-----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, HhNkCCK/tTodgBCMO+9qRo/sUUpn3jWPylKXPrZqeNYDeVV4cH+Eiyz8x+jUrSqQ 4NRxQ2Mr9KMHGlq609HWEQ== 0000950153-99-001427.txt : 19991117 0000950153-99-001427.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950153-99-001427 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTEGRA DENTAL GROUP 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-Q SEC ACT: SEC FILE NUMBER: 001-13725 FILM NUMBER: 99754963 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 10-Q 1 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] 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 PENTEGRA DENTAL GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-045043 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 952-1200 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 November 12, 1999, was 10,806,248. -1- 2 FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO. PART I - FINANCIAL INFORMATION PAGE Item 1 - Consolidated Financial Statements (unaudited) Consolidated Balance Sheets as of September 30, 1999 and March 31, 1999............................................................................ 3 Consolidated Statements of Operations for the Three and Six Months Ended September 30, 1999 and September 30, 1998.................................... 4 Consolidated Statement of Changes in Shareholders' Equity as of September 30, 1999........................................................... 5 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1999 and September 30, 1998.................................... 6 Notes to Consolidated Financial Statements ............................................... 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................... 8 PART II - OTHER INFORMATION Item 1 - Legal Proceedings..................................................................... 14 Item 4 - Submission of Matters to a Vote of Security Holders................................... 14 Item 5 - Other Information..................................................................... 14 Item 6 - Exhibits and Reports on Form 8-K...................................................... 14 Signature...................................................................................... 14
-2- 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, March 31, 1999 1999 ------------- --------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 65 $ 1,047 Receivables from affiliated practices, net of allowance for doubtful accounts of $237 and $125 at September 30, 1999 and March 31, 1999 5,967 5,659 Prepaid and other current assets 611 465 Notes receivable from affiliated practices - current 407 286 -------- -------- Total current assets 7,050 7,457 Property and equipment, net 7,280 6,171 Intangible assets, net 25,998 21,848 Notes receivable from affiliated practices, net 1,357 971 Deferred tax asset 1,901 680 -------- -------- Total assets $ 43,586 $ 37,127 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Line of credit $ 9,000 $ -- Current portion of long term debt 269 537 Accounts payable and accrued liabilities 2,337 1,756 Accrued employment agreement 820 940 -------- -------- Total current liabilities 12,426 3,233 Line of credit -- 8,000 Convertible subordinated notes 4,422 4,566 Shareholders' notes 559 568 Long term debt 1,673 -- Commitments and contingencies Shareholders' equity Common stock, $.001 par value 40,000,000 shares authorized, 10,670,589 and 9,102,503 shares outstanding at September 30, 1999 and March 31, 1999 11 9 Additional paid-in capital 25,170 21,823 Accumulated deficit (378) (1,072) Less: treasury shares, at cost, 175,083 common shares (297) -- Total shareholders' equity 24,506 20,760 -------- -------- Total liabilities and shareholders' equity $ 43,586 $ 37,127 ======== ========
The accompanying notes are an integral part of the financial statements -3- 4 PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data)
Three Months Ended Six Months Ended September 30, September 30, 1999 1998 1999 1998 -------- -------- -------- -------- Net revenue $ 15,609 $ 8,761 $ 28,058 $ 16,173 Operating expenses: Clinical salaries, wages and benefits 6,394 3,534 11,520 6,370 Dental supplies and lab fees 2,856 1,586 5,081 2,806 Rent 1,155 703 1,988 1,253 Advertising and marketing 388 155 657 266 General and administrative 1,424 960 2,429 1,836 Other operating expenses 2,042 1,231 3,596 1,982 Depreciation and amortization 661 225 1,192 396 -------- -------- -------- -------- Total operating expenses 14,920 8,394 26,463 14,909 -------- -------- -------- -------- Earnings from operations 689 367 1,595 1,264 Interest expense (292) -- (538) (3) Interest income 48 39 85 82 Other income 80 -- 81 -- -------- -------- -------- -------- Income before income taxes 525 406 1,223 1,343 Income taxes 250 112 529 375 -------- -------- -------- -------- Net income $ 275 $ 294 $ 694 $ 968 ======== ======== ======== ======== Basic and diluted earnings per share $ 0.03 $ 0.04 $ 0.07 $ 0.13 ======== ======== ======== ======== Weighted average number of shares outstanding - basic and diluted 10,844 7,526 9,973 7,206 ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements -4- 5 PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands)
Additional Total Common Stock Paid-In Accumulated Treasury Shareholders' Shares Amount Capital Deficit Stock Equity ------ -------- ---------- ----------- -------- ------------- Balances, March 31, 1999 9,103 $ 9 $ 21,823 $ (1,072) $ -- $ 20,760 Issuance of common stock 1,743 2 3,347 -- -- 3,349 Shares repurchased -- -- -- -- (297) (297) Net income -- -- -- 694 694 ------ -------- -------- -------- -------- -------- Balances, September 30, 1999 10,846 $ 11 $ 25,170 $ (378) $ (297) $ 24,506 ====== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements -5- 6 PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Six Months Ended September 30, 1999 1998 ------- ------- Net cash used by operating activities $ (532) $(4,392) Cash flows from investing activities Capital expenditures (207) (566) Acquisitions of affiliated dental practices net of cash acquired (1,210) (2,925) Issuance of notes receivable -- (1,058) Collections of notes receivable 40 -- ------- ------- Net cash used by investing activities (1,377) (4,549) ------- ------- Cash flows from financing activities Proceeds from issuance of common stock -- 2,930 Proceeds from line of credit 1,000 -- Repayment of long term debt (73) ------- ------- Net cash provided by financing activities 927 2,930 ------- ------- Net change in cash and cash equivalents (982) (6,011) Cash and cash equivalents, beginning of period 1,047 6,708 ------- ------- Cash and cash equivalents, end of period $ 65 $ 697 ======= ======= Supplemental disclosures of cash flow information: Convertible subordinated notes reduced to offset Receivables from affiliated practices $ 144 $ -- Equipment purchased with capital leases $ 942 $ --
