-----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, UTGjjLkN7g5mFcgWZ6OjrRPNqO9FdAeSqRW3IMoCbfonItaMthTECqMdE1gEGGzO RDSwP7/4O8zII0//hqrynQ== 0001047469-98-007407.txt : 19980225 0001047469-98-007407.hdr.sgml : 19980225 ACCESSION NUMBER: 0001047469-98-007407 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980224 SROS: AMEX 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: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-37633 FILM NUMBER: 98548331 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 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1998 REGISTRATION NO. 333-37633 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PENTEGRA DENTAL GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 8021 76-0545043 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
------------------------------ PENTEGRA DENTAL GROUP, INC. GARY S. GLATTER 2999 NORTH 44TH STREET, STE. 650 2999 NORTH 44TH STREET, STE. 650 PHOENIX, ARIZONA 85018 PHOENIX, ARIZONA 85018 (602) 952-1200 (602) 952-1200 (Address, including zip code, and (Name and address, including zip code, telephone number, including area code, and telephone number, including area of registrant's principal executive code, of agent for service) offices)
------------------------------ COPIES TO: RICHARD S. ROTH TED W. PARIS JACKSON WALKER L.L.P. BAKER & BOTTS, L.L.P. 1100 LOUISIANA 910 LOUISIANA SUITE 4200 SUITE 3000 HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(2),(3) FEE(4) Common Stock, $.001 par value............ -- -- $27,312,500 $8,058
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) Includes shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (3) Estimated solely for purposes of calculating the registration fee. (4) Previously paid. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED FEBRUARY 24, 1998 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. 2,500,000 SHARES [LOGO] PENTEGRA DENTAL GROUP, INC. COMMON STOCK All of the shares of Common Stock offered hereby are being sold by the Company. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price per share will be between $8.50 and $9.50. For information relating to the factors to be considered in determining the initial public offering price, see "Underwriting". The Common Stock has been approved for listing on the American Stock Exchange under the symbol "PEN." ---------------- SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Discounts Price to and Proceeds to Public Commissions(1) Company(2) Per Share........................................ $ $ $ Total(3)......................................... $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting estimated expenses of $2,900,000, payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 375,000 shares of Common Stock, solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company, before deducting expenses, will be $ , $ and $ , respectively. See "Underwriting." ---------------- The shares of Common Stock are offered severally by the Underwriters named herein subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates representing the shares of Common Stock will be ready for delivery on or about , 1998. Dain Rauscher Incorporated EVEREN Securities, Inc. THE DATE OF THIS PROSPECTUS IS , 1998. [MAP] * Pentegra does not intend to employ dentists to practice dentistry or otherwise control the practice of dentistry by dentists employed by Affiliated Practices to which it will provide administrative and management services. THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS CONTAINING FINANCIAL STATEMENTS AUDITED BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND WITH QUARTERLY REPORTS CONTAINING UNAUDITED SUMMARY FINANCIAL INFORMATION FOR EACH OF THE FIRST THREE QUARTERS OF EACH FISCAL YEAR. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY PENTEGRA DENTAL GROUP, INC. ("PENTEGRA" OR THE "COMPANY") WAS RECENTLY FORMED TO SERVE, UPON COMPLETION OF THE OFFERING, AS THE PARENT CORPORATION OF PENTEGRA INVESTMENTS, INC. ("PII"). CONCURRENTLY WITH THE CLOSING OF THE OFFERING MADE HEREBY (THE "OFFERING"), (I) THE COMPANY WILL ACQUIRE, IN SEPARATE TRANSACTIONS (THE "AFFILIATIONS"), SUBSTANTIALLY ALL THE TANGIBLE AND INTANGIBLE ASSETS, AND ASSUME CERTAIN LIABILITIES, OF 50 DENTAL PRACTICES (COLLECTIVELY, THE "FOUNDING AFFILIATED PRACTICES") IN EXCHANGE FOR CASH AND SHARES OF COMMON STOCK, (II) THE HOLDERS OF COMMON STOCK OF PII WILL EXCHANGE EACH SHARE OUTSTANDING IMMEDIATELY PRIOR TO THE CLOSING OF THE OFFERING (BUT AFTER GIVING EFFECT TO A REPURCHASE BY PII OF SHARES OF ITS COMMON STOCK, AT A PURCHASE PRICE OF $0.015 PER SHARE, SUCH THAT THE TOTAL NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $0.001 (THE "COMMON STOCK"), ISSUABLE BY THE COMPANY IN CONNECTION WITH THE AFFILIATIONS AND THE SHARE EXCHANGE WILL NOT EXCEED 3,941,898 SHARES) FOR SHARES OF COMMON STOCK ON A ONE-FOR-ONE BASIS (THE "SHARE EXCHANGE") PURSUANT TO AN EXCHANGE AGREEMENT, (III) THE COMPANY WILL ACQUIRE (THE "PENTEGRA/NAPILI TRANSACTION") SUBSTANTIALLY ALL OF THE ASSETS OF TWO COMPANIES CONTROLLED BY THE COMPANY'S CHAIRMAN OF THE BOARD, PENTEGRA, LTD. AND NAPILI, INTERNATIONAL ("NAPILI"), (IV) PII WILL REPURCHASE 245,835 SHARES OF ITS CLASS B PREFERRED STOCK, PAR VALUE $0.01 PER SHARE ("CLASS B PREFERRED"), AT THE SUBSCRIPTION PRICE PER SHARE PAID TO PII FOR THOSE SHARES AND, IMMEDIATELY THEREAFTER, REDEEM ALL OF THE REMAINING SHARES OF ITS CLASS A PREFERRED STOCK, PAR VALUE $0.01 PER SHARE ("CLASS A PREFERRED") AND CLASS B PREFERRED AT A REDEMPTION PRICE OF $1.50 PER SHARE, $1.15 PAYABLE IN CASH AND $0.35 PAYABLE IN THE FORM OF A PROMISSORY NOTE (THE "REPURCHASE AND REDEMPTION"), AND (V) THE COMPANY WILL REPAY APPROXIMATELY $836,000 OF INDEBTEDNESS OUTSTANDING UNDER PROMISSORY NOTES ISSUED BY THE COMPANY IN CONNECTION WITH ITS ORGANIZATIONAL FINANCING. THE NUMBER OF SHARES OF COMMON STOCK TO BE ISSUED IN EACH AFFILIATION WILL DEPEND ON THE INITIAL PUBLIC OFFERING PRICE OF THE COMMON STOCK. ACCORDINGLY, THE DISCLOSURES HEREIN RELATING TO THE SHARES OF COMMON STOCK ISSUED IN CONNECTION WITH THE AFFILIATIONS AND THE SHARE EXCHANGE ARE ESTIMATED, BASED ON AN ASSUMED INITIAL PUBLIC OFFERING PRICE OF $9.00 PER SHARE (THE MIDPOINT OF THE ESTIMATED INITIAL PUBLIC OFFERING PRICE RANGE). HOWEVER, IN ANY EVENT, THE NUMBER OF SHARES OF COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE AFFILIATIONS AND THE SHARE EXCHANGE WILL NOT EXCEED 3,941,898 SHARES IN THE AGGREGATE. PENTEGRA DOES NOT EMPLOY DENTISTS TO PRACTICE DENTISTRY NOR DOES IT OTHERWISE CONTROL THE PRACTICE OF DENTISTRY. UNLESS OTHERWISE INDICATED BY THE CONTEXT, REFERENCES HEREIN TO (I) "PENTEGRA" OR THE "COMPANY" INCLUDE PENTEGRA DENTAL GROUP, INC. AND PII AND (II) "AFFILIATED PRACTICES" MEAN THE FOUNDING AFFILIATED PRACTICES AND ANY DENTAL PRACTICES WITH WHICH THE COMPANY MAY ENTER INTO SIMILAR RELATIONSHIPS IN THE FUTURE. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO A REVERSE STOCK SPLIT OF THE OUTSTANDING SHARES OF COMMON STOCK OF PII AND (II) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Pentegra Dental Group, Inc. was recently formed to provide management, administrative, development and other services to dental practices throughout the United States. The Company's approach to dental practice management (the "Pentegra Dental Program") was developed by Dr. Omer K. Reed, the Chairman of the Board of the Company, and is designed to increase revenues and lower costs at Affiliated Practices while freeing the practicing dentists to focus on the delivery of high-quality care. The Company will earn management service fees under long-term service agreements with Affiliated Practices (the "Service Agreements"). In most cases, service fees payable to the Company under the Service Agreements represent a share of the Affiliated Practices' operating profits, thereby providing incentives for the Company and the Affiliated Practices to work together to maximize practice profitability. The Company will also seek to grow by acquiring and affiliating with additional dental practices. The Company has entered into definitive acquisition agreements and Service Agreements with 50 professional corporations or associations owned by the dentist-owners of the Founding Affiliated Practices, which include 77 dentists and 63 dental offices located in 18 states. These acquisition agreements provide 3 that the Company will acquire substantially all of the tangible and intangible assets, and assume certain liabilities, of the Founding Affiliated Practices. The Founding Affiliated Practices are primarily general dentistry practices, but also include specialists such as periodontists, pedodontists and oral surgeons. In addition, the Company will acquire from Dr. Reed the assets of a consulting firm, Pentegra, Ltd., which was founded in 1988, and a seminar company, Napili, which was founded in 1963. The clinical, administrative and marketing training developed and provided by these companies to practicing dentists and their teams are the foundation for the Pentegra Dental Program. After completion of the Offering, the Pentegra Dental Program will be available exclusively to Affiliated Practices. The Health Care Finance Administration ("HCFA") estimates that in 1995 approximately $43 billion was spent in the United States on dental services, and projects annual dental expenditures will reach $79 billion in the year 2005. In a 1995 survey, the American Dental Association ("ADA") reported that there were approximately 153,000 active dentists in the United States, approximately 88% of whom were practicing either alone or with only one other dentist. In recent years, dentists have begun to consolidate into affiliated groups and with practice management companies. Dentists who affiliate with practice management companies gain several benefits, such as opportunities to achieve economies of scale, to implement cost management techniques and to gain access to capital for new equipment and other working capital needs. The Company's objective is to become a leader in providing dental practice management services. In order to achieve this objective, the Company's strategy includes the following elements: - FOCUS ON TRADITIONAL FEE-FOR-SERVICE DENTAL CARE. According to the 1997 Mercer Consulting Group Survey of Employer-Sponsored Health Plans, approximately 86% of the respondents in that survey reported that they offer their employees dental plans that pay for dental services on a fee-for-service basis. The Company believes that fee-for-service care is high-quality, highly profitable and professionally rewarding for dentists. - INCREASE PRODUCTIVITY AND PROFITABILITY OF AFFILIATED PRACTICES BY IMPLEMENTING THE PENTEGRA DENTAL PROGRAM. The Pentegra Dental Program involves implementing techniques designed to increase revenues and lower costs, as well as methods to make the dentist and his or her practice team more efficient in the delivery of dental care. - LOWER OPERATING COSTS BY ACHIEVING ECONOMIES OF SCALE. The Company believes that, as a result of its size and resources, it will be able to provide Affiliated Practices with certain management functions at lower cost than if the Affiliated Practices were to perform the services by themselves. - FREE THE DENTIST TO FOCUS MORE TIME ON THE PRACTICE OF DENTISTRY. The Company will relieve practicing dentists of administrative tasks. The Company believes its management and administrative support will substantially reduce the amount of time affiliated dentists are required to spend on administrative matters and enable them to dedicate more time and effort toward the growth of their professional practices. - GROW THROUGH ACQUISITIONS AND AFFILIATIONS OF ADDITIONAL DENTAL PRACTICES. The Company will generally seek to affiliate with practices that have high potential for future growth, particularly through implementation of the Pentegra Dental Program, an established reputation for high-quality care and a strategic fit either in an existing market or as an entry into a new market. The Pentegra Dental Program is based on a cooperative approach that emphasizes patient wellness and involves the dentist and his or her patient mutually agreeing on a program to achieve and maintain optimal oral health. The Company believes that the average dentist has the skills necessary to diagnose and provide appropriate care to patients, but many of them have not developed the skills needed to obtain patient acceptances of, and commitments to, the treatment plans. As a result, a significant amount of recommended care may not be completed, with correspondingly lower revenues to the dentists. The Company will provide training and support to assist affiliated dentists and their teams to communicate 4 effectively with each patient regarding the type and value of care needed, to obtain the patient's commitment to a treatment plan and then to implement the agreed-upon treatment. In order to promote operational efficiency and assure quality of care at Affiliated Practices, the Company's information systems will monitor patient treatment plans and track the number and type of procedures performed by each practice. Additionally, the Company will provide the Affiliated Practices with billing and collections, purchasing, inventory management, invoice processing and payment, payroll processing, patient scheduling and financial reporting and analysis relating to the implementation of the Pentegra Dental Program. The Company anticipates that the cost of implementing the Pentegra Dental Program in Affiliated Practices primarily consists of compensation expenses to existing Pentegra, Ltd. and Napili employees and will be comparable to the historical compensation expense levels for those two entities. The Service Agreements with the professional corporations or associations to be formed by the dentist owners of the Founding Affiliated Practices have initial terms of 40 years, subject to earlier termination under certain circumstances. Pursuant to the Service Agreements, the Company will become the exclusive manager and administrator of non-dental services relating to the operation of the Founding Affiliated Practices, and will, among other things, (i) administer the billing and collections for the Founding Affiliated Practices, (ii) provide the necessary clerical, accounting and other non-dental services to the Founding Affiliated Practices and (iii) provide facilities and equipment for the Founding Affiliated Practices. The service fees payable by the Founding Affiliated Practices to the Company under the Service Agreements were determined in arm's length negotiations among the parties. Generally the service fees are computed based on (i) a percentage of revenues less operating expenses, (ii) a percentage of revenues not to exceed a percentage of revenues less operating expenses, (iii) a specific fixed service fee or (iv) some combination of these. See "Business--Service Agreements." Dentist compensation is determined by the Affiliated Practices pursuant to employment arrangements between the Affiliated Practice and the individual dentists. The Company does not participate in the negotiation of dentist compensation. Pursuant to the terms of the Service Agreements, the Affiliated Practices will continue to provide dental services and will be exclusively in control of all aspects of the practice of dentistry and the provision of dental services. The Company will not engage in the practice of dentistry. As a result of the Affiliations and upon completion of the Offering, the dentist-owners of the Founding Affiliated Practices and the executive officers and directors of the Company will beneficially own approximately 55.3% of the outstanding shares of Common Stock. In addition, the Company's Bylaws provide that a majority of the members of the Board of Directors must be (i) licensed to practice dentistry and (ii) affiliated with one of the Affiliated Practices. See "Risk Factors--Board Composition" and "--Certain Anti-takeover Provisions," "Certain Transactions--Organization of the Company" and "Principal Stockholders." 