT (INCLUDING THE EXHIBITS HERETO) AND EACH DOCUMENT, CERTIFICATE OR OTHER INSTRUMENT FURNISHED OR TO BE FURNISHED BY SELLER HEREUNDER, AND, WITH RESPECT TO ALL TIMES PRIOR TO THE CLOSING DATE, ARISING FROM OR BY REASON OF OR RESULTING FROM SELLER'S MANAGEMENT AND CONDUCT OF THE OWNERSHIP OR OPERATION OF SELLER AND FROM ANY ALLEGED ACT OR NEGLIGENCE OF SELLER OR ITS EMPLOYEES, AGENTS AND INDEPENDENT CONTRACTORS IN OR ABOUT SELLER'S BUSINESS, AND WITH RESPECT TO (I) ANY VIOLATION BY SELLER OR ITS CONSULTANTS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS AND AFFILIATES OF STATE OR FEDERAL LAWS, (II) TAXES IMPOSED BY LAW ON SELLER ARISING FROM OR BY REASON OF THE OPERATION OF SELLER PRIOR TO THE CLOSING DATE OR AS A RESULT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, (III) ANY LIABILITY OF SELLER FOR COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES) INCURRED IN CONNECTION WITH THE NEGOTIATION, PREPARATION OR CLOSING OF TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE OTHER DOCUMENTS TO BE EXECUTED IN CONNECTION HEREWITH. SELLER'S INDEMNIFICATION OBLIGATION HEREUNDER IS SUBJECT TO THE LIMITATIONS SET FORTH IN SECTION 9.4 OF THIS AGREEMENT. 22 9.3 INDEMNIFICATION PROCEDURE. Within 60 days after Indemnified Person receives written notice of the commencement of any action or other proceeding in respect of which indemnification or reimbursement may be sought hereunder, or within such lesser time as may be provided by law for the defense of such action or proceeding, such Indemnified Person shall notify Seller thereof. If any such action or other proceeding shall be brought against any Indemnified Person, Seller shall, upon written notice given within a reasonable time following receipt by Seller of such notice from Indemnified Person, be entitled to assume the defense of such action or proceeding with counsel chosen by Seller and reasonably satisfactory to Indemnified Person; provided, however, that any Indemnified Person may at its own expense retain separate counsel to participate in such defense. Notwithstanding the foregoing, Indemnified Person shall have the right to employ separate counsel at Seller's expense and to control its own defense of such action or proceeding if, in the reasonable opinion of counsel to such Indemnified Person, (a) there are or may be legal defenses available to such Indemnified Person or to other Indemnified Persons that are different from or additional to those available to Seller and which could not be adequately advanced by counsel chosen by Seller, or (b) a conflict or potential conflict exists between Seller and such Indemnified Person that would make such separate representation advisable; provided, however, that in no event shall Seller be required to pay fees and expenses hereunder for more than one firm of attorneys of Indemnified Person in any jurisdiction in any one action or proceeding or group of related actions or proceedings. Seller has been named a defendant in that certain lawsuit brought by Montage Media, Inc. against Mr. William O'Doherty, Seller and certain other defendants (the "Lawsuit"). Purchaser in no way shall assume any of Seller's obligations or liabilities in connection with the Lawsuit. As such, no Indemnified Person may hire separate counsel in connection with the Lawsuit without Seller's prior written consent. Seller shall not, without the prior written consent of any Indemnified Person, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding to which such Indemnified Person is a party unless such settlement, compromise or consent includes an unconditional release of such Indemnified Person from all liability arising or potentially arising from or by reason of such claim, action or proceeding. No Indemnified Party shall settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding to which Seller or an Indemnified Person is a party. 9.4 RIGHT OF SETOFF; LIMITATION OF SELLER'S INDEMNIFICATION OBLIGATION. In the event of any breach of warranty, representation, covenant or agreement by either party giving rise to indemnification under SECTION 9.2 hereof, the aggrieved party shall be entitled to offset the amount of damages incurred by it as a result of such breach of warranty, representation, covenant or agreement against any amounts payable by the aggrieved party. Notwithstanding any other provision of this SECTION 9, the liability of Seller with respect to any action or other proceeding in respect of which indemnification or reimbursement may be sought hereunder, including, but not limited to, claims relating to any excess amounts paid by Purchaser in connection with those liabilities of Seller expressly assumed hereunder by Purchaser (such amount, an "Excess"), shall be limited solely and exclusively to a withdrawal of that portion of the Escrow Shares, which, when divided by $1.25, shall provide to Purchaser sufficient consideration to cover any such indemnification claim, and, in no event shall Seller be liable for any amount in excess of the total number of Escrow Shares 23 divided by $1.25. Except as set forth in SECTIONS 11 and 12 of this Agreement, Seller shall have no other obligation at law or in equity to Purchaser. With respect to any Excess, before any such withdrawal of Escrow Shares is made, Purchaser will advise the Chairman and Chief Executive Officer of Seller of any such claim resulting in an Excess, and extend to him the opportunity to settle or dispute such claim prior to the settlement thereof by Purchaser using the Escrow Shares, and, if Seller shall at any point during the six month period commencing on the Closing Date and ending on the date that is six months after the Closing Date cease to exist, then Purchaser shall advise Mr. Jeffrey J. Goodman ("Goodman") of any claim that results in an Excess and extend to him the opportunity to settle or dispute such claim prior to the settlement thereof by Purchaser using the Escrow Shares. SECTION 10 - TERMINATION. This Agreement may be terminated: (a) at any time by mutual written agreement of all parties; (b) at any time by Purchaser by delivery of written notice to Seller if any representation or warranty of Seller contained in this Agreement or in any certificate or other document executed and delivered by Seller pursuant to this Agreement is or becomes untrue or breached in any material respect or if Seller fails to comply in any material respect with any covenant or agreement contained herein, and any such misrepresentation, noncompliance or breach is not cured, waived or eliminated within 20 days after receipt of written notice thereof; (c) at any time by Seller by delivery of written notice to Purchaser if any representation or warranty of Purchaser contained in this Agreement or in any certificate or other document executed and delivered by Purchaser pursuant to this Agreement is or becomes untrue or breached in any material respect or if Purchaser fails to comply in any material respect with any covenant or agreement contained herein and any such misrepresentation, noncompliance or breach is not cured, waived or eliminated within 20 days after receipt of written notice thereof; or (d) by Purchaser or Seller by delivery of written notice to the other party if the transactions contemplated hereby shall not have been consummated by September 1, 2000. SECTION 11 - NONCOMPETITION. 11.1 SELLER'S COVENANT NOT TO COMPETE. Seller acknowledges and recognizes the highly competitive nature of the Business and Purchaser's business and the goodwill, continued patronage and specifically the names and addresses of the Business's and Purchaser's Clients (as defined herein) constitute a substantial asset of Purchaser having been acquired through considerable time, money and effort. Accordingly, Seller agrees that, for a period of two years following the Closing Date, within the Restricted Area (as defined herein), Seller will not, directly or indirectly, (i) individually, or in conjunction with others, whether as an officer, director, proprietor, employer, employee, partner, independent contractor, investor (other than as a holder solely as an investment of less than five percent (5%) of the equity of an entity), consultant, advisor, agent 24 or otherwise, engage in any Business Activities (as defined herein); (ii) compete with Purchaser by soliciting, inducing or influencing any of Purchaser's or the Business's Clients to discontinue or reduce the extent of such Client's relationship with Purchaser and/or the Business; (iii) recruit, solicit or otherwise influence any employee or agent of Purchaser or the Business to discontinue such employment or agency relationship; (iv) employ or seek to employ, or cause or permit any business which engages in any Business Activities of Seller or the Business (the "Competitive Business") to employ or seek to employ for any Competitive Business, any person who is then, or was at any time within six months prior to the date Seller or Competitive Business employs or seeks to employ such person, employed by Purchaser or the Business; and (v) interfere with, disrupt, or attempt to interfere with or disrupt, any past, present or prospective relationship, contractual or otherwise, between Purchaser or the Business and any customer, employee or agent of Purchaser or the Business. For the purposes of this SECTION 11.1, Purchaser shall include any and all subsidiaries, affiliates, successors and assigns of Purchaser or the Business. 11.2 GOODMAN'S COVENANT NOT TO COMPETE. Goodman acknowledges and recognizes the highly competitive nature of the Business and Purchaser's business and the goodwill, continued patronage and specifically the names and addresses of the Business's and Purchaser's Clients (as defined herein) constitute a substantial asset of Purchaser having been acquired through considerable time, money and effort. Accordingly, Goodman agrees that, for a period of six months following the Closing Date, within the Restricted Area (as defined herein), Goodman will not, directly or indirectly, individually or in conjunction with others, whether as an officer, director, proprietor, employer, employee, partner, independent contractor, investor (other than as a holder solely as an investment of less than five percent (5%) of the equity of an entity), consultant, advisor, agent or otherwise, engage in any Business Activities (as defined herein) involving any or all of R-Dental, Dental Exchange or Net32. Because of the difficulty of measuring economic losses to Purchaser as a result of the breach of the covenants contained in SECTIONS 11. 1 and 11.2, and because of the immediate and irreparable damage that would be caused to Purchaser for which it would have no other adequate remedy, Seller and Goodman each agree that, in the event of a breach by either Seller or Goodman of the foregoing covenant, the Purchaser may seek enforcement thereof against either Seller or Goodman, as applicable, by injunction and restraining order. 11.3 REASONABLE RESTRAINT. It is agreed by the parties that the foregoing covenants in this SECTION 11 pose a reasonable restraint on each of Seller and Goodman in light of the activities and business of Purchaser on the date of the execution of this Agreement and the future plans of Purchaser. 11.4 SEVERABILITY; REFORMATION. The covenants in this SECTION 11 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and this Agreement shall thereby be reformed. 25 11.5 TERM. It is specifically agreed that the periods set forth in SECTION 11.1 and 11.2 shall be computed by excluding from such computation any time during which each of Seller and Goodman has received notice of and is in violation of any provision of this SECTION 11. The covenants contained in this SECTION 11 shall have no effect if the transactions contemplated by this Agreement are not consummated for any reason but otherwise shall not be affected by any breach of any other provision hereof by any party hereto. 11.6 DEFINITIONS. For the purposes of this SECTION 11, the following terms shall have the following meaning: (a) "Clients" shall mean any persons, partnerships, corporations, professional associations or other organizations for whom Seller is currently performing Business Activities or, within the two-year period prior to the date of this Agreement, has performed Business Activities; (b) "Restrictive Area" shall mean any state within the United States in which either Seller or Goodman is currently performing Business Activities or, within the two-year period prior to the date of this Agreement, has performed Business Activities; and (c) "Business Activities" shall mean the current business activities of each of Seller and Goodman relating to the promotion and merchandising of dental products and other related products for manufacturers, vendors, retailers or consumers, and such business activities of each of Seller and Goodman carried out at any time within the two-year period prior to the date of this Agreement. SECTION 12 - NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Each of Seller and Goodman recognizes and acknowledges that each of Seller and Goodman has in the past and currently has access to certain confidential information of Purchaser that is a valuable, special and unique asset of Purchaser's businesses. Such confidential information includes, but is not limited to, customer lists, trade secrets, private or secret processes, methods and ideas, technical information, marketing activities and information concerning products, services, development activity and training methods. Each of Seller and Goodman agrees that each of Seller and Goodman will not use or disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, unless (i) such information becomes available to or known by the public generally through no fault of Seller or Goodman or (ii) disclosure is required by law or the order of any governmental authority under color of law, provided that prior to disclosing any information pursuant to this clause (unless such disclosure is prohibited under law), Seller or Goodman, as applicable, shall give prior written notice thereof to Purchaser, and provide Purchaser with the opportunity to contest such disclosure. In the event of a breach or threatened breach by either Seller or Goodman of the provisions of this SECTION 12, Purchaser shall be entitled to seek an injunction restraining Seller or Goodman, as applicable, from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Purchaser from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. The obligations of Seller and Goodman 26 under this section shall survive the Closing Date, or the termination of this Agreement. SECTION 13 - MISCELLANEOUS. 13.1 NOTICES. Any communications required or desired to be given hereunder shall be deemed to have been properly given if sent by hand delivery, or by facsimile and overnight courier, to the parties hereto at the following addresses, or at such other address as either party may advise the other in writing from time to time: If to Purchaser: Pentegra Dental Group, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85018 Attn: President Facsimile: (602) 952-0544 with a copy to: Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, TX 75202 Attn: James S. Ryan, II Facsimile: (214) 953-5822 If to Seller Dexpo.com, Inc. c/o Kelley Drye & Warren LLP 101 Park Avenue New York, NY 10178 Attn: Salvatore J. Vitiello, Esq. Facsimile: (212) 808-7897 All such communications shall be deemed to have been delivered on the date of hand delivery or on the next business day following the deposit of such communications, properly addressed and postage prepaid with the overnight courier. 13.2 FURTHER ASSURANCES. Each party hereby agrees to perform any further acts and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. 13.3 EACH PARTY TO BEAR COSTS. Each of the parties to this Agreement shall pay all of the costs and expenses incurred by such party in connection with the transactions contemplated by this Agreement, whether or not such transactions are consummated. Without limiting the generality of the foregoing and whether or not such liabilities may be deemed to have been incurred in the ordinary course of business, neither party shall be liable to or required to pay, either directly or indirectly, any (a) fees and expenses of legal counsel, accountants, 27 auditors or other persons or entities retained by the other party for services rendered in connection with negotiating and closing the transactions contemplated by this Agreement or the documents to be executed in connection herewith, whether or not such costs or expenses are incurred before or after the Closing Date and the incurring party shall be liable for all such costs and expenses of the incurring party, and (b) local, state and federal income taxes or other similar charges on income or gain incurred by the incurring party as a result of the transactions contemplated hereby. 13.4 PUBLIC DISCLOSURES. Except as otherwise required by law, no party to this Agreement shall make any public or other disclosure of this Agreement or the transactions contemplated hereby prior to the Closing hereof, without the prior consent of the other party. If a public or other disclosure, other than as required by law, is made, the parties to this Agreement shall cooperate with respect to the form and content of any such disclosures. 13.5 GOVERNING LAW. THIS AGREEMENT SHALL BE INTERPRETED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE AND APPLIED WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAWS PRINCIPLES. 13.6 CAPTIONS. The captions or headings in this Agreement are made for convenience and general reference only and shall not be construed to describe, define or limit the scope or intent of the provisions of this Agreement. 13.7 INTEGRATION OF EXHIBITS. All Exhibits attached to this Agreement are integral parts of this Agreement as if fully set forth herein, and all statements appearing therein shall be deemed disclosed for all purposes and not only in connection with the specific representation in which they are explicitly referenced. 13.8 ENTIRE AGREEMENT/AMENDMENT. THIS INSTRUMENT, INCLUDING ALL EXHIBITS ATTACHED HERETO, CONTAINS THE ENTIRE AGREEMENT OF THE PARTIES AND SUPERSEDES ANY AND ALL PRIOR OR CONTEMPORANEOUS AGREEMENTS BETWEEN THE PARTIES, WRITTEN OR ORAL, WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY. 13.9 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original, and such counterparts shall together constitute and be one and the same instrument. 13.10 BINDING EFFECT/ASSIGNMENT. This Agreement shall be binding on, and shall inure to the benefit of, the parties hereto, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No party may assign any right or obligation hereunder without the prior written consent of the other parties; provided, however, that Purchaser may assign its rights and obligations hereunder to an affiliate and to its lender or lenders. 13.11 NO RULE OF CONSTRUCTION. The parties acknowledge that this Agreement was initially prepared by Purchaser, and that all parties have read and negotiated the language used in this Agreement. The parties agree that, because all parties participated in negotiating and drafting this Agreement, no rule of construction shall apply to this Agreement which construes ambiguous language in 28 favor of or against any party by reason of that party's role in drafting this Agreement. 13.12 COSTS OF ENFORCEMENT. In the event that Purchaser, on the one hand, or Seller, on the other hand, file suit in any court against any other party to enforce the terms of this Agreement against the other party or to obtain performance by it hereunder, the prevailing party will be entitled to recover all reasonable costs, including reasonable attorneys' fees, from the other party as part of any judgment in such suit. The term "prevailing party" shall mean the party in whose favor final judgment after appeal (if any) is rendered with respect to the claims asserted in the complaint. "Reasonable attorneys' fees" are those reasonable attorneys' fees actually incurred in obtaining a judgment in favor of the prevailing party. 13.13 AMENDMENTS; WAIVERS. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all the parties hereto. Any waiver of the terms and conditions hereof must be in writing, and signed by the parties hereto. The waiver of any of the terms and conditions of this Agreement shall not be construed as a waiver of any other terms and conditions hereof. 13.14 CHOICE OF FORUM. Each of the parties hereto agree that should any suit, action or proceeding arising out of this Agreement be instituted by any party hereto (other than a suit, action or proceeding to enforce or realize upon any final court judgment arising out of this Agreement), such suit, action or proceeding shall be instituted only in a state or federal court with a material connection with the primary claim involved in such suit, action or proceeding or in Maricopa County, Arizona. Each of the parties hereto consents to the in personam jurisdiction of any such state or federal court and waives any objection to the venue of any such suit, action or proceeding. The parties hereto recognize that courts outside such courts may also have jurisdiction over suits, actions or proceedings arising out of this Agreement, and in the event that any party hereto shall institute a proceeding involving this Agreement in a jurisdiction outside such courts, the party instituting such proceeding shall indemnify any other party hereto for any losses and expenses that may result from the breach of the foregoing covenant to institute proceedings only in such courts. 13.15 SERVICE OF PROCESS. Service of any and all process that may be served on any party hereto in any suit, action or proceeding arising out of this Agreement may be made in the manner and to the address set forth in SECTION 13.1 and service thus made shall be taken and held to be valid personal service upon such party by any party hereto on whose behalf such service is made. 13.16 SEVERABILITY. If any provision of this Agreement shall be found to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and this Agreement shall be construed and enforced as if such provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect. In lieu of such provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such provision as may be possible and be legal, valid and enforceable. 13.17 THIRD PARTY BENEFICIARIES. The Designees shall be treated as third party beneficiaries under this Agreement with respect to: (i) Purchaser's covenant regarding registration of the Common Stock, as set forth in SECTION 29 5.3(B) and the Registration Rights Agreement; (ii) Purchaser's hosting Seller's websites, as set forth in SECTION 5.2; and (iii) any right Seller may have with respect to Escrow Shares pursuant to the Escrow Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 30 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. PENTEGRA DENTAL GROUP, INC. DEXPO.COM, INC. By: /s/ JAMES M. POWERS, JR. By: /s/ JEFFREY J. GOODMAN ------------------------- -------------------------- James M. Powers, Jr. Jeffrey J. Goodman President President With respect to Sections 11 and 12 only: Jeffrey J. Goodman 31 INDEX TO EXHIBITS EXHIBIT DESCRIPTION - ------- ----------- EXHIBIT 1.1(a) Personal Property, Plant, Furniture, Fixtures, Equipment and Goodwill EXHIBIT 1.1(b) Names, Slogans, Trademarks, Service Marks and Logos EXHIBIT 1.1(c) Inventory EXHIBIT 1.1(d) Contracts EXHIBIT 1.1(e) Accounts Receivable EXHIBIT 1.1(g) Transferable Licenses and Other Regulatory Approvals Administrative Policy and Procedure Manuals, Trade Secrets, Trademarks, Service Marks, Marketing and Promotional Materials, All Other Property EXHIBIT 1.1(h) Rights and Books and Records EXHIBIT 1.1(i) Domain Names EXHIBIT 1.3(b) Asset Allocation EXHIBIT 1.3(c) Assumed Liabilities EXHIBIT 1.4(a) Registration Rights Agreement EXHIBIT 2.3 Permits, Licenses and Governmental Qualifications EXHIBIT 2.5 Required Consents of Seller EXHIBIT 2.6 Seller's Financial Statements EXHIBIT 2.7 Leases EXHIBIT 2.9 Liens, Claims, Charges, Exceptions or Encumbrances on or Against the Assets EXHIBIT 2.11 Seller's Intellectual Property and Past Names EXHIBIT 2.13 Legal Proceedings Against Seller EXHIBIT 2.15 Subsequent Events EXHIBIT 2.16 Accounts Receivable; Working Capital EXHIBIT 2.18 Seller's Liabilities and Debt EXHIBIT 2.19 Seller's Insurance Policies EXHIBIT 2.20 Seller's Employee Benefits Plans EXHIBIT 2.25 Seller's Banking Relationships EXHIBIT 2.26 Form of Investor Questionnaire EXHIBIT 2.27 Form of Lock-Up Agreement EXHIBIT 3.1 Authorized and Issued Common Stock of Purchaser 32 EXHIBIT DESCRIPTION - ------- ----------- EXHIBIT 3.2 Required Consents of Purchaser EXHIBIT 6.8(a) Seller's Employees and Agents EXHIBIT 6.8(b) Form of Employee Termination Agreement EXHIBIT 8.1(f) Bill of Sale EXHIBIT 8.1(g) Assignment and Assumption Agreement EXHIBIT 8.1(h) Escrow Agreement EXHIBIT 8.2(a) Purchase Price Allocation 33 EXHIBIT 1.1(A) Personal Property, Plant, Furniture, Fixtures, Equipment and Goodwill Two servers (already delivered) complete with licensed OpenSite auction software (already delivered) and custom software (already delivered). 34 EXHIBIT 1.1(B) Names, Slogans, Trademarks, Service Marks and Logos Dexpo.com, Inc. Dexpo Dexpo.com Dexpo.net $5Fridays 35 EXHIBIT 1.1(C) Inventory None. 36 EXHIBIT 1.1(D) Contracts All Vendor/Manufacturer Contracts - None. All User/Member Agreements - None. All Trade Agreements - None. All Notes Receivable - None. 37 EXHIBIT 1.1(E) Accounts Receivable See attached. 38 EXHIBIT 1.1(G) Transferable Licenses and Other Regulatory Approvals Licenses for the following software: OpenSite Oracle Database MicroSoft Visual Interdev MicroSoft Visual SourceSafe Visual Basic E-Share Bulletin Board and Chat Rooms 39 EXHIBIT 1.1(H) Administrative Policy and Procedure Manuals, Trade Secrets, Trademarks, Service Marks, Marketing and Promotional Materials, All Other Property Rights and Books and Records The master computer files containing Seller's logos, artwork and related designs reside with Anonymous, Inc., 51 N. Towamencin Avenue, Landsdale, PA 19446, 215.412.8210 (phone), which created the foregoing for the Seller as works for hire. 40 EXHIBIT 1.1(I) Domain Names www.dexpo.com www.dexpo.net 41 EXHIBIT 1.3(B) Asset Allocation See attached. 42 EXHIBIT 1.3(C) Assumed Liabilities None. 43 EXHIBIT 1.4(A) Registration Rights Agreement See attached. 44 EXHIBIT 2.3 Permits, Licenses and Governmental Qualifications Registration related to Seller's URLs dexpo.com and dexpo.net. 45 EXHIBIT 2.5 Required Consents of Seller The transaction requires the consent of Seller's stockholders and its Board of Directors. 46 EXHIBIT 2.6 Seller's Financial Statements See attached. 47 EXHIBIT 2.7 Leases A lease relating to copier equipment leased from Canon was terminated. Seller's lease for space at 1100 E. Hector Street, Conshohocken, PA, was terminated pursuant to the terms of the attached Lease Termination Agreement. 48 EXHIBIT 2.9 Liens, Claims, Charges, Exceptions or Encumbrances on or Against the Assets None. [CONFIRM WITH UCC SEARCH RESULTS.] 49 EXHIBIT 2.11 Seller's Intellectual Property and Past Names See Exhibits 1.1(b), 1.1(g), 1.1(h) and 1.1(i). 50 EXHIBIT 2.13 Legal Proceedings Against Seller Montage Media Corporation v. William O'Doherty, Dexpo.com, Jeff Goodman and Glen Bonagura, filed in Superior Court of New Jersey, Chancery Division: Bergen County, Docket No. is BER-L-1322-00. 51 EXHIBIT 2.15 Subsequent Events None. 52 EXHIBIT 2.16 Accounts Receivable; Working Capital Seller has a $5,000 cash balance as of June 30, 2000, to be used in connection with the liquidation of the corporation and the payment of final expenses. 53 EXHIBIT 2.18 Seller's Liabilities and Debt None. 54 EXHIBIT 2.19 Seller's Insurance Policies Seller has a $3 million Directors' and Officers' Liability Insurance policy through Aim Insurance of Allentown, Pennsylvania, a copy of which is attached hereto. The Company maintained a Business Owner's Insurance policy, a summary of which is attached hereto. The Company maintained a business auto insurance policy, a summary of which is attached hereto. 55 EXHIBIT 2.20 Seller's Employee Benefits Plans Seller maintained a self-directed 401(k) program for certain employees. All other employees of Seller were contracted from CNA-Unisource. 56 EXHIBIT 2.25 Seller's Banking Relationships None. The company has a checking account numbered 085010395 with Progress Bank of Conshohecken, Pennsylvania. 57 EXHIBIT 2.26 Form of Investor Questionnaire INVESTOR SUITABILITY REPRESENTATION 1. CAREFULLY READ THIS INVESTOR SUITABILITY REPRESENTATION STATEMENT. ASK QUESTIONS IF THERE IS ANYTHING IN THIS STATEMENT THAT YOU DO NOT UNDERSTAND. 2. THE COMMON SHARES OF PENTEGRA DENTAL GROUP, INC., A DELAWARE CORPORATION (THE "SHARES"), HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE "BLUE SKY" OR SECURITIES LAWS. BY SIGNING BELOW, THE RECEIVING PARTY REPRESENTS AND WARRANTS THAT IT, HE OR SHE IS ACQUIRING THE INTERESTS FOR ITS, HIS OR HER OWN ACCOUNT OR INVESTMENT AND NOT WITH A VIEW TO OR IN CONNECTION WITH A DISTRIBUTION THEREOF AND WILL NOT SELL OR TRANSFER THE INTERESTS IN VIOLATION OF ANY FEDERAL OR STATE SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED PURSUANT THERETO. 3. BY SIGNING BELOW, THE INVESTOR REPRESENTS AND WARRANTS THAT IT, HE OR SHE HAS HAD AN ADEQUATE OPPORTUNITY TO ASK QUESTIONS OF AND RECEIVE ANSWERS FROM THE OFFICERS OF PENTEGRA DENTAL GROUP, INC. ("PENTEGRA") CONCERNING ANY AND ALL MATTERS RELATING TO THE BACKGROUND AND EXPERIENCE OF THE OFFICERS AND DIRECTORS OF PENTEGRA, THE PLANS FOR THE OPERATIONS OF THE BUSINESS OF PENTEGRA AND ANY PLANS FOR ADDITIONAL ACQUISITIONS AND THE LIKE. 4. BY SIGNING BELOW, THE INVESTOR REPRESENTS AND WARRANTS THAT IT, HE OR SHE HAS ASKED ANY AND ALL QUESTIONS IN THE NATURE DESCRIBED IN THE PRECEDING SECTION AND ALL QUESTIONS HAVE BEEN ANSWERED TO ITS, HIS OR HER SATISFACTION. 