The accompanying notes are an integral part of the financial statements -6- 7 PENTEGRA DENTAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION Pentegra Dental Group, Inc. (the "Company") provides practice management services to dental practices throughout the United States. As of September 30, 1999, the Company managed 100 affiliated practices ("Affiliated Practices") in 30 states. The unaudited consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes the presentation and disclosures herein are adequate to make the information not misleading, but do not purport to be a complete presentation inasmuch as all note disclosures required by generally accepted accounting principles are not included. In the opinion of management, the consolidated financial statements reflect all elimination entries and normal adjustments that are necessary for a fair presentation of the results for the interim periods ended September 30, 1999 and 1998. Fiscal operating results for interim periods are not necessarily indicative of the results for full years. It is suggested that these consolidated financial statements be read in conjunction with the financial statements of Pentegra Dental Group, Inc., and related notes thereto, and management's discussion and analysis related thereto, all of which are included in the Company's annual report on Form 10-K for the fiscal year ended March 31, 1999, as filed with the SEC. 2. SIGNIFICANT ACCOUNTING POLICIES EARNINGS PER SHARE 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. Outstanding options to purchase 804,031 shares of Common Stock at exercise prices above the market value of Common Stock were excluded from the calculation of earnings per share for the three and six months ended September 30, 1999, respectively, because their effect would have been antidilutive. 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. INCOME TAXES Income tax expense approximated 43% and 28% of income before income taxes for the six months ended September 30, 1999 and 1998, respectively. The Company expects the effective tax rate for income generated during fiscal -7- 8 2000 will be 43%. The effective rate of 43% for fiscal 2000 results from permanent differences between financial reporting of expense and deductible expenses for income tax purposes. 3. ACQUISITION OF OMEGA ORTHODONTICS, INC. In March 1999, the Company entered into a merger agreement with Omega Orthodontics, Inc. ("Omega"). On July 1, 1999, this transaction closed and each of the approximately 5.0 million outstanding shares of Omega was exchanged for 0.356 of a share of the Company (approximately 1.75 million shares). Approximately $1.1 million of Omega debt was assumed by Pentegra. 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 including the impact of certain adjustments including: (i) the elimination of nonrecurring merger related costs, and (ii) reduced amortization expense reflecting the reduction in value assigned to intangible assets.
Six months ended September 30 1999 1998 ---- ---- Pro forma Pro forma (in thousands, except per share amounts) Revenues $ 30,075 $ 19,998 Expenses 29,479 19,114 ----------- ----------- Net Income 596 874 ----------- ----------- Net income per basic and diluted share .05 .10 Weighted average number of basic and diluted share outstanding: 10,845,000 8,949,000
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 resulting from the integration of the Company's and Omega's operations. 4. PRACTICE AFFILIATIONS During the six months ended September 30, 1999, the Company entered into four new affiliation agreements. These agreements call for a reduced management service fee (typically 7% to 8% of collections) in exchange for certain management services. The Company also has acquired an option to purchase the assets of these practices of these affiliation agreements. During the quarter ended September 30, 1999, the management services agreement and asset ownership of two affiliated dental practices ceased, due to physical disabilities of the owner dentists as described in the management services agreement. In exchange for the termination of the management services agreement and the transfer of title of the assets back to the practice, Pentegra received substantially all the stock provided to the owner dentists at the time of acquisition and payment of all outstanding service fees. Shares returned to the Company have been recorded as treasury stock. The net result of these two transactions was a non-operating gain of approximately $80,000 during the quarter ended September 30, 1999. -8- 9 5. NOTES RECEIVABLE Notes receivable consists of notes from affiliate practices, bearing interest of 0-9% with terms ranging from one to fourteen years. The notes resulted from advances made to certain practices to assist them in acquiring other practices or working capital advances. As of September 30, 1999, notes receivable totaled approximately $1.7 million. Notes totaling approximately $375,000 are due from two affiliate dentist members on the board of directors. 6. SUBSEQUENT EVENTS The Company finalized the merger with Liberty Dental Alliance, Inc. ("Liberty") in October 1999. The consideration paid for the corporate entity consisted of approximately $420,000 in cash, 150,194 shares of Pentegra common stock, and 26,302 options to purchase Pentegra common stock. In addition to the closing of the merger with Liberty, the Company has agreed to pay additional consideration in the form of commissions to the founders of Liberty for additional acquisitions of practices related to Liberty through December 31, 1999. ITEM 2. 