5 THE OFFERING Common Stock offered by the Company...... 2,500,000 shares Common Stock to be outstanding after the Offering(1)............................ 6,441,898 shares Use of proceeds.......................... To fund the cash distribution to the dentist-owners of the Founding Affiliated Practices (approximately $6.4 million), to fund the cash portion of the consideration in the Pentegra/Napili Transaction (approximately $100,000), to fund the cash portion of the repurchase or redemption price of the outstanding shares of preferred stock of PII (approximately $1.7 million), to repay certain indebtedness of Pentegra and the Founding Affiliated Practices (approximately $2.6 million), the 9.5% promissory notes issued by the Company in connection with its organizational financing ($350,000) and the 15.0% promissory notes issued by the Company in connection with its organizational financing ($486,000), to purchase certain accounts receivable of the Founding Affiliated Practices (approximately $276,000) and for general corporate purposes. See "Use of Proceeds." American Stock Exchange symbol........... PEN
- --------- (1) Includes 2,922,549 shares of Common Stock to be issued in connection with the Affiliations and 1,019,349 shares of Common Stock to be issued in connection with the Share Exchange and excludes (i) an aggregate of 671,667 shares of Common Stock issuable upon exercise of stock options to be granted under the Company's 1997 Stock Compensation Plan (the "1997 Stock Compensation Plan") effective on the date the Offering closes at an exercise price equal to the initial public offering price per share and (ii) 1,328,333 shares reserved for future issuance under the 1997 Stock Compensation Plan. See "Management--1997 Stock Compensation Plan." The actual number of shares to be issued as consideration for the Affiliations may be higher or lower depending on the actual initial public offering price per share. For example, an aggregate of 2,768,734 shares of Common Stock would be issued to the dentist-owners of the Founding Affiliated Practices if that price is $9.50 per share, while an aggregate of 3,094,468 shares of Common Stock would be issued to the dentist-owners of the Founding Affiliated Practices if that price is $8.50 per share. However, in any event, the number of shares of Common Stock to be issued in connection with the Affiliations and the Share Exchange will not exceed 3,941,898 shares in the aggregate. RISK FACTORS The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." 6 SUMMARY FINANCIAL DATA (IN THOUSANDS) Upon completion of the Offering and pursuant to the Affiliations, the Company will acquire substantially all the tangible and intangible assets and assume certain liabilities of the Founding Affiliated Practices. Due to the fact that the Company has had no significant operations to date, no pro forma statement of operations has been included in this Prospectus. The nature and amount of costs to be incurred by the Company in connection with the management services it will provide to the Founding Affiliated Practices may differ from the costs historically incurred by the Founding Affiliated Practices. The summary historical financial information presented below has been derived from the audited financial statements of Pentegra Dental Group, Inc. included in this Prospectus. Except as indicated, the following information does not reflect the effects of the Offering, the Affiliations, the Share Exchange, the Pentegra/ Napili Transaction and the Repurchase and Redemption. For certain information concerning the Affiliations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 of Notes to the Pentegra Dental Group, Inc. financial statements.
FOR THE PERIOD FROM INCEPTION (FEBRUARY 21, 1997) THROUGH DECEMBER 31, 1997 ------------------- Statement of Operations Data: Revenue................................................................ $ -- Expenses General and administrative expenses.................................. 709 Other expenses....................................................... 645 ------- Total expenses..................................................... 1,354 ------- Net loss............................................................. $ (1,354) ------- -------
DECEMBER 31, 1997 ---------------------------- HISTORICAL AS ADJUSTED(1) ----------- --------------- Balance Sheet Data: Cash and cash equivalents(2)..................................... $ 100 $ 7,687 Working capital (deficit)........................................ (2,210) 6,413 Total assets..................................................... 3,257 11,448 Redeemable preferred stock....................................... 1,089 -- Stockholders' equity (deficit)................................... (142) 9,300
- --------- (1) As adjusted gives effect to (i) the Offering, (ii) the Affiliations, (iii) the repayment of certain indebtedness of Pentegra and the Founding Affiliated Practices, (iv) the Pentegra/Napili Transaction, (v) the Share Exchange and (vi) the Repurchase and Redemption, as if such transactions had occurred on December 31, 1997. It excludes the effect of the issuance in February 1998, and repayment from proceeds of the Offering, of $486,000 aggregate principal amount of 15% promissory notes. See the Unaudited Pro Forma Balance Sheet of Pentegra and the notes thereto included in this Prospectus. (2) See "Use of Proceeds." 7 RISK FACTORS PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON STOCK. STATEMENTS MADE IN THIS PROSPECTUS THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INCLUDE THOSE RELATING TO THE COMPANY'S FUTURE PLANS AND EXPECTED EVENTS, OUTCOMES AND RESULTS. ALTHOUGH THE COMPANY BELIEVES IT HAS A REASONABLE BASIS FOR EACH SUCH STATEMENT, SUCH STATEMENTS ARE BY THEIR NATURE SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW, AND THE COMPANY CANNOT AND DOES NOT PROVIDE ANY ASSURANCE AS TO SUCH PLANS OR EXPECTED EVENTS, OUTCOMES OR RESULTS. PROSPECTIVE PURCHASERS SHOULD THEREFORE EXERCISE CAUTION IN MAKING AN INVESTMENT DECISION. ABSENCE OF COMBINED OPERATING HISTORY; NO PRIOR OPERATING EXPERIENCE The Company was incorporated in 1997 and has conducted no operations to date other than in connection with the Offering and the Affiliations. The Company has entered into agreements to acquire substantially all the assets and assume certain liabilities of the Founding Affiliated Practices concurrently with the closing of the Offering. In connection with the Affiliations, the Company is entering into Service Agreements with the Founding Affiliated Practices for initial terms of 40 years (subject to early termination by either party for "cause," which includes a material default by or bankruptcy of the other party). See "Business--Service Agreements." Historically, the Founding Affiliated Practices have operated as separate independent entities. There can be no assurance that the process of integrating the management and administrative functions of the Founding Affiliated Practices will be successful or that the Company's management will be able to manage these operations effectively or implement the Company's operating or expansion strategies successfully. Failure by the Company to implement its operating and expansion strategies successfully would have a material adverse effect on the Company. See "Business--Business Strategy" and "--Service Agreements." RELIANCE ON AFFILIATED PRACTICES AND DENTISTS The Company will receive fees for management services provided to the Affiliated Practices under the Service Agreements. It will not employ dentists or control the practice of dentistry by the dentists employed by the Affiliated Practices, and its management services revenue generally will depend on revenue generated by the Affiliated Practices. In some cases, the management fees will be based on the costs and expenses the Company incurs in connection with providing management services. While the laws of some states permit the Company to participate in the negotiations by Affiliated Practices of managed care contracts, preferred provider arrangements and other negotiated price agreements, the Affiliated Practices will be the contracting parties for those relationships, and the Company will be dependent on its Affiliated Practices for the success of any such relationships. Accordingly, the profitability of those payor relationships, as well as the performance of the individual dentists employed by the Affiliated Practices, will affect the Company's profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Business--Service Agreements." The revenue of the Affiliated Practices (and, therefore, the success of the Company) is dependent on fees generated by the dentists employed by the Affiliated Practices. In connection with the Service Agreements, each dentist who owns a Founding Affiliated Practice will enter into a five-year employment agreement with the professional corporation or other entity with which that dentist is affiliated (and which is a party to a Service Agreement). The dentist employment agreements provide that the employee dentist will not compete with the Affiliated Practice during the term of the agreement and following the termination of the agreement for a term of two years in a specified geographical area. In most states, however, a covenant not to compete will be enforced only to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement, does not unreasonably restrain the party against whom enforcement is sought and is not contrary to the public interest. This determination is made based on all the facts and circumstances of the specific case at the time enforcement is sought. Thus, there can be no assurance that a court will enforce such a covenant in a given situation. In addition, no judicial 8 precedents have addressed whether a dental practice management company's interest under a management or service agreement will be viewed as the type of protectable business interest that would permit it to enforce such a covenant or to require an affiliated practice to enforce such covenants against an employee dentist. A substantial reduction in the number of dentists employed by or associated with the Affiliated Practices could have a material adverse effect on the financial performance of the Company. Failure by the Affiliated Practices to employ a sufficient number of dentists (whether by renewals of existing employment agreements or otherwise) would have a material adverse effect on the Company. See "Business--Dentist Employment Agreements." DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS The success of the Company's business strategy will be dependent on, among other things, the successful implementation of new management information systems and other operating systems to permit the effective integration of the administrative operations of the Affiliated Practices into the Company's operations. For example, the Company will be required to integrate its financial information system with existing practice management systems at the Affiliated Practices, which may be different from those used by the Company. Any significant delay or increase in expense associated with the conversion and integration of management information systems used by Affiliated Practices could have a material adverse effect on the successful implementation of the Company's expansion strategy. In addition, the Company will have some systems that are decentralized, including cash collections. Accordingly, the Company will rely on local staff for certain functions, including transferring cash from the Affiliated Practices to the Company. See "Business--Management Information Systems." RISKS ASSOCIATED WITH EXPANSION STRATEGY GENERAL The success of the Company's expansion strategy will depend on a number of factors, including the Company's ability to (i) identify attractive and willing candidates to become Affiliated Practices in suitable markets and in suitable locations within those markets, (ii) affiliate with acceptable Affiliated Practices on favorable terms, (iii) adapt the Company's structure to comply with present or future legal requirements affecting the Company's arrangements with Affiliated Practices and comply with regulatory and licensing requirements applicable to dentists and facilities operated and services offered by dentists, (iv) obtain suitable financing to facilitate its expansion program and (v) expand the Company's infrastructure and management to accommodate expansion. A shortage of available dentists with the skills and experience sought by the Company would have a material adverse effect on the Company's expansion opportunities, and the Company anticipates facing substantial competition from other companies to establish affiliations with additional dental practices. In addition, there can be no assurance that the Company's expansion strategy will be successful, that modifications to the Company's strategy will not be required or that the Company will be able to manage effectively and enhance the profitability of additional Affiliated Practices. There can be no assurance that the Company will be able to achieve planned growth, that the assets of dental practices will continue to be available for acquisition by the Company, that the Company will be able to realize expected operating and economic efficiencies from pending or future affiliations or that future affiliations with additional Affiliated Practices will be profitable. See "--Competition," "--Immediate and Substantial Dilution and Absence of Dividends," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Business--Business Strategy." POTENTIAL DILUTION OF EXISTING STOCKHOLDERS; NONCASH AMORTIZATION CHARGES Using shares of Common Stock as consideration for (or in order to provide financing for) future acquisitions could result in significant dilution to then-existing stockholders. In addition, future acquisitions accounted for as purchases may result in substantial annual noncash amortization charges for intangible assets in the Company's statements of operations. 