5. BY SIGNING BELOW, THE INVESTOR REPRESENTS AND WARRANTS THAT IT, HE OR SHE UNDERSTANDS AND AGREES THAT THE SHARES MUST BE HELD INDEFINITELY UNLESS THEY ARE SUBSEQUENTLY REGISTERED UNDER THE ACT AND STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND STATE SECURITIES LAWS COVERING THE SALE OF THE SHARES IS AVAILABLE. 6. BY SIGNING BELOW, THE INVESTOR REPRESENTS AND WARRANTS THAT IT, HE OR SHE UNDERSTANDS THAT LEGENDS STATING THAT THE SHARES HAVE NOT BEEN REGISTERED UNDER THE ACT NOR STATE SECURITIES LAWS AND SETTING OUT OR REFERRING TO THE 58 RESTRICTIONS ON THE TRANSFERABILITY AND RESALE OF THE SHARES WILL BE PLACED ON THE SHARES. 7. THE INVESTOR UNDERSTANDS THAT THE INFORMATION SUPPLIED IN THIS SECTION WILL BE DISCLOSED TO NOONE OTHER THAN OFFICERS AND AGENTS OF PENTEGRA AND DEXPO.COM, INC. ("DEXPO") WITHOUT ITS, HIS OR HER CONSENT UNLESS IT IS NECESSARY FOR PENTEGRA TO USE SUCH INFORMATION TO SUPPORT THE EXEMPTIONS FROM REGISTRATION UNDER THE ACT AND UNDER STATE LAW, OR AS OTHERWISE REQUIRED BY APPLICABLE LAW. 8. THIS INVESTOR SUITABILITY REPRESENTATION DOES NOT CONSTITUTE AN OFFER BY PENTEGRA OR DEXPO OR THEIR OFFICERS TO SELL ANY SECURITIES OF PENTEGRA. ANY SUCH OFFER MAY ONLY BE MADE THROUGH DELIVERY BY PENTEGRA OF A DEFINITIVE WRITTEN AGREEMENT EXECUTED BY PENTEGRA, TOGETHER WITH SUCH DISCLOSURE INFORMATION AS PENTEGRA DEEMS APPROPRIATE. The financial information and representations in this section are required to be provided to Pentegra and Dexpo so the Investor can qualify to acquire shares. If the Investor wishes to be considered an "accredited investor," it, he or she must INITIAL the paragraph below which describes the suitability requirement under which the Investor intends to qualify. Upon request of Pentegra, the Investor must provide information to document the representation initialed, as described within each paragraph. ONLY ONE PARAGRAPH NEED BE INITIALED. 59 1. The Investor is NOT an Accredited Investor. OR 2. Individual Net Worth Suitability. This suitability, requirement may be selected only by a natural individual(s), and NOT by a corporation, partnership, trust, estate, unincorporated association or other entity. The Investor represents and warrants that his or her individual net worth or joint net worth with his or her spouse, exceeds $1,000,000. OR 3. Individual Net Income Suitability. This suitability requirement may be selected only by a natural individual(s), and NOT by a corporation, partnership, trust, estate, unincorporated association or other entity. The Investor represents and warrants that his or her individual net income was in excess of $200,000 in each of the two most recent years, or his or her joint income with his or her spouse was in excess of $300,000 in each of those years and he or she reasonably expects his or her net income to reach such level in the current year. OR 4. Certain Qualified Organizations. The Investor represents and warrants that it is (check one): (a) A corporation, partnership, Massachusetts or similar business trust, or organization described in Section 501(c)(3) of the Internal Revenue Code (tax exempt organization), not formed for the specific purpose of acquiring the securities offered, having total assets in excess of $5,000,000. (b) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of the Act. (c) A bank, savings and loan association or other similar institution (as defined in Sections 3(a)(2) and 3(a)(5)(A) of the Act) whether acting in its individual or fiduciary capacity. (d) An insurance company (as defined in Section 2(13) of the Act). 60 (e) An investment company registered under the Investment Company Act of 1940. (f) A business development company as defined Section 2(a)(48) of the Investment Company Act of 1940 or private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940. (g) A Small Business Investment Company licensed by the U.S. Small Business Administration under Sections 301(c) or (d) of the Small Business Investment Act of 1958. (h) A broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended. (i) Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000. (j) Any employee benefit plan within the meaning of the Employment Retirement Income Security Act of 1974, as amended ("ERISA") if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors. NOTE: If you claim suitability under this paragraph 4, Pentegra may require that you provide appropriate information supporting your claim to status as a Qualified Organization. OR 5. Entity Suitability. The Investor represents and warrants that it is a corporation, a partnership, an unincorporated association or other similar entity, and that each owner of an equity interest in the entity satisfies the suitability requirements of either paragraphs (2), (3) or (4) above. NOTE: If you claim suitability under this paragraph (5), you must submit a list of each of the owners with an equity interest in the entity, setting forth the address, telephone number and social security or tax identification number and list for EACH such owner the information required under paragraphs (2), (3) or (4) above. These separate pages must be validly signed by or on behalf of each such owner or beneficiary. OR 61 6. Officer, Director, Suitability. The Investor represents and warrants that it, he or she is an officer or director of Pentegra. IN WITNESS WHEREOF, Investor has executed this Suitability Statement as of this _____ day of ___________, 2000. INVESTOR: Printed Name: ----------------------------- Social Security No.: ---------------------- OR ------------------------------------------- (Name of Entity) By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ FEIN: ------------------------------------- 62 EXHIBIT 2.27 Form of Lock-Up Agreement See attached. 63 EXHIBIT 3.1 Authorized and Issued Common Stock of Purchaser Shares of common stock authorized - 40,000,000. Shares of common stock outstanding as of June 15, 2000 - 10,798,130. 64 EXHIBIT 3.2 Required Consents of Purchaser The consent of Purchaser's Board of Directors is required. 65 EXHIBIT 6.8(A) Seller's Employees and Agents As of the Closing Date, no individuals are currently employees or independent contractors of Seller; however, Seller has obtained releases from Messrs. Bonagura, Goodman, DeAngelis and Scholl. 66 EXHIBIT 6.8(B) Form of Employee Termination Agreement See attached releases from Messrs. Bonagura, Goodman, Scholl and DeAngelis. 67 EXHIBIT 8.1(F) Bill of Sale See attached. 68 EXHIBIT 8.1(G) Assignment and Assumption Agreement See attached. 69 EXHIBIT 8.1(H) Escrow Agreement See attached. 70 EXHIBIT 8.2(A) Purchase Price Allocation See attached. 71 EX-10.14 10 ex10-14.txt FOURTH AMENDMENT TO CREDIT AGREEMENT Exhibit 10.14 FOURTH AMENDMENT TO CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS THIS FOURTH AMENDMENT TO CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS (herein called this "Amendment") made effective as of June 29, 2001 (the "Effective Date"), by and among E-DENTIST.COM, INC., a Delaware corporation, formerly known as Pentegra Dental Group, Inc. (herein called "Borrower"), and BANK ONE, TEXAS, N.A., individually as a Lender and as Agent for the Lenders (herein called "Agent"), and the Lenders party to the Original Agreement ("Lenders"), defined below. WITNESSETH: WHEREAS, Borrower, Agent and Lenders have entered into that certain Credit Agreement dated as of June 1, 1998, as amended by that certain letter agreement dated September 9, 1998, that certain First Amendment to Credit Agreement dated as of February 9, 1999, that certain Second Amendment to Credit Agreement dated as of July 15, 1999 and that certain Third Amendment to Credit Agreement dated as of June 1, 2000 (as the same may from time to time be further amended, supplemented, or restated, collectively, the "Original Agreement"), for the purposes and consideration therein expressed, pursuant to which Lenders became obligated to make loans to Borrower as therein provided; and WHEREAS, Borrower and Lenders desire to amend the Original Agreement to modify certain terms and provisions thereof as more fully set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, in consideration of the loans which have been made by Lender to Borrower pursuant to the Original Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. DEFINITIONS AND REFERENCES Section 1.1. TERMS DEFINED IN THE ORIGINAL AGREEMENT. Unless the context otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement" shall have the same meanings therein whenever used in this Amendment. The term "Loan Documents (as defined in the Original Agreement) shall also include this Amendment and all of the documents, instruments, agreements and items executed in connection with this Amendment, and as described in Article V of this Amendment. Section 1.2. OTHER DEFINED TERMS. Unless the context otherwise requires, the following terms when used in this Amendment, the Original Agreement or any Loan Document, shall have the meanings assigned to them in this Section 1.2. 1 "AMENDMENT" means this Fourth Amendment to Credit Agreement and Other Loan Documents. "CREDIT AGREEMENT" means the Original Agreement, as amended hereby. ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT Section 2.1. DEFINED TERMS. (a) The following defined terms in Section 1.1. of the Credit Agreement are hereby amended in their entirety to read as follows: "BASE RATE" means, for each day, the per annum rate of interest which is two hundred (200) basis points above the Prime Rate. If the Prime Rate changes after the date hereof, the Base Rate shall be automatically increased or decreased, as the case may be, without notice to Borrower, from time to time as of the effective date of each such change in the Prime Rate. The Base Rate shall in no event, however, exceed the Highest Lawful Rate. "BASE RATE LOAN" means all of the Loans which have been previously advanced to Borrower in accordance with the Credit Agreement, totaling the principal amount of Nine Million Two Hundred Forty-Seven Thousand Two Hundred Nineteen and 02/100 Dollars ($9,247,219.02), representing the sum of the outstanding principal balance of Eurodollar Loan No. 1 and the outstanding principal balance of Eurodollar Loan No 2, which Loan shall bear interest at the Base Rate. "BASE RATE PAYMENT DATE" means (i) the fifteenth (15th) day of each calendar month, beginning with July 15, 2001 and (ii) any day on which past due interest or principal is owed hereunder and is unpaid. "DEFAULT RATE" means, at the time in question, the per annum rate of interest which is four hundred (400) basis points above the Base Rate then in effect. The Default Rate shall in no event, however, exceed the Highest Lawful Rate. "ELIGIBLE TRANSFEREE" means any Person approved as an Eligible Transferee by Agent (provided that no Person organized outside of the United States may be an Eligible Transferee if Borrower would be required to pay withholding taxes on interest or principal owed to such Person). "LENDERS" means Bank One, Texas, N.A. together with its successors, assigns and transferees. "MATURITY DATE" means July 1, 2002. 2 "PRIME RATE" means the base commercial rate of interest as announced from time to time by Bank One, N.A. (which may not be the lowest, best or most favorable rate of interest which Bank One, N.A. may charge on loans to its customers). (b) The following new defined terms are hereby added to Section 1.1. of the Credit Agreement in appropriate alphabetical order: "WARRANT" means that certain Warrant to Subscribe for and Purchase Common Stock of e-dentist.com, Inc., issued as of the date hereof by Borrower to Bank One, N.A., granting to Bank One, N.A. the right to acquire a number of shares of Borrower's common stock equal to three percent (3%) of the total current number of outstanding shares of Borrower's common stock on a fully diluted basis. Section 2.2. BORROWER'S REDUCTION OF BORROWING AVAILABILITY. Section 2.2 of the Credit Agreement is hereby deleted in its entirety. Section 2.3. REQUESTS FOR NEW LOANS. Section 2.3 of the Credit Agreement is hereby deleted in its entirety. Section 2.4. CONTINUATIONS AND CONVERSIONS OF EXISTING LOANS. Section 2.4 of the Credit Agreement is hereby deleted in its entirety. Section 2.5. SCHEDULED PRINCIPAL AND INTEREST PAYMENTS. Section 2.7 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 2.7 SCHEDULED PRINCIPAL AND INTEREST PAYMENTS. The principal amount of the Base Rate Loan shall be payable in monthly installments of $25,000.00 each and shall be due and payable beginning on July 15, 2001 (the "Monthly Payment") and continuing on the fifteenth (15th) day of every month thereafter until the Maturity Date, on which date the entire unpaid principal balance of the Base Rate Loan and all accrued and unpaid interest thereon shall be due and payable. In addition to the monthly principal installments described above, interest shall be payable monthly as it accrues through the fifteenth (15th) day of each month, said installments of interest becoming due and payable beginning July 15, 2001 and continuing on the fifteenth (15th) day of each month thereafter until the Maturity Date." Section 2.6. MANDATORY PREPAYMENTS. Section 2.8 of the Credit Agreement is hereby deleted in its entirety. Section 2.7. BOOKS, FINANCIAL STATEMENTS AND REPORTS. Sections 6.2(a) and 6.2(b) of the Credit Agreement are hereby amended in their entirety to read as follows: "(a) As soon as it is available, and in any event within one hundred five (105) days after the end of each Fiscal Year, Borrower shall deliver to Lenders a copy of Borrower's annual audited 10-K statement as filed with the Securities and Exchange Commission ("10-K"); 3 (b) As soon as it is available, and in any event within sixty (60) days after the end of each Fiscal Quarter, Borrower shall deliver to Lenders a copy of Borrower's quarterly 10-Q statement as filed with the Securities and Exchange Commission ("10-Q");" Section 2.8. COMPLIANCE CERTIFICATE. Section 6.3 of the Credit Agreement is hereby amended in its entirety to read as follows: "SECTION 6.3. With the statements described in Sections 6.2(a) and 6.2(b), Borrower shall deliver to Lender a certificate in the form of EXHIBIT D signed by the chief financial officer of Borrower (i) stating that the statements described in Sections 6.2(a) and 6.2(b) are accurate and complete (subject to normal year-end adjustments), (ii) stating that he has reviewed the Loan Documents, (iii) containing calculations showing compliance (or non-compliance) at the end of each Fiscal Quarter with each of the financial covenants set forth in SECTION 7.14, SECTION 7.19, and SECTION 7.20 hereof at the end of each such Fiscal Quarter and (iv) stating that no Default exists at the end of such period or at the time of such certificate or specifying the nature and period of existence of any such Default." Section 2.9. CERTIFICATE ACCOMPANYING FINANCIAL STATEMENTS. Exhibit D attached to the Credit Agreement is hereby deleted in its entirety and replaced with the EXHIBIT D-1 attached hereto. Section 2.10. INDEBTEDNESS. Section 7.1 of the Credit Agreement is hereby amended in its entirety to read as follows: "SECTION 7.1. INDEBTEDNESS. No Restricted Person will in any manner owe or be liable for Indebtedness except: (i) the Obligations; (ii) Subordinated Debt consummated on or before June 29, 2001 in an aggregate principal amount not to exceed the amount of such Indebtedness outstanding as of June 29, 2001, excluding any renewals or extensions of such Indebtedness; (iii) Indebtedness outstanding under the instruments and agreements described on the Disclosure Schedule, excluding any renewals or extensions of such Indebtedness; (iv) purchase money Indebtedness or other acquired or assumed Indebtedness in connection with Dental Practice Acquisitions consummated on or before June 1, 2000 in an aggregate principal amount not to exceed the amount of such Indebtedness outstanding as of June 1, 2000, excluding any renewals or extensions of such Indebtedness." 4 Section 2.11. LIMITATION ON MERGERS, ISSUANCES AND SECURITIES. Section 7.4 of the Credit Agreement is hereby amended in its entirety to read as follows: "SECTION 7.4 LIMITATION ON MERGERS, ISSUANCES AND SECURITIES. No Restricted Person will merge or consolidate with or into any other business entity. No Subsidiary of Borrower which is a partnership will allow any diminution of Borrower's interest (direct or indirect) therein." Section 2.12. CURRENT RATIO. Section 7.14 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.14. CURRENT RATIO. As of the end of each Fiscal Quarter, the ratio of Borrower's Consolidated current assets to its Consolidated current liabilities, as reflected in the applicable 10-Q or 10-K, shall not, during any of the following periods, be less than the following: FISCAL QUARTER ENDED MINIMUM CURRENT RATIO -------------------- --------------------- June 30, 2001 0.13 to 1.0 September 30, 2001 0.02 to 1.0 December 31, 2001 0.02 to 1.0 March 31, 2002 0.02 to 1.0" Section 2.13. EBITDA. Section 7.19 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.19. EBITDA. As of the end of each Fiscal Quarter, the Borrower's EBITDA shall not, during any of the following periods, be less than the following amounts: FISCAL QUARTER ENDED MINIMUM EBITDA -------------------- -------------- June 30, 2001 $150,000 September 30, 2001 $350,000 December 31, 2001 $600,000 March 31, 2002 $900,000" Section 2.14. NET WORTH. Section 7.20 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.20. NET WORTH. As of the end of each Fiscal Quarter, Borrower's Consolidated Net Worth, as reflected in the applicable 10-Q or 10-K, shall not, as of the end of each of the following periods, be less than the following amounts: FISCAL QUARTER ENDED MINIMUM NET WORTH -------------------- ----------------- June 30, 2001 ($7,200,000) September 30, 2001 ($7,200,000) December 31, 2001 ($7,000,000) March 31, 2002 ($6,500,000)" 5 Section 2.15. PAYMENT DEFAULT. Sections 8.1(a) and 8.1(b) of the Credit Agreement are hereby amended in their entirety to read as follows: "(a) Any Restricted Person fails to pay within three (3) Business Days, any Obligation when due and payable, whether at a date for the payment of a fixed installment or as a contingent or other payment becomes due and payable or as a result of acceleration or otherwise; (b) Any Restricted Person fails to pay within three (3) Business Days, any Obligation (other than the Obligations in clause (a) above) when due and payable, whether at a date for the payment of a fixed installment or as a contingent or other payment becomes due and payable or as a result of acceleration or otherwise;" Section 2.16. NON-PAYMENT DEFAULT. Section 8.1(e) of the Credit Agreement is hereby amended in its entirety to read as follows: "(e) Any Restricted Person fails (other than as referred to in clauses (a), (b), (c) or (d) above) to duly observe, perform or comply with any covenant, agreement, condition or provision of any Loan Document, and such failure remains unremedied for a period of fifteen (15) days after notice of such failure is given by Agent to Borrower;" Section 2.17. OTHER DEFAULTS. Section 8.1(j)(iv) of the Credit Agreement is hereby amended in its entirety to read as follows: "(iv) suffers the entry against it of a final judgment for the payment of money in excess of $200,000 (not covered by insurance satisfactory to Agent in its discretion), unless the same is discharged within forty-five (45) days after the date of entry thereof or an appeal or appropriate proceeding for review thereof is taken within such period and a stay of execution pending such appeal is obtained; or" Section 2.18. JOINT AND SEVERAL LIABILITY; PARTIES IN INTEREST; ASSIGNMENTS. Section 10.5 of the Credit Agreement is hereby amended in its entirety to read as follows: "(a) All Obligations which are incurred by two or more Restricted Persons shall be their joint and several obligations and liabilities. All grants, covenants and agreements contained in the Loan Documents shall bind and inure to the benefit of the parties thereto and their respective successors and assigns; provided, however, that no Restricted Person may assign or transfer any of its rights or delegate any of its duties or obligations under any Loan Document without the prior consent of the Lenders. Neither Borrower nor any Affiliates of Borrower shall directly or indirectly purchase or otherwise retire any Obligations owed to any Lender nor will any Lender accept any offer to do so, unless each Lender shall have received substantially the same offer with respect to the same Percentage Share of the Obligations owed to it. If Borrower or any Affiliate of Borrower at any time purchases some but less than all of the Obligations owed to all Bank Parties, such purchaser shall not be entitled to any rights of any Bank Party under the Loan Documents unless and until Borrower or its Affiliates have purchased all of the Obligations. 6 (b) Lender may sell, assign, transfer or convey its rights under the Loans or under the Loan Documents, in whole or in part, to any Person who is an Eligible Transferee. (c) Nothing contained in this SECTION 10.5 shall prevent or prohibit Lender from assigning or pledging all or any portion of the Loans and Note to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank; provided that no such assignment or pledge shall relieve Lender from its obligations hereunder." Section 2.19. GOVERNING LAW; SUBMISSION TO PROCESS. Section 10.7 is hereby amended in its entirety to read as follows: "Section 10.7 GOVERNING LAW; SUBMISSION TO PROCESS. EXCEPT TO THE EXTENT THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED IN A LOAN DOCUMENT, THE LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF ARIZONA AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ARIZONA AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. CHAPTER 15 OF TEXAS REVISED CIVIL STATUTES ANNOTATED ARTICLE 5069 (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) DOES NOT APPLY TO THIS AGREEMENT OR TO THE NOTES. BORROWER HEREBY IRREVOCABLY SUBMITS ITSELF AND EACH OTHER RESTRICTED PERSON TO THE NON-EXCLUSIVE JURSIDCTION OF THE STATE AND FEDERAL COURTS SITTING IN THE STATE OF ARIZONA AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT OR ANY RESTRICTED PERSON IN ANY LEGAL PROCEEDING RELATING TO THE LOAN DOCUMENTS OR THE OBLIGATIONS BY ANY MEANS ALLOWED UNDER ARIZONA OR FEDERAL LAW. THE PARTIES HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, THAT ANY SUCH PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND FURTHER AGREE TO A TRANSFER OF ANY SUCH PROCEEDING TO A FEDERAL COURT SITTING IN THE STATE OF ARIZONA TO THE EXTENT THAT IT HAS SUBJECT MATTER JURISDICTION, AND OTHERWISE TO A STATE COURT IN MARICOPA COUNTY, ARIZONA. IN FURTHERANCE THEREOF, BORROWER AND BANK PARTIES EACH HEREBY ACKNOWLEDGE AND AGREE THAT IT WAS NOT INCONVENIENT FOR THEM TO NEGOTIATE AND RECEIVE BENEFITS OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT IN SUCH COUNTY AND THAT IT WILL BE NEITHER INCONVENIENT NOR 7 UNFAIR TO LITIGATE OR OTHERWISE RESOLVE ANY DISPUTES OR CLAIMS IN A COURT SITTING IN SUCH COUNTY. NOTHING HEREIN SHALL AFFECT THE RIGHT OF BANK PARTIES TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF BANK PARTIES TO BRING PROCEEDINGS AGAINST BORROWER IN COURTS OF ANY OTHER JURISDICTION." ARTICLE III. AMENDMENTS TO PROMISSORY NOTE Section 3.1. DEFINED TERMS. The definition of Base Rate Payment Date in the third paragraph on page 1 of the Note is hereby amended in its entirety to read as follows: "BASE RATE PAYMENT DATE" means (i) the fifteenth (15th) day of each calendar month, beginning with July 15, 2001 and (ii) any day on which past due interest or principal is owed hereunder and is unpaid. Section 3.2. PAYMENT OF INTEREST. The third sentence in the fourth paragraph on page 1 of the Note is hereby amended in its entirety as follows: "On each Base Rate Payment Date, Borrower shall pay to the holder hereof all unpaid interest which has accrued on the Base Rate Loan through the Base Rate Payment Date." ARTICLE IV. FEES AND OTHER AGREEMENTS Section 4.1. CONVERSION TO SINGLE BASE RATE LOAN. Borrower acknowledges that prior to the Effective Date, Eurodollar Loan No. l and Eurodollar Loan No. 2 were converted and consolidated into the Base Rate Loan payable to Lenders. The Base Rate Loan is the only Loan outstanding under the Credit Agreement. The Base Rate Loan is evidenced by the Note, as amended herein. Section 4.2. AMENDMENT FEE. In consideration of Agent's agreement to enter into this Amendment, Borrower shall pay to Agent for the account of Lenders an amendment fee in the aggregate amount of $46,236.10 (the "Amendment Fee"), which shall be due and payable on the Effective Date. Section 4.3. PAYMENT OF ACCRUED AND UNPAID INTEREST. On the Effective Date, Borrower shall pay to Agent for the account of Lenders, all accrued and unpaid interest on the Base Rate Loan through and including June 28, 2001. 8 Section 4.4. WAIVER OF CERTAIN DEFAULTS. Lenders hereby waive any Default or Event of Default resulting from any violations by Borrower of the financial covenants set forth in SECTIONS 7.14, 7.19 and 7.20 of the Credit Agreement occurring prior to the Effective Date. Section 4.5. Borrower's representatives are experienced and knowledgeable business people, and Borrower has been represented by independent legal counsel who is experienced in all matters relevant to this Amendment, including, but not limited to, bankruptcy and insolvency law. Borrower has executed this Amendment after being made fully aware and advised of the effect and significance of all terms, conditions, and provisions of this Amendment. Section 4.6. In the event that Borrower files a voluntary petition, or has an order for relief entered against it, under the Bankruptcy Code or any other similar federal or state law, Borrower unconditionally and irrevocably agrees that Lenders shall be entitled, and Borrower hereby unconditionally and irrevocably consents, to relief from the automatic stay so that Lenders may exercise any and all of their respective rights and remedies provided under the Credit Agreement and the Loan Documents, and at law or in equity, including, but not limited to, taking all steps necessary to foreclose on the Collateral. In such event, Borrower hereby agrees that it shall not, in any manner, oppose or otherwise delay any motion filed by Lenders for relief from the automatic stay. Lenders' enforcement of the right granted herein from relief from the automatic stay is subject only to approval of the bankruptcy court in which the case is then pending. ARTICLE V. CONDITIONS OF EFFECTIVENESS Section 5.1. EFFECTIVE DATE. This Amendment shall become effective as of the Effective Date when and only when: (a) Agent shall have received all of the following, at Agent's office, duly executed and/or delivered and in form and substance satisfactory to Agent, all of the following: (i) this Amendment; (ii) a Consent of Guarantor in the form attached hereto; (iii) a certificate of the President and Secretary of Borrower dated the date of this Amendment certifying as to certain corporate matters and that all of the representations and warranties set forth in Article VI hereof are true and correct at and as of the Effective Date; (iv) the Amendment Fee described in Section 4.2; (v) all accrued and unpaid interest on the Base Rate Loan through and including June 28, 2001; 9 (vi) a Security Agreement dated as of the Effective Date (the "Security Agreement"); (vii) a Pledge Agreement dated as of the Effective Date (the "Pledge Agreement") (viii) a Control Agreement dated as of the Effective Date, among Borrower, Agent, and Bank One, Arizona, N.A. relating to the Remittance Account; (ix) the Warrant, dated as of the Effective Date, substantially in the form of Exhibit A attached hereto; (x) a Registration Rights Agreement executed by Borrower substantially in the form of Schedule 1 to the Warrant; (xi) UCC-1 financing statements naming Borrower, as debtor, and Agent, as secured party, covering the Collateral described in the Security Agreement and the Pledge Agreement, to be filed with the Offices of the Secretary of State of Arizona, Delaware and Texas; (xii) all necessary UCC financing statement amendments reflecting Borrower's name change; and (xiii) such other supporting documents as Agent may reasonably request; (b) Borrower shall have paid, in connection with this Amendment and such Loan Documents, all recording, handling, amendment and other fees required to be paid to Agent pursuant to any Loan Documents; and (c) Borrower shall have paid, in connection with this Amendment and such Loan Documents, all other fees and reimbursements to be paid to Agent pursuant to any Loan Documents, or otherwise due Agent, and including fees and disbursements of Agent's attorneys, Bryan Cave LLP. ARTICLE VI. REPRESENTATIONS AND WARRANTIES Section 6.1. REPRESENTATIONS AND WARRANTIES OF BORROWER. In order to induce Agent to enter into this Amendment, Borrower represents and warrants to Agent that: (a) The representations and warranties contained in Article V of the Credit Agreement, are true and correct at and as of the Effective Date, except to the extent that the facts upon which such representations are based have been changed by transactions and events expressly permitted by the Credit Agreement. 