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 THE COMPANY 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 THE COMPANY'S SEC FILINGS. OVERVIEW The Company provides practice management services to fee-for-service dental practices in the United States. On March 30, 1998, the Company acquired simultaneously with the closing of its initial public offering ("IPO"), substantially all of the tangible and intangible assets, and assumed the liabilities, of 51 founding affiliated practices. The Company also began to provide practice management services to professional corporations or associations owned by the dentist-owners of those affiliated practices (one of which split into two separate dental practices immediately after the IPO) pursuant to long-term management service agreements entered into at the time of the affiliations. Since the IPO, the Company has affiliated with 49 additional practices. The expenses incurred by the Company in fulfilling its obligations under the management service agreements will be generally of the same nature as the operating costs and expenses that would have otherwise been incurred by the affiliated practices, including salaries, wages and benefits of practice personnel (excluding dentists and certain other licensed dental care professionals), dental supplies and office supplies used in administering their practices and the office (general and administrative) expenses of their practices. In addition to the operating costs and expenses discussed above, the Company incurs personnel and administrative expenses in connection with maintaining a corporate office, which provides management, practice enhancements, administrative and business development services. -9- 10 RESULTS OF OPERATIONS (UNAUDITED) Following completion of the IPO on March 30, 1998, the Company began operations effective April 1, 1998. Management service fee recognition and related expenses began April 1, 1998, and the Company began managing 51 dental practices in 18 states. On July 1, 1999, the Company completed its acquisition of Omega Orthodontics, Inc., which included 15 orthodontic practices with annualized practice revenue of approximately $11 million. At September 30, 1999, the Company managed 101 practices in 30 states. COMPONENTS OF REVENUES AND EXPENSES Under the terms of the typical management services agreement with an affiliated practice, the Company becomes the exclusive manager and administrator of all non-dental services relating to the operation of an affiliated practice. The obligations of the Company include assuming responsibility for the operating expenses incurred in connection with managing the dental centers. These expenses include 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 incurs 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 typical services agreement and subject to applicable law, the Company is 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, 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 represent amounts earned by the Company under the terms of its management services agreements with the Affiliated Practices, which generally equate 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 Net revenue generated for the three months ended September 30, 1999 was approximately $15.6 million, a $6.8 increase over approximately $8.8 million generated for the three months ended September 30, 1998. Net revenue generated for the six months ended September 30, 1999 was approximately $28.1 million, a $11.9 increase over approximately $16.2 million generated for the six months ended September 30, 1998. For the three months ended September 30, 1999 and 1998, dental center revenues aggregated to approximately $19.2 million and $11.7 million, respectively. For the six months ended September 30, 1999 and 1998, dental center revenues aggregated to approximately $35.4 million and $22.6 million, respectively. The dental center revenue and net revenue increases resulted substantially through additional practice affiliations with 24 dental practices since September 30, 1998. OPERATING EXPENSES The Company incurred operating expenses of approximately $14.9 million for the three months ended September 30, 1999, this increase of approximately $6.5 over approximately $8.4 million in operating expenses incurred for the three months ended September 30, 1998. The Company incurred operating expenses of approximately $26.5 million for the six months ended September 30, 1999, an increase of approximately $11.6 over approximately $14.9 million in operating expenses incurred for the six months ended September 30, 1998. Operating expenses consisted primarily of salaries, wages and benefits, dental supplies and laboratory fees, rent, advertising and marketing, and general and administrative expenses. These operating expense increases were mainly due to the affiliation of the Company with 24 additional practices since September 30, 1998. -10- 11 General and administrative expenses consist of the corporate expenses of the Company. These corporate expenses include salaries, wages and benefits, rent, consulting fees, travel (primarily related to practice development), office costs and other general corporate expenses. For the three months ended September 30, 1999, general and administrative expenses were approximately $1.42, million an increase of approximately $440,000 over approximately $960,000 in general and administrative expenses incurred for the three months ended September 30, 1998. General and administrative expenses represented 9.1% and 11.0% of net revenue for the three months ended September 30, 1999 and 1998, respectively. For the six months ended September 30, 1999, general and administrative expenses were approximately $2.4 million, an increase of approximately $600,000 over approximately $1.8 million in general and administrative expenses incurred for the six months ended September 30, 1998. General and administrative expenses represented 8.6% and 11.4% of net revenue for the six months ended September 30, 1999 and 1998, respectively. Depreciation and amortization expenses were approximately $661,000 for the three