9 NEED FOR ADDITIONAL FINANCING The Company's expansion program will require substantial capital resources. Capital is needed not only for the acquisition of the assets of additional Affiliated Practices, but also for the effective integration, operation and expansion of the Affiliated Practices. The Affiliated Practices may from time to time require capital for renovation and expansion and for the addition of equipment and technology, and there can be no assurance that an Affiliated Practice to which the Company advances working capital loans for these purposes will be able to repay those loans in full. The Company believes the net proceeds from the Offering and cash flow from operations will be sufficient to meet the Company's anticipated expansion and working capital needs through the end of 1998. Thereafter, however, the Company may require additional capital from outside financing sources in order to continue its expansion program. There can be no assurance that the Company will be able to obtain additional funds when needed on satisfactory terms or at all. Any significant limitation on the Company's ability to obtain additional financing could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." PROCEEDS OF OFFERING PAYABLE TO AFFILIATES In connection with the closing of the Affiliations, the Company will pay, out of the net proceeds from the Offering, an aggregate of approximately $7.7 million to promoters (including $6.4 million to be paid to the dentist-owners of the Founding Affiliated Practices as the cash portion of the consideration in the Affiliations), officers and directors of the Company. Of this amount, approximately $6.4 million will be paid to the owners of the Founding Affiliated Practices, including approximately $216,326 to Ronnie L. Andress, D.D.S., $150,092 to James H. Clarke, Jr., D.D.S., $143,183 to Mack E. Greder, D.D.S., $144,017 to Roger Allen Kay, D.D.S., and $295,830 to Ronald M. Yaros, D.D.S. (each of whom will become a member of the Board of Directors of the Company (the "Board of Directors"). In addition, the Company will use $100,000 of the net proceeds from the Offering to pay the cash portion of the consideration to purchase substantially all of the tangible and intangible assets of Pentegra, Ltd. and Napili, both of which entities are affiliates of Dr. Reed, the Company's Chairman of the Board. The Company will also use approximately (i) $1.7 million of the proceeds from the Offering in connection with the Repurchase and Redemption of PII's Class A Preferred and Class B Preferred, including approximately $37,500 to Dr. Reed, $37,500 to Gary S. Glatter, $37,500 to George M. Siegel, $334 to James L. Dunn, Jr., $667 to J. Michael Casas, $37,500 to Dr. Greder and $37,500 to Dr. Kay (each of whom is, or on closing of the Offering will be, a member of the Board of Directors or an officer of the Company), (ii) approximately $836,000 of the proceeds from the Offering in connection with the repayment of $350,000 aggregate principal amount of 9.5% promissory notes and $486,000 aggregate principal amount of 15.0% notes (all of which promissory notes were issued by the Company to fund certain offering and operating expenses), including principal amounts of approximately $10,000 to James P. Allen, D.D.S., $10,000 to Steve Anderson, D.D.S., $10,000 to Marvin V. Cavallino, D.D.S., $20,000 to James H. Clarke, Jr., D.D.S., $5,000 to Henry F. Cuttler, D.D.S., $6,000 to Edward T. Dougherty, Jr., D.D.S., $20,000 to Kevin Gasser, D.D.S., $5,000 to Alan H. Gerbholz, D.D.S., $20,000 to Mack E. Greder, D.D.S., $20,000 to Salvatore Guarnieri, D.D.S., $25,000 to Kent Hamilton, D.D.S., $10,000 to Stephen Hwang, D.D.S., $10,000 to Penn Jackson, Sr., D.D.S., $10,000 to Roger Allen Kay, D.D.S., $5,000 to Patrick T. Kelly, D.D.S., $5,000 to Brian K. Kniff, D.D.S., $10,000 to Donald W. Lanning, D.D.S., $10,000 to David A. Little, D.D.S., $10,000 to Richard W. Mains, D.D.S., $35,000 to James M. McDonough, D.D.S. $5,000 to James W. Medlock, D.D.S., $5,000 to Mary B. Mellard, D.D.S., $7,500 to Byron L. Novosad, D.D.S., $35,000 to Harold A. Pebbles, Jr., D.D.S. $5,000 to Richard Reinitz, D.D.S., $30,000 to Richard N. Smith, D.D.S., $20,000 to Jack Stephens, D.D.S., $15,000 to Y. Paul Suzuki, D.D.S., $10,000 to S. Victor Uhrenholdt, D.D.S. and $15,000 to Ronald M. Yaros, D.D.S. (all of whom are dentist-owners of Founding Affiliated Practices) and approximately $35,000 to George M. Siegel, and (iii) an aggregate of approximately $276,000 of the net proceeds of the Offering in connection with the purchase of certain accounts receivable from the Founding Affiliated Practices. See "Use of Proceeds" and "Certain Transactions--Organization of the Company." 10 GOVERNMENT REGULATION Various federal and state laws regulate the dental services industry. Regulatory oversight includes, but is not limited to, considerations 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. CORPORATE PRACTICE OF DENTISTRY AND FEE SPLITTING RESTRICTIONS The laws of many states, including all the states in which the Founding Affiliated Practices are located other than New Mexico and Wisconsin, 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, including all the states in which the Founding Affiliated Practices are located other than Alaska, Maine, Massachusetts, New Mexico and Wisconsin, also prohibit dentists from sharing professional fees with non-dental entities. State dental boards do not generally interpret these prohibitions as preventing a non-dental entity from owning non-professional assets used by a dentist in a dental practice or providing management services to a dentist for a fee, provided certain conditions are met. The Company believes that its operations will not contravene any applicable restriction on the corporate practice of dentistry. There can be no assurance, however, that a review of the Company's business relationships by courts or regulatory authorities will not result in determinations that could prohibit or otherwise adversely affect the operations of the Company or that the regulatory environment will not change, requiring the Company to reorganize or restrict its existing or future operations. The laws regarding fee-splitting and the corporate practice of dentistry and their interpretation are enforced by regulatory authorities with broad discretion. There can be no assurance that the legality of the Company's business or its 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. FRAUD AND ABUSE LAWS AND RESTRICTIONS ON REFERRALS AND SELF-REFERRALS Many states in which the Founding Affiliated Practices are located, including California, Florida, Maine, Maryland, Michigan, New York, Texas and Washington, have fraud and abuse laws that, in many cases, apply to referrals for items or services reimbursable by any insurer, not just by Medicare and Medicaid. A number of states, including many of the states in which the Founding Affiliated Practices are located, also impose significant penalties for submitting false claims for dental services. In addition, most of the states in which the Founding Affiliated Practices are located, including Alaska, Arizona, California, Florida, Louisiana, Maine, Maryland, Michigan, New York, Texas and Washington, have laws prohibiting paying or receiving any remuneration, direct or indirect, that is intended to induce referrals for health care items or services, including dental items and services. Many states in which the Founding Affiliated Practices are located either prohibit or require disclosure of self-referral arrangements and impose penalties for the violation of these laws. Many states, including Alaska, Florida and Maine, limit the ability of a person other than a licensed dentist to own or control equipment or offices used in a dental practice. Some of these states allow leasing of equipment and office space to a dental practice under a bona fide lease, if the equipment and office remain under the control of the dentist. ADVERTISING RESTRICTIONS AND LIMITATIONS ON DELEGATION Some states prohibit the advertising of dental services under a trade or corporate name. Some states, including Texas, require all advertisements to be in the name of the dentist. A number of states also 11 regulate the content of advertisements of dental services and the use of promotional gift items. In addition, many states impose limits on the tasks that may be delegated by dentists to hygienists and dental assistants. These laws and their interpretations vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. INSURANCE REGULATION There are certain state insurance regulatory risks associated with the Company's anticipated role in negotiating and administering managed care contracts on behalf of the Affiliated Practices. The application of state insurance laws to third-party payor arrangements, other than fee-for-service arrangements, is an unsettled area of law with little guidance available. State insurance laws are subject to broad interpretation by regulators and, in some states, state insurance regulators may determine that the Company or the Affiliated Practices are engaged in the business of insurance because of the capitation features (or similar features under which an Affiliated Practice assumes financial risk) that may be contained in managed care contracts. In the event the Company or an Affiliated Practice is determined to be engaged in the business of insurance, the Company or the Affiliated Practice could be required to either seek licensure as an insurance company or change the form of its relationships with the third-party payors. There can be no assurance that the Company's operations would not be adversely affected if the Company or any of the Affiliated Practices were to become subject to state insurance regulations. HEALTH CARE REFORM The United States Congress has considered various types of health care reform, including comprehensive revisions to the current health care system. It is uncertain what legislative proposals, if any, will be adopted in the future or what actions federal or state legislatures or third-party payors may take in anticipation of or in response to any health care reform proposals or legislation. There can be no assurance that applicable federal or state laws and regulations will not change or be interpreted in the future either to restrict or adversely affect the Company's relationships with dentists or the operation of Affiliated Practices. See "Business--Government Regulation." RISKS ASSOCIATED WITH COST CONTAINMENT INITIATIVES The health care industry, including the dental services market, is experiencing a trend toward cost containment, as third-party and government payors seek to impose lower reimbursement rates on providers. The Company believes this trend will continue and will increasingly affect dental services. This may result in a reduction in per-patient and per-procedure revenue from historical levels. There can be no assurance that any reductions in revenues and operating margins could be offset through cost reductions, increased volume, introduction of new procedures or otherwise. Accordingly, significant reductions in payments to Affiliated Practices or other changes in reimbursement by third-party payors for dental services performed by Affiliated Practices may have a material adverse effect on the Company. RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS; CAPITATED FEE REVENUE The Company believes that managed care arrangements are becoming more prevalent in certain sectors of the dental services industry. As an increasing percentage of the population is covered by managed care organizations that provide dental coverage, the Company believes its future success may be dependent, in part, on its ability to assist the Affiliated Practices in negotiating contracts with dental health maintenance organizations, insurance companies, self insurance plans and other private third-party payors pursuant to which services will be provided on some type of fee-for-service or capitated basis by some of its Affiliated Practices. Under certain capitated contracts, the health care provider accepts a predetermined amount per patient per month as its sole payment in exchange for providing a specific schedule of services to enrollees. These contracts shift much of the risk of providing health care from the payor to the provider. To the extent that an Affiliated Practice enters into capitated managed care arrangements, it will be 12 exposed to the risk that the cost of providing dental care required by these contracts exceeds the amount the Affiliated Practice receives for providing such care. If those costs exceed the revenues received for the service provided, the Affiliated Practice will remain responsible under its Service Agreement for reimbursing the Company for all of the costs associated with providing those services, even if no service fee is due thereunder. To the extent an Affiliated Practice enters into additional managed care contracts, it may achieve greater predictability of revenues but greater unpredictability of expenses due to the fluctuating costs of the services provided. There can be no assurance that the Company will be able to negotiate on behalf of the Affiliated Practices satisfactory arrangements on a capitated basis, regardless of the amount of risk sharing. In addition, to the extent that patients or enrollees covered by certain of these