10 (b) Borrower is duly authorized to execute and deliver this Amendment and will continue to be duly authorized to perform its obligations under the Credit Agreement. Borrower has duly taken all corporate action necessary to authorize the execution and delivery of this Amendment and to authorize the performance of its obligations hereunder and under the Credit Agreement. (c) The execution and delivery by Borrower of this Amendment, the performance by Borrower of its obligations hereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or any of its organizational documents, or of any material agreement, judgment, license, order or permit applicable to or binding upon it, or result in the creation of any lien, charge or encumbrance upon any assets or properties or any of its assets. Except for those which have been duly obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by Borrower of this Amendment or to consummate the transactions contemplated hereby. (d) When duly executed and delivered, each of this Amendment and the Credit Agreement will be a legal and binding obligation of Borrower, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency and similar laws applying to creditors' rights generally and by principles of equity applying to creditors' rights generally. (e) The audited annual Consolidated financial statements of Borrower dated as of March 31, 2001 fairly present the Consolidated financial position at such date and the Consolidated statement of operations and the changes in Consolidated financial position for the periods ending on such date for Borrower. Copies of such financial statement have been delivered to each Lender. Since such date no Material Adverse Change has occurred in the financial condition or businesses or in the Consolidated financial condition or businesses of Borrower. (f) Attached hereto as Exhibit B is a true, correct, and complete list of each Dental Practice Advance made by Borrower on or prior to the Effective Date, which has not been repaid in full. (g) CAPITALIZATION. The authorized capital stock of Borrower consists of (i) 40,000,000 shares of common stock, par value $.001 per share, of which 10,572,548 shares are issued and outstanding and (ii) 10,000,000 shares of preferred stock of which zero shares are issued and outstanding. On the date of this Amendment, 2,553,516 shares of Borrower's common stock are subject to outstanding stock options, warrants or other rights to acquire shares of common stock (whether or not such stock options, warrants or other rights are presently exercisable). Except for the foregoing, no Person or entity has any right to acquire any equity securities or other securities of Borrower. 11 ARTICLE VII. MISCELLANEOUS Section 7.1. RATIFICATION OF AGREEMENTS. The Credit Agreement as hereby amended is hereby ratified and confirmed in all respects. The Loan Documents, as they may be amended or affected by this Amendment are hereby ratified and confirmed in all respects. Any reference to the "Credit Agreement" in any Loan Document shall be deemed to refer to all previous amendments thereof and this Amendment also. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Agent under the Credit Agreement or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement or any other Loan Document. In the event of any perceived conflict or inconsistency between the provisions of this Amendment and the Credit Agreement, the provisions of this Amendment shall govern. Section 7.2. SURVIVAL OF AGREEMENTS. All representations, warranties, covenants and agreements of Borrower herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Loan, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by Guarantor or Borrower hereunder or under the Credit Agreement to Agent shall be deemed to constitute representations and warranties by, or agreements and covenants of, such Person under this Amendment and under the Credit Agreement. Section 7.3. RELEASE OF CLAIMS. Borrower hereby releases and forever discharges all Bank Parties, together with their respective employees, agents, attorneys, officers, and directors (all of the foregoing hereinafter called the "Released Parties"), from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether heretofore or hereafter accruing, for or because of any matter or things done omitted or suffered to be done by any of the Released Parties prior to and including the date hereof, and in any way directly or indirectly arising out of or in any way connected to the Credit Agreement, as amended hereby, including but not limited to claims of usury (although no such claims are known to exist) (all of the foregoing hereinafter called the "Released Matters"). Borrower acknowledges that the agreements in this Section 7.3 are intended to cover and be in full satisfaction for all or any alleged injuries or damages arising in connection with the Released Matters. Section 7.4. LOAN DOCUMENTS. This Amendment is a "Loan Document" under the Credit Agreement, and all provisions in the Credit Agreement pertaining to Loan Documents apply hereto and thereto. Section 7.5. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas and any applicable laws of the United States of America in all respects, including construction, validity and performance. 12 Section 7.6. COUNTERPARTS; FAX. This Amendment may be separately executed in counterparts and by the parties hereto, each of which when so executed shall be deemed to constitute one and the same Amendment. This Amendment may be validly executed in counterpart and delivered to the other party by facsimile or other electronic transmission provided that Borrower delivers its original counterpart signature page to Secured Party the next business day immediately following the date of its execution of this Amendment by depositing same with a reputable overnight courier service. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 13 IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. BORROWER: E-DENTIST.COM, INC., a Delaware corporation By: /s/ JAMES M. POWERS, JR. ------------------------------------ James M. Powers, Jr. President & Chief Executive Officer AGENT AND LENDERS: BANK ONE, TEXAS, N.A. By: /s/ DENNIS B. WARREN ------------------------------------ Dennis B. Warren First Vice President 14 CONSENT AND AGREEMENT Pentegra Investments, Inc., a Delaware corporation, hereby (i) consents to the provisions of the foregoing Fourth Amendment to Credit Agreement and Other Loan Documents and the transactions contemplated therein and (ii) ratifies and confirms the Guaranty dated as of June 1, 1998 made by it for the benefit of Bank One Texas, N.A. and any other Lenders that become parties to the Credit Agreement ("Guaranty") and (iii) agrees that all of its respective obligations and covenants thereunder (to the extent it is a party thereto) shall remain unimpaired by the execution and delivery of said Amendment and the other documents and instruments executed in connection therewith and that the Guaranty shall remain in full force and effect. THIS CONSENT AND AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS OF THE PARTIES. IN WITNESS WHEREOF, this Consent and Agreement is executed by the undersigned and is made effective as of June 29, 2001. PENTEGRA INVESTMENTS, INC. By: /s/ JAMES M. POWERS, JR. ------------------------------------ James M. Powers, Jr. President and Chief Executive Officer 15 EXHIBIT A WARRANT [SEE ATTACHED] Exhibit A EXHIBIT B DENTAL PRACTICE ADVANCES AS OF MAY 31, 2001 Outstanding Issue Date Principal ---------- --------- Anderson June 29, 2000 63,928.58 Barber & Barber June 26, 2000 246,904.78 Cartwright August 1, 2000 86,641.69 Cavallino June 30, 2000 12,873.16 Collins June 27, 2000 21,017.25 Ford June 30, 2000 72,549.63 Greder October 10, 2000 230,376.36 Henderson July 6, 2000 54,092.64 Holleron June 26, 2000 47,534.97 Lanning June 29, 2000 66,960.68 Lee June 26, 2000 34,362.62 Legg June 26, 2000 50,800.00 Majors August 1, 2000 132,808.47 O'Brien July 24, 2000 191,059.37 Phillips June 26, 2000 25,045.77 Pinner June 29, 2000 58,122.09 Reinitz December 1, 2000 37,660.08 Richards March 31, 2000 232,115.07 Richards July 5, 2000 58,561.28 Schiro July 20, 1999 56,941.11 Schneekluth July 5, 2000 90,454.41 Smith July 27, 2000 160,000.00 Smith-Wilson July 12, 2000 50,221.03 Van Zandt September 1, 2000 120,000.00 ------------ 2,201,031.05 ============ Exhibit B EXHIBIT D-1 CERTIFICATE ACCOMPANYING FINANCIAL STATEMENTS Reference is made to that certain Credit Agreement dated as of June 1, 1998 (as the same has been amended through the date hereof and may be further amended, supplemented or restated following the date hereof, the "Credit Agreement"), by and among E-DENTIST.COM, INC., a Delaware corporation, formerly known as Pentegra Dental Group, Inc. ("Borrower"), BANK ONE, TEXAS, N.A., individually as a Lender and as Agent for the Lenders ("Agent"), and the parties identified and defined as "Lenders" in the Credit Agreement, which Credit Agreement is in full force and effect as of the date hereof. Terms which are defined in the Credit Agreement are used herein with the meanings given them in the Credit Agreement. This Certificate is furnished pursuant to Section 6.2(a), Section 6.2(b) and Section 7 of the Credit Agreement. Together herewith Borrower is furnishing to Agent and each Lender, Borrower's *[unaudited/audited] financial statements (the "Financial Statements") as of the *[quarter/year] ending ____________________ (the "Reporting Date"). Borrower hereby represents, warrants, and acknowledges to Agent and each Lender that: (a) the undersigned is the duly elected, qualified and acting Chief Financial Officer of Borrower; (b) the Financial Statements are accurate and complete and satisfy the requirements of the Credit Agreement; (c) attached hereto is a schedule of calculations showing Borrower's compliance as of the Reporting Date with the financial covenants of Sections *[7.14, 7.19 and 7.20] of the Credit Agreement *[or Borrower's non-compliance as of such date with the requirements of Section(s) 7.14, 7.19 and 7.20] of the Credit Agreement; (d) on the Reporting Date, Borrower was, and on the date hereof Borrower is, in full compliance with the disclosure requirements of Section 6.2 of the Credit Agreement, and no Default otherwise existed on the Reporting Date or otherwise exists on the date of this instrument *[except for Defaults) under Section(s) _________________ of the Credit Agreement, which * [is/are] more fully described on a schedule attached hereto]; and (e) *[Unless otherwise disclosed on a schedule attached hereto,] The representations and warranties of Borrower set forth in the Credit Agreement and the other Loan Documents are true and correct, in all material respects, on and as of the date hereof (except to the extent that the facts on which such representations and warranties are based have been changed by the extension of credit under the Credit Agreement), with the same effect as though such representations and warranties had been made on and as of the date hereof. Exhibit D-1 - Page 1 The undersigned hereby certifies that he has reviewed the Loan Documents and the Financial Statements and has otherwise undertaken such inquiry as is in his opinion necessary to enable him to express an informed opinion with respect to the above representations, warranties and acknowledgments of Borrower and, to the best of his knowledge, such representations, warranties, and acknowledgments are true, correct and complete. IN WITNESS WHEREOF, this instrument is executed as of ____________________, 200__. E-DENTIST.COM, INC. By: ------------------------------------- Printed Name: --------------------------- Its: Chief Financial Officer Exhibit D-1 - Page 2 [FOURTH AMENDMENT] CERTIFICATE OF E-DENTIST.COM, INC. Dated: June 29, 2001 Reference is made to (i) that certain Credit Agreement dated as of June 1, 1998 (as amended, supplemented, or restated to the date hereof, the "Credit Agreement"), among e-dentist.com, Inc., a Delaware corporation, formerly known as Pentegra Dental Group, Inc. ("Borrower"), Bank One, Texas, N.A., individually as a Lender and as Agent (herein called "Agent"), and the Lenders, including Agent, party to the Credit Agreement ("Lenders") and (ii) that certain Fourth Amendment to Credit Agreement and Other Loan Documents dated of even date herewith (the "Fourth Amendment") among Borrower, Agent and Lenders. Terms which are defined in the Credit Agreement and which are used but not defined herein shall have the meanings given them in the Credit Agreement. The undersigned, James M. Powers, Jr. and James L. Dunn, Jr., do hereby certify that: 1. They are the duly elected, qualified, and acting President and Chief Executive Officer and Secretary, respectively, of Borrower. 2. All representations and warranties made by any Restricted Person in any Loan Document delivered on or before the date hereof are true on and as of the date hereof (except to the extent that the facts upon which such representations are based have been changed by the transactions contemplated in the Credit Agreement) as if such representations and warranties had been made as of the date hereof. 3. No Default exists on the date hereof. 4. Each Restricted Person has performed and complied with all agreements and conditions required in the Loan Documents to be performed or complied with by it or them on or prior to the date hereof. 5. Attached as Exhibit A to that certain Omnibus Certificate dated as of June 1, 1998 executed by the undersigned (the "Original Omnibus Certificate"), is a true, correct and complete copy of certain resolutions duly adopted by the Board of Directors of Borrower in accordance with Borrower's Articles of Incorporation and Bylaws, and none of such resolutions has been rescinded, revoked, modified or amended in any respect, and all of such resolutions are in full force and effect on the date hereof and authorize the execution, delivery and performance of the Fourth Amendment. 1 6. Paragraph 2 of the Original Omnibus Certificate is no longer true and accurate in all respects, accordingly, the information contained in this Paragraph 6 replaces and substitutes Paragraph 2 of the Original Omnibus Certificate. The following named individuals are duly elected, qualified and acting officers of Borrower and hold the offices set forth opposite their respective names as of the date hereof, and the signatures set opposite their respective names and titles of said officers are their true and authentic signatures: NAME TITLE SPECIMEN SIGNATURE - ---- ----- ------------------ James M. Powers, Jr. President and /s/ JAMES M. POWERS, JR. Chief Executive Officer Charles Sanders Chief Financial Officer /s/ CHARLES SANDERS James L. Dunn, Jr. Secretary /s/ JAMES L. DUNN, JR. 7. Exhibit B attached to the Original Omnibus Certificate is no longer true and accurate in all respects. Attached hereto as Schedule B is a true, correct and complete copy of a Certificate of Amendment of Restated Certificate of Incorporation of Borrower which is in addition to the documents attached as Exhibit B to the Original Omnibus Certificate and such certificate amendment and the other documents attached as Exhibit B to the Original Omnibus Certificate have not been rescinded, revoked, modified or amended in any respect are in full force and effect on the date hereof. 8. Attached as Exhibit C to the Original Omnibus Certificate is a true, correct and complete copy of the Bylaws of Borrower. None of such Bylaws has been rescinded, revoked, modified or amended in any respect are in full force and effect on the date hereof. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 2 IN WITNESS WHEREOF, this instrument is executed by the undersigned as of the date first written above. By: /s/ JAMES M. POWERS, JR. ------------------------------------ James M. Powers, Jr. President and Chief Executive Officer (solely in his capacity as President and Chief Executive Officer of e-dentist.com, Inc.) By: /s/ JAMES L. DUNN, JR. ------------------------------------ James L. Dunn, Jr. Secretary (solely in his capacity as Secretary of e-dentist.com, Inc.) 3 SCHEDULE B CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION [see attached] 4 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made effective as of June 29, 2001, by e-dentist.com, Inc., a Delaware corporation, formerly known as Pentegra Dental Group, Inc. ("Debtor"), in favor of BANK ONE, TEXAS, N.A., a national banking association, individually as a Lender and as Agent for the Lenders from time to time parties to the Credit Agreement described herein ("Secured Party"). Debtor hereby agrees as follows: RECITALS A. Debtor and Secured Party, as Agent, and certain lenders (each a "Lender" and collectively, the "Lenders") are parties to that certain Credit Agreement dated as of June 1, 1998, as amended by that certain letter agreement dated September 9, 1998, that certain First Amendment to Credit Agreement dated as of February 9, 1999, that certain Second Amendment to Credit Agreement dated as of July 15, 1999, that certain Third Amendment to Credit Agreement dated as of June 1, 2000 and that certain Fourth Amendment to Credit Agreement dated of even date herewith (as the same may from time to time be further amended, supplemented, or restated, collectively, the "Credit Agreement"), pursuant to which credit was extended to Debtor as provided therein. B. Pursuant to the Credit Agreement, Debtor has executed that certain Security Agreement dated as of June 1, 1998, as amended by that certain First Amendment to Security Agreement dated as of June 1, 2000 (as the same may from time to time be further amended, supplemented, or restated, collectively, the "Original Agreement") in favor of Secured Party, as Agent for the benefit of Lenders, pursuant to which Debtor granted to Secured Party a security interest in the Collateral as defined therein. C. Debtor and Secured Party desire to amend certain terms and provisions of the Credit Agreement pursuant to the Fourth Amendment to Credit Agreement, and Secured Party is willing to enter into the Fourth Amendment to Credit Agreement, but only upon the condition that Debtor shall have executed and delivered this Agreement. AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, in the Credit Agreement and in the Original Agreement, in consideration of the loans which have been made by Secured Party to Debtor, in order to induce Secured Party to enter into the Fourth Amendment to Credit Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1 Section 1. DEFINITIONS AND CONSTRUCTION. Section 1.1. GENERAL DEFINITIONS. Among the terms used in this Agreement are the following: "ACCOUNTS" has the meaning given it in Section 2.1. "COLLATERAL" means all of Debtor's right, title and interest, now existing or hereafter acquired, in and to all property, of whatever type, which is described in Section 2.1 as being at any time subject to a security interest hereunder to Secured Party. "COLLATERAL ACCOUNT" has the meaning given it in Section 3.2(k). "CREDIT AGREEMENT" has the meaning given it in Recital A above. "GENERAL INTANGIBLES" has the meaning given it in Section 2.1. "INSTRUMENTS" has the meaning given it in Section 2.1. "RECEIVABLES" has the meaning given it in Section 2.1. "REMITTANCE ACCOUNT" has the meaning given it in Section 2.1. "SECURED OBLIGATIONS" has the meaning given it in Section 2.2. Section 1.2. CONSTRUCTION. All capitalized terms used in this Agreement which are defined in the Credit Agreement and not otherwise defined herein shall have the same meanings herein as set forth therein. All terms used in this Agreement which are defined in the Uniform Commercial Code currently in effect in the State of Arizona (the "Code") and not otherwise defined herein or in the Credit Agreement shall have the same meanings herein as set forth therein, except where the context otherwise requires. Unless the context otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document (including, but not limited to, references in Section 2.1) also refer to and include all renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document, provided that nothing contained in this Section shall be construed to allow, without written consent of Secured Party, any Person to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 2. SECURITY INTEREST. Section 2.1. GRANT OF SECURITY INTEREST. As collateral security for all of the Secured Obligations, Debtor hereby pledges and assigns to Secured Party and grants to Secured Party a continuing security interest, for the benefit of Lenders, in all of the following (the "Collateral"): ACCOUNTS. All "accounts" (as defined in the Code) of any kind, and shall include, without limitation, all accounts receivable (including any accounts receivable of any Dental Practice Group), book debts and other forms of obligations (other than forms of obligations evidenced by chattel paper, documents or instruments) now owned or hereafter received or acquired by or 2 belonging or owing to Debtor, whether arising out of goods sold or services rendered by Debtor or from any other transaction, whether or not the same involves the sale of goods or services by Debtor (including, without limitation, any such obligation which may be characterized as an account or contract right under the Code), and all of Debtor's rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, and all of Debtor's rights to any goods represented by any of the foregoing, and all monies due or to become due to Debtor under all purchase orders, contracts and agreements for the sale of goods or the performance of services or both by Debtor (whether or not yet earned by performance on the part of Debtor or in connection with any other transaction), now in existence or hereafter occurring, including without limitation the right to receive the proceeds of said purchase orders, contracts and agreements, and all chattel paper, documents and instruments of any kind, relating to such accounts and all rights in, to or under all management service agreements, security agreements, leases and other contracts securing or otherwise relating to any such accounts, chattel paper, documents, or instruments, and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing (the "Receivables"). BANK ACCOUNTS. The Collateral Account (as hereinafter defined), and all funds and investments held in the Collateral Account from time to time or purchased with proceeds thereof, and any and all other moneys, securities or other property (and the proceeds therefrom) of the Debtor now or hereafter held or received by or in transit to Secured Party or any Lender from or for the account of Debtor, whether for safekeeping, custody, pledge, transmission, collection or otherwise, any and all deposits (general or special, time or demand, provisional or final) of the Debtor with Secured Party or any Lender, and any other credits and claims of the Debtor at any time existing against Secured Party or any Lender, including claims under certificates of deposit. BANK ONE, ARIZONA, N.A. ACCOUNTS. (i) Account number 4848-6521 in the name of Debtor established with Bank One, Arizona, N.A. for the purposes set forth in Section 6.18 of the Credit Agreement and any and all deposits (general or special, time or demand, provisional or final) now or at any time hereafter on deposit in such account (the "Remittance Account"), (ii) any and all other accounts and deposits (general or special, time or demand, provisional or final) of Debtor with Bank One, Arizona, N.A., (iii) all money and all instruments, certificates, investment property, documents, and writings evidencing the same, (iv) all sums due or to become due thereon, and all extensions or renewals thereof, if the accounts may be extended or renewed, and (v) any other credits and claims of Debtor at any time existing against Bank One, Arizona, N.A., including claims under certificates of deposit. EQUIPMENT. All "equipment" (as defined in the Code) of any kind (including any equipment used in any Dental Practice Group), and shall include, without limitation, all machinery, equipment, furnishings, vehicles and computers and other electronic data-processing and other office equipment of any nature whatsoever, any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments components, parts, equipment and accessories installed thereon or affixed thereto. GENERAL INTANGIBLES, ETC. All "general intangibles" (as defined in the Code) (including, without limiting the foregoing in any respect, all management service agreements between the Debtor and any third parties, all choses in 3 action, tax refunds, and insurance proceeds), all chattel paper, documents, instruments, security agreements, leases, other contracts and money, and all other rights of Debtor (except those constituting Receivables) to receive payments of money or the ownership of property (the "General Intangibles"). INSTRUMENTS. All "instruments" (as defined in the Code) in all forms (other than securities) including, but not limited to, the Dental Practice Notes, and all interest, cash and other instruments or other writings or property from time to time received, receivable or otherwise distributed in respect of or in exchange for or in renewal or extension of any or all of the foregoing instruments including, but not limited to, the Dental Practice Payments (the "Instruments"). INVENTORY. All "inventory" (as defined in the Code) of any kind (including any inventory used in any Dental Practice Group), and shall include, without limitation, all inventory, merchandise, goods and other personal property, which are held by or on behalf of Debtor for sale or lease or are furnished or are to be furnished under a contract of services or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in Debtor's business, or the processing, packaging, promotion, delivery or shipping of the same, and all finished goods, whether or not such inventory is listed on any schedules, assignments or reports furnished to Secured Party from time to time and whether or not the same is in transit or in the constructive, actual or exclusive occupancy or possession of Debtor or is held by Debtor or by others for Debtor's account, including, without limitation, all goods covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers and all inventory which may be located on the premises of Debtor or of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or other Persons. TRADEMARKS. All trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and any other designs or sources of business identifiers, indicia of origin or similar devices (including any of the foregoing used in any Dental Practice Group), all registrations with respect thereto, all applications with respect to the foregoing, and all extensions and renewals with respect to any of the foregoing, together with all of the goodwill associated therewith, in each case whether now or hereafter existing, and all rights and interest associated with the foregoing. OTHER COLLATERAL. To the extent not otherwise covered by the foregoing all chattel paper, documents, instruments, money and other types of personal property. RELATED COLLATERAL AND PROCEEDS. All books and records (including, without limitation, customer lists, computer software, computer hardware, computer disks and tapes and other materials and records) of Debtor pertaining in any way to any or all of the foregoing; all parts of, all accessions to, all replacements for, all products of, all payments of any type in lieu of or in respect of, and all documents and general intangibles covering or relating to any or all of the foregoing; all proceeds of any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the payee thereof) or under any indemnity, warranty or guaranty by reason of loss to or otherwise with respect to any of the foregoing Collateral. 4 In each case, the foregoing shall be covered by this Agreement, whether now or hereafter existing, and whether Debtor's ownership or other rights therein are now held or hereafter acquired and howsoever Debtor's interest therein may arise or appear (whether by ownership, security interest, claim or otherwise). Section 2.2. OBLIGATIONS SECURED. The security interest created hereby in the Collateral constitutes continuing collateral security for (i) the "Obligations" as defined in the Credit Agreement, and all amounts from time to time owing by Debtor under the Credit Agreement, the Note and the other Loan Documents whether now existing or hereafter arising, (ii) all other loans and future advances made by Secured Party, any Affiliate of Bank One, Texas, N.A. or any Lender to Debtor and all other debts, obligations and liabilities of every kind and character of Debtor now or hereafter existing in favor of Secured Party or Lenders, whether such debts, obligations or liabilities be direct or indirect, primary or secondary, joint or several, fixed or contingent, and whether originally payable to Lenders or to a third party and subsequently acquired by a Lender, and whether such debts, obligations or liabilities are evidenced by notes, open account, overdraft, endorsement, security agreement, guaranty, or otherwise (it being contemplated that Debtor may hereafter become indebted to Lenders in further sum or sums but Lenders shall have no obligation to extend further indebtedness by reason of this Agreement), (iii) the due performance and observance by Debtor of all of its other obligations from time to time existing under or in respect of any of the Loan Documents, and (iv) the payment and performance of any and all present or future obligations of Debtor according to the terms of any present or future interest rate or currency rate swap, rate cap, rate floor, rate collar, exchange transaction, forward rate agreement, or other exchange rate protection agreements or any option with respect to any such transaction now existing or hereafter entered into between Debtor, any Subsidiary of Debtor, and one or more parties constituting Secured Party or any Lender (or any affiliate of any Lender) (collectively, the "Secured Obligations"). Section 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. Section 3.1. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants as follows: (a) OWNERSHIP AND LIENS. Debtor has good and marketable title to the Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except for the security interest created by this Agreement and Permitted Liens. No dispute, right of setoff (except as provided in certain management service agreements), counterclaim or defense exists with respect to all or any part of the Collateral. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except such as may have been filed in favor of Secured Party relating to this Agreement and Permitted Liens. (b) SECURITY INTEREST. Debtor has and will have at all times full right, power and authority to grant a security interest in the Collateral to Secured Party in the manner provided herein, free and clear of any lien, security interest or other charge or encumbrance, except for Permitted Liens. This Agreement creates a valid and binding security interest in favor of Secured Party in the Collateral securing the Secured Obligations. 5 (c) LOCATION. Debtor's residence or chief executive office and principal place of business, as the case may be, and the office where the records concerning the Collateral are kept is located at its address set forth next to Debtor's signature below. Section 3.2. COVENANTS. Unless Secured Party shall otherwise consent in writing, Debtor will at all times comply with the covenants contained in this Section 3.2. (a) FURTHER ASSURANCES. Debtor will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest; (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral; or (iii) to otherwise effect the purposes of this Agreement. (b) INSPECTION OF COLLATERAL AND INFORMATION. Debtor will keep adequate records concerning the Collateral and will permit Secured Party and all representatives appointed by Secured Party, including independent accountants, agents, attorneys, appraisers and any other persons to inspect any of the Collateral and the books and records of or relating to the Collateral at any time during normal business hours, and to make photocopies and photographs thereof, and to write down and record any information as such representatives shall obtain. Debtor will furnish to Secured Party any information which Secured Party may from time to time request concerning any covenant, provision or representation contained herein or any other matter in connection with the Collateral. (c) CONDITION OF GOODS. Obligor will maintain, preserve, protect and keep all Collateral which constitutes goods in good condition, repair and working order (ordinary wear and tear excepted) and will cause such Collateral to be used and operated in a good and workmanlike manner, in accordance with applicable law and in a manner which will not make void or cancelable any insurance with respect to such Collateral. Obligor will promptly make or cause to be made all repairs, replacements and other improvements to or in connection with the Collateral which are necessary or desirable or that Secured Party may request to such end. (d) INSURANCE AND PAYMENT OF TAXES, ETC. Debtor will, at its own expense, maintain insurance with respect to all Collateral which constitutes goods in such amounts, against such risks, in such form and with such insurers, as shall be satisfactory to Secured Party from time to time. Debtor (i) will timely pay all property and other taxes, assessments and governmental charges or levies imposed upon the Collateral or any part thereof; (ii) will timely pay all lawful claims which, if unpaid, 6 might become a lien or charge upon the Collateral or any part thereof; and (iii) will maintain appropriate accruals and reserves for all such liabilities in a timely fashion in accordance with generally accepted accounting principles. Debtor may, however, delay paying or discharging any such taxes, assessments, charges, claims or liabilities so long as the validity thereof is contested in good faith by proper proceedings and it has set aside on its books adequate reserves therefor. (e) RECEIVABLES AND GENERAL INTANGIBLES. Debtor will, except as otherwise provided herein, collect, at its own expense, all amounts due or to become due under each of the Receivables and General Intangibles. In connection with such collections, Debtor may (and, at Secured Party's direction, will) take such action as Debtor or Secured Party may deem necessary or advisable to enforce collection or performance of each of the Receivables and General Intangibles. Debtor will duly perform and cause to be performed all of its obligations with respect to the goods or services, the sale or lease or rendition of which gave rise or will give rise to each Receivable and all of its obligations to be performed under or with respect to the General Intangibles. (f) DELIVERY OF PLEDGED COLLATERAL. All instruments and writings constituting Instruments from time to time shall be delivered to Secured Party promptly upon the receipt thereof by or on behalf of Obligor. All such Instruments shall be held by or on behalf of Secured Party pursuant hereto and shall be delivered in suitable form for transfer by delivery with any necessary endorsement or shall be accompanied by fully executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. (g) TRANSFER OR ENCUMBRANCE. Debtor will not sell, assign (by operation of law or otherwise), transfer, exchange, lease or otherwise dispose of any of the Collateral, nor will Debtor grant a lien or security interest in or execute, file or record any financing statement or other security instrument with respect to the Collateral, nor will Debtor deliver actual or constructive possession of the Collateral to any other Person. (h) POSSESSION AND COMPROMISE OF COLLATERAL. Debtor will not cause or permit the removal of any item of the Collateral from its possession, control and risk of loss. Debtor will not adjust, settle, compromise, amend or modify any of the Collateral, other than an adjustment, settlement, compromise, amendment or modification in good faith and in the ordinary course of business, other than during the continuance of an Event of Default, of any Receivable or General Intangible. (i) FINANCING STATEMENT FILINGS. Debtor will not cause or permit any change to be made in its name, identity or corporate structure, or any change to be made to a jurisdiction other than as represented in Section 3.1 hereof (i) in the location of any Collateral, (ii) the location of any records concerning any Collateral or (iii) in the location of Debtor's residence or chief executive office or chief place of business, as the case may be, unless Debtor shall have 7 notified Secured Party of such change at lease thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Secured Party for the purpose of further perfecting or protecting the security interest in favor of Secured Party in the Collateral. (j) COLLECTION LOCKBOX. Upon the occurrence and during the continuance of an Event of Default, Debtor shall instruct all account debtors and other Persons obligated to make payments to Debtor on any Collateral, to make such payments to a lockbox held in the name and under the control of Secured Party (the "Lockbox") and Debtor shall enter into a lockbox agreement with Secured Party for the receipt and processing of such payments, in form and substance acceptable to Secured Party, which shall, among other things, provide for the transfer of funds from the Lockbox to Secured Party as provided below. If during such time when the proceeds of any Collateral are being deposited in the Lockbox, the Debtor receives the proceeds of any Collateral (including any payments with respect to which instructions have been given as provided above), Debtor shall as promptly as possible deposit such proceeds into the Lockbox. Until so deposited, all such proceeds shall be held in trust by Debtor for Secured Party and shall not be commingled with any other funds or property of Debtor, and Debtor will not adjust, settle or compromise the amount or payment of any such Collateral or release wholly or partly any account debtor or obligor thereof or allow any credit or discount thereon. (k) COLLATERAL ACCOUNT. All receipts of the Lockbox shall be deposited daily into a deposit account in the name and under the control of Secured Party (the "Collateral Account"). Amounts on deposit in the Collateral Account shall either remain on deposit therein or be invested and re-invested from time to time in such Liquid Investments as Debtor (or, if a Default or Event of Default has occurred and is continuing, Secured Party) shall determine, which Liquid Investments shall be held in the name and be under the control of Secured Party until liquidated and applied as provided in the following subsection. Any income received by Secured Party with respect to the balance from time to time standing to the credit of the Collateral Account, including any interest on or proceeds of Liquid Investments, shall also remain, or be deposited, in the Collateral Account. All right, title and interest in and to the amounts on deposit from time to time in the Collateral Account, together with any Liquid Investments from time to time made pursuant to this section shall vest in Secured Party, shall constitute part of the Collateral hereunder, and shall not constitute payment of the Secured Obligations until applied thereto as herein provided. (l) DISTRIBUTION OF COLLATERAL ACCOUNT. At any time when no Default or Event of Default has occurred and is continuing, the outstanding balance in the Collateral Account shall be distributed to Debtor upon the order of Debtor. If immediately available cash on deposit in the Collateral Account is not sufficient to make any such distribution to Debtor, Secured Party shall liquidate as promptly as practicable 8 Liquid Investments as required to obtain sufficient cash to make such distribution and, notwithstanding any other provision of this section, such distribution shall not be made until such liquidation has taken place. During the continuation of a Default or an Event of Default, Secured Party shall, at Secured Party's discretion, either (i) continue to hold the balance of the Collateral Account and all Liquid Investments as Collateral, or (ii) apply any or all of the balance from time to time standing to the credit of the Collateral Account (subject to collection) as specified in Section 4.3 and liquidate any or all Liquid Investments and apply the proceeds thereof as specified in Section 4.3. (m) As used in this section, "LIQUID INVESTMENT" means any investment in the name of Secured Party (and, in the opinion of counsel to Secured Party, appropriately subject to a perfected security interest in favor of Secured Party) which matures within one month after it is acquired by Secured Party and is either (i) a certificate of deposit or time deposit issued by any Lender or (ii) an obligation entitled to the full faith and credit of the United States which is in book-entry form and subject to pledge under applicable state law and Treasury regulations. (n) REMITTANCE ACCOUNT. Debtor shall not have any right to make any withdrawals from or issue checks against the Remittance Account. Secured Party will apply distributions from the Remittance Account in accordance with the express provisions of the Credit Agreement. Section 4. REMEDIES; POWERS AND AUTHORIZATIONS. Section 4.1. PROVISIONS CONCERNING THE COLLATERAL. (a) POWER OF ATTORNEY. If Default or Event of Default exists and is continuing, Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact and proxy, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement. (b) PERFORMANCE BY SECURED PARTY. If Debtor fails to perform any agreement or obligation contained herein, Secured Party may itself perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be payable by Debtor under Section 4.5. Section 4.2. EVENT OF DEFAULT - REMEDIES. If an Event of Default shall have occurred and be continuing, and without limiting other rights and remedies provided herein, under the Loan Documents or otherwise available to Secured Party, Secured Party may from time to time in its discretion, without limitation and without notice (a) exercise in respect of the Collateral all the rights and remedies of a secured party on default under the Code (whether or not the Code applies to the affected Collateral); (b) require Debtor to, and Debtor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it 9 available to Secured Party at a place to be designated by Secured Party which is convenient to both parties; (c) reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest created hereby by any available judicial procedure; or (d) apply by appropriate judicial proceedings for appointment of a receiver for the Collateral, or any part thereof, and Debtor hereby consents to any such appointment. Debtor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Section 4.3. APPLICATION OF PROCEEDS. If any Default or Event of Default shall have occurred and be continuing, Secured Party may in its discretion apply any cash held by Secured Party as Collateral, and any cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral, to any or all of the following in such order as Secured Party may elect: (a) to the repayment of the costs and expenses, including reasonable attorneys' fees and legal expenses, incurred by Secured Party in connection with: (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure of Debtor to perform or observe any of the provisions hereof; (b) to the payment or other satisfaction of any liens and other encumbrances upon any of the Collateral; (c) to the satisfaction of any other Secured Obligations; (d) by holding the same as Collateral; (e) to the payment of any other amounts required by applicable law (including, without limitation, Section 9.504(a)(3) of the Code or any successor or similar, applicable statutory provision); and (f) by delivery to Debtor or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct. Section 4.4. DEFICIENCY. In the event that the proceeds of any sale, collection or realization of or upon Collateral by Secured Party are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor shall be liable for the deficiency, together with interest thereon at such other rate as shall be fixed by applicable law, together with the costs of collection and the reasonable fees of any attorneys employed by Secured Party to collect such deficiency. Section 4.5. INDEMNITY AND EXPENSES. (a) Debtor hereby indemnifies and agrees to hold harmless Secured Party and each Lender and their respective officers, directors, employees, agents and counsel (each an "Indemnified Person") from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever ("Claims and Liabilities") which may be imposed on, incurred by, or asserted against any Indemnified Person growing out of or resulting from this Agreement and the transactions and events at any time associated therewith. THE FOREGOING 10 INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH CLAIMS AND LIABILITIES ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED IN WHOLE OR IN PART BY ANY NEGLIGENT ACT OR OMISSION BY ANY INDEMNIFIED PERSON, except to the limited extent any Claims and Liabilities of an Indemnified Person are proximately caused by such Indemnified Person's gross negligence or willful misconduct. The indemnification provided for in this section shall survive the termination of this Agreement. (b) Debtor will upon demand pay to Secured Party the amount of any and all costs and expenses, including the fees and disbursements of Secured Party's counsel and of any experts and agents, which Secured Party may incur in connection with: (i) the transaction which give rise to this Agreement; (ii) the preparation of this Agreement and the perfection and preservation of this security interest created under this Agreement; (iii) the administration of this Agreement; (iv) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral; (v) the exercise or enforcement of any of the rights of Secured Party hereunder; or (vi) the failure by Debtor to perform or observe any of the provisions hereof, except expenses resulting from Secured Party's gross negligence or willful misconduct. Section 5. MISCELLANEOUS. Section 5.1. WAIVER AND AMENDMENT. No failure or delay by Secured Party in exercising any right, power or remedy which Secured Party may have under this Agreement shall operate as a waiver thereof or of any other right, power of remedy, nor shall any single or partial exercise by Secured Party of any such right, power or remedy preclude any other or future exercise thereof or of any other right, power or remedy. No waiver of any provision of this Agreement and no consent to any departure therefrom shall ever be effective unless it is in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instances and for the purposes for which given and to the extent specified in such writing. No modification or amendment of or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced. In addition, all such amendments and waivers shall be effective only if given with the necessary approvals of Lenders as required in the Credit Agreement. Section 5.2. NOTICES. Any notice or communication required or permitted hereunder shall be given as provided in the Credit Agreement. Section 5.3. PRESERVATION OF RIGHTS. No failure on the part of Secured Party to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies of Secured. Party provided herein are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law. 11 Section 5.4. BINDING EFFECT AND ASSIGNMENT. This Agreement creates a continuing security interest in the Collateral and (a) shall be binding on Debtor and its successors and permitted assigns and (b) shall inure, together with all rights and remedies of Secured Party hereunder, to the benefit of Secured Party and Lenders and their respective successors, transferees and assigns. None of the rights or obligations of Debtor hereunder may be assigned or otherwise transferred without the prior written consent of Secured Party. Section 5.5. TERMINATION. It is contemplated by the parties hereto that there may be times when no Secured Obligations are outstanding, but notwithstanding such occurrences, this Agreement shall remain valid and shall be in full force and effect as to subsequent outstanding Secured Obligations. Upon written request for the termination hereof delivered by Debtor to Secured Party, if no Secured Obligations are outstanding, and the Credit Agreement and the commitment of Lenders to extend credit to Debtor have terminated or expired, this Agreement and the security interest created hereby shall terminate and Secured Party will at Debtor's expense, (a) return to Debtor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof; and (b) execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence such termination. SECTION 5.6. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA AND THE LAWS OF THE UNITED STATES OF AMERICA; EXCEPT TO THE EXTENT THAT THE PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST CREATED HEREBY ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF ARIZONA. Section 5.7 RATIFICATION OF ORIGINAL AGREEMENT. Debtor hereby ratifies and confirms the Original Agreement and ratifies, confirms, extends, grants, and re-grants to Secured Party the security interest and Liens granted to Secured Party in the Collateral to secure payment of all Obligations, as described in the Original Agreement. Any reference to the Original Agreement in any other document shall be deemed to refer to this Agreement also. The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of any provision of the Original Agreement or any other document. Section 5.8 COUNTERPARTS; FAX. This Agreement may be separately executed in counterparts and by the parties hereto, each of which when so executed shall be deemed to constitute one and the same Agreement. This Agreement may be validly executed in counterpart and delivered to the other party by facsimile or other electronic transmission provided that Debtor delivers its original counterpart signature page to Secured Party the next business day immediately following the date of its execution of this Agreement by depositing same with a reputable overnight courier service. Section 5.9 LOAN DOCUMENT; SECURITY DOCUMENT. This Agreement is a "Loan Document" and a "Security Document," as defined in the Credit Agreement, and this Agreement is subject to all provisions of the Credit Agreement governing Loan Documents and Security Documents. 12 IN WITNESS WHEREOF, Debtor has caused this Agreement to be executed and delivered by its officer thereunto duly authorized, as of the date first above written. DEBTOR: E-DENTIST.COM, INC., a Delaware corporation Address: By: /s/ JAMES M. POWERS, JR. ------------------------------------ 2999 No. 44th St., Suite 650 James M. Powers, Jr. Phoenix, Arizona 85018 President & Chief Executive Officer 13 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement") is made effective as of June 29, 2001, by e-dentist.com, Inc., a Delaware corporation, formerly known as Pentegra Dental Group, Inc. (herein called "Debtor"), in favor of Bank One, Texas, N.A., a national banking association, individually as a Lender and as Agent for the "Lenders" from time to time parties to the "Credit Agreement," as defined below (herein called "Secured Party"). RECITALS A. Debtor has executed in favor of Lenders a certain Promissory Note dated June 1, 1998, payable to the order of Lenders in the aggregate principal amount of $15,000,000 (such promissory note, as from time to time amended, and any promissory note given in substitution, renewal or extension therefor or thereof, in whole or in part, being herein called the "Note"). B. The Note was executed pursuant to that certain Credit Agreement dated as of June 1, 1998, as amended by that certain letter agreement dated September 9, 1998, that certain First Amendment to Credit Agreement dated as of February 9, 1999, that certain Second Amendment to Credit Agreement dated as of July 15, 1999, that certain Third Amendment to Credit Agreement dated as of June 1, 2000 and that certain Fourth Amendment to Credit Agreement dated of even date herewith (as the same may from time to time be further amended, supplemented, or restated, collectively, the "Credit Agreement"), by and among Debtor, Secured Party, and the lenders named therein ("Lenders"). C. Pursuant to the Credit Agreement, Debtor has executed that certain Pledge Agreement dated as of June 1, 1998 (as the same may from time to time be amended, supplemented, or restated, the "Original Agreement"), in favor of Secured Party, as Agent for the benefit of Lenders, pursuant to which Debtor pledged and granted a security interest to Secured Party in the Pledged Shares as defined therein. D. Debtor and Secured Party desire to amend certain terms and provisions of the Credit Agreement pursuant to the Fourth Amendment to Credit Agreement, and Secured Party is willing to enter into the Fourth Amendment to Credit Agreement, but only upon the condition that Debtor shall have executed and delivered this Agreement. AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, in consideration of the loans which have been made by Secured Party to Debtor, in order to induce Secured Party to enter into the Fourth Amendment to Loan Agreement, and of Ten Dollars and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor hereby agrees with Secured Party as follows: 1 ARTICLE I. -- DEFINITIONS AND REFERENCES Section 1.1. GENERAL DEFINITIONS. As used herein, the terms "Agreement", "Debtor", "Secured Party", "Note", "Lenders" and "Credit Agreement" shall have the meanings indicated above, and the following terms shall have the following meanings: "CODE" means the Uniform Commercial Code in effect in the State of Arizona on the date hereof. "COLLATERAL" means all property of whatever type, in which Secured Party at any time has a security interest pursuant to Section 2.1. "COMMITMENT" means the agreement or commitment by Lenders to make loans or otherwise extend credit to Debtor under the Credit Agreement, and any other agreement, commitment, statement of terms or other document contemplating the making of loans or advances or other extension of credit by Lenders to or for the account of Debtor which is now or at any time hereafter intended to be secured by the Collateral under this Agreement. As of June 1, 2000, Lenders are no longer under any obligation to make loans, advances or other extension of credit to Debtor under the Commitment. "ISSUER" means any issuer of Pledged Shares and any successor of such Issuer. "LIEN" means, with respect to any property or assets, any right or interest therein of a creditor to secure indebtedness of any kind which is owed to him or any other arrangement with such creditor which provides for the payment of such indebtedness out of such property or assets or which allows him to have such indebtedness satisfied out of such property or assets prior to the general creditors of any owner thereof, including without limitation any lien, mortgage, security interest, pledge, deposit, production payment, rights of a vendor under any title retention or conditional sale agreement or lease substantially equivalent thereto, tax lien, mechanic's or materialman's lien, or any other charge or encumbrance for security purposes, whether arising by law or agreement or otherwise, but excluding any right of offset which arises without agreement in the ordinary course of business and any filed financing statement, any registration with an issuer of uncertificated securities, or any other arrangement which would serve to perfect any of the foregoing, regardless of whether such financing statement is filed, such registration is made, or such arrangement is undertaken before or after such Lien exists. "OBLIGATIONS" means all present and future indebtedness, obligations and liabilities of whatever type which are or shall be secured pursuant to Section 2.2. "OBLIGATION DOCUMENTS" means the Credit Agreement, the Note, and all other documents and instruments under, by reason of which, or pursuant to which any or all of the Obligations are evidenced, governed, secured, guaranteed, or otherwise dealt with, and all other agreements, certificates, and other documents, instruments and writings heretofore or hereafter delivered in connection herewith or therewith. "OTHER LIABLE PARTY" means any Person, other than Debtor, who may now or may at any time hereafter be primarily or secondarily liable for any of the Obligations or who may now or may at any time hereafter have granted to Secured Party a Lien upon any property as security for the Obligations. 2 "PERSON" means an individual, corporation, partnership, association, joint stock company, trust, unincorporated organization or joint venture, or a court or governmental unit or any agency or subdivision thereof, or any other legally recognizable entity. "PLEDGED SHARES" has the meaning given it in Section 2.1(a). "RELATED PERSON" means Debtor, each Subsidiary of Debtor, and each Other Liable Party. "SUBSIDIARY" means, with respect to any Person, any corporation, association, partnership, joint venture, or other business or corporate entity, enterprise or organization which is directly or indirectly (through one or more intermediaries) controlled by or owned fifty percent or more by such Person. Section 1.2. INCORPORATION OF OTHER DEFINITIONS. Reference is hereby made to the Credit Agreement for a statement of the terms thereof. All capitalized terms used in this Agreement which are defined in the Credit Agreement and not otherwise defined herein shall have the same meanings herein as set forth therein. All terms used in this Agreement which are defined in the Code and not otherwise defined herein or in the Credit Agreement shall have the same meanings herein as set forth therein, except where the context otherwise requires. Section 1.3. EXHIBITS. All exhibits attached to this Agreement are a part hereof for all purposes. Section 1.4. AMENDMENT OF DEFINED INSTRUMENTS. Unless the context otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document (including, but not limited to, references in Section 2.1) also refer to and include all renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document, provided that nothing contained in this Section shall be construed to authorize any Person to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 1.5. REFERENCES AND TITLES. All references in this Agreement to Exhibits, Articles, Sections, subsections, and other subdivisions refer to the Exhibits, Articles, Sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any subdivision are for convenience only and do not constitute any part of any such subdivision and shall be disregarded in construing the language contained in this Agreement. The words "this Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Section" and "this subsection" and similar phrases refer only to the Sections or subsections hereof in which the phrase occurs. The word "or" is not exclusive, and the word "including" (in all of its forms) means "including without limitation". Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. 