months ended September 30, 1999 and approximately $294,000 for the three months ended September 30, 1998, an increase of $367,000. Depreciation and amortization represented 4.2% and 2.6% of expenses for the three months ended September 30, 1999 and 1998, respectively. The increase is due primarily to the acquisition of fixed assets and management services agreements in conjunction with practice affiliations. For the six months ended September 30, 1999 and 1998, depreciation and amortization expenses were approximately $1,192,000 and $396,000 respectively. For the six months ended September 30, 1999 and 1998, depreciation and amortization expense represented 4.2% and 2.4% respectively, of net revenue. INCOME TAX EXPENSE Income tax expense for the three months ended September 30, 1999 totaled approximately $250,000, an increase of approximately $138,000 over approximately $112,000 in income tax expense incurred for the three months ended September 30, 1998. Income tax expense approximated 48% and 28% of income before income taxes for the three months ended September 30, 1999 and 1998, respectively. Income tax expense for the six months ended September 30, 1999 totaled approximately $529,000, an increase of approximately $154,000 over approximately $375,000 in income tax expense incurred for the six months ended September 30, 1998. Income tax expense approximated 43% and 28% of income before income taxes for the six months ended September 30, 1999 and 1998, respectively. The Company expects the effective tax rate for income generated during fiscal 2000 will be 43%. The effective rate of 43% for fiscal 2000 results from permanent differences between financial reporting of expense and deductible expenses for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES Current assets included approximately $65,000 in cash and $6.0 million in accounts receivable, due from affiliated practices. The day following the end of the fiscal quarter, the Company collected approximately $1.0 million in cash from the affiliated practices. At September 30, 1999 current liabilities consisted of approximately $2.3 million in accounts payable and accrued liabilities, mostly related to expenses of affiliated practices. Also included in current liabilities is the amount drawn on the line of credit of $9 million due June 1, 2000. The Company is in the process of refinancing the revolving bank credit facility. The Company believes that it will be successful in refinancing facility. The Company believes that cash on hand, together with the availability under the current revolving line of credit and other financing sources, will be sufficient to continue execution of its affiliation strategy. Any significant limitation on the Company's ability to obtain financing may have a material adverse effect on the Company. The Company maintains 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 service agreements and accounts receivable. The credit facility contains restrictions on the incurrence of additional indebtedness and payment of -11- 12 dividends on the Common Stock. Additionally, compliance with certain financial covenants is required and the lender has approval rights with respect with acquisitions exceeding certain limits. At September 30, 1999 $9.0 million was outstanding under the revolving line of credit. On July 1, 1999, the revolving bank credit facility was amended to permit the acquisition of Omega Orthodontics, Inc. In connection with the approval by the bank, the Company paid $100,000 as an amendment fee, and the term of the credit facility was shortened by one year. The term of the credit facility now will expire on June 1, 2000. Cash used in investing activities for the six months ended September 30, 1999 and 1998 included approximately $207,000 and $566,000, respectively, for purchases of capital equipment and approximately $1.2 million and $2.9 million, respectively, for the purchase of intangibles associated with those new practice affiliations, respectively. For the six months ended September 30, 1998, notes receivable were issued totaling approximately $1.1 million which represented payment of dental practice affiliation debts, and will be repaid by the affiliated practices over future years. Cash generated from financing activities for the six-month period ended September 30, 1999 included draws on the revolving line of credit of $1.0 million. During the six-month period ended September 30, 1998, 375,000 shares of common stock were sold with the exercise of the underwriter's over-allotment option that provided net proceeds to the company of approximately $2.9 million. YEAR 2000 ISSUE A number of computer programs and other equipment with embedded chips or processors ("Systems") use two digits rather than four digits to define the applicable year. Any Systems that are date sensitive may recognize a date of "00" as the year 1900 rather than the year 2000. This could result in miscalculations or system failures causing disruptions of operations, as well as potentially exposing the Company to third party liability. This issue is commonly referred to as the year 2000 ("Y2K") problem. The Company has initiated a Y2K compliance program to ensure that all of the critical Systems and processes that are under its direct control remain functional. The Company completed the installation of year 2000 compliant software for its operations prior to the IPO. Accordingly the Company does not expect the year 2000 issue to have a material adverse effect on its financial position, results of operations or cash flows. Although the Company's Y2K compliance program will attempt to determine the Y2K readiness of key third parties, there may be certain Systems or processes relied on by the Company that are outside of its control, and there can be no assurance that these Systems or processes will remain functional. Non-compliance by key third parties could have a material adverse effect on the operations of the Company. To date, the costs incurred by the Company that relate solely to the Y2K compliance program have been minimal. In the opinion of management, the costs to complete the Company's Y2K compliance program will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. The