contracts require, in the aggregate, more frequent or extensive care than anticipated, operating margins may be reduced, or the revenues derived from these agreements may be insufficient to cover the costs of the services provided. As a result, Affiliated Practices would be at risk for additional costs which would reduce or eliminate any earnings for the Affiliated Practices under these contracts, with a corresponding reduction in or elimination of the service fee payable to the Company in those cases where the Service Agreements provide for percentage-based service fees. CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS Following the completion of the Affiliations and the Offering, Dr. Reed, the Company's Chairman of the Board, the other executive officers and directors of the Company as a group and the owners of the Founding Affiliated Practices other than Dr. Reed will beneficially own approximately 2.0%, 14.5% and 45.5%, respectively, of the outstanding shares of Common Stock. These persons, if acting in concert, will be able to exercise control over the Company's affairs, elect the entire Board of Directors and (subject to Section 203 of the Delaware General Corporation Law ("DGCL")) control the outcome of any matter submitted to a vote of stockholders. CONFLICTS OF INTEREST; WORKING CAPITAL LOANS TO AFFILIATED PRACTICES Each of Drs. Reed, Andress, Clarke, Greder, Kay and Yaros is the sole shareholder of a Founding Affiliated Practice and a professional corporation or association owned by them will be a party to a Service Agreement with the Company. In connection with the provision of management services by the Company to the Affiliated Practice owned by these dentists, there are conflicts of interest that may arise from time to time in connection with negotiating terms of working capital loans from the Company to that practice, if any, and certain other arrangements under the Service Agreement. In the event the Company elects to make working capital loans to Affiliated Practices, those loans will be negotiated and documented as independent transactions between the Company and the Affiliated Practices and will have no effect on the amount of service fees payable to the Company. The Company has no present plans, understandings, arrangements or agreements with respect to the making of working capital loans to Affiliated Practices. The Company anticipates that, if any working capital loans were made by the Company to Affiliated Practices, those loans would generally bear interest at prime plus one percent and would be repayable over varying periods of time not to exceed five years. In addition, if any such Affiliated Practice did not have sufficient operating income in any given month to pay the service fees due under its Service Agreement and repay all of the principal and/or interest then due under such a working capital loan, the Company anticipates it would permit the Affiliated Practice to defer the repayment of the portion of the principal and/or interest payments due, to the extent the Affiliated Practice is unable to pay, until the next month in which the Affiliated Practice's operating income is sufficient to pay the service fees and make all current debt service payments under the working capital loan. BOARD COMPOSITION The Company's Bylaws provide that a majority of the members of the Board of Directors must be licensed dentists who are affiliated with Affiliated Practices. As a result, there will be a limited group of 13 persons from which candidates to fill these board positions may be selected, and it is not anticipated that many of these persons will have had prior experience as board members of publicly held companies. This provision could also discourage potential acquisition proposals, delay or prevent a change in control of the Company or limit the price that certain investors might be willing to pay in the future for shares of Common Stock. In addition, each of Dr. Reed and the other board members who own an Affiliated Practice will be a party to a Service Agreement with the Company. In connection with the provision of management services by the Company to the Affiliated Practices owned by those dentists, conflicts of interest may arise. See "--Certain Anti-takeover Provisions," "Security Ownership of Certain Beneficial Owners and Management" and "Certain Transactions." DEPENDENCE ON KEY PERSONNEL The Company's future performance depends in significant part on the continued service of its senior management, including Dr. Reed and Gary S. Glatter, the President and Chief Executive Officer of the Company. There can be no assurance that these individuals will continue to work for the Company. Loss of services of those persons could have a material adverse effect on the Company. The success of the Company's growth strategy will also depend on the Company's ability to attract and retain additional high quality personnel. See "Business--Employees" and "Management." COMPETITION The Company anticipates facing substantial competition from other companies to establish affiliations with additional dental practices. The Company is aware of several publicly traded dental practice management companies that have operations in jurisdictions where one or more of the Founding Affiliated Practices conduct business (including Apple Orthodontix, Inc., Birner Dental Management Services, Inc., Castle Dental Centers, Inc., Coast Dental Services, Inc., Dental Care Alliance, Inc., Gentle Dental Service Corp., Monarch Dental Corporation, OrthAlliance, Inc. and Orthodontic Centers of America, Inc.) and several companies pursuing similar strategies in other segments of the health care industry. Certain of these competitors have greater financial and other resources than the Company and have operations in areas where the Company may seek to expand in the future. Additional companies with similar objectives are expected to enter the Company's markets and compete with the Company. In addition, the business of providing dental services is highly competitive in each market in which the Company will operate. Each of the Founding Affiliated Practices faces local competition from other dentists, pedodontists (dentists specializing in the care of children's teeth) and other providers of specialty dental services (such as periodontists, orthodontists and oral surgeons) some of whom have more established practices. There can be no assurance that the Company or the Affiliated Practices 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 or the Affiliated Practices. See "Business-- Competition." MALPRACTICE RISKS OF PROVIDING DENTAL SERVICES The Affiliated Practices provide dental services to the public and are exposed to the risk of professional liability and other claims. In recent years, dentists have become subject to an increasing number of lawsuits alleging malpractice and related legal theories. Some of these lawsuits may involve large claims and significant defense costs. Any suits involving the Company or dentists at the Affiliated Practices, if successful, could result in substantial damage awards to the claimants that may exceed the limits of any applicable insurance coverage. Although the Company will 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 to comply with all applicable regulations and legal requirements, and the Company maintains liability insurance for itself. There can be no assurance, however, that a future claim or claims will not be successful 14 or, if successful, will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs. Malpractice insurance, moreover, can be expensive and varies from state to state. Successful malpractice claims asserted against the Affiliated Practices (or their dentists) or the Company may have a material adverse effect on the Company. See "Business--Litigation and Insurance." POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK The market price of the Common Stock of the Company could be adversely affected by the sale of substantial amounts of the Common Stock in the public market following the Offering. The shares being sold in the Offering will be freely tradable unless acquired by affiliates of the Company. Concurrently with the closing of the Offering, the owners of the Founding Affiliated Practices will receive, in the aggregate, 2,922,549 shares of Common Stock as a portion of the consideration for the assets of their practices. Certain other stockholders of the Company will hold, in the aggregate, an additional 1,019,349 shares of Common Stock. Those shares are not being offered and sold pursuant to this Prospectus. All of those 3,941,898 shares were or are being issued in transactions that have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration. In addition, the Company's executive officers, directors and current stockholders and the persons acquiring shares of Common Stock in connection with the Affiliations have agreed with the Company that they will not sell any of the shares of Common Stock owned by them immediately after the consummation of the Affiliations for a period of one year following the closing of the Offering, subject to their right to exercise certain piggy-back registration rights. After the expiration of that restricted period, all of those shares may be sold in accordance with Rule 144 under the Securities Act, subject to the applicable volume limitations, holding period and other requirements of Rule 144. The Company and its directors, executive officers and current stockholders have agreed not to offer or sell any shares of Common Stock for a period of 180 days (the "180-Day Lockup Period") following the date of this Prospectus without the prior written consent of Dain Rauscher Incorporated, except that the Company may, subject to certain conditions, issue Common Stock in connection with acquisitions and awards under the 1997 Stock Compensation Plan. Following completion of the Offering, the Company intends to register the issuance of an additional 1,500,000 shares of its Common Stock under the Securities Act subsequent to completion of the Offering for use by the Company as all or a portion of the consideration to be paid in future acquisitions. Those shares will generally be freely tradable by nonaffiliates after their issuance, unless the resale thereof is contractually restricted, and resales of those shares during the 180-Day Lockup Period would require the prior written consent of Dain Rauscher Incorporated. The Company anticipates that, prior to the consummation of the Offering, the Company will have outstanding under the 1997 Stock Compensation Plan options to purchase approximately 671,667 shares of Common Stock. The Company intends to register the shares issuable upon exercise of options granted under the 1997 Stock Compensation Plan. See "Management--1997 Stock Compensation Plan" and "Shares Eligible for Future Sale." NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or, if a trading market does develop, that it will continue after the Offering. The initial public offering price of the Common Stock, which will be determined through negotiations between the Company and the Underwriters, may not be indicative of the price at which the Common Stock will trade after the Offering. See "Underwriting" for a description of the factors to be considered in determining the initial public offering price. The securities markets have, from 15 time to time, experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. These fluctuations often substantially affect the market price of a company's common stock. The market prices for securities of medical and dental practice management companies have in the past been, and can be expected to be, particularly volatile. The market price of the Common Stock could be subject to significant fluctuations in response to numerous factors, including variations in financial results or announcements of material events by the Company or its competitors. Regulatory changes, developments in the health care industry or changes in general conditions in the economy or the financial markets could also adversely affect the market price of the Common Stock. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Restated Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws and of the DGCL could, together or separately, discourage potential acquisition proposals, delay or prevent a change in control of the Company or limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. The Certificate of Incorporation provides for "blank check" preferred stock, which may be issued without stockholder approval and provides for a "staggered" Board of Directors. In addition, certain provisions of the Company's Bylaws restrict the right of the stockholders to call a special meeting of stockholders, to nominate directors, to submit proposals to be considered at stockholders' meetings and to adopt amendments to the Bylaws, and the Bylaws require that at least a majority of the members of the Board of Directors be licensed dentists who are affiliated with Affiliated Practices. The Company also is subject to Section 203 of the DGCL, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business acquisitions with an "interested stockholder" for a period of three years following the date such stockholder became an interested stockholder. See "Description of Capital Stock." IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS Purchasers of shares of Common Stock offered hereby will experience immediate and substantial dilution in the pro forma net tangible book value of their shares in the amount of $7.59 per share. Existing stockholders will receive an increase of $3.06 per share in the pro forma net tangible book value of their shares, which have a historical deficit in net tangible book value per share of $(1.65) as of December 31, 1997. See "Dilution." In the event the Company issues additional Common Stock in the future, including shares that may be issued in connection with future acquisitions, purchasers of Common Stock in the Offering may experience further dilution in the net tangible book value per share of Common Stock. The Company has never paid any cash dividends and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." 