3 ARTICLE II. - SECURITY INTEREST Section 2.1. GRANT OF SECURITY INTEREST. As collateral security for all of the Obligations, Debtor hereby pledges and assigns to Secured Party and grants to Secured Party a continuing security interest, for the benefit of Lenders, in all of the following: (a) PLEDGED SHARES. All of the following, whether now or hereafter existing, which are owned by Debtor or in which Debtor otherwise has any rights: (i) all shares of capital stock of each of Debtor's Subsidiaries, whether existing or hereafter acquired or created; (ii) all shares of capital stock of or partnership, membership or other equity interest in any Dental Practice Group, whether existing or hereafter acquired or created; (iii) all certificates representing such shares and partnership, membership or other equity interest; (iv) all options and other rights, contractual or otherwise, at any time existing with respect to such shares and partnership, membership or other equity interest; and (v) all dividends, distributions, cash, instruments and other property now or hereafter received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares and partnership, membership or other equity interest (any and all such shares and partnership, membership or other equity interest, certificates, options, rights, dividends, distributions, cash, instruments and other property being herein called the "Pledged Shares"). (b) PROCEEDS. All proceeds of any and all of the foregoing Pledged Shares and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof) or under any indemnity, warranty or guaranty by reason of loss to or otherwise with respect to any of the foregoing Pledged Shares. In each case, the foregoing shall be covered by this Agreement, whether Debtor's ownership or other rights therein are presently held or hereafter acquired and however Debtor's interests therein may arise or appear (whether by ownership, security interest, claim or otherwise). Section 2.2. OBLIGATIONS SECURED. The security interest created hereby in the Collateral constitutes continuing collateral security for all of the following obligations, indebtedness and liabilities, whether now existing or hereafter incurred: (a) CREDIT AGREEMENT INDEBTEDNESS. The payment by Debtor, as and when due and payable, of all amounts from time to time owing by Debtor under or in respect of the Credit Agreement, the Note, or any of the other Obligation Documents, and the due performance by Debtor of all of its other obligations under or in respect of the various Obligation Documents. (b) OTHER INDEBTEDNESS. (i) All loans and future advances made by Secured Party, any Affiliate of Bank One, Texas, N.A. or any Lender to Debtor and all other debts, obligations and liabilities of every kind and character of Debtor now or hereafter existing in favor of Lenders or Secured Party, whether such debts, obligations or liabilities be direct or indirect, primary or secondary, joint or several, fixed or contingent, and whether originally payable to Lenders or Secured Party or to a third party and subsequently acquired by Lenders or Secured Party and whether such debts, obligations or liabilities are evidenced by notes, open account, overdraft, endorsement, security agreement, guaranty or otherwise (it being contemplated that Debtor may hereafter become indebted to Lenders or Secured Party in further sum or sums but neither Lenders nor Secured 4 Party shall have any obligation to extend further indebtedness by reason of this Agreement), and (ii) the payment and performance of any and all present or future obligations of Debtor according to the terms of any present or future interest rate or currency rate swap, rate cap, rate floor, rate collar, exchange transaction, forward rate agreement, or other exchange rate protection agreements or any option with respect to any such transaction now existing or hereafter entered into between Debtor, any Subsidiary of Debtor, and one or more parties constituting Secured Party or any Lender (or any affiliate of any Lender). (c) RENEWALS. All renewals, extensions, amendments, modifications, supplements, or restatements of or substitutions for any of the foregoing. ARTICLE III. - REPRESENTATIONS. WARRANTIES AND COVENANTS Section 3.1. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Agent and Lenders as follows: (a) OWNERSHIP AND LIENS. Debtor has good and marketable title to the Collateral free and clear of all Liens, encumbrances or adverse claims, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted by the Credit Agreement. No dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Collateral. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except such as may have been filed in favor of Secured Party relating to this Agreement. (b) NO CONFLICTS OR CONSENTS. Neither the ownership or the intended use of the Collateral by Debtor, nor the grant of the security interest by Debtor to Secured Party herein, nor the exercise by Secured Party of its rights or remedies hereunder, will (i) conflict with any provision of (a) any domestic or foreign law, statute, rule or regulation, (b) the articles or certificate of incorporation, charter or bylaws of Debtor or any Issuer, or (c) any agreement, judgment, license, order or permit applicable to or binding upon Debtor or any Issuer, or (ii) result in or require the creation of any Lien, charge or encumbrance upon any assets or properties of Debtor or any Issuer except as expressly contemplated in the Obligation Documents. Except as expressly contemplated in the Obligation Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court, governmental authority, Issuer or third party is required in connection with the grant by Debtor of the security interest herein, or the exercise by Secured Party of its rights and remedies hereunder. (c) SECURITY INTEREST. Debtor has and will have at all times full right, power and authority to grant a security interest in the Collateral to Secured Party in the manner provided herein, free and clear of any Lien, adverse claim, or encumbrance. This Agreement creates a valid and binding security interest in favor of Secured Party in the Collateral securing the Obligations. The taking possession by Secured Party of all certificates, instruments and cash constituting Collateral from time to time and the filing of the financing statements delivered concurrently herewith by Debtor to Secured Party will perfect, and establish the first priority of, Secured Party's security interest hereunder in the Collateral securing the Obligations. No further or subsequent filing, recording, registration, other public notice or other action is 5 necessary or desirable to perfect or otherwise continue, preserve or protect such security interest except for continuation statements or filings as contemplated in Section 3.3(d). (d) LOCATION OF DEBTOR AND RECORDS. Debtor's chief executive office and principal place of business and the office where the records concerning the Collateral are kept is located at its address set forth on the signature page to the Credit Agreement and at 901 Main Street, Suite 6000, Dallas, Texas. (e) PLEDGED SHARES. Debtor has delivered to Secured Party all certificates evidencing Pledged Shares. All such certificates are valid and genuine and have not been altered. All shares and other securities constituting Pledged Shares have been duly authorized and validly issued, are fully paid and non-assessable, and were not issued in violation of the preemptive rights of any Person or of any agreement by which Debtor or the Issuer thereof is bound. All documentary, stamp or other taxes or fees owing in connection with the issuance, transfer or pledge of Pledged Shares (or rights in respect thereof) have been paid. No restrictions or conditions exist with respect to the transfer, voting or capital of any Pledged Shares. The Pledged Shares constitute the percentage of the class of issued shares of capital stock, partnership interest or membership interest which is indicated on EXHIBIT A attached hereto. No Issuer of any Pledged Shares has any outstanding stock rights, rights to subscribe, options, warrants or convertible securities outstanding, as applicable, or any other rights outstanding whereby any Person would be entitled to have issued to him capital stock, partnership interests or membership interests of such Issuer. Section 3.2. AFFIRMATIVE COVENANTS. Unless Secured Party shall otherwise consent in writing, Debtor will at all times comply with the covenants contained in this Section 3.2 from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. (a) OWNERSHIP AND LIENS. Debtor will maintain good and marketable title to all Collateral free and clear of all Liens, encumbrances or adverse claims, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted by the Credit Agreement. Debtor will not permit any dispute, right of setoff, counterclaim or defense to exist with respect to all or any part of the Collateral. Debtor will cause to be terminated any financing statement or other registration with respect to the Collateral, except such as may exist or as may have been filed in favor of Secured Party. Debtor will defend Secured Party's right, title and special property and security interest in and to the Collateral against the claims of any Person. (b) FURTHER ASSURANCES. Debtor will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest; (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral; or (iii) to otherwise effect the purposes of this Agreement, including: (A) executing and filing such financing or continuation statements, or amendments thereto, as may be necessary or desirable or that Secured Party may request in order to perfect and preserve the security interest created or purported to be created hereby; (B) delivering to Secured Party (upon request, to the extent not otherwise required hereunder to be delivered without request) all originals of chattel paper, documents or instruments which are from time to time included in the 6 Collateral; and (C) furnishing to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (c) INSPECTION AND INFORMATION. Debtor will keep adequate records concerning the Collateral and will permit Secured Party and all representatives appointed by Secured Party, including independent accountants, agents, attorneys, appraisers and any other persons, to inspect any of the Collateral and the books and records of or relating to the Collateral at any time during normal business hours, and to make photocopies and photographs thereof, and to write down and record any information as such representatives shall obtain. Debtor will furnish to Secured Party any information which Secured Party may from time to time request concerning any covenant, provision or representation contained herein or any other matter in connection with the Collateral or Debtor's business, properties, or financial condition. (d) DELIVERY OF PLEDGED SHARES. All instruments and writings evidencing the Pledged Shares shall be delivered to Secured Party on or prior to the execution and delivery of this Agreement. All other instruments and writings hereafter evidencing or constituting Pledged Shares shall be delivered to Secured Party promptly upon the receipt thereof by or on behalf of Debtor. All such Pledged Shares shall be held by or on behalf of Secured Party pursuant hereto and shall be delivered in suitable form for transfer by delivery with any necessary endorsement or shall be accompanied by fully executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. (e) PROCEEDS OF PLEDGED SHARES. If Debtor shall receive, by virtue of its being or having been an owner of any Pledged Shares, any (i) stock certificate (including any certificate representing a stock dividend or distribution in connection with any increase or reduction of capital; reclassification, merger, consolidation, sale of assets, combination of shares, stock split, spinoff or split-off), certificate evidencing any partnership or membership interest, promissory note or other instrument or writing; (ii) option or right, whether as an addition to, substitution for, or in exchange for, any Pledged Shares, or otherwise; (iii) dividends or other distributions payable in cash (except such dividends or distributions permitted to be retained by Debtor pursuant to Section 4.8 hereof) or in securities or other property, or (iv) dividends or other distributions in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, Debtor shall receive the same in trust for the benefit of Secured Party, shall segregate it from Debtor's other property, and shall promptly deliver it to Secured Party in the exact form received, with any necessary endorsement or appropriate stock powers duly executed in blank, to be held by Secured Party as Collateral. (f) STATUS OF PLEDGED SHARES. The certificates evidencing the Pledged Shares shall at all times be valid and genuine and shall not be altered. The Pledged Shares constituting capital stock at all times shall be duly authorized, validly issued, fully paid, and non-assessable, and shall not be issued in violation of the preemptive rights of any Person or of any agreement by which Debtor or the Issuer thereof is bound. (g) NOTICES FROM ISSUER. Debtor will promptly deliver to Secured Party a copy of each notice or other communication received by Debtor from any Issuer in respect of any Pledged Shares. 7 Section 3.3. NEGATIVE COVENANTS. Unless Secured Party shall otherwise consent in writing, Debtor will at all times comply with the covenants contained in this Section 3.3 from the date hereof and so long as any part of the Obligations or the Commitment is outstanding. (a) TRANSFER OR ENCUMBRANCE. Debtor will not sell, assign (by operation of law or otherwise), transfer, exchange, lease or otherwise dispose of any of the Collateral, nor will Debtor grant a Lien upon or execute, file or record any financing statement or other registration with respect to the Collateral, nor will Debtor allow any such Lien, financing statement, or other registration to exist or deliver actual or constructive possession of the Collateral to any other Person, other than Liens in favor of Secured Party or expressly permitted by the Credit Agreement. (b) IMPAIRMENT OF SECURITY INTEREST. Debtor will not take or fail to take any action which would in any manner impair the enforceability of Secured Party's security interest in any Collateral. (c) COMPROMISE OF COLLATERAL. Debtor will not adjust, settle, compromise, amend or modify any of its rights in the Collateral. (d) FINANCING STATEMENT FILINGS. Debtor recognizes that financing statements pertaining to the Collateral have been or may be filed where Debtor maintains any Collateral, has its records concerning any Collateral or has its chief executive office or chief place of business. Without limitation of any other covenant herein, Debtor will not cause or permit any change to be made in its name, identity or corporate structure, or any change to be made to a jurisdiction other than as represented in Section 3.1 hereof in (i) the location of any records concerning any Collateral or (ii) in the location of its chief executive office or chief place of business, unless Debtor shall have notified Secured Party of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Secured Party for the purpose of further perfecting or protecting the security interest in favor of Secured Party in the Collateral. In any notice furnished pursuant to this subsection, Debtor will expressly state that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of Secured Party's security interest in the Collateral. (e) DILUTION OF SHAREHOLDINGS. Debtor will not permit the issuance of (i) any additional shares of any class of capital stock of any Issuer (unless immediately upon issuance the same are pledged and delivered to Secured Party pursuant to the terms hereof to the extent necessary to give Secured Party a security interest after such issue in at least the same percentage of such Issuer's outstanding shares as Issuer had before such issue), (ii) any securities convertible voluntarily by the holder thereof or automatically upon the occurrence or nonoccurrence of any event or condition into, or exchangeable for, any such shares of capital stock, or (iii) any warrants, options, contracts or other commitments entitling any Person to purchase or otherwise acquire any such shares of capital stock. (f) RESTRICTIONS ON PLEDGED SHARES. Debtor will not enter into any agreement creating, or otherwise permit to exist, any restriction or condition upon the transfer, voting or control of any Pledged Shares. 8 ARTICLE IV. - REMEDIES. POWERS AND AUTHORIZATIONS Section 4.1. PROVISIONS CONCERNING THE COLLATERAL. (a) ADDITIONAL FILINGS. Debtor hereby authorizes Secured Party to file, without the signature of Debtor where permitted by law, one or more financing or continuation statements, and amendments thereto, relating to the Collateral. Debtor further agrees that a carbon, photographic or other reproduction of this Security Agreement or of any financing statement describing any Collateral is sufficient as a financing statement and may be filed in any jurisdiction Secured Party may deem appropriate. (b) POWER OF ATTORNEY. Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact and proxy, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, after the occurrence of a Default or of an Event of Default, to take any action, and to execute or endorse any instrument, certificate or notice, which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement including: (i) to request or instruct each Issuer (and each registrar, transfer agent, or similar Person acting on behalf of each Issuer) to register the pledge or transfer of the Collateral to Secured Party; (ii) to otherwise give notification to any Issuer, registrar, transfer agent, financial intermediary, or other Person of Secured Party's security interests hereunder; (iii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iv) to receive, endorse and collect any drafts or other instruments, documents and chattel paper; and (iv) to file any claims or take any action or institute any proceedings which Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce, perfect, or establish the priority of the rights of Secured Party with respect to any of the Collateral. Debtor hereby acknowledges that such power of attorney and proxy are coupled with an interest and are irrevocable. (c) PERFORMANCE BY SECURED PARTY. If Debtor fails to perform any agreement or obligation contained herein, Secured Party may itself perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be payable by Debtor under Section 4.5. (d) COLLECTION RIGHTS. Secured Party shall have the right at any time after the occurrence of a Default or of an Event of Default, to notify any or all obligors (including any Issuer) under any accounts or general intangibles included among the Collateral of the assignment thereof to Secured Party and to direct such obligors to make payment of all amounts due or to become due to Debtor thereunder directly to Secured Party and, upon such notification and at the expense of Debtor and to the extent permitted by law, to enforce collection thereof and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Debtor could have done. After Debtor receives notice that Secured Party has given any notice referred to above in this subsection: (i) all amounts and proceeds (including instruments and writings) received by Debtor in respect of such accounts or general intangibles shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Debtor and shall be forthwith paid over to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash collateral and (A) applied as a voluntary prepayment under 9 the Credit Agreement so long as no Default or Event of Default shall have occurred and be continuing or (B) if any Event of Default shall have occurred and be continuing, applied as specified in Section 4.3, and (ii) Debtor will not adjust, settle or compromise the amount or payment of any such account or general intangible or release wholly or partly any account debtor or obligor thereof (including any Issuer) or allow any credit or discount thereon. Section 4.2. EVENT OF DEFAULT REMEDIES. If an Event of Default shall have occurred and be continuing, Secured Party may from time to time in its discretion, without limitation and without notice except as expressly provided below: (a) exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, under the other Obligation Documents or otherwise available to it, all the rights and remedies of a secured party on default under the Code (whether or not the Code applies to the affected Collateral); (b) require Debtor to, and Debtor hereby agrees that it will at its expense and upon request of Secured Party, promptly assemble all or part of the Collateral as directed by Secured Party and make it (together with all books, records and information of Debtor relating thereto) available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; (c) reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest created hereby by any available judicial procedure; (d) dispose of, at its office, on the premises of Debtor or elsewhere, all or any part of the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Collateral shall not exhaust Secured Party's power of sale, but sales may be made from time to time, and at any time, until all of the Collateral has been sold or until the Obligations have been paid and performed in full), and at any such sale it shall not be necessary to exhibit any of the Collateral; (e) buy the Collateral, or any part thereof, at any public sale; (f) buy the Collateral, or any part thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations; (g) apply by appropriate judicial proceedings for appointment of a receiver for the Collateral, or any part thereof, and Debtor hereby consents to any such appointment; and (h) at its discretion, retain the Collateral in satisfaction of the Obligations whenever the circumstances are such that Secured Party is entitled to do so under the Code or otherwise (provided that Secured Party shall in no circumstances be deemed to have retained the Collateral in satisfaction of the Obligations in the absence of an express notice by Secured Party to Debtor that Secured Party has either done so or intends to do so). 10 Debtor agrees that, to the extent notice of sale shall be required by law, at least seven (7) days' notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Section 4.3. APPLICATION OF PROCEEDS. If any Event of Default shall have occurred and be continuing, Secured Party may in its discretion apply any cash held by Secured Party as Collateral, and any cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral, to any or all of the following in such order as Secured Party may elect: (a) To the repayment of the reasonable costs and expenses, including reasonable attorneys' fees and legal expenses, incurred by Secured Party in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure of Debtor to perform or observe any of the provisions hereof; (b) To the payment or other satisfaction of any Liens, encumbrances, or adverse claims upon or against any of the Collateral; (c) To the reimbursement of Secured Party for the amount of any obligations of Debtor or any Other Liable Party paid or discharged by Secured Party pursuant to the provisions of this Agreement or the other Obligation Documents, and of any expenses of Secured Party payable by Debtor hereunder or under the other Obligation Documents; (d) To the satisfaction of any other Obligations; (e) By holding the same as Collateral; (f) To the payment of any other amounts required by applicable law (including Section 9.504(a)(3) of the Code or any successor or similar, applicable statutory provision); and (g) By delivery to Debtor or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct. Section 4.4. DEFICIENCY. In the event that the proceeds of any sale, collection or realization of or upon Collateral by Secured Party are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor shall be liable for the deficiency, together with interest thereon as provided in the governing Obligation Documents or (if no interest is so provided) at such other rate as shall be fixed by applicable law, together with the costs of collection and the reasonable fees of any attorneys employed by Secured Party to collect such deficiency. Section 4.5. INDEMNITY AND EXPENSES. In addition to, and not in qualification of, any similar obligations under other Obligation Documents: 11 (a) Debtor agrees to indemnify Secured Party from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including enforcement of this Agreement) WHETHER OR NOT SUCH CLAIMS, LOSSES AND LIABILITIES ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR PART, UNDER ANY . CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED BY OR ARISE OUT OF SECURED PARTY'S OWN NEGLIGENCE, except to the extent such claims, losses or liabilities are proximately caused by Secured Party's gross negligence or willful misconduct. (b) Debtor will upon demand pay to Secured Party the amount of any and all costs and expenses, including the reasonable fees and disbursements of Secured Party's counsel and of any experts and agents, which Secured Party may incur in connection with (i) the transactions which give rise to this Agreement, (ii) the preparation of this Agreement and the perfection and preservation of this security interest created under this Agreement, (iii) the administration of this Agreement; (iv) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral; (v) the exercise or enforcement of any of the rights of Secured Party hereunder; or (vi) the failure by Debtor to perform or observe any of the provisions hereof, except expenses resulting from Secured Party's gross negligence or willful misconduct. Section 4.6. NON-JUDICIAL REMEDIES. In granting to Secured Party the power to enforce its rights hereunder without prior judicial process or judicial hearing, Debtor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Secured Party to enforce its rights by judicial process. In so providing for non judicial remedies, Debtor recognizes and concedes that such remedies are consistent with the usage of trade, are responsive to commercial necessity, and are the result of a bargain at arm's length. Nothing herein is intended to prevent Secured Party or Debtor from resorting to judicial process at either party's option. Section 4.7. OTHER RECOURSE. Debtor waives any right to require Secured Party to proceed against any other Person, exhaust any Collateral or other security for the Obligations, or to have any Other Liable Party joined with Debtor in any suit arising out of the Obligations or this Agreement, or pursue any other remedy in Secured Party's power. Debtor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension for any period of any of the Obligations of any Other Liable Party from time to time. Debtor further waives any defense arising by reason of any disability or other defense of any Other Liable Party or by reason of the cessation from any cause whatsoever of the liability of any Other Liable Party. Until all of the Obligations shall have been paid in full, Debtor shall have no right to subrogation and Debtor waives the right to enforce any remedy which Secured Party has or may hereafter have against any Other Liable Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Secured Party. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor without affecting Debtor's liability hereunder or on the Obligations, from time to time to (a) take or hold any other property of any type from any other Person as security for the Obligations, and exchange, enforce, waive and release any or all of such other property, (b) apply the Collateral or such other property and direct the order or manner of sale thereof as Secured Party may in its discretion determine, (c) renew, extend for any period, accelerate, modify, compromise, settle or release any of the obligations of any Other Liable Party in respect to any or all of the Obligations or other security for the Obligations, (d) waive, enforce, modify, amend or supplement 12 any of the provisions of any Obligation Document with any Person other than Debtor, and (e) release or substitute any Other Liable Party. Section 4.8. VOTING RIGHTS, DIVIDENDS, ETC. IN RESPECT OF PLEDGED SHARES. (a) So long as no Default or Event of Default shall have occurred and be continuing Debtor may receive and retain any and all dividends, distributions or interest paid in respect of the Pledged Shares; PROVIDED, HOWEVER, that any and all (i) dividends, distributions and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of or in exchange for, any Pledged Shares, (ii) dividends and other distributions paid or payable in cash in respect of any Pledged Shares in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, and (iii) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Pledged Shares, shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Shares and shall, if received by Debtor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Debtor, and be forthwith delivered to Secured Party in the exact form received with any necessary endorsement or appropriate stock powers duly executed in blank, to be held by Secured Party as Collateral. (b) Upon the occurrence and during the continuance of a Default or an Event of Default: (i) all rights of Debtor to receive and retain the dividends, distributions and interest payments which it would otherwise be authorized to receive and retain pursuant to subsection (a) of this section shall automatically cease, and all such rights shall thereupon become vested in Secured Party which shall thereupon have the sole right to receive and hold as Pledged Shares such dividends, distributions and interest payments; (ii) without limiting the generality of the foregoing, Secured Party may at its option exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Shares as if it were the absolute owner thereof, including, without limitation, the right to exchange, in its discretion, any and all of the Pledged Shares upon the merger, consolidation, reorganization, recapitalization or other adjustment of any Issuer, or upon the exercise by any Issuer of any right, privilege or option pertaining to any Pledged Shares, and, in connection therewith, to deposit and deliver any and all of the Pledged Shares with any committee, depository, transfer, agent, registrar or other designated agent upon such terms and conditions as it may determine; and (iii) all dividends, distributions and interest payments which are received by Debtor contrary to the provisions of subsection (b)(i) of this section shall be received in trust for the benefit of Secured Party, shall 13 be segregated from other funds of Debtor, and shall be forthwith paid over to Secured Party as Pledged Shares in the exact form received, to be held by Secured Party as Collateral. Anything herein to the contrary notwithstanding, Debtor may at all times exercise any and all voting rights pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms of this Agreement or any other Obligation Document. Section 4.9. PRIVATE SALE OF PLEDGED SHARES. Debtor recognizes that Secured Party may deem it impracticable to effect a public sale of all or any part of the Pledged Shares and that Secured Party may, therefore, determine to make one or more private sales of any such securities to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Debtor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sales shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to delay sale of any, such securities for the period of time necessary to permit the Issuer of such securities to register such securities for public sale under the Securities Act of 1933, as amended. Debtor further acknowledges and agrees that any offer to sell such securities which has been (a) publicly advertised on a BONA FIDE basis in a newspaper or other publication of general circulation in the financial community of Dallas, Texas (to the extent that such an offer may be so advertised without prior registration under the Securities Act), or (b) made privately in the manner described above to not less than fifteen (15) BONA FIDE offerees shall be deemed to involve a "public sale" for the purposes of Section 9.504(c) of the Code (or any successor or similar, applicable statutory provision) as then in effect in the State of Texas, notwithstanding that such sale may not constitute a "public offering" under the Securities Act of 1933, as amended, and that Secured Party may, in such event, bid for the purchase of such securities. ARTICLE V. - MISCELLANEOUS Section 5.1. NOTICES. Any notice or communication required or permitted hereunder shall be given as provided in the Credit Agreement. Section 5.2. AMENDMENTS. No amendment of any provision of this Agreement shall be effective unless it is in writing and signed by Debtor and Secured Party, and no waiver of any provision of this Agreement, and no consent to any departure by Debtor therefrom, shall be effective unless it is in writing and signed by Secured Party, end then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given and to the extent specified in such writing. In addition, all such amendments and waivers shall be effective only if given with the necessary approvals of Lenders as required in the Credit Agreements. Section 5.3. PRESERVATION OF RIGHTS. No failure on the part of Secured Party to exercise, and no delay in exercising, any right hereunder or under any other Obligation Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. Neither the execution nor the delivery of this Agreement shall in any manner impair or affect any other security for the Obligations. The rights and remedies of Secured Party provided 14 herein and in the other Obligation Documents are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law. The rights of Secured Party under any Obligation Document against any party thereto are not conditional or contingent on any attempt by Secured Party to exercise any of its rights under any other Obligation Document against such party or against any other Person. Section 5.4. UNENFORCEABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or invalidity without invalidating the remaining portions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 5.5. SURVIVAL OF AGREEMENTS. All representations and warranties of Debtor herein, and all covenants and agreements herein shall survive the execution and delivery of this Agreement; the execution and delivery of any other Obligation Documents and the creation of the Obligations. Section 5.6. OTHER LIABLE PARTY. Neither this Agreement nor the exercise by Secured Party or the failure of Secured Party to exercise any right, power or remedy conferred herein or by law shall be construed as relieving any Other Liable Party from liability on the Obligations or any deficiency thereon. This Agreement shall continue irrespective of the fact that the liability of any Other Liable Party may have ceased or irrespective of the validity or enforceability of any other Obligation Document to which Debtor or any Other Liable Party may be a party, and notwithstanding the reorganization, death, incapacity or bankruptcy of any Other Liable Party, and notwithstanding the reorganization or bankruptcy or other event or proceeding affecting any Other Liable Party. Section 5.7. BINDING EFFECT AND ASSIGNMENT. This Agreement creates a continuing security interest in the Collateral and (a) shall be binding on Debtor and its successors and permitted assigns and (b) shall inure, together with all rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing, Secured Party may pledge, assign or otherwise transfer any or all of the Obligations to any other Person, and such other Person shall thereupon become vested with all of the benefits in respect thereof granted to Secured Party, herein or otherwise. None of the rights or duties of Debtor hereunder may be assigned or otherwise transferred without the prior written consent of Secured Party. Section 5.8. TERMINATION. It is contemplated by the parties hereto that there may be times when no Obligations are outstanding, but notwithstanding such occurrences, this Agreement shall remain valid and shall be in full force and effect as to subsequent outstanding Obligations. Upon the satisfaction in full of the Obligations, upon the termination or expiration of the Credit Agreement and any other commitment of Secured Party to extend credit to Debtor, and upon written request for the termination hereof delivered by Debtor to Secured Party, this Agreement and the security interest created hereby shall terminate and all rights to the Collateral shall revert to Debtor. Secured Party will, upon Debtor's request and at Debtor's expense, (a) return to Debtor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof; and (b) execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence such termination. 15 Section 5.9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona applicable to contracts made and to be performed entirely within such State, except as required by mandatory provisions of law and except to the extent that the perfection and the effect of perfection or non-perfection of the security interest created hereunder, in respect of any particular collateral, are governed by the laws of a jurisdiction other than such State. Section 5.10. COUNTERPARTS; FAX. This Agreement may be separately executed in counterparts and by the parties hereto, each of which when so executed shall be deemed to constitute one and the same Agreement. This Agreement may be validly executed in counterpart and delivered to the other party by facsimile or other electronic transmission provided that Debtor delivers its original counterpart signature page to Secured Party the next business day immediately following the date of its execution of this Agreement by depositing same with a reputable overnight courier service. Section 5.11. RATIFICATION OF ORIGINAL AGREEMENT. Debtor hereby ratifies and confirms the Original Agreement and ratifies, confirms, extends, pledges and re-pledges, grants and re-grants to Secured Party the security interest and Liens granted to Secured Party in the Collateral to secure payment of all Obligations, as described in the Original Agreement. Any reference to the Original Agreement in any other document shall be deemed to refer to this Agreement also. The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of any provision of the Original Agreement or any other document. Section 5.12. LOAN DOCUMENT; SECURITY DOCUMENT. This Agreement is a "Loan Document" and a "Security Document," as defined in the Credit Agreement, and this Agreement is subject to all provisions of the Credit Agreement governing Loan Documents and Security Documents. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 16 IN WITNESS WHEREOF, Debtor has caused this Agreement to be executed and delivered by its officer thereunto duly authorized, as of the date first above written. E-DENTIST.COM, INC., a Delaware corporation By: /s/ JAMES M. POWERS, JR. ------------------------------------ James M. Powers, Jr. President & Chief Executive Officer 17 EXHIBIT A DESCRIPTION OF INTERESTS IN ISSUERS
PERCENTAGE INTEREST, PARTNERSHIP INTEREST OR NAME OF ISSUER CERTIFICATE NO. NO. OF SHARES/UNITS MEMBERSHIP INTEREST - -------------- --------------- ------------------- ------------------- Pentegra Investments, Inc. 1 1 100%
18 REMITTANCE ACCOUNT CONTROL AGREEMENT THIS REMITTANCE ACCOUNT CONTROL AGREEMENT (this "Agreement"), is made as of June 29, 2001, among BANK ONE ARIZONA, N.A., a national banking association (the "Bank"), E-DENTIST.COM, INC., a Delaware corporation formerly known as Pentegra Dental Group, Inc. ("Borrower"), and BANK ONE TEXAS, N.A., a national banking association (together with its successors, assigns and transferees, "Lender"). PRELIMINARY STATEMENT: The capitalized terms which are not otherwise defined in this Agreement shall have the meanings ascribed to such terms in that certain Credit Agreement dated June 1, 1998, as amended, between Borrower and Lender (together with all amendments thereto and as same may from time to time may be further amended, supplemented or restated, the "Credit Agreement"). Pursuant to the Credit Agreement, Lender has made certain loans to Borrower (collectively, the "Loans"). The Loans are secured by liens on the Collateral pursuant to the Security Documents. In connection with the Credit Agreement and the Loans, Borrower has executed and delivered that certain Security Agreement dated of even date herewith (the "Security Agreement"), as additional security for its Obligations under the Loan Documents wherein all Dental Practice Payments (as such term is defined below) paid in connection with the Dental Practice Notes have been pledged to Lender. NOW, THEREFORE, in consideration of the mutual premises contained herein and in the Loan Documents, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree, intending to be legally bound, as follows: Section 1. DEFINED TERMS. (a) As used herein, the following capitalized terms shall have the respective meanings set forth below: "AGREEMENT" shall have the meaning set forth in the Preliminary Statement hereto. "CREDIT AGREEMENT" shall have the meaning set forth in Preliminary Statement hereto. "LOANS" shall have the meaning set forth in the Preliminary Statement hereto. "REMITTANCE ACCOUNT" shall have the meaning set forth in Section 2(a) hereof. "SECURITY AGREEMENT" shall have the meaning set forth in the Preliminary Statement hereto. (b) All terms used but not otherwise defined in this Agreement shall have the same defined meanings set forth in the Credit Agreement or in the other Loan Documents, unless the context shall require otherwise. 1 (c) The meanings given to capitalized terms defined herein shall be equally applicable in both singular and plural forms of such terms. Section 2. DUTIES. (a) The Bank has established in the name of Borrower a separate bank account known as Account No. 4848-6521 (the "Remittance Account") for the deposit of all Dental Practice Payments and all other cash flow in respect of the Dental Practice Payments. The Remittance Account shall be an account in the name of Borrower. (b) The Borrower agrees to cause all Dental Practice Payments and all other cash flow received in respect of the Dental Practice Payments from any Dental Practice Group to be deposited directly into the Remittance Account on the next business day following Borrower's receipt of any such payments. Borrower shall not commingle any such funds in the Remittance Account with the operating account of Borrower at the Bank or with any other accounts of Borrower, and such funds shall be held by Borrower in an express trust for the benefit of Lender until deposited into the Remittance Account as required by the preceding sentence. Any deposit made by or on behalf of Borrower into the Remittance Account shall be deemed deposited into the Remittance Account when the funds in respect of such deposit shall become available funds. Borrower shall provide Lender on a monthly basis with a copy of all information as Lender may request to evidence that all Dental Practice Payments received by Borrower were timely deposited in the Remittance Account. Any failure of Borrower to promptly deposit any Dental Practice Payments in the Remittance Account as provided in this Agreement shall constitute an Event of Default. (c) Items deposited by or on behalf of Borrower with the Bank for the Remittance Account which are returned for insufficient or uncollected funds will be re-deposited the first time. Items returned unpaid the second time for whatever reason shall be debited to the Remittance Account under advice and returned to Borrower or taken into account in the Remittance Account analysis provided at the end of the month. Return item fees will be charged by the Bank directly to the Remittance Account. (d) The parties agree that until the Obligations are satisfied in full, the Bank shall pay over to the Lender all amounts deposited in the Remittance Account on demand, without prior notice to Borrower. (e) In order to further secure the performance by Borrower of the Obligations, Borrower hereby acknowledges and confirms that: (i) Lender and its authorized agents or designees shall have the right to make withdrawals from the Remittance Account; and (ii) neither Borrower nor any other Person claiming on behalf of or through Borrower shall have any right or authority, whether express or implied, to make use of, or withdraw any amounts from, the Remittance Account. The Remittance Account has been assigned the federal tax identification number of Borrower, which number is 76-0545043. 2 (f) The Bank shall send a monthly account statement to Borrower and to Lender, which monthly account statement shall specify the credits and charges to the Remittance Account with respect to the Dental Practice Payments for the previous monthly period. (g) The Bank may terminate this Agreement at any time and for any reason by written notice delivered to all parties hereto thirty (30) days prior to the effective date of such termination. The Bank hereby agrees that it shall take all reasonable action necessary to facilitate the transfer of its obligations, duties and rights to the replacement clearing bank selected by Borrower and Lender. The Lender, acting alone, may terminate this Agreement at any time by written notice delivered to the Borrower and the Bank. This Agreement may not be terminated by the Borrower without the prior written consent of the Lender. No such termination shall impair the rights of any party with respect to checks processed prior to the effective date of termination. In the event that this Agreement is terminated by the Bank in accordance with this Section, the Lender and the Borrower shall enter into a mutually acceptable new deposit control agreement with a mutually acceptable bank, in form and substance substantially similar to this Agreement, except as may otherwise be required by such new bank. This Agreement shall terminate upon the repayment of the Loans and satisfaction of the Obligations. Upon termination of this Agreement, Lender shall deliver such instruments as shall be necessary to terminate this Agreement and close the Remittance Account. (h) The Bank shall have no liability whatsoever to any of the parties hereto or their respective successors and assigns for any loss or damage that either or both may claim to have suffered or incurred, either directly or indirectly, by reason of this Agreement, or any transaction or service contemplated by the provisions hereof, unless the Bank's actions or omissions are due to its failure to exercise due care and caution or its willful misconduct. This Section shall survive any expiration or termination of this Agreement. (i) No warranties, express or implied, of any nature whatsoever are made by the Bank in connection with the services to be provided under this Agreement. (j) In the event that the Bank is served with a court order which affects the Remittance Account, the Bank will act in accordance with such court order. Until a court order is received by the Bank, whether such order is issued by the bankruptcy court or any other court of competent jurisdiction, the Bank shall not have the right nor will it place a hold on funds in, or in the process of being deposited to, the Remittance Account and will process funds in strict accordance with the terms and conditions of this Agreement. Section 3. FEES. The Borrower shall be, and at all times remains, liable to the Bank and Lender to pay all fees, charges, costs and expenses in connection with the Remittance Account, this Agreement and the subject matter hereof, including those of the Bank and Lender. The fees and charges of the Bank shall be set forth in the monthly statement prepared by the Bank pursuant to Section 2(f) hereof. 3 Section 4. MATTERS CONCERNING BORROWER. (a) Borrower hereby pledges, transfers and assigns to Lender, and grants to Lender, as additional security for the payment and performance of the Obligations, a continuing security interest in and to: (i) the Remittance Account and all of the Borrower's right, title and interest in and to all cash, property or rights transferred to or deposited in the Remittance Account from time to time by Borrower or on behalf of Borrower in accordance with the provisions of this Agreement; and (ii) any and all proceeds of the foregoing. This Agreement and the pledge, assignment and grant of security interest made hereby shall secure payment of the Obligations owed by Borrower to Lender under the Credit Agreement and the Note. Borrower acknowledges and agrees that the Bank is acting at the direction of, and as the agent of, Lender in connection with the subject matter of this Agreement. Borrower further agrees to execute, acknowledge, deliver, file or do, at its sole cost and expense, all other acts, assignments, notices, agreements or other instruments as Lender may reasonably require in order to effectuate, assure, secure, assign, transfer and convey unto Lender any of the rights granted by this Section 4. (b) Lender may withdraw and apply all sums from the Remittance Account to the Obligations in such order, proportion and priority as Lender may determine in its sole discretion. Lender's right to withdraw and apply amounts in the Remittance Account shall be in addition to all other rights and remedies provided to Lender under this Agreement, the Credit Agreement and the other Loan Documents and at law or in equity. Bank shall promptly pay over to Lender all amounts from time to time on deposit in the Remittance Account. Bank shall have the right to rely upon any notice from Lender to Bank regarding the Remittance Account, and the Bank shall promptly comply with the terms and provisions of this Agreement required of the Bank, notwithstanding any countervailing or contradictory instructions or claims from the Borrower, and Borrower hereby releases the Bank of and from any claims, damages, actions, causes of actions or liabilities that Borrower may have against the Bank for following the terms of this Agreement. (c) A default under this Agreement shall constitute an Event of Default under the Credit Agreement; and an Event of Default under the Credit Agreement or any other Loan Document shall constitute a default under this Agreement. Section 5. AMENDMENT. This Agreement may be amended from time to time in writing by all parties hereto. Section 6. NOTICES. All notices, demands, designations, certificates, requests, offers, consents, approvals, appointments and other instruments given pursuant to this Agreement (collectively called "Notices") shall be in writing and given by (i) hand delivery, (ii) facsimile, (iii) express overnight delivery service or (iv) certified or registered mail, return receipt requested, and shall be deemed to have been delivered upon (a) receipt, if hand delivered, (b) transmission, if delivered by facsimile, (c) the next business day, if delivered by express overnight delivery service, or (d) the third business day following the day of deposit of such notice with the United States Postal Service, if sent by certified or registered mail, return receipt requested. Notices shall be provided to the parties and addresses (or facsimile numbers, as applicable) specified below: 4 If to Lender: Bank One, N.A. c/o Bank One Arizona, N.A. Large Corporate Managed Assets Mail Code: AZ1-1133 201 North Central Avenue Phoenix, AZ 85004-2267 Attention: Dennis Warren If to Bank: Bank One, N.A. Large Corporate Managed Assets Mail Code: AZ1-1133 201 North Central Avenue Phoenix, AZ 85004-2267 Attention: Dennis Warren If to Borrower: e-dentist.com, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85018 Attention: James M. Powers, Jr. President & Chief Executive Officer with a copy to: e-dentist.com, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85018 Attention: Charlies Sanders Chief Financial Officer or to such other address or such other person as either party may from time to time hereafter specify to the other party in a notice delivered in the manner provided above. Whenever in this Agreement the giving of Notice is required, the giving thereof may be waived in writing at any time by the person or persons entitled to receive such Notice. Section 7. FORUM SELECTION; JURISDICTION; VENUE; CHOICE OF LAW. Borrower acknowledges that this Agreement was substantially negotiated in the State of Arizona, this Agreement was delivered in the State of Arizona and there are substantial contacts between the parties and the transactions contemplated herein and the State of Arizona. For purposes of any action or proceeding arising out of this Agreement, the parties hereto expressly submit to the jurisdiction of all federal and state courts located in the State of Arizona. Section 8. CERTAIN MATTERS AFFECTING THE BANK. (a) The Bank hereby acknowledges the security interest granted by Borrower to Lender in and to the Dental Practice Payments and the Remittance Account and agrees to comply with all instructions originated by Lender directing the disposition of the funds in the Remittance Account without further 5 consent of the Borrower. The Bank may rely and shall be protected in acting or refraining from acting upon any notice (including, but not limited to, electronically confirmed facsimiles of such notice) believed by it to be genuine and to have been signed or presented by the proper party or parties. (b) The duties and obligations of the Bank shall be determined solely by the express provisions of this Agreement, the Bank shall not be liable except for the performance of its duties and obligations as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Bank. (c) The Bank shall not be liable for any claims, suits, actions, costs, damages, liabilities, or expenses, or for any interruption of services, or incidental, consequential, special or punitive damages ("Liabilities") in connection with the subject matter of this Agreement other than Liabilities caused by (i) the negligence or willful misconduct of the Bank or any of its affiliates or any director, officer, employee or agent of any of them, or (ii) a breach of this Agreement by the Bank. Lender and Borrower hereby agree to indemnify and hold harmless the Bank and its respective affiliates and the directors, officers, employees, and agents of any of them and the successors and assigns of the Bank from and against any and all Liabilities arising from or in connection with any acts or omissions or agent of any of them in connection with this Agreement, other than those Liabilities caused by (i) the gross negligence or willful misconduct of the Bank or such indemnified party, or (ii) breach of this Agreement by the Bank. (d) Except for this Agreement, the Bank acknowledges to Lender that there are no other deposit control agreements or other agreements affecting the Remittance Account to which the Bank is a party. Section 9. HEADINGS. The Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 10. SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Section 11. Intentionally Omitted. Section 12. SUBROGATION. To the extent that proceeds of the Obligations are used to pay indebtedness secured by any outstanding lien, security interest, charge or prior encumbrance against the Collateral, such proceeds have been advanced by Lender at Borrower's request and Lender shall be subrogated to any and all rights, security interests and liens owned by any owner or holder of such outstanding liens, security interests, charges or encumbrances, irrespective of whether said liens, security interests, charges or encumbrances are released. Section 13. CONSTRUCTION. Borrower and Lender acknowledge and warrant to one other that each has been represented by independent counsel and has executed this Agreement after being fully advised by said counsel as to its effect and 6 significance. This Agreement shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party which prepared the instrument, the relative bargaining powers of the parties or the domicile of any party. Section 14. ASSIGNMENT. Lender may assign in whole or in part its rights under this Agreement to any Eligible Transferee. Upon any assignment of Lender's entire right and interest hereunder, Lender shall automatically be relieved, from and after the date of such assignment, of liability for the performance of any obligation of Lender contained herein. Section 15. COUNTERPARTS; FAX. This Agreement may be executed in any number of counterparts and each thereof shall be deemed to be an original, and all such counterparts shall constitute but one and the same instrument. This Agreement may be validly executed in counterparts and delivered by facsimile or other electronic transmission, provided that Borrower delivers its original counterpart signature pages to Bank and Lender the next business day immediately following the date of its execution of this Agreement by depositing same with a reputable overnight courier service. Section 16. TIME OF THE ESSENCE. Time is of the essence in the performance of each and every obligation under this Agreement. Section 17. WAIVER OF JURY TRIAL AND PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES. BORROWER, BANK AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EACH MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES HERETO AGAINST ANY OTHER PARTY HERETO OR ITS SUCCESSORS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE RELATIONSHIP OF BORROWER, BANK AND LENDER, BORROWER'S USE OF THE COLLATERAL, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. THIS WAIVER BY THE PARTIES HERETO OF ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY HAS BEEN NEGOTIATED AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. FURTHERMORE, BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES FROM LENDER OR BANK WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY BORROWER AGAINST LENDER, BANK OR THEIR RESPECTIVE SUCCESSORS, ASSIGNS OR TRANSFEREES WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENTS CONTEMPLATED HEREIN OR RELATED HERETO. THE WAIVER BY BORROWER OF ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL AND INDIRECT DAMAGES HAS BEEN NEGOTIATED BY BORROWER, BANK AND LENDER AND IS AN ESSENTIAL ASPECT OF THEIR BARGAIN. 7 Section 18. LOAN DOCUMENT; SECURITY DOCUMENT. This Agreement is a Loan Document and a Security Document under the Credit Agreement, and all provisions in the Credit Agreement pertaining to Loan Documents and Security Documents apply hereto and thereto. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, the parties hereto have executed this Remittance Account Control Agreement in several counterparts (each of which shall be deemed as original) as of the date first above written. BORROWER: E-DENTIST.COM, INC., a Delaware corporation By: /s/ JAMES M. POWERS, JR. ------------------------------------ Name: James M. Powers, Jr. Title: President & Chief Executive Officer LENDER: BANK ONE TEXAS, N.A., a national banking association By: /s/ DENNIS B. WARREN ------------------------------------ Name: Dennis B. Warren Title: First Vice President BANK: BANK ONE ARIZONA, N.A., a national banking association By: /s/ DENNIS B. WARREN ------------------------------------ Name: Dennis B. Warren Title: First Vice President 9 RESTRICTION ON TRANSFER THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED, AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT CANNOT BE SOLD OR TRANSFERRED, WITHOUT (I) THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER MAY BE LAWFULLY MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL APPLICABLE STATE SECURITIES LAWS OR (II) SUCH REGISTRATION. WARRANT To Subscribe for and Purchase Common Stock of e-dentist.com, Inc. THIS CERTIFIES THAT, for value received, Bank One, N.A., a national banking association, or its registered assigns (the "Holder"), is entitled to subscribe for and purchase from e-dentist.com, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, at the price specified below (subject to adjustment as noted below) at any time from and after the date hereof to and including June 29, 2010, that number of shares (the "Warrant Shares") of the Company's common stock, par value $0.001 per share ("Common Stock") which is equal to three percent (3.0%) of the maximum number of shares of Common Stock outstanding on a fully diluted basis on any date of determination during the term of this Warrant (subject to further adjustment as noted below). The number of Warrant Shares shall be determined on the first day of each calendar quarter, on each day the Holder may exercise this Warrant in respect of any Warrant Shares, and on each day on which the Holder may request that the Company calculate the number of Warrant Shares (each such date is herein referred to as a "Determination Date"). For purposes of this Warrant, the number of "shares of Common Stock outstanding on a fully diluted basis" on any Date of Determination shall include (i) all shares of Common Stock issued and outstanding on such date plus (ii) the maximum number of shares of Common Stock that may be issued under or pursuant to all options, warrants or other rights to acquire in any manner issued and outstanding on such date (whether of not any such option, warrant or other right is then exercisable or may become exercisable at some future date). Notwithstanding the foregoing, the number of Warrant Shares shall be determined and fixed at 3% as aforesaid, and (subject to adjustment pursuant to Section 4) on the date that the Company satisfies all of its obligations to Bank One, N.A. and its affiliates. The Warrant purchase price shall be forty-two cents ($0.42) per share (the "Exercise Price"). The Exercise Price shall be subject to adjustment as provided in Section 4 hereof. This Warrant is subject to the following provisions, terms and conditions: 1 1. The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part, by written notice of exercise delivered to the Company and by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company at 2999 North 44th Street, Suite 650, Phoenix, Arizona 85018 (or such other location as the Company may designate by notice in writing to the Holder hereof) and upon payment to it by check of the purchase price for such shares. The Company shall not be required to issue fractions of shares of Common Stock upon exercise of this Warrant. If any fraction of a share would, but for this Section, be issuable upon any exercise of this Warrant, and if the Company shall have elected not to issue such fraction of a share, in lieu of such fractional share the Company shall pay to the Holder, in cash, an amount equal to such fraction of the fair market value per share of outstanding Common Stock of the Company on the Business Day immediately prior to the date of such exercise (the fair market value for such purpose shall be the closing price of the Common Stock on the principal stock exchange on which the Common Stock is then traded or the principal quotation system in which bid and ask prices for the Common Stock are then maintained). The Company agrees that the shares so purchased shall be and are deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment tendered for such shares as aforesaid. Subject to the provisions of the next succeeding paragraph, certificates for the shares of stock so purchased (bearing an appropriate legend to indicate that the shares have not been registered under securities laws) shall be delivered to the Holder hereof within a reasonable time, not exceeding 10 days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant reflecting the shares, if any, as to which this Warrant shall not then have been exercised shall also be delivered to the Holder hereof within such time. 2. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for shares of stock upon exercise of this Warrant except in accordance with the provisions of this Agreement and the restrictive legend under the heading "Restriction on Transfer." 3. The Company covenants and agrees that: (a) all shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid and nonassessable and free from all preemptive rights of any stockholder, and from all taxes, liens and charges with respect to the issue thereof (other than transfer taxes); (b) during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant; (c) during the period within which the rights represented by this Warrant may be exercised, the Company further will use reasonable best efforts to maintain the eligibility of the Common Stock for listing on the American Stock Exchange and quotation on the domestic over-the-counter market and use reasonable best efforts to keep the Common Stock so listed and quoted; 2 (d) during the period within which the rights represented by this Warrant may be exercised, the Company's Certificate of Incorporation and by-laws shall not be amended or modified if such amendment or modification has or would have, directly or indirectly, a material adverse effect on the Holder of this Warrant or Common Stock purchased or purchasable upon exercise of this Warrant or on the rights and remedies hereunder; and (e) during the period within which the rights represented by this Warrant may be exercised, the Company will promptly after each Determination Date (defined in the first paragraph of this Warrant) notify the Holder in writing of the number of Warrant Shares determined as of such Determination Date, and each such notification shall be accompanied by a certificate, signed by the Company's principal financial officer, setting forth in reasonable detail the information used to determine the number of Warrant Shares on such Determination Date. 4. (a) If the Company shall after the date of issuance of this Warrant subdivide its outstanding shares of Common Stock into a greater number of shares or consolidate its outstanding shares of Common Stock into a smaller number of shares (any such event being called a "Common Stock Reorganization"), then the Exercise Price shall be adjusted, effective at such time, to a number determined by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such Common Stock Reorganization and the denominator of which shall be the number of shares outstanding after giving effect to such Common Stock Reorganization. (b) (i) If the Company shall after the date of issuance of this Warrant issue or otherwise sell or distribute any shares of Common Stock, otherwise than pursuant to a Common Stock Reorganization (any such event, including any event described in paragraphs (ii) and (iii) below, being herein called a "Common Stock Distribution"), if such Common Stock Distribution shall be for a consideration per share less than the Exercise Price in effect immediately prior to the date of such Common Stock Distribution, or on the first date of the announcement of such Common Stock Distribution (whichever is less), then, effective upon such Common Stock Distribution, the Exercise Price shall be adjusted by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be an amount equal to the sum of (A) the number of shares of Common Stock outstanding (and issuable upon exercise or conversion of outstanding options, warrants and convertible securities) immediately prior to the Common Stock Distribution, plus (B) the number of shares of Common Stock which the aggregate consideration, if any, received by the Company (determined as provided below) for such Common Stock Distribution would buy at the last sales price thereof, as of the date immediately prior to such Common Stock Distribution or as of the date immediately prior to the date of announcement of such Common Stock Distribution (whichever is less) and the denominator of which shall be the total number of shares of Common Stock outstanding (and issuable 3 upon exercise or conversion of outstanding options, warrants and convertible securities) immediately prior to such Common Stock Distribution plus the number of shares of Common Stock issued (or deemed to be issued pursuant to paragraphs (ii) and (iii) below) in such Common Stock Distribution. The provisions of this paragraph (i), including by operation of paragraph (ii) or (iii) below, shall not operate to increase the Exercise Price. (ii) If the Company shall after the date of issuance of this Warrant issue, sell, distribute or otherwise grant in any manner (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any warrants or options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such rights, warrants or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the rights to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (determined by dividing (A) the aggregate amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the last sales price per share of outstanding Common Stock of the Company on the date of granting such Options or on the date of announcement thereof (whichever is less), then for purposes of paragraph (i) above, the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued as of the date of granting of such Options and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraph (iv) below, no additional adjustment of the Exercise Price shall be made upon the actual exercise of such Options or upon conversion or exchange of such Convertible Securities. (iii) If the Company shall after the date of issuance of this Warrant issue, sell or otherwise distribute or grant (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (A) the aggregate amount received or receivable by the Company as consideration for the issue, sale or distribution of such Convertible Securities, plus, the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the last sales price per share of outstanding Common Stock of the Company on the date of such issue, sale or distribution or on the date of announcement thereof (whichever is less), then, for purposes of paragraph (i) above, the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the issue, sale or distribution of such Convertible Securities 4 and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraph (iv) below, no additional adjustment of the Exercise Price shall be made upon the actual conversion or exchange of such Convertible Securities. (iv) If the purchase price provided for in any Option referred to in paragraph (ii) above, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph (ii) or (iii) above, or the rate at which any Convertible Securities referred to in paragraph (ii) or (iii) above are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against, and having the effect of protecting against, dilution upon an event which results in a related adjustment pursuant to this paragraph 4), the Exercise Price then in effect shall forthwith be readjusted (effective only with respect to any exercise of this Warrant after such readjustment) to the Exercise Price which would then be in effect had the adjustment made upon the issue, sale, distribution or grant of such Options or Convertible Securities been made based upon such changed purchase price, additional consideration or conversion rate, as the case may be; PROVIDED, HOWEVER, that such readjustment shall give effect to such change only with respect to such Options and Convertible Securities as then remain outstanding. If, at any time after any adjustment of the Exercise Price shall have been made pursuant to this paragraph 4 on the basis of the issuance of any Option or Convertible Securities or after any new adjustments of the Exercise Price shall have been made pursuant to this paragraph, the right of conversion, exercise or exchange in such Option or Convertible Securities shall expire or terminate, and the right of conversion, exercise or exchange in respect of a portion of such Option or Convertible Securities shall not have been exercised, such previous adjustment shall be rescinded and annulled. Thereupon, a recomputation shall be made of the effect of such Option or Convertible Securities on the basis of treating the number of shares of Common Stock, if any, theretofore actually issued or issuable pursuant to the previous exercise of such right of conversion, exercise or exchange as having been issued on the date or dates of such conversion, exercise or exchange and for the consideration actually received and receivable therefor, and treating any such Option or Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of any such issuance for the consideration per share for which shares of Common Stock are issuable under such Option or Convertible Securities; and, if and to the extent called for by the foregoing provisions of this paragraph on the basis aforesaid, a new adjustment of the Exercise Price shall be made, which new adjustment shall supersede (effective only with respect to any exercise of this Warrant after such readjustment) the previous adjustment so rescinded and annulled. (v) If the Company shall after the date of issuance of this Warrant pay a dividend or make any other distribution upon any capital stock of the Company payable in Common Stock, options or Convertible Securities, then, for purposes of paragraph (i) above, such Common Stock, Options or Convertible Securities, as the case may be, shall be deemed to have been issued or sold without consideration. 5 (vi) If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed by the Company for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor net of any underwriting commissions or concessions paid or allowed by the Company in connection therewith. If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed by the Company for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair market value of such consideration, as determined in good faith by the Board of Directors of the Company, provided, however, that the fair market value of any security for which a last sales price is available shall be the market price of such security, after deduction of any expenses incurred and any underwriting commissions or concessions paid or allowed by the Company in connection therewith. If any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair market value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as shall be attributable to such Common Stock, Options or Convertible Securities, as the case may be. (vii) If the Company shall set a record date for the purpose of entitling the holders of the Common Stock to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue, sale, distribution or grant of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (viii) For purposes of determining whether any adjustment is required pursuant to this paragraph 4 any security of the Company having rights substantially equivalent to the Common Stock as to dividends or upon liquidation dissolution or winding up of the Company shall be treated as if such security were Common Stock. (c) If the Company shall after the date of issuance of this Warrant issue or distribute to all or substantially all holders of shares of Common Stock evidences of indebtedness, any other securities of the Company or any property, assets or cash, and if such issuance or distribution does not constitute a Common Stock Reorganization or a Common Stock Distribution (any such nonexcluded event being herein called a "Dividend"), the Exercise Price shall be adjusted (but not increased), effective immediately after the record date at which the holders of shares of Common Stock are determined for purposes of such Dividend, to a number determined by multiplying the Exercise Price immediately before such Dividend by a fraction, the numerator of which shall be the last sales price per share of outstanding Common Stock of the Company on such record date less the then fair market value, as determined in good faith by the Board of Directors of the Company, of the evidences of indebtedness, securities, cash, or property or other assets issued or distributed in such 6 Dividend with respect to one share of Common Stock and the denominator of which shall be the last sales price per share of outstanding Common Stock on such record date. If after the date of issuance of this Warrant the Company repurchases shares of Common Stock for a per share consideration which exceeds the last sales price (as calculated immediately prior to such repurchase), then the Exercise Price shall be adjusted in accordance with the foregoing provision, as if, in lieu of such repurchases, the Company had (A) distributed a Dividend having a fair market value, as determined in good faith by the Board of Directors of the Company, equal to the fair market value, as determined in good faith by the Board of Directors of the Company, of all property and cash expended in the repurchases, and (B) effected a reverse split of the Common Stock in the proportion required to reduce the number of shares of Common Stock outstanding from (I) the number of such shares outstanding immediately before such first repurchase to (II) the number of such shares outstanding immediately following all the repurchases. In lieu of the adjustments provided for in this paragraph 4(c) as a result of a Dividend, at the option of Holder, the Company shall instead pay to the Holder a cash Dividend equal to the amount of consideration to which the Holder would have been entitled if the Holder had fully exercised this Warrant immediately prior to the record date at which the holders of shares of Common Stock were determined for purposes of such Dividend. (d) If after the date of issuance of this Warrant there shall be any consolidation or merger to which the Company is a party, other than a consolidation or a merger in which the Company is a continuing corporation and which does not result in any reclassification of, or change (other than a Common Stock Reorganization or a change in par value), in, outstanding shares of Common Stock, or any sale or conveyance of the property of the Company as an entirety or substantially as an entirety (any such event being called a "Capital Reorganization"), then, effective upon the effective date of such Capital Reorganization, the Holder shall have the right to purchase, upon exercise of this Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable hereunder, the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have owned or have been entitled to receive after such Capital Reorganization if this Warrant had been exercised immediately prior to such Capital Reorganization, assuming such holder (i) is not a person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or conveyance was made, as the case may be ("constituent person"), or an Affiliate of a constituent person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such Capital Reorganization (provided that if the kind or amount of securities, cash or other property receivable upon such Capital Reorganization is not the same for each share of Common Stock held immediately prior to such consolidation, merger, sale or conveyance by other than a constituent person or an affiliate thereof and in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purposes of this paragraph the kind and amount of shares of stock and other securities or other property (including cash) receivable upon such Capital Reorganization shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). As a condition to effecting any Capital Reorganization, the Company or the successor or surviving corporation, as the case may be, shall execute and deliver to the Holder an agreement as to 7 the Holder's rights in accordance with this paragraph 4(d), providing for subsequent adjustments as nearly equivalent as may be practicable to the adjustments provided for in this paragraph 4. The provisions of this paragraph 4(d) shall similarly apply to successive Capital Reorganizations. (e) If after the date of the issuance of this Warrant the Company shall issue by reclassification of its shares of Common Stock other securities of the Company, then the number of shares of Common Stock purchasable upon exercise of the Warrant immediately prior to such issuance shall be adjusted so that the Holder upon exercise hereof shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Company which it would have owned or have been entitled to receive after such issuance, had this Warrant been exercised immediately prior to such issuance or any record date with respect thereto. An adjustment made pursuant to this paragraph 4(e) shall become effective upon the date of the issuance retroactive to the record date with respect thereto, if any. Such adjustment shall be made successively whenever such an issuance is made. (f) (i) Any adjustments pursuant to this paragraph 4 shall be made successively whenever an event referred to herein shall occur. (ii) If the Company shall set a record date to determine the holders of shares of Common Stock for purposes of a Common Stock Reorganization, Common Stock Distribution, Dividend or Capital Reorganization, and shall legally abandon such action prior to effecting such Action, then no adjustment shall be made pursuant to this paragraph 4 in respect of such action. (iii) No adjustment in the Exercise Price shall be made hereunder unless such adjustment decreases such price by one percent or more, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall serve to adjust such price by one percent or more. (iv) No adjustment in the Exercise Price shall be made hereunder if such adjustment would reduce the exercise price to an amount below par value of the Common Stock, which par value shall initially be $0.001 per share of Common Stock. (v) No adjustment shall be made pursuant to this paragraph 4 in respect of (A) exercises or conversions of any rights, warrants, options, or convertible securities outstanding on the date hereof or issued to employees of the Company or any parent or subsidiary pursuant to stock option plans in effect on the date of this Warrant, (B) the issuance (or deemed issuance) or repurchase of shares of Common Stock in connection with the exercise of the Warrant or (C) the issuance of shares of Common Stock in an underwritten public offering managed by a nationally recognized investment banking firm. (g) As a condition precedent to the taking of any action which would require an adjustment pursuant to this paragraph 4, the Company shall take any action which may be necessary, including obtaining regulatory approvals or 8 exemptions, in order that the Company may thereafter validly and legally issue as fully paid and nonassessable all shares of Common Stock which the Holder is entitled to receive upon exercise thereof. (h) Promptly after an adjustment or readjustment pursuant to this paragraph 4 becomes determinable, the Company shall give notice to the Holder of any action which requires an adjustment or readjustment pursuant to this paragraph 4, describing such event in reasonable detail and specifying the record date or effective date, if determinable, the required adjustment and the computation thereof, if applicable. If the Holder fails to object to any such notice within 30 days of receipt of the Company's notice, the adjustment will be deemed accepted by the Holder. 5. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Company (the original Warrantholder's indemnity being satisfactory indemnity in the event of loss, theft or destruction of any Warrant owned by such holder), or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of shares of Common Stock as provided for in such lost, stolen, destroyed or mutilated Warrant. 6. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. 7. (a) The Holder of this Warrant, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Common Stock issuable or issued upon the exercise hereof of such Holder's intention to do so, describing briefly the manner of any proposed transfer of this Warrant or such Holder's intention as to the disposition to be made of shares of Common Stock issuable or issued upon the exercise hereof. Such Holder shall also provide the Company with an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed transfer of this Warrant or disposition of shares received upon exercise hereof may be effected without registration or qualification (under any Federal or State law) and without causing the loss of the applicable securities law registration exemption(s) relied upon by the Company when it issued this Warrant. Upon receipt of such written notice and opinion by the Company, such Holder shall be entitled to transfer this Warrant, or to exercise this Warrant in accordance with its terms and dispose of the shares received upon such exercise or to dispose of shares of Common Stock received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by such Holder to the Company, provided that an appropriate legend respecting the aforesaid restrictions on transfer and disposition shall be endorsed on this Warrant or the certificates for such shares. (b) This Warrant (and the shares of Common Stock issuable upon the exercise of this Warrant) is entitled to the benefit of certain registration rights pursuant to a Registration Rights Agreement, a copy of which is attached hereto as Schedule 1. 9 8. Subject to the provisions of paragraph 7 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder hereof, at the principal office of the Company by the Holder hereof in person or by its duly authorized attorney, upon surrender of this Warrant properly endorsed and this Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the office of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the rights to subscribe for and purchase such number of shares as shall be designated by said Holder hereof at the time of such surrender. Each taker and Holder of this Warrant, by taking or holding the same, consents and agrees that the bearer of this Warrant, when endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered Holder hereof as the owner for all purposes. 9. Any notices required or permitted to be given under the terms of this Warrant shall be sent by certified or registered mail (with return receipt requested) or delivered personally or by courier (including a nationally recognized overnight delivery service) or by facsimile transmission. Any notice so given shall be deemed effective three days after being deposited in the U.S. Mail, or upon receipt if delivered personally or by courier or facsimile transmission, in each case addressed to a party at the following address or such other address as each such party furnishes to the other in accordance with this paragraph 9: If to the Company: e-dentist.com, Inc. 2999 North 44th Street Suite 650 Phoenix, AZ 85018 Telephone: (602) 952-1200 Facsimile: (602) 952-0544 Attention: Mr. James M. Powers, Jr. If to the Holder: Bank One, N.A. 201 North. Central Avenue Phoenix, AZ 85004-2267 Telephone: (602) 221-2910 Facsimile: (602) 221-1737 Attention: Dennis B. Warren 10. (a) No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it 10 would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Company and the Holder. The provisions of the Registration Rights Agreement may be amended, modified or waived only in accordance with the respective provisions thereof. (b) Any such amendment, modification or waiver effected pursuant to this paragraph 10 or the applicable provisions of the Registration Rights Agreement shall be binding upon the Holder of the Warrant and Common Stock issuable upon exercise, upon each future holder thereof and upon the Company. In the event of any such amendment, modification or waiver the Company shall give prompt notice thereof to the Holder and, if appropriate, notation thereof shall be made on any Warrant thereafter surrendered for registration of transfer or exchange. No notice or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 11. All representations, warranties and covenants made by the Company herein or in any certificate or other instrument delivered by or on behalf of it in connection with the Warrant shall be considered to have been relied upon by the Holder and shall survive the issuance and delivery of the Warrant, regardless of any investigation made by the Holder, and shall continue in full force and effect so long as any Warrant is outstanding. All statements in any such certificate or other instrument shall constitute representations and warranties hereunder. 12. All covenants, stipulations, promises and agreements contained in this Warrant by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. 13. In case any one or more of the provisions contained in the Registration Rights Agreement or this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 14. The Company shall not by any action including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any at the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not, directly or indirectly, increase the par value of any shares of Common Stock receivable upon the exercise of this warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable (subject to Wisconsin law) shares of Common Stock upon the exercise of this warrant, and (c) use its commercially reasonable best efforts to obtain all such authorizations exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. 11 15. (a) Any legal action or proceeding with respect to this Warrant may be brought in the courts of the State of Arizona located in Maricopa County or of the United States District Court for the District of Arizona, and, by execution and delivery of this Warrant, the Company irrevocably accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. The Company hereby waives personal service of any and all process upon it and consents that all such service of process may be made by registered mail (return receipt requested) directed to the Company at its address set forth in paragraph 9 and service so made shall be deemed to be completed five (5) days after the same shall have been deposited in the U.S. mails. Nothing herein shall affect the right of the Holder to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other jurisdiction. (b) The Company hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Warrant brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 16. All questions concerning this Warrant will be governed and interpreted and enforced in accordance with the laws of the State of Arizona, without giving effect to rules governing the conflict of laws. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated as of June 29, 2001. E-DENTIST.COM, INC. By /s/ JAMES M. POWERS, JR. ------------------------------------- James M. Powers, Jr. President and Chief Executive Officer 12 FORM OF ASSIGNMENT (To Be Signed Only Upon Assignment) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ___________________________ all of the rights of the undersigned under this Warrant, with respect to the number of shares set forth below, and appoints ___________________________ to transfer this Warrant on the books of E-DENTIST.COM, INC. with the full power of substitution in the premises. NAME OF ASSIGNEE ADDRESS NUMBER OF SHARES - ---------------- ------- ---------------- Dated: ______________________ In the presence of: - ----------------------------------- ------------------------------------ (Signature must conform in all respects to the name of the holder as specified on the face of this Warrant without alteration, enlargement or any change whatsoever, and the signature must be guaranteed in the usual manner.) SUBSCRIPTION FORM To be Executed by the Holder of this Warrant if such Holder Desires to Exercise this Warrant in Whole or in Part: To: E-DENTIST.COM, INC. (the "Company") The undersigned -------------------------------------------------------- Please insert Social Security or other identifying number of Subscriber: -------------------------------------- hereby irrevocably elects to exercise the right of purchase represented by this Warrant for, and to purchase thereunder, _________ shares of the Common Stock provided for therein and tenders payment herewith to the order of the Company in the amount of $___________, such payment being made as provided on the face of this Warrant. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below. The undersigned requests that certificates for such shares of Common Stock be issued as follows: Name: ---------------------------------------------------------------------------- Address: ------------------------------------------------------------------------ Deliver to: --------------------------------------------------------------------- Address: ------------------------------------------------------------------------ Dated: Signature -------------------------- ---------------------------- Note: The signature on this Subscription Form must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of June 29, 2001 (the "Agreement"), is made between E-DENTIST.COM, INC., a Delaware corporation (the "Company"), and BANK ONE, N.A., a national banking association (the "Holder"). RECITALS A. The Company and the Holder have entered into a Fourth Amendment to Credit Agreement dated as of the date of this Agreement (the "Fourth Amendment"). B. The Company has agreed to issue a warrant (the "Warrant") to the Holder to purchase shares of the Company's Common Stock, par value $0.001 per share (the "Common Stock") to induce the Holder to execute and deliver the Fourth Amendment. The shares of the Common Stock for which the Warrant is exercisable are collectively referred to herein as the "Common Shares." C. The Company wishes to execute and deliver this Agreement in order to induce the Holder to provide the loan under the Fourth Amendment and has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws with respect to the Common Shares. AGREEMENTS In consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Company and the Holder hereby agree as follows: A. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: 1. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. 2. "Holder" shall have the meaning set forth in the first paragraph hereof, as well as any transferee or assignee of the initial Holder who agrees to become bound by the provisions of this Agreement in accordance with section 10 hereof. 3. "Registrable Securities" means the Warrant and the Common Shares, together with any shares of Common Stock which may be issued as a dividend or other distribution and any additional shares of Common Stock which may be issued due to anti-dilution adjustments with respect to the Warrant and Common Shares, which are required to be included in a Registration Statement pursuant to section 2 below. 4. "Registration Period" means the period between the date of this Agreement and the earlier of (i) the date on which all of the Registrable Securities have been sold pursuant to a Registration Statement or Rule 144, or 1 (ii) the date on which the Registrable Securities, may be immediately sold without registration by a Holder who is not an affiliate of the Company pursuant to Rule 144(k) under the 1933 Act or any similar or successor rule (provided that the Holder has received an opinion of the Company's counsel who is reasonably acceptable to the Holder covering the matters referred to in this clause (ii) and such opinion is reasonably satisfactory to the Holder). Notwithstanding the foregoing, if the Registration Period for one type of Registrable Security shall expire, the Registration Period for all other types of Registrable Securities shall remain unchanged until such time as they are sold in accordance with clause (i) above or may be sold in accordance with clause (ii) above. 5. "Registration Statement" means a registration statement filed with the Securities and Exchange Commission (the "SEC") under the 1933 Act. 6. The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such Registration Statement by the SEC. 7. "Rule 144" shall mean Rule 144 promulgated under the 1933 Act or any successor rule thereto. B. REGISTRATION. The Company covenants and agrees: (a) At any time and from time to time, the Holder may make a written request to the Company (a "Demand Notice") that the Company register the offer and sale of all or any part of the Holder's Registrable Securities under the 1933 Act ( a "Demand Registration"). Upon receipt of a Demand Notice, the Company will use its reasonable best efforts to file within 60 days after the date of the Demand Notice a Registration Statement with the SEC registering the Registrable Securities included in the Demand Notice for resale. The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective by the SEC within 120 days after the date of the Demand Notice. Such reasonable best efforts shall include, but not be limited to, promptly responding to all comments received from the staff of the SEC. Should the Company receive notification from the SEC that the Registration Statement will receive no action or no review from the SEC, the Company shall cause such Registration Statement to become effective within five business days of such SEC notification. Once declared effective by the SEC, the Company shall use all reasonable best efforts to cause such Registration Statement to remain continuously effective throughout the Registration Period. Notwithstanding anything in this section 2(a) to the contrary, the Holder shall be entitled to no more than two Demand Registrations. (b) The offering of such Registrable Securities pursuant to the Registration Statement shall be in the form of either an underwritten offering or through the use of brokers or in privately negotiated transactions, in either case as selected by the Holder within no more than five (5) business days following the date of the Demand Notice. In the event that the Holder elects that the offering be an underwritten offering, the Company and the Holder shall enter into a customary underwriting agreement with such underwriter(s) (and the Holder may at its option require that the representations, warranties and covenants of the Company to or for the benefit of the underwriter(s) also are made for the benefit of the Holder). 2 (c) Notwithstanding the foregoing, the Company may delay in filing the Registration Statement and may withhold efforts to cause the Registration Statement to become effective, if the Company determines in good faith that such registration will (i) materially and adversely interfere with or affect the negotiation or completion of any actual or pending material transaction that is being contemplated by the Company (whether or not a final decision has been made to undertake such transaction) at the time the right to delay or withhold efforts is exercised, or (ii) involve initial or continuing disclosure obligations that are not in the best interests of the Company's stockholders. The Company may exercise such right to delay or withhold efforts not more than once and for not more than sixty (60) days. Notwithstanding anything to the contrary that may be contained in this Agreement, if the Company exercises its right to delay or to withhold efforts, the Company shall use its reasonable best efforts to have the Registration Statement filed or declared effective, as the case may be, at the earliest practicable date after the Company's reasons for delaying or withholding efforts are no longer applicable (but subject to the time limitation in the immediately preceding sentence). (d) Whenever the Company proposes to register (including on behalf of a selling stockholder) any of its securities under the 1933 Act (except for the registration of securities to be offered pursuant to an employee benefit plan on Form S-8 or pursuant to a registration made on Form S-4, or any successor forms) at any time other than pursuant to a Demand Registration and the registration form to be used may be used for the registration of the Registrable Securities (a "Piggyback Registration"), it will so notify the Holder in writing no later than the earlier to occur of (i) the tenth (10th) day following the Company's receipt of notice of exercise of other demand registration rights, or (ii) 30 days prior to the anticipated date of filing. Subject to the provisions of section 2(f), the Company will include in the Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion from the Holder with fifteen (15) business days after the Holder's receipt of the Company's notice. The Holder may withdraw all or any part of the Registrable Securities from a Piggyback Registration at any time before ten (10) business days prior to the effective date of the Piggyback Registration. The Company, the Holder and any person who hereafter becomes entitled to register its securities in a registration initiated by the Company shall sell their securities on the same terms and conditions. (e) If the managing underwriter gives the Company its written opinion that the total number of securities requested to be included in the Piggyback Registration exceeds the number of securities that can be sold, the Company will include the securities in the registration in the following order of priority: (i) first, all securities the Company or the shareholder for whom the Company is effecting the registration, as the case may be, proposes to sell; (ii) second, up to the full number of Registrable Securities requested to be included in the registration; and (iii) third, any other securities requested to be included, allocated among the holders of such securities in such proportions as the Company and those holders may agree. (f) If any Piggyback Registration is an underwritten offering, the Company and the Holder shall enter into a customary underwriting agreement with the underwriter(s) administering the offering. The Holder may not participate in any Piggyback Registration without (i) agreeing to sell securities on the basis provided in the underwriting arrangements approved by the Company, and (ii) completing all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required by the underwriting arrangements. 3 C. ADDITIONAL OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall have the following additional obligations: 1. The Company shall keep the Registration Statement effective pursuant to Rule 415 under the 1933 Act at all times during the Registration Period. 2. The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) filed by the Company shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, shall comply with the provisions of the 1933 Act applicable to the Company with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the sellers thereof as set forth in the Registration Statement. In the event the number of shares of Common Stock included in a Registration Statement filed pursuant to this Agreement is insufficient to cover all of the Registrable Securities, the Company shall amend the Registration Statement and/or file a new Registration Statement so as to cover all of the Registrable Securities as soon as practicable. The Company shall use its reasonable best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. 3. The Company shall furnish to each Holder whose Registrable Securities are included in the Registration Statement (i) promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, one copy of the Registration Statement and any amendment thereto, each preliminary prospectus and final prospectus and each amendment or supplement thereto, and each substantive letter written by or on behalf of the Company to the SEC and each item of each substantive correspondence from the SEC, in each case relating to such Registration Statement (other than any portion of any item thereof which contains information for which the Company has sought confidential treatment); and (ii) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto, and such other documents as such Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holder. 4. The Company shall use its reasonable best efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions as the Holder reasonably requests, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or 4 advisable to qualify the Registrable Securities for sale in such jurisdictions. Notwithstanding the foregoing provision, the Company shall not be required in connection therewith or as a condition thereto to (i) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this section 3(d), (ii) subject itself to general taxation in any such jurisdiction, (iii) file a general consent to service of process in any such jurisdiction, (iv) provide any undertakings that cause more than nominal expense or burden to the Company, or (v) make any change in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders. 5. The Company shall notify each Holder who holds Registrable Securities being sold pursuant to a Registration Statement of the happening of any event of which the Company has knowledge as a result of which the prospectus included in the Registration Statement as then in effect includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading (a "Suspension Event"). The Company shall make such notification as promptly as practicable after the Company becomes aware of such Suspension Event, shall promptly use its reasonable best efforts to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and shall deliver a copy of such supplement or amendment to each Holder. 6. The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement and, if such an order is issued, shall use its reasonable best efforts to obtain the withdrawal of such order at the earliest possible time and to notify each Holder who holds Registrable Securities being sold of the issuance of such order and the resolution thereof. 7. The Company shall permit a single firm of counsel designated by the Holder to review the Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC, and shall not file any document in a form to which such counsel reasonably objects. 8. The Company shall make available for inspection by the Holder whose Registrable Securities are being sold pursuant to such registration and any attorney, accountant or other agent retained by any such Holder (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to a Holder) of any Record or other information unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or (iii) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such 5 Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance reasonably satisfactory to the Company) with the Company with respect thereto, substantially in the form of this section 3(h). The Holder agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein shall be deemed to limit the Holder's ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. 9. The Company shall cooperate with the Holder of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities, if any, and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. 10. In the event of an underwritten offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering, with such terms and conditions as the Company and the underwriter(s) may agree. The Holder, if participating in such underwriting, shall also enter into and perform its obligations under such an agreement. 11. The Company shall take all other reasonable actions reasonably requested by the Holder which are necessary to expedite and facilitate disposition by the Holder of the Registrable Securities pursuant to the Registration Statement. D. OBLIGATIONS OF THE HOLDER. In connection with the registration of the Registrable Securities, the Holder shall have the following obligations: 1. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the Holder that the Holder shall furnish in writing to the Company such information regarding the Holder, the Registrable Securities held by the Holder and the intended method of disposition of the Registrable Securities held by the Holder as shall be required to effect the registration of the Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. 2. The Holder, by acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder unless such Holder has notified the Company in writing of such Holder's election to exclude all of such Holder's Registrable Securities from the Registration Statement. 3. The Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in section 3(e) or 3(f), such Holder will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by section 3(e) or 3(f) and, if so directed by the 6 Company, such Holder shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. The Company shall use its reasonable best efforts to limit the duration of any discontinuance of disposition of Registrable Securities pursuant to this paragraph. E. EXPENSES OF REGISTRATION. All expenses, other than discounts and commissions attributable to the sale of any Registrable Securities, incurred in connection with registrations, filings or qualifications pursuant to section 2, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and the fees and disbursements of counsel for the Company, shall be borne by the Company. F. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: 1. The Company will indemnify and hold harmless each Holder who holds such Registrable Securities, the directors, if any, of such Holder, the officers and employees, if any, of such Holder, each person, if any, who controls any Holder within the meaning of the 1933 Act (each, an "Indemnified Person"), against any losses, claims, damages, expenses or liabilities (joint or several) or actions in respect thereof (collectively "Claims") to which any of them become subject under the 1933 Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act or any state securities law or any rule or regulation (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Holder and each such underwriter or controlling person, promptly as such expenses are incurred and are due and payable, for any legal fees or other expenses reasonably incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this section 6(a): (A) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (B) with respect to any preliminary prospectus shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if 7 the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if a prospectus was timely made available by the Company pursuant to section 3(c) hereof; and (C) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Persons and shall survive the transfer of the Registrable Securities by the Holder pursuant to section 10. In connection with a firm or best efforts underwritten offering, to the extent customarily required by the managing underwriter, the Company will indemnify the underwriters, their officers, directors, trustees, partners, employees, advisors and agents, and each person who controls the underwriters (within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act), together with all officers, directors, trustees, partners, employees, advisors and agents of such controlling person, to the extent customary in such agreements. 2. In connection with any Registration Statement in which the Holder is participating, the Holder agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the 1933 Act (an "Indemnified Party"), against any Claim to which any of them may become subject, under the 1933 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in connection with such Registration Statement, and such Holder will reimburse any legal fees or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Holder, which consent shall not be unreasonably withheld; provided further, however, that the Holder shall be liable under this section 6(b) for only that amount of a Claim as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Holder pursuant to section 10. In connection with a firm or best efforts underwritten offering, to the extent customarily required by the managing underwriter, the Holder will indemnify the underwriters, their officers, directors, trustees, partners, employees, advisors and agents, and each person who controls the underwriters (within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act), together with all officers, directors, trustees, partners, employees, advisors and agents of such controlling person, to the extent customary in such agreements. 3. Promptly after receipt by an Indemnified Person or Indemnified Party under this section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this section 6, deliver to the indemnifying party a written notice of the commencement thereof and this indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so 8 desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying parties; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and other party represented by such counsel in such proceeding. The Company shall pay for only one separate legal counsel for the Holder; such legal counsel shall be selected by the Holder. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. G. CONTRIBUTION. If for any reason the indemnification provided for in section 6 is unavailable to an Indemnified Party or an Indemnified Person or is insufficient to hold it harmless as payable by the Indemnified Party or an Indemnified Person as contemplated therein, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under section 6, provided, however, that (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. H. CHANGES IN CAPITAL STOCK. If, and as often as, there is any change in the capital stock of the Company by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with respect to the capital stock as so changed. I. RULE 144 REPORTING. With a view to making available to the Holder the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144, at all times after the date hereof; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act; and 9 (c) Furnish to any Holder, so long as the Holder owns any Registrable Securities, upon request (i) a written statement by the Company as to its compliance with the reporting requirements of the 1933 Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or as to its qualification as a registrant whose securities may be resold pursuant to Form S-3 or any registration form under the 1933 Act subsequently adopted by the SEC that permits the inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. J. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Holder to transferees or assignees of all or any portion of such Registrable Securities if (i) the Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, and (iv) at or before the time the Company received the written notice contemplated by clause (ii) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. Upon a transfer in compliance with this section 10, all references in this Agreement to "Holder" shall be deemed to refer in addition to any transferee hereunder with respect to such transferred Registrable Securities. Notwithstanding anything to the contrary that may be contained in this Agreement, in the event that the Holder does not transfer all of the Registrable Securities or transfers the Registrable Securities to more than one transferee, the holders of the Registrable Securities thereafter shall be entitled to take any action hereunder by the approval of not less than thirty-three percent (33%) of all Registrable Securities or by the approval of not less than thirty-three percent (33%) of the Registrable Securities which are the subject of such registration, as appropriate. K. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder(s) who hold a majority interest of the Registrable Securities. Any amendment or waiver effected in accordance with this section 11 shall be binding upon each Holder and the Company. L. MISCELLANEOUS. 1. CONFLICTING INSTRUCTIONS. A person or entity is deemed to be a Holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. 10 2. NOTICES. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (with return receipt requested) or delivered personally or by courier (including a nationally recognized overnight delivery service) or by facsimile transmission. Any notice so given shall be deemed effective three days after being deposited in the U.S. Mail, or upon receipt if delivered personally or by courier or facsimile transmission, in each case addressed to a party at the following address or such other address as each such party furnishes to the other in accordance with this section 12(b): If to the Company: e-dentist.com, Inc. 2999 North 44th Street Suite 650 Phoenix, AZ 85018 Telephone: (602) 952-1200 Facsimile: (602) 952-0544 Attention: Mr. James M. Powers, Jr. If to the Holder: Bank One, N.A. 201 North. Central Avenue Phoenix, AZ 85004-2267 Telephone: (602) 221-2910 Facsimile: (602) 221-1737 Attention: Dennis B. Warren 3. WAIVER. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. 4. GOVERNING LAW. This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of Arizona applicable to the agreements made and to be performed entirely within such state, without giving effect to rules governing the conflict of laws. 5. Any legal action or proceeding with respect to this Agreement may be brought in the courts of the State of Arizona located in Maricopa or of the United States District Court for the District of Arizona, and, by execution and delivery of this Agreement, the Company irrevocably accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. The Company hereby waives personal service of any and all process upon it and consents that all such service of process may be made by registered mail (return receipt requested) directed to the Company at its address set forth in section L.2 and service so made shall be deemed to be completed five (5) days after the same shall have been deposited in the U.S. 11 mails. Nothing herein shall affect the right of the Holder to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other jurisdiction. 6. The Company hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to in clause (e) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 7. SEVERABILITY. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. 8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 9. SUCCESSORS AND ASSIGNS. Subject to the requirements of section 10 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. 10. USE OF PRONOUNS. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 11. HEADINGS. The headings and subheadings in the Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission, and facsimile signatures shall be binding on the parties hereto. 13. FURTHER ACTS. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 14. CONSENTS. All consents and other determinations to be made by the Holder pursuant to this Agreement shall be made by Holder(s) holding a majority of the Registrable Securities, determined as if all Warrants then outstanding had been converted into or exercised for Common Shares. 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. COMPANY: E-DENTIST.COM, INC. By: /S/ JAMES M. POWERS, JR. ------------------------------- James M. Powers, Jr., Chairman, President and Chief Executive Officer HOLDER: BANK ONE, N.A. By: /S/ DENNIS B. WARREN ------------------------------- Dennis B. Warren First Vice President 13 EX-12 11 ex12.txt RATIO OF EARNINGS TO FIXED CHANGES EXHIBIT 12 E-DENTIST.COM, INC. RATIO OF EARNINGS TO FIXED CHANGES The following table sets forth the Company's earnings to fixed charges for the periods indicated: YEAR ENDED MARCH 31, ---------------------- 2001 2000 1999 ---- ---- ---- Ratio of Earnings to Fixed Charges (a) (b) (c) 5.0 (a) For the purposes of computing the consolidated ratio of earnings to fixed charges, earnings consist of income before income taxes and extraordinary items. Fixed charges consist of interest on all indebtedness, amortization of debt discount and expense, and that portion of rental expense that we believe to be representation of interest. (b) Due to the loss recorded in 2001, the ratio coverage was less than 1:1. The Company would have needed to generate additional earnings of $25 million to achieve a coverage of 1:1 in 2001. (c) Due to the loss recorded in 2000, the ratio coverage was less than 1:1. The Company would have needed to generate additional earnings of $3.5 million to achieve a coverage of 1:1 in 2000. EX-21.1 12 ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Liberty Acquisition Corporation, a Tennessee corporation and wholly owned subsidiary of e-dentist.com, Inc. 2. Special Omega Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of e-dentist.com, Inc. 3. Pentegra Investments, Inc., a Delaware corporation and wholly owned subsidiary of e-dentist.com, Inc. EX-23.1 13 ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-56033) of e-dentist.com, Inc., of our report dated June 22, 2001 except for Note 1 and Note 10, as to which the date is June 29, 2001 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Phoenix, Arizona July 5, 2001 -----END PRIVACY-ENHANCED MESSAGE-----