Company has received assurance that the systems implemented prior to the IPO are Y2K compliant. In addition, the Company has inventoried all hardware and software at the affiliated practices that process information related to practice management. The Company has estimated it will incur approximately $250,000 in affiliate practice computer upgrades for Y2K compliance. These upgrades are estimated to be completed by November 1999. The failure to correct a material year 2000 problem could possibly result in an interruption in or failure of, certain normal business activities operations. Such failure would materially and adversely affect the Company's financial position, results of operations and cash flows. Due to the general uncertainty inherent in the year 2000 problem, including uncertainty regarding the year 2000 readiness of third party suppliers and potential future acquisitions, the Company is unable to determine at this time whether the consequences of any possible year 2000 failures will have a -12- 13 material adverse impact on the Company's financial position, results or operations and cash flows. The Company believes that, with the scheduled completion of its computer system upgrades, the possibility of any material interruption to normal operations should be significantly reduced. The Company's plans to comply with year 2000 requirements and completion dates are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources and other factors. There can be no assurances; however, that the estimates will be achieved and actual results could differ from those estimates. Specific factors that might cause such material difference include, but are not limited to, the availability and cost of personnel trained in this area, the ability to identify and correct potential problems and similar uncertainties. If during the course of the Company's assessments of its critical Systems it is determined that the risk of Y2K disruptions is significant, contingency plans will be developed as appropriate. Such plans might include the use of alternative service providers or product suppliers should they incur significant Y2K losses. Currently, the Company does not have any contingency plans in place based on Y2K readiness assessments. -13- 14 PART II ITEM 1. LEGAL PROCEEDINGS - None ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS - none ITEM 3. DEFAULTS OF SENIOR SECURITIES - none ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5. OTHER INFORMATION - none ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number Description - ------ ----------- 3.1* Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (Registration No. 333-37633). 3.2* Bylaws (incorporated herein by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 (Registration No. 333-37633)). 10.1* Agreement and Plan of Merger dated as of March 15, 1999 among the Company, Omega Orthodontics, Inc. and the stockholders of Omega Orthodontics, Inc. named therein (included as Annex to the Proxy Statement/Prospectus that is included in the Company's Registration Statement on Form S-4 (Registration No. 333-78335)). 10.2 $272,000 Promissory Note of Mack E. Greder, D.D.S., P.C. issued to the Company, dated September 1, 1999. 10.3 $109,279.04 Promissory Note of David A. Little, D.D.S., P.C. issued to the Company, dated September 30, 1999. 27.1 Financial Data Schedule.
- --------------------- *Incorporated herein by reference as indicated. (b) Reports of Form 8-K Current Report on Form 8-K dated July 1, 1999 was filed on July 15, 1999 (Item 2. Acquisition or Disposition of Assets and Item 5. Financial Statements and Exhibits), which contained the unaudited financial statements of Omega Orthodontics, Inc. for the quarter ended March 31, 1999. -14- 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, Pentegra Dental Group, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENTEGRA DENTAL GROUP, INC. Dated: 11/15/1999 --------------------- /s/ Sam H. Carr --------------------------- By: Sam H. Carr Sr. Vice President - Chief Financial Officer -15- 16 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 3.1* Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (Registration No. 333-37633). 3.2* Bylaws (incorporated herein by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 (Registration No. 333-37633)). 10.1* Agreement and Plan of Merger dated as of March 15, 1999 among the Company, Omega Orthodontics, Inc. and the stockholders of Omega Orthodontics, Inc. named therein (included as Annex to the Proxy Statement/Prospectus that is included in the Company's Registration Statement on Form S-4 (Registration No. 333-78335)). 10.2 $272,000 Promissory Note of Mack E. Greder, D.D.S., P.C. issued to the Company, dated September 1, 1999. 10.3 $109,279.04 Promissory Note of David A. Little, D.D.S., P.C. issued to the Company, dated September 30, 1999. 27.1 Financial Data Schedule.
- --------------------- *Incorporated herein by reference as indicated. EX-10.2 2 EX-10.2 1 EXHIBIT 10.2 PROMISSORY NOTE Date: September 1, 1999 Maker: Mack E. Greder, D.D.S., P.C. Payee: Pentegra Dental Group, Inc. Place of Payment: 2999 N. 44th Street, Suite 650, Phoenix, AZ 85018 Principal Amount: $272,000.00 For value received, the undersigned, Mack E. Greder, D.D.S., P.C. (hereinafter referred to as the "Maker") does hereby promise to pay to the order of Pentegra Dental Group, Inc. (hereinafter referred to as the "Payee or Holder"), the sum of Two Hundred Seventy-two Thousand and 00/100 Dollars ($272,000.00), plus interest at the rate of Nine Percent (9%) per annum on the unpaid principal, until fully paid. The principal and accrued interest shall be paid by the Maker in lawful money of the United States of America. The principal and accrued interest on this note shall be due and payable in eleven (11) equal monthly installments of Six Thousand Dollars ($6,000). The first installment shall be due and payable on September 15, 1999 (the "Initial Payment Date") with each installment due on the fifteenth of each month thereafter. The note shall mature on August 15, 2000 with a balloon payment then due of Two Hundred Fifty-four Thousand Eight Hundred Fifty-four and 00/100 Dollars ($254,854). Payments shall be