16 THE COMPANY The Company has conducted no operations to date other than in connection with the Offering and the Affiliations. PII was formed in February 1997 and changed its name from "Pentegra Dental Group, Inc." to "Pentegra Investments, Inc." in July 1997. PII then organized Pentegra Dental Group, Inc. as its wholly owned subsidiary in July 1997 to, among other things, complete the Offering, the Affiliations, the Share Exchange, the Pentegra/Napili Transaction and the Repurchase and Redemption. The Company has entered into agreements to acquire substantially all the assets and assume certain liabilities of the Founding Affiliated Practices, Pentegra, Ltd. and Napili concurrently with the closing of the Offering. The Company's principal executive offices are located at 2999 N. 44th Street, Suite 650, Phoenix, Arizona 85018, and its telephone number is (602) 952-1200. 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby (after deducting the underwriting discounts and commissions and estimated offering expenses (excluding the offering expenses previously funded with proceeds from the issuance of promissory notes and capital stock of PII, including all the Class A Preferred and Class B Preferred involved in the Repurchase and Redemption)) are estimated to be approximately $19.0 million (approximately $22.1 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $9.00 per share (the midpoint of the estimated initial public offering price range). Of those net proceeds, (i) approximately $6.4 million will be used to pay the cash portion of the consideration for the Affiliations, (ii) $100,000 will be used to fund the cash portion of the consideration in the Pentegra/Napili Transaction, (iii) approximately $1.7 million will be used to fund the cash portion of the consideration in the Redemption and Repurchase (approximately $1.5 million has been received by the Company as proceeds in connection with the 1997 issuances of the shares of Class A Preferred and Class B Preferred to be repurchased or redeemed), (iv) approximately $2.6 million will be used to repay certain indebtedness of the Company and the Founding Affiliated Practices (approximately $520,000 of which was incurred in 1997 by certain Founding Affiliated Practices to acquire dental equipment), (v) approximately $350,000 will be used to repay 9.5% promissory notes issued by the Company to fund certain offering and operating expenses, which notes mature 30 days following consummation of the Offering, (vi) approximately $486,000 will be used to repay 15.0% promissory notes issued by the Company subsequent to December 31, 1997 to fund certain offering and operating expenses, which notes mature three days following consummation of the Offering, and (vii) approximately $276,000 will be used to purchase certain accounts receivable, net of accounts payable, of the Founding Affiliated Practices. The remaining net proceeds will be used for general corporate purposes, which are expected to include future acquisitions and future capital expenditures. Pending such uses, the net proceeds will be invested in short-term, interest-bearing, investment-grade securities. The promoters (including the dentist-owners of the Founding Affiliated Practices), officers and directors of the Company will receive an aggregate of approximately $7.7 million out of the net proceeds of the Offering. Other than with respect to the Affiliations, the Company currently has no agreement or understanding with respect to any future affiliation. See "Risk Factors--Proceeds of Offering Payable to Affiliates" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The consideration being paid by the Company in connection with each Affiliation was determined by negotiations between executive officers of the Company not affiliated with any Founding Affiliated Practice and a representative of that Founding Affiliated Practice. The Company used the same valuation method to negotiate the consideration being paid to each of the Founding Affiliated Practices, including the respective practices wholly owned by Drs. Reed, Andress, Clarke, Greder, Kay and Yaros, which method was based upon the Founding Affiliated Practice's gross revenue, net of certain operating expenses, and the Company's assessment of growth potential. See "Certain Transactions" for information concerning the identification of the owners of the Founding Affiliated Practices and the respective amounts of cash being paid to them out of the proceeds of the Offering and shares of Common Stock being issued to them in connection with the Affiliations. The indebtedness of the Founding Affiliated Practices to be repaid bears interest at an average rate of 8.0% and would otherwise mature at various dates through 2002. DIVIDEND POLICY It is the Company's current intention to retain earnings for the foreseeable future to support operations and finance expansion. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, cash flow from operations, capital requirements, expansion plans, the income tax laws then in effect, the requirements of Delaware law and restrictions that may be imposed by the Company's future financing arrangements. 18 DILUTION The deficit in net tangible book value of the Company as of December 31, 1997 was approximately $(2.9) million, or $(1.65) per share of Common Stock, as determined by dividing the tangible net worth of the Company (tangible assets less total liabilities and the aggregate stated value of the Class A Preferred and Class B Preferred) by the number of shares of Common Stock outstanding. After giving effect to (i) the Affiliations and (ii) the sale by the Company of 2,500,000 shares of Common Stock offered at a price of $9.00 per share (the midpoint of the estimated initial public offering price range) and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds," the net pro forma tangible book value of the Company as of December 31, 1997 would have been approximately $9.1 million, or $1.41 per share of Common Stock. This represents an immediate increase in the net tangible book value of $3.06 per share to existing stockholders consisting of a decrease of $0.65 per share attributed to the assumption of net liabilities of the Founding Affiliated Practices and the related cash distribution of approximately $6.4 million to promoters (which is the aggregate cash consideration to be distributed in the Affiliations), a decrease of $(0.16) related to the redemption of shares of Class A Preferred and Class B Preferred and an increase of $3.87 per share relating to the Offering. The deficit in pro forma net tangible book value immediately after the Affiliations is $9.1 million, or $(2.30) per share. This is an immediate dilution to new investors purchasing Common Stock in the Offering of $7.59 per share. The following table illustrates the per share dilution to new investors purchasing Common Stock in the Offering: Assumed initial public offering price per share(1).......... $ 9.00 Historical deficit in net tangible book value............. $ (1.65) Decrease due to acquisition of net assets and related cash distribution to promoters............................... (0.65) --------- Pro forma net tangible book value per share after the Affiliations............................................ (2.30) Redempton of preferred stock(2)........................... (0.16) Increase due to the Offering.............................. 3.87 --------- Pro forma net tangible book value per share after the Affiliations and Offering............................... $ 1.41 --------- Dilution per share to initial public offering investors..... $ 7.59 --------- ---------
- --------- (1) Before deducting estimated underwriting discounts and expenses of the Offering payable by the Company. (2) Reflects the dividend to be recognized in connection with the redemption of an aggregate of 1,337,500 shares of Class A Preferred and Class B Preferred. See Note D to the Pentegra Dental Group, Inc. Unaudited Pro Forma Balance Sheet. The following table sets forth, on a pro forma basis to give effect to the Affiliations as of December 31, 1997, the number of shares of Common Stock purchased from the Company, the total consideration to the Company and the average price per share paid to the Company by existing stockholders and the 19 new investors purchasing shares from the Company in the Offering (before deducting underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------------- ----------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ----------- ---------------- ----------- ------------ Existing stockholders................. 1,019,349 15.8% $ 1,212,000 6.9% $ 1.19 Stockholders receiving shares in connection with the Affiliations.... 2,922,549 45.4% (6,167,000)(1) (35.1)% $ (2.11)(1) New investors......................... 2,500,000 38.8% $ 22,500,000 128.2% $ 9.00 ---------- ----- ---------------- ----- Total............................. 6,441,898 100.0% $ 17,545,000 100.0% ---------- ----- ---------------- ----- ---------- ----- ---------------- -----
- --------- (1) Represents the cash distribution of approximately $6.4 million and the aggregate historical book value of the assets to be acquired, net of liabilities of the Founding Affiliated Practices to be assumed by the Company (a net amount of approximately $220,000), in the Affiliations. All of the calculations above exclude an aggregate of 671,667 shares of Common Stock issuable upon exercise of stock options anticipated to be outstanding on the date the Offering closes at an exercise price equal to the initial public offering price per share under the 1997 Stock Compensation Plan and 1,328,333 shares reserved for future issuance under the 1997 Stock Compensation Plan. See "Management--1997 Stock Compensation Plan." 20 CAPITALIZATION The following table sets forth the short-term debt and the capitalization of the Company at December 31, 1997 (a) on a historical basis, (b) on a pro forma basis, to give effect to the Affiliations and (c) on that pro forma basis, as adjusted to give effect to the Offering and the use of the estimated net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with the unaudited Pro Forma Balance Sheet of Pentegra and the notes thereto included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1997 ------------------------------------- HISTORICAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- (IN THOUSANDS) Short-term debt: Distribution liability(1).................................................. $ -- $ 6,487 $ -- Current portion of long-term debt, net of discount......................... 215 839 -- ----------- ----------- ----------- Total short-term debt...................................................... $ 215 $ 7,326 $ -- ----------- ----------- ----------- ----------- ----------- ----------- Long-term debt: Long-term debt, net of current portion(1).................................. -- 2,097 568 Redeemable Preferred Stock................................................... 1,089 1,089 -- Stockholders' equity (deficit): Common Stock, 40,000,000 shares authorized; 1,756,667 shares issued and outstanding, 3,941,898 shares issued and outstanding, pro forma, and 6,441,898 shares issued and outstanding, as adjusted(2).................. 18 21 7 Additional paid-in capital(2)(3)........................................... 1,194 (4,976) 12,032 Accumulated deficit........................................................ (1,354) (1,354) (2,739) ----------- ----------- ----------- Total stockholders' equity............................................... (142) (6,309) 9,300 ----------- ----------- ----------- Total capitalization..................................................... $ 947 $ (3,123) $ 9,868 ----------- ----------- ----------- ----------- ----------- -----------
- --------- (1) The distribution liability includes approximately $6,387,000 for the cash portion of the consideration in the Affiliations payable as a distribution to promoters and $100,000 payable on the closing of the Pentegra/Napili Transaction. Long-term debt includes $1,997,000 debt to be assumed from the Founding Affiliated Practices and a $100,000 promissory note to be issued in connection with the Pentegra/Napili Transaction. The consideration for the Pentegra/Napili Transaction consists of $100,000 from the proceeds of the Offering and $100,000 in the form of a 9.0% promissory note due in April 1999. (2) Reflects the shares of Common Stock to be issued and the dividend to be recognized in connection with the repurchase of an aggregate of 245,835 shares and the redemption of an aggregate of 1,337,550 shares of Class A Preferred and Class B Preferred. See Note D to the Pentegra Dental Group, Inc. Unaudited Pro Forma Balance Sheet. Excludes 671,667 shares of Common Stock to become subject to option awards that have been authorized pursuant to the 1997 Stock Compensation Plan. See "Management--1997 Stock Compensation Plan." (3) The $(6,170,000) effect of the Affiliations on additional paid-in capital is aggregate cash payments of approximately $6,387,000 to be made to promoters as part of the consideration for the Affiliations, less the aggregate historical book value of the assets to be acquired less the liabilities assumed (a net amount of approximately $220,000), plus the par value of the Common Stock to be issued in connection with the Affiliations. 21 SELECTED FINANCIAL DATA (IN THOUSANDS) Upon completion of the Offering and pursuant to the Affiliations, the Company will acquire substantially all the tangible and intangible assets and assume certain liabilities of the Founding Affiliated Practices. Due to the fact that the Company has had no significant operations to date, no pro forma statement of operations has been included in this Prospectus. The nature and amount of costs to be incurred by the Company in connection with the management services it will provide to the Founding Affiliated Practices may differ from the costs historically incurred by the Founding Affiliated Practices. The selected historical financial data of the Company should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and the notes thereto included in this Prospectus. The selected historical financial data of the Company as of December 31, 1997 and for the period from inception, February 21, 1997, through December 31, 1997, set forth below, have been derived from the audited financial statements of Pentegra Dental Group, Inc. included in this Prospectus. Except as indicated, the following information does not reflect the effects of the Offering, the Affiliations, the Share Exchange, the Pentegra/Napili Transaction and the Repurchase and Redemption. For certain information concerning the Affiliations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 of Notes to the Pentegra Dental Group, Inc. financial statements.
FOR THE PERIOD FROM INCEPTION (FEBRUARY 21, 1997) THROUGH DECEMBER 31, 1997 -------- STATEMENT OF OPERATIONS DATA: Revenue.............................................. $ -- General and administrative expenses................ 709 Other expenses..................................... 645 -------- Total expenses................................. 1,354 -------- Net loss........................................... $(1,354) -------- --------
DECEMBER 31, 1997 --------------------------- HISTORICAL AS ADJUSTED(1) ----------- -------------- BALANCE SHEET DATA: Cash and cash equivalents(2)........................................................... $ 100 $ 7,687 Working capital (deficit).............................................................. (2,210) 6,413 Total assets........................................................................... 3,257 11,448 Redeemable preferred stock............................................................. 1,089 -- Stockholders' equity (deficit)......................................................... (142) 9,300
- --------- (1) As adjusted gives effect to (i) the Offering, (ii) the Affiliations, (iii) the repayment of certain indebtedness of Pentegra and the Founding Affiliated Practices, (iv) the Pentegra/Napili Transaction, (v) the Share Exchange and (vi) the Repurchase and Redemption, as if such transactions had occurred on December 31, 1997. It excludes the effect of the issuance in February 1998, and repayment from proceeds of the Offering, of $486,000 aggregate principal amount of 15% promissory notes. See the Unaudited Pro Forma Balance Sheet of Pentegra and the notes thereto included in this Prospectus. (2) See "Use of Proceeds." 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. SUCH STATEMENTS ARE ONLY PREDICTIONS AND THE ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE HISTORICAL RESULTS SET FORTH IN THIS DISCUSSION AND ANALYSIS ARE NOT INDICATIVE OF TRENDS WITH RESPECT TO ANY ACTUAL OR PROJECTED FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE PRO FORMA BALANCE SHEET, THE FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED IN THIS PROSPECTUS. OVERVIEW Although the Company has conducted no significant operations to date, it will succeed to the business of Pentegra, Ltd. and Napili, which developed the Pentegra Dental Program. In connection with the Affiliations, the Company will acquire certain tangible and intangible assets and assume certain liabilities of, and enter into Service Agreements with, the Founding Affiliated Practices. Through those Service Agreements, the Company will be providing practice management services to the Founding Affiliated Practices in return for management service fees. The expenses incurred by the Company in fulfilling its obligations under the Service Agreements will be generally of the same nature as the operating costs and expenses that were otherwise incurred by the Founding 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 the practices. In addition to the operating costs and expenses discussed above, the Company will be incurring personnel and administrative expenses in connection with establishing and maintaining a corporate office, which will provide management, administrative, marketing and development and acquisition services to Affiliated Practices. The Service Agreements with the professional corporations or associations to be formed by the dentist-owners of the Founding Affiliated Practices have initial terms of 40 years, subject to earlier termination under certain circumstances. Pursuant to those Service Agreements, the Company will become the exclusive manager and administrator of non-dental services relating to the operation of the Founding Affiliated Practices, and will, among other things, (i) administer the billing and collections for the Founding Affiliated Practices, (ii) provide the necessary clerical, accounting and other non-dental services to the Founding Affiliated Practices and (iii) provide facilities and equipment for the Founding Affiliated Practices. The service fees payable by the Founding Affiliated Practices to the Company under the Service Agreements are based on fair market value of the services to be provided. Generally, the service fees are computed based on (i) a percentage of revenues less operating expenses, (ii) a percentage of revenues not to exceed a percentage of revenues less operating expenses, (iii) a specific fixed service fee or (iv) some combination of these. See "--Planned Operations" and "Business--Service Agreements." The Company does not participate in the negotiation of dentist compensation. Under each Service Agreement, the Affiliated Practice will retain the decision-making power and responsibility for, among other things, (i) hiring, compensating and supervising dentists and other licensed dental professionals, (ii) ensuring that dentists have the required licenses, credentials, approvals and other certifications appropriate to the performance of their duties and (iii) complying with federal and state laws, regulations and ethical standards applicable to the practice of dentistry. Pursuant to the terms of the Service Agreements, the Affiliated Practices will continue to provide dental services and will be exclusively in control of all aspects of the practice of dentistry and the provision of dental services. The Company will not engage in the practice of dentistry. 23 As a result of the Affiliations and upon completion of the Offering, the dentist-owners of the Founding Affiliated Practices and certain officers and directors of the Company will beneficially own approximately 55.3% of the outstanding shares of Common Stock. See "Certain Transactions--Organization of the Company" and "Principal Stockholders." RESULTS OF OPERATIONS PENTEGRA AND PII Pentegra and PII have conducted no significant operations to date and will not conduct significant operations until the Affiliations, the Pentegra/Napili Transaction and the Offering are completed. The Company had no revenues and a net loss of $1,354,000 for the period from inception, February 21, 1997, through December 31, 1997. General and administrative expenses totalling approximately $1,354,000 were incurred during the period from inception through December 31, 1997. The Company has incurred and will continue to incur various legal, accounting, travel, personnel and marketing costs in connection with the Affiliations and the Offering. Of these expenses, (i) $1,450,000 is being funded with proceeds from the issuances of the Common Stock, Class A Preferred and Class B Preferred in the second quarter of 1997, (ii) $350,000 is being funded with proceeds from the issuance of $350,000 aggregate principal amount of 9.5% promissory notes of the Company to four separate lenders in October and November 1997 and (iii) $486,000 is being funded with proceeds from the issuance of $486,000 aggregate principal amount of 15.0% promissory notes of the Company to 30 dentist-owners of Founding Affiliated Practices, two of the Company's existing stockholders and two other lenders, all in February 1998. PLANNED OPERATIONS The Company intends to complete the Affiliations and the Pentegra/Napili Transaction concurrently with the closing of the Offering. Upon consummation of the Affiliations, the Company will enter into a Service Agreement with each Founding Affiliated Practice under which the Company will become the exclusive manager and administrator of non-dental services relating to the operation of the Founding Affiliated Practices. The following is a summary of the typical form of Service Agreement the Company will enter into with each Founding Affiliated Practice. The Company expects to enter into similar agreements with Affiliated Practices in the future. The actual terms of the Service Agreements may vary from the description below on a case-by-case basis, depending on negotiations with the individual Founding Affiliated Practices and the requirements of applicable laws and governmental regulations. Each Service Agreement is for an initial term of 40 years, with automatic extensions (unless specified notice is given) of five years. The Service Agreement may be terminated by either party if the other party (i) files a petition in bankruptcy (or other similar events occur) or (ii) defaults on the performance of a material duty or obligation, which default continues for a specified term after notice. In addition, the Service Agreement may be terminated by the Company (i) if the Founding Affiliated Practice or a dentist engages in conduct for which the dentist's license to practice dentistry is revoked or suspended or is the subject of any restrictions or limitations by any governmental authority to such an extent that he, she or it cannot engage in the practice of dentistry or (ii) upon a breach by the dentist of the employment agreement between the Founding Affiliated Practice and the dentist. The management service fees (the "Service Fees") payable to the Company by the Founding Affiliated Practices under the Service Agreements, together with operating and non-operating expenses of each Affiliated Practice to be paid to the Company pursuant to the Service Agreements, are payable monthly and consist of various combinations of the following: (i) "Standard Service Agreement", which provides for (a) a percentage (ranging from 30% to 40%) of the Affiliated Practice's revenues related to dental services less operating expenses associated with the operation of the Affiliated Practice or (b) a percentage (16%) of the Affiliated Practice's dental service revenues, not to exceed a percentage (35%) of the difference between those revenues and operating expenses associated with the operation of the 24 Affiliated Practice; or (ii) "Alternative Service Agreement," which provides for the greater of (a) a percentage (35%) of the Affiliated Practice's revenues related to dental services less operating expenses associated with the operation of the Affiliated Practice or (b) a specified fixed Service Fee (ranging from $54,000 to $305,000 annually). In addition, with respect to four of the Founding Affiliated Practices, the Service Fees are based on fixed fees that are subject to renegotiation on an annual basis. Service Fees payable to the Company under clause (i)(a) above are payable by 37 of the Founding Affiliated Practices, located in each state in which the Founding Affiliated Practices are located other than New York and California, and are calculated by subtracting the operating expenses of the Founding Affiliated Practice (including non-dental salaries, insurance, rent and other non-dentist costs) from the net revenues of the Founding Affiliated Practice and multiplying the resulting amount by 30%, 35% or 40%, depending on the terms of the particular Service Agreement. One Founding Affiliated Practice located in California will pay its Service Fee according to the formula set forth in clause (i)(b) above, equal to the greater of 16% of its net revenues or 35% of the difference between its net revenues and operating expenses. Service Fees to be received by the Company under clause (ii)(b) above are payable by eight of the Founding Affiliated Practices in Texas and will result in a minimum service fee being received by the Company (ranging from $54,000 to $305,000 annually). The annual fixed fees payable by the four Founding Affiliated Practices in New York are $66,009, $115,251, $83,579 and $140,127 and will be subject to renegotiation each year based on the fair value of the services to be received by those Founding Affiliated Practices from the Company. On a monthly basis, the Company will calculate the Service Fee due from each Founding Affiliated Practice pursuant to the terms of each Service Agreement. In addition, if the costs related to providing dental services pursuant to capitated managed care arrangements exceed the revenues received for those services, the Affiliated Practice will remain responsible for reimbursing the Company for all of the costs associated with providing those services, even if no Service Fee is due to the Company under its Service Agreement. Dentist compensation will be determined by the Affiliated Practices pursuant to employment arrangements between the Affiliated Practices and the individual dentists. The Company does not participate in the negotiation of dentist employment compensation. The Company will not engage in the practice of dentistry. To the extent that a Founding Affiliated Practice, with the assistance of the Company pursuant to its Service Agreement, increases its revenues and/ or decreases its operating expenses, the Service Fees payable to the Company may increase. The Service Fees for each Founding Affiliated Practice will be calculated individually and will not be based on the operations of any other Founding Affiliated Practice. It is anticipated that substantially all the Company's revenues will consist of Service Fees and the operating expenses that the Affiliated Practices will pay to the Company under the Service Agreements. Service Fees may be expected to vary proportionately with the level of dental services provided by Founding Affiliated Practices and future affiliations with additional Affiliated Practices. LIQUIDITY AND CAPITAL RESOURCES The Company had cash of approximately $100,000 at December 31, 1997. In October and November 1997, the Company received an additional $350,000 through the issuance of $350,000 aggregate principal amount of 9.5% promissory notes to four lenders. In connection with the issuance of the 9.5% promissory notes, PII issued an aggregate of 20,000 shares of its common stock in October 1997 to two of those lenders for cash consideration of $.015 per share. In February 1998, the Company received an additional $486,000 through the issuance of $486,000 aggregate principal amount of 15.0% promissory notes to 30 dentist-owners of Founding Affiliated Practices, two of the Company's existing stockholders and two other lenders. The Company anticipates receiving approximately $19.0 million, net of underwriters' commissions and other offering costs, as proceeds from the Offering. The Company will use the net proceeds of the Offering to pay (i) the costs of the Offering not previously funded from the proceeds of the issuance of 25 capital stock and notes of the Company, (ii) the cash portion of the consideration for the Affiliations of approximately $6.4 million, (iii) the cash portion of the consideration for the Pentegra/Napili Transaction of $100,000, (iv) approximately $1.7 million in connection with the cash portion payable by the Company in the Repurchase and Redemption, (v) approximately $2.6 million to retire certain indebtedness of the Founding Affiliated Practices and (vi) approximately $836,000 to repay the aggregate principal amount outstanding under the Company's 9.5% promissory notes and 15.0% promissory notes. The remaining net proceeds will be used for general corporate purposes, which are expected to include future acquisitions and capital expenditures. The cost of implementing the Company's management information systems is estimated to be approximately $550,000, including enhanced microcomputer and related hardware in certain dental practice offices. Approximately half of this amount has been paid with proceeds from the sale of Class A Preferred and Class B Preferred, with the remainder to be paid from the net proceeds of the Offering. Any significant delay or increase in expense associated with the implementation of the Company's management information systems could have a material adverse effect on the Company's results of operations and liquidity. Management believes the net proceeds of the Offering, combined with the Company's cash flows from operations, will be sufficient to fund planned capital expenditures and ongoing operations of the Company through the end of 1998. The Company is also seeking to establish a revolving bank credit facility and intends to register an additional 1,500,000 shares of Common Stock under the Securities Act following the Offering which, when combined with the Company's cash resources, will be used in the Company's expansion program. In addition, the Company may seek to utilize seller financing debt in future affiliations or additional equity offerings to finance the Company's operations. The Company has initiated preliminary discussions with a potential lender regarding a credit facility (the "Credit Facility"), to be used for general corporate purposes, including financing of acquisitions, capital expenditures and working capital. On the basis of those discussions, the Company expects to enter into the Credit Facility promptly following the closing of the Offering and that the Credit Facility will provide for a revolving line of credit up to $15.0 million. The ability of the Company to secure the Credit Facility is subject to satisfactory negotiations with its prospective lender as well as the negotiation and execution of definitive loan documentation. The Company expects that any borrowings under the Credit Facility will be secured by liens on certain of the Company's assets (including its rights under its Service Agreements and accounts receivable) and that the Credit Facility will (i) contain restrictions on the incurrence of additional indebtedness (except for purchase money loans for property and equipment) and the payment of dividends on the Common Stock, (ii) require compliance with certain financial covenants and (iii) provide the lender with approval rights with respect to acquisitions exceeding certain limits. There can be no assurance that the Company can obtain the Credit Facility on terms it deems acceptable. ACCOUNTING TREATMENT In accordance with Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary Assets by Promoters or Shareholders" ("SAB 48"), the acquisition of the assets and assumption of certain liabilities pursuant to the Affiliations from certain promoters of the Company (the dentists who own the Founding Affiliated Practices) will be accounted for by the Company at the transferors' historical cost basis. The Common Stock being issued in the Affiliations will be recorded at the historical net book value of the net assets being acquired, as reflected on the books of the Founding Affiliated Practices. Cash consideration paid to the promoters in the Affiliations of approximately $6.4 million and the assumption of approximately $220,000 of net assets of the Founding Affiliated Practices will be treated for accounting purposes as a dividend to the promoters. See "Business--Summary of Terms of Affiliations" and "Certain Transactions--Organization of the Company." 26 CHANGE IN FISCAL YEAR Following consummation of the Offering, the Company intends to change its fiscal year from the year ending on December 31 to the year ending on March 31. RECENT PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation, presentation, and disclosure requirements of earnings per share and supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128 requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the impact of common stock equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share as opposed to the greater of the average market price per share or ending market price per share when applying the treasury stock method in determining common stock equivalents, replaces fully diluted earnings per share. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 131 establishes standards for reporting segment information by public enterprises in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. Both of these statements are effective for fiscal years beginning after December 15, 1997. The Company believes implementation of SFAS Nos. 130 and 131 will not have a material effect on its financial position, results of operations or cash flows. In November 1997, the Emerging Issues Task Force of the FASB (the "EITF") reached a consensus relating to the conditions under which a physician or dental practice management company would consolidate the accounts of an affiliated physician or dental practice. The Company believes that its accounting policies conform to the EITF consensus. 27 BUSINESS OVERVIEW Pentegra Dental Group, Inc. was recently formed to provide management, administrative, development and other services to dental practices throughout the United States. The Company's approach to dental practice management, the Pentegra Dental Program, was developed by Dr. Omer K. Reed, the Chairman of the Board of the Company, and is designed to increase revenues and lower costs at Affiliated Practices while freeing the practicing dentists to focus on the delivery of high-quality care. The Company will earn management service fees under long-term service agreements with Affiliated Practices (the "Service Agreements"). In most cases, service fees payable to the Company under the Service Agreements represent a share of the Affiliated Practices' operating profits, thereby providing incentives for the Company and the Affiliated Practices to work together to maximize practice profitability. The Company will also seek to grow by acquiring and affiliating with additional dental practices. The Company has entered into definitive acquisition agreements and Service Agreements with 50 Founding Affiliated Practices, which include 77 dentists and 63 dental offices located in 18 states. These dentists have practiced an average of 21 years. Of these dentists, 68 are general dentists, one is a prosthodontist, five are periodontists, one is a pedodontist and two are oral surgeons. In addition, the Company will acquire from Dr. Reed the assets of a consulting firm, Pentegra, Ltd., which was founded in 1988, and a seminar company, Napili, which was founded in 1963. The clinical, administrative and marketing training developed and provided by these companies to practicing dentists and their teams are the foundation for the Pentegra Dental Program. After completion of the Offering, the Pentegra Dental Program will be available exclusively to Affiliated Practices. The Company believes it has several advantages that would lead dental practices to seek to affiliate with the Company: (i) the Company and the Founding Affiliated Practices focus on providing traditional fee-for-service dental care, which the Company believes is highly profitable and professionally rewarding for dentists; (ii) the Pentegra Dental Program offers proven techniques to increase practice profitability substantially; (iii) both the Company and the Affiliated Practices will have incentives to work together to maximize practice profitability; and (iv) affiliation with the Company will enable Affiliated Practices to benefit from professional management techniques, economies of scale in administrative and other functions, and enable affiliated dentists to dedicate more time and effort towards the growth of their practices. INDUSTRY The Health Care Finance Administration ("HCFA") estimates that in 1995, approximately $43 billion was spent in the United States on dental services. HCFA projects annual dental expenditures to increase at an average annual rate of six percent per year, reaching $79 billion in the year 2005. The Company believes there are several factors that will drive growth in dental expenditures in the United States, including (i) the aging of the population, which increases the demand for restorative and maintenance procedures (E.G., crowns, bridges and implants) that tend to be more profitable than routine procedures (E.G., cleanings and fillings); (ii) the increasing attention to dental health and wellness, with greater emphasis on personal appearance, which increases the demand for general dentistry services and, in particular, cosmetic dental procedures (E.G., porcelain bonding and bleaching), which also tend to be more profitable than routine procedures; and (iii) the increasing percentage of the population covered by some form of dental insurance, which, according to the National Center for Health Statistics, makes patients more likely to seek treatment from their dentist. Payments for dental services are made either directly by patients or by third-party payors. Third-party payors primarily consist of private insurance indemnity plans, preferred provider organizations ("PPOs") and dental health maintenance organizations and other managed care programs ("DHMOs"). Private indemnity insurance companies typically pay for a patient's dental care on a fee-for-service basis, while PPO plans pay on a discounted fee-for-service basis. DHMO plans typically pay on a per-person, per- 28 month basis regardless of the level of service provided to the patient. In the case of both PPOs and DHMOs, patients typically must pay on a fee-for-service basis for any services outside the limited range of dental procedures covered. According to the 1997 Mercer Consulting Group survey of Employer-Sponsored Health Plans, approximately 86% of the respondents in that survey reported that they offer their employees dental plans that pay for dental services on a fee-for-service basis, while approximately 22% of the plans surveyed are PPO and DHMO plans (I.E., discounted fee-for-service payments or capitated payments). According to HCFA, only approximately four percent of all payments for dental care are made under the Medicaid program (which provides limited coverage for indigent children), with no coverage being provided by the Medicare program. In a 1995 survey, the ADA reported that there were approximately 153,000 active dentists in the United States, approximately 88% of whom were practicing either alone or with only one other dentist. In recent years, dentists have begun to consolidate into affiliated groups and with practice management organizations. Dentists who affiliate with practice management companies gain several benefits, such as opportunities to achieve economies of scale, to implement cost management techniques and to gain access to capital for new equipment and other working capital needs. BUSINESS STRATEGY The Company's objective is to become a leader in providing dental practice management services. In order to achieve this objective, the Company's strategy includes the following elements: - FOCUS ON TRADITIONAL FEE-FOR-SERVICE DENTAL CARE. According to the 1997 Mercer Consulting Group Survey of Employer-Sponsored Health Plans, approximately 86% of the respondents in that survey reported that they offer their employees dental plans that pay for dental services on a fee-for-service basis. The Company believes that fee-for-service care is high-quality, highly profitable and professionally rewarding for dentists. - INCREASE PRODUCTIVITY AND PROFITABILITY OF AFFILIATED PRACTICES BY IMPLEMENTING THE PENTEGRA DENTAL PROGRAM. The Pentegra Dental Program involves implementing techniques designed to increase revenues and lower costs, as well as methods to make the dentist and his or her practice team more efficient in the delivery of dental care. - LOWER OPERATING COSTS BY ACHIEVING ECONOMIES OF SCALE. The Company believes that, as a result of its size and resources, it will be able to provide Affiliated Practices with certain management functions at lower cost than if the Affiliated Practices were to perform the services by themselves. - FREE THE DENTIST TO FOCUS MORE TIME ON THE PRACTICE OF DENTISTRY. The Company will relieve practicing dentists of administrative tasks. The Company believes its management and administrative support will substantially reduce the amount of time affiliated dentists are required to spend on administrative matters and enable them to dedicate more time and effort toward the growth of their professional practices. - GROW THROUGH ACQUISITIONS AND AFFILIATIONS OF ADDITIONAL DENTAL PRACTICES. The Company will generally seek to affiliate with practices that have high potential for future growth, particularly through implementation of the Pentegra Dental Program, an established reputation for high-quality care and a strategic fit either in an existing market or as an entry into a new market. SERVICES AND OPERATIONS THE PENTEGRA DENTAL PROGRAM The Company intends to implement the Pentegra Dental Program at each Affiliated Practice. The Pentegra Dental Program was developed by Dr. Reed through Pentegra, Ltd. and Napili. Napili was founded in 1963 and has conducted technical and management seminars for over 15,000 practicing 29 dentists, including many who have attended these seminars more than once. As a result of demand by attendees of Napili seminars, Dr. Reed established Pentegra, Ltd. in 1988 to provide hands-on, on-site training and services to small groups of dentists. Shortly after completion of the Offering, Pentegra, Ltd. and Napili will no longer operate independently and their services will be available exclusively to Affiliated Practices. The Company focuses on traditional fee-for-service practices, which generate revenue by providing care to their established patient bases and typically grow through patient referrals. The Company believes that the average dentist has the skills necessary to diagnose and provide appropriate care to patients, but many of them have not developed the skills needed to obtain patient acceptances of, and commitments to, the treatment plans. As a result, a significant amount of recommended care may not be completed, with correspondingly lower revenues to the dentists. The Pentegra Dental Program is based on a cooperative approach that emphasizes patient wellness and involves the dentist and