due and payable, at the principal office of the Payee or Holder, on the monthly anniversary date of the Initial Payment Date. Each installment shall be applied first to the payment of accrued interest due on the unpaid principal balance, and the remainder of each installment shall be applied to the reduction of the principal. Payment of this Note before maturity may be made at any time, and from time to time, in whole or in part without penalty or premium. Any such partial pre-payment of principal shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent monthly installments or change the amount of such installments unless otherwise agreed in writing by Payee or Holder. Should default be made in the timely payment of interest or principal due hereunder, and that default remain uncured for more than thirty (30) days beyond its timely payment, (a "Non Payment Default") then that Non-Payment Default shall mature the entire remaining indebtedness, without notice, at the option of the Payee or Holder. The Maker and each Surety, endorser, and guarantor, waives presentment for payment, all demands for payment, notice of intent to accelerate maturity, notice of acceleration of maturity, protests, and notices of protest. Maker consents that the Payee or Holder may extend the time of any payment or any part of the debt at any time. Any delay on the part of the Payee or Holder in exercising any rights granted by this Note shall not operate as a waiver of those rights; and the acceptance of any payment after it's due date shall not be deemed a waiver of the right to require prompt payment when due of all other sums; and the acceptance of any payment after the Payee has declared the entire indebtedness due and payable shall not cure any default of the Maker nor operate as a waiver of any rights of Payee or Holder. This Note shall be paid without claim of set off nor deduction of any nature whatsoever. In addition to the foregoing event of default (for Non-payment), at the option of the payee or Holder, this Note shall become immediately due and payable with notice on the happening of any one of the following additional events of default ("Events of Default"): a. The Maker has sold any interest in the professional practice of Mack E. Greder, D.D.S., P.C. or any of the assets located at 1113 North 72nd Street, Omaha, NE 68114, or any other dental practice owned by Maker with which Pentegra has -16- 2 executed a service agreement (collectively the "Practice") without Pentegra's prior written consent; b. The Maker has defaulted upon the obligations arising under the Service Agreement, Employment Agreement, or Dentist Agreement, by and between Maker and Pentegra Dental Group, Inc; c. The Maker has mortgaged, pledged or encumbered the Practice to another party; except as such encumbrance may have arisen automatically by law or with prior written consent by the Payee or Holder; d. The Maker makes a general assignment for creditors, is adjudicated bankrupt, files a voluntary petition in bankruptcy or reorganization or effects or attempts to effect a plan or other arrangement with creditors; or if Maker applies for a receiver, custodian or trustee for it or for any substantial portion or its property or assets; or if an order shall be entered by any court of competent jurisdiction approving an involuntary petition seeking reorganization; or if a receiver, trustee or custodian shall be appointed for it for any substantial portion of its property or assets; or if bankruptcy, reorganization or liquidation proceedings are instituted against the Maker and remain for thirty (30) days; or if the Maker becomes unable to meet its obligations as they mature; or if the Maker shall commit any act of bankruptcy; The events set forth in subparagraphs above (a)-(d) above shall not be Events of Default until the Maker has been sent a notice from the Payee or Holder of the Maker's default and Maker has not cured that Default within twenty (20) days of such notice. The Maker agrees that, at any time that there remains an unpaid balance due upon this Note, that the Payee or Holder shall have the right to sell, assign, or transfer his right, title, and interest herein to any person (the "Holder"); and further that the Assignee (Holder) shall then acquire all rights, title, and interest that had been granted to the Payee or Holder hereunder. The Maker agrees that, if this Note is given to an attorney for collection, or if suit is brought for collection, or if it is collected through probate, bankruptcy, or other judicial proceeding, then Maker shall pay Payee or Holder all costs of collection, including reasonable attorney's fees and court costs, in addition to other amounts due. Any and all past due and unpaid principal and interest shall bear interest at the rate of twelve percent (12.0%) per annum. However, all agreements between Maker and Payee or Holder are hereby expressly limited, so that in no event shall the amount paid, or agreed to be paid, to Payee or Holder, exceed the maximum amount permissible under the applicable federal and state usury laws. It is therefore the intention of Maker and Payee or Holder to conform strictly to said state and federal usury laws. Therefore, in this note or in any of the documents securing payment hereof, the aggregate of all interest and any other charges constituting interest under the applicable law contracted for, chargeable, or receivable, under this note shall under no circumstances exceed the maximum amount of interest permitted by law. If any excess of interest is provided for, or be adjudicated to be so provided for, in this note or in any of the documents securing payment hereof, then in such event, the provisions of this paragraph shall govern and control; and neither Maker or Maker's heirs, legal representatives, successors, assigns, or any other party liable for the payment hereof shall be obligated to pay the amount of such -17- 3 interest to the extent that it is in excess of the maximum permitted by law; and any excess of said interest shall be deemed a mistake and is hereby canceled automatically and if therefore paid, shall at the option of Payee or Holder of this note be refunded to Maker, or credited to the principal amount of said note; and the effective rate of interest shall be automatically subject to reduction to the maximum lawful contract rate allowed under said laws, or as is or as they may hereafter be construed by courts of appropriate jurisdiction. To the extent permitted by law, the determination of the rate of interest shall be made by amortizing, prorating, allocating, and spreading in equal parts during the period of the full stated term of this note, all interest at any time contracted for, charged, or received from Maker in connection therewith. THE MAKER AGREES THAT THIS WRITTEN NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES CONCERNING THE AMOUNTS BORROWED BY MAKER, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. The Maker agrees that there are no unwritten oral agreements between the parties. When the context requires, singular nouns and pronouns include the plural. Executed this _________ day of _________________________, 1999. ___________________________________ Mack E. Greder, D.D.S., P.C., MAKER President The undersigned, Mack E. Greder, D.D.S., does hereby individually, jointly and severally guarantee the full, complete and punctual payment of this note. ___________________________________ Mack E. Greder, D.D.S. Individually as Guarantor -18- EX-10.3 3 EX-10.3 1 EXHIBIT 10.3 PROMISSORY NOTE Date: September 30, 1999 Maker: David A. Little, D.D.S., P.C. Payee: Pentegra Dental Group, Inc. Place of Payment: 2999 N. 44th Street, Suite 650, Phoenix, AZ 85018 Principal Amount: $109,279.04 For value received, the undersigned David A. Little, D.D.S., P.C., (hereinafter referred to as the "Maker") does hereby promise to pay to the order of Pentegra Dental Group, Inc. (hereinafter referred to as the "Payee or Holder"), the sum of One Hundred Nine Thousand Two Hundred Seventy Nine and 04/100 Dollars ($109,279.04), plus interest at the rate of Nine Percent (9.000%) per annum on the unpaid principal, until fully paid. The principal and accrued interest shall be paid by the Maker in lawful money of the United States of America. The principal and accrued interest on this note shall be due and payable in forty-two (42) equal monthly installments of Four Thousand Fifteen and 11/100 Dollars ($4,015.11). The first installment shall be due and payable on October 1, 1999 (the "Initial Payment Date"). Payments shall be due and payable, at the principal office of the Payee or Holder, on the monthly anniversary date of the Initial Payment Date. Each installment shall be applied first to the payment of accrued interest due on the unpaid principal balance, and the remainder of each installment shall be applied to the reduction of the principal. Payment of this Note before maturity may be made at any time, and from time to time, in whole or in part without penalty or premium. Any such partial pre-payment of principal shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent monthly installments or change the amount of such installments unless otherwise agreed in writing by Payee or Holder. Should default be made in the timely payment of interest or principal due hereunder, and that default remain uncured for more than thirty (30) days beyond its timely payment, (a "Non Payment Default") then that Non-Payment Default shall mature the entire remaining indebtedness, without notice, at the option of the Payee or Holder. The Maker and each Surety, endorser, and guarantor, waives presentment for payment, all demands for payment, notice of intent to accelerate maturity, notice of acceleration of maturity, protests, and notices of protest. Maker consents that the Payee or Holder may extend the time of any payment or any part of the debt at any time. Any delay on the part of the Payee or Holder in exercising any rights granted by this Note shall not operate as a waiver of those rights; and the acceptance of any payment after it's due date shall not be deemed a waiver of the right to require prompt payment when due of all other sums; and the acceptance of any payment after the Payee has declared the entire indebtedness due and payable shall not cure any default of the Maker nor operate as a waiver of any rights of Payee or Holder. This Note shall be paid without claim of set off nor deduction of any nature whatsoever. In addition to the foregoing event of default (for Non-payment), at the option of the payee or Holder, this Note shall become immediately due and payable with notice on the happening of any one of the following additional events of default ("Events of Default"): a. The Maker has sold any interest in the professional practice of David A. Little, D.D.S., P.C. or any other dental practice owned by Maker with which Pentegra has executed a service agreement (collectively the "Practice") without Pentegra's prior written consent; -19- 2 b. The Maker has defaulted upon the obligations arising under the Service Agreement, Employment Agreement, or Dentist Agreement, by and between Maker and Pentegra Dental Group, Inc; c. The Maker has mortgaged, pledged or encumbered the Practice to another party; except as such encumbrance may have arisen automatically by law or with prior written consent by the Payee or Holder; d. The Maker makes a general assignment for creditors, is adjudicated bankrupt, files a voluntary petition in bankruptcy or reorganization or effects or attempts to effect a plan or other arrangement with creditors; or if Maker applies for a receiver, custodian or trustee for it or for any substantial portion or its property or assets; or if an order shall be entered by any court of competent jurisdiction approving an involuntary petition seeking reorganization; or if a receiver, trustee or custodian shall be appointed for it for any substantial portion of its property or assets; or if bankruptcy, reorganization or liquidation proceedings are instituted against the Maker and remain for thirty (30) days; or if the Maker becomes unable to meet its obligations as they mature; or if the Maker shall commit any act of bankruptcy; The events set forth in subparagraphs above (a)-(d) above shall not be Events of Default until the Maker has been sent a notice from the Payee or Holder of the Maker's default and Maker has not cured that