his or her patient mutually agreeing on a program to achieve and maintain optimal oral health. The Company will provide seminars and on-site training and support to assist affiliated dentists (who will control the practice of dentistry at Affiliated Practices) and their teams to communicate effectively with each patient regarding the type and value of care needed, obtain the patient's commitment to a treatment plan and then implement the agreed-upon treatment plan. An initial on-site consulting and training session will be provided to Affiliated Practices lasting from one to three days, with subsequent sessions provided as necessary. At each initial session, the Company will perform an analysis that includes on-site observation of the dental practice, monitoring of the clinical staff and patient flow, as well as a review of the charting and record documentation of the care provided. The purpose of this analysis is to identify areas where improvements might be made in the day-to-day operations of the dental practice, including changes in personnel and facility utilization, patient scheduling and communication (both between the dentist and his or her staff and between all dental practice personnel and its patients). In addition, the dental practice's personnel, including its dentists, are introduced to techniques designed to (i) improve communication among them and (ii) sensitize them to becoming more confident and consistent in their communications with patients in order to ensure that each patient is fully informed and agrees with the dentist on a mutually acceptable treatment plan. The Company and the Affiliated Practices will monitor the patients' treatment plans by using active recall systems to ensure that scheduled treatments are actually performed. The Pentegra Dental Program stresses quality of care and personal attention, both of which the Company believes are highly valued by patients and help achieve treatment plan acceptance. The Company intends to develop and maintain a statistical database for each Affiliated Practice to define and measure the standard of care and assure that the desired standards are being achieved. The Pentegra Dental Program also analyzes and rationalizes fee structures to increase profitability. The Company believes that typical fee structures do not accurately reflect all direct and indirect costs of various procedures. In order to address this, the Company will use time-related cost allocation models to recommend fee structures for Affiliated Practices that are designed to reflect the true cost of procedures and, hence, increase profitability. In addition, the Pentegra Dental Program focuses on increasing the productivity of the dentist and his or her team. The Company will seek to increase the use of hygienists and production at the Affiliated Practices. A number of dental services can be provided by hygiene teams with only limited involvement by the dentist, thereby enabling dentists to use their extra time on higher margin procedures requiring greater expertise and skill. The Company will also monitor the Affiliated Practices' patient scheduling and time spent with patients, and will provide office design services, in order to increase utilization of existing dental equipment and personnel. 30 MANAGEMENT INFORMATION SYSTEMS The Company will utilize an integrated server-based information system to track important operational and financial data related to each Affiliated Practice's performance. The Company's management information system will enable the Company to collect from each Affiliated Practice, on a daily basis, data on patients seen, number and type of procedures performed, billing and collections, and other data needed for financial reporting and analysis. The Company will then compile and analyze this data in order to promote efficiency and assure high quality care at Affiliated Practices, as well as maintain necessary financial controls. The Company's management information system will also enable the Company to centralize certain functions, such as purchasing, accounts payable and payroll processing, and achieve economies of scale. The centralized data repository of the Company's management information system has been completed. The Company is currently in the process of refining and testing the interfacing of its management information system with beta sites at selected Founding Affiliated Practices. The Company has successfully completed testing to ensure access to the Company's data repository via the internet at the beta sites, but has not yet completed testing of the entry and retrieval of statistical data into the data repository from the beta sites. The Company expects its integrated system to be operational at all of the Founding Affiliated Practices at the closing of the Offering, and will be installed promptly at all future Affiliated Practices as they affiliate with the Company. Any significant delay or increase in expense associated with the conversion and integration of management information systems used by Affiliated Practices could have a material adverse effect on the successful implementation of the Company's expansion strategy. In addition, the Company will have some systems that will remain decentralized for at least some time, such as cash collections. Accordingly, the Company will rely on local staff for certain functions, including transferring cash from the Affiliated Practices to the Company. OTHER PRACTICE MANAGEMENT SERVICES The Company will provide other practice management services to the Affiliated Practices, including staffing, general business and professional dental education and training to affiliated dentists, dental hygenists and office staff, employee benefits administration, advertising and other marketing support and, where permitted by applicable law, dentist recruiting. This management and administrative support should substantially reduce the amount of time affiliated dentists are required to spend on administrative matters and enable them to dedicate more time and effort toward the growth of their professional practices. In addition, the Company expects to be able to negotiate, on behalf of Affiliated Practices, discounts on, among other things, dental and office supplies, health and malpractice insurance and equipment. The Company does not currently intend to enter into any agreements with third-party payors. In certain markets, the Company may assist Affiliated Practices in securing reimbursement contracts from third-party payors. In those situations, the Company's role will be to negotiate and administer the contracts on behalf of the Affiliated Practices. 31 LOCATIONS Upon consummation of the Affiliations, the Company will provide management services to the Founding Affiliated Practices, with offices in the following states:
NUMBER OF ------------------------------- STATE OFFICES DENTISTS CITIES - ------------------------------------------------------------------- --------- --------- --------- Alaska............................................................. 1 1 1 Arizona............................................................ 6 7 4 California......................................................... 1 1 1 Colorado........................................................... 4 6 4 Florida............................................................ 3 3 2 Louisiana.......................................................... 1 1 1 Maine.............................................................. 1 1 1 Maryland........................................................... 1 1 1 Massachusetts...................................................... 1 2 1 Michigan........................................................... 1 1 1 Nebraska........................................................... 2 2 1 New Mexico......................................................... 1 2 1 New York........................................................... 4 4 3 North Dakota....................................................... 1 1 1 Oregon............................................................. 1 1 1 Texas.............................................................. 31 40 12 Washington......................................................... 2 2 2 Wisconsin.......................................................... 1 1 1 --------- --------- --------- Totals........................................................... 63 77 39 --------- --------- --------- --------- --------- ---------
All office facilities are leased, in some cases from the owner of the Affiliated Practice using the facility. Pursuant to its Service Agreements, the Company will provide all the office facilities (which it intends to lease), dental equipment and furnishings to the Affiliated Practices. SUMMARY OF TERMS OF AFFILIATIONS The aggregate consideration that will be paid by Pentegra to the promoters consists of (i) approximately $6.4 million in cash and (ii) shares of Common Stock having a value of approximately $26.3 million, based on the initial public offering price (2,922,549 shares of Common Stock, based on an assumed initial public offering price of $9.00 per share). The number of shares to be issued in connection with the Affiliations will decrease if the initial public offering price is higher, and will increase if the initial public offering price is lower, than $9.00 per share. For example, an aggregate of 2,768,734 shares of Common Stock would be issued to the dentist-owners of the Founding Affiliated Practices (all of whom are promoters of the Company) if that price is $9.50 per share, while an aggregate of 3,094,468 shares of Common Stock would be issued to those persons if that price is $8.50 per share. The Company will also assume certain indebtedness of the Founding Affiliated Practices of approximately $2.6 million. Pentegra will acquire substantially all the assets necessary to operate the business of each of the Founding Affiliated Practices, except as limited by applicable restrictions on the corporate practice of dentistry. See Note 4 of Notes to the Pentegra Dental Group, Inc. Financial Statements and "--Government Regulation." The assets to be acquired include furniture, fixtures, computer equipment, dental chairs, lights, autoclaves, mixers, vacuum and suction systems, cabinets, hand instruments and hand pieces of each Founding Affiliated Practice. Pentegra will also acquire the intangible assets of each Founding Affiliated Practice and will employ the non-professional staff of each Founding Affiliated Practice. Prior to consummation of the Offering, each dentist-owner who owns a Founding Affiliated Practice will form a new professional corporation or association that will (i) employ the dentists-owner and all other dentists working at the 32 Founding Affiliated Practice and (ii) be a party to a Service Agreement to whom the Company will provide services thereunder. The Company will own no interest in those professional corporations or associations. In the event of a breach of the Service Agreement by an Affiliated Practice, the Company will have the right to designate a dentist to purchase the ownership interests of the applicable professional corporation or association. The consideration being paid by Pentegra for each Founding Affiliated Practice was determined by negotiations between executive officers of Pentegra not affiliated with any Founding Affiliated Practice and a representative of that Founding Affiliated Practice. Pentegra used valuation methods to negotiate the consideration being paid to each of the Founding Affiliated Practices, including the respective practices wholly owned by Drs. Reed, Andress, Clarke, Greder, Kay and Yaros, which methods were based upon the Founding Affiliated Practice's gross revenue, net of certain operating expenses, and the Company's assessment of growth potential. The closing of each Affiliation is subject to customary conditions. These conditions include, among others, the accuracy, on the closing date of the Affiliations, of the representations and warranties made by the Founding Affiliated Practices and their stockholders and by the Company; the performance of each of their respective covenants included in the agreements relating to the Affiliations; and the absence of any material adverse change in the results of operations, financial condition or business of each Founding Affiliated Practice. Any Founding Affiliated Practice's acquisition agreement may be terminated, under certain circumstances, prior to the closing of the Offering: (i) by the mutual consent of Pentegra and the Founding Affiliated Practice; (ii) if the Offering and the acquisition of that Founding Affiliated Practice are not closed by March 31, 1998; or (iii) by the Founding Affiliated Practice or Pentegra if a material breach or default is made by the other party in the observance or in the due and timely performance of any of the covenants, agreements or conditions contained in the acquisition agreement. SERVICE AGREEMENTS Upon consummation of the Affiliations, the Company will enter into a Service Agreement with each Founding Affiliated Practice under which the Company will become the exclusive manager and administrator of non-dental services relating to the operation of the Founding Affiliated Practices. The following is intended to be a brief summary of the typical form of Service Agreement the Company will enter into with each Founding Affiliated Practice. The Company expects to enter into similar agreements with Affiliated Practices in the future. The actual terms of the various Service Agreements vary from the description below on a case-by-case basis, depending on negotiations with the individual Founding Affiliated Practices and the requirements of applicable law and governmental regulations. The Service Fees payable under the Service Agreements to the Company by the professional corporations or associations to be formed by the dentist-owners of the Founding Affiliated Practices were determined in arm's-length negotiations among the parties. Those Affiliated Practices that have revenues greater than the average amount of revenues generated by the Affiliated Practices will typically require more administrative and other services from the Company than those Affiliated Practices with lower than average revenues. Such fees, together with reimbursement for operating and non-operating expenses of each Affiliated Practice to be paid by the Company pursuant to the Service Agreements, are payable monthly and consist of various combinations of the following: (i) a percentage (ranging from 30% to 40%) of the Affiliated Practice's revenues related to dental services less operating expenses associated with the operation of the Affiliated Practice; (ii) a percentage