Default within twenty (20) days of such notice. The Maker agrees that, at any time that there remains an unpaid balance due upon this Note, that the Payee or Holder shall have the right to sell, assign, or transfer his right, title, and interest herein to any person (the "Holder"); and further that the Assignee (Holder) shall then acquire all rights, title, and interest that had been granted to the Payee or Holder hereunder. The Maker agrees that, if this Note is given to an attorney for collection, or if suit is brought for collection, or if it is collected through probate, bankruptcy, or other judicial proceeding, then Maker shall pay Payee or Holder all costs of collection, including reasonable attorney's fees and court costs, in addition to other amounts due. Any and all past due and unpaid principal and interest shall bear interest at the rate of twelve percent (12.000%) per annum. However, all agreements between Maker and Payee or Holder are hereby expressly limited, so that in no event shall the amount paid, or agreed to be paid, to Payee or Holder, exceed the maximum amount permissible under the applicable federal and state usury laws. It is therefore the intention of Maker and Payee or Holder to conform strictly to said state and federal usury laws. Therefore, in this note or in any of the documents securing payment hereof, the aggregate of all interest and any other charges constituting interest under the applicable law contracted for, chargeable, or receivable, under this note shall under no circumstances exceed the maximum amount of interest permitted by law. If any excess of interest is provided for, or be adjudicated to be so provided for, in this note or in any of the documents securing payment hereof, then in such event, the provisions of this paragraph shall govern and control; and neither Maker or Maker's heirs, legal representatives, successors, assigns, or any other party liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum permitted by law; and any excess of said interest shall be deemed a mistake and is hereby canceled automatically and if therefore paid, shall at the option -20- 3 of Payee or Holder of this note be refunded to Maker, or credited to the principal amount of said note; and the effective rate of interest shall be automatically subject to reduction to the maximum lawful contract rate allowed under said laws, or as is or as they may hereafter be construed by courts of appropriate jurisdiction. To the extent permitted by law, the determination of the rate of interest shall be made by amortizing, prorating, allocating, and spreading in equal parts during the period of the full stated term of this note, all interest at any time contracted for, charged, or received from Maker in connection therewith. THE MAKER AGREES THAT THIS WRITTEN NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES CONCERNING THE AMOUNTS BORROWED BY MAKER, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. The Maker agrees that there are no unwritten oral agreements between the parties. When the context requires, singular nouns and pronouns include the plural. Executed this 30th day of September, 1999. David A. Little, D.D.S., P.C., MAKER By:_________________________________ David A. Little, D.D.S., President -21- 4 GUARANTY BY OFFICERS AND SHAREHOLDERS Whereas, Pentegra Dental Group, Inc. ("Lender") has Noted money to David A. Little, D.D.S., P.C., a Professional Corporation (the "Borrower") pursuant to a certain promissory note dated on an even date herewith in the original principal sum of One Hundred Nine Thousand Two Hundred Seventy Nine and 04/100 Dollars ($109,279.04) (the "Note"). In consideration of, and in order to induce Pentegra to accept the Borrower's Note, the undersigned officer and shareholder of the Borrower (the "Guarantor"), being financially interested in and dependent upon the economic well being of Borrower, hereby absolutely and unconditionally guarantees to Lender the full and prompt performance by Borrower of all obligation which Borrower presently or hereafter may have to Lender under the Note. Guarantor hereby expressly waives all defenses which might constitute a legal or equitable discharge of a surety or guarantor, and agrees that this Guaranty shall be valid and unconditionally binding upon Guarantor regardless of: (i) the reorganization, merger, or consolidation of Borrower into or with another entity, corporate or otherwise, or the dissolution of Borrower, or the sale or other disposition of all or substantially all of the capital stock, business or assets of Borrower to any other person or party, (ii) the voluntary or involuntary bankruptcy (including reorganization in bankruptcy) of Borrower, (iii) the release of Borrower from any of its obligations under the Note by Lender or by operation of law or otherwise. Guarantor further agrees that this Guaranty shall remain and continue in full force and effect notwithstanding any renewal, modification or extension of the Note. Guarantor hereby expressly waives all notice of and consenting to any such renewal, modification, or extension, and to the execution by Borrower of any documents pertaining to any such renewal, modification or extension. Guarantor further agrees that its liability under this Guaranty shall be absolute, primary and direct, and that lender shall not be required to pursue any right or remedy it may have against Borrower under the Note or otherwise (and shall not be required to first commence any action or obtain any judgement against Borrower) before enforcing this Guaranty against Guarantor. This guaranty is assignable by Lender, but may not be assigned by Guarantor. IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed on this _____day of __________________, 1999. GUARANTOR: David A. Little, D.D.S., P.C. By: ________________________________________ David A. Little, D.D.S., Individually EX-27.1 4 EX-27.1
5 FROM THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED. 1,000 6-MOS MAR-31-2000 JUL-01-1999 SEP-30-1999 65 0 5,967 0 0 7,050 8,626 (1,346) 43,586 12,426 6,654 0 0 11 25,170 43,586 15,609 15,609 14,920 14,920 (81) 0 453 1,223 529 694 0 0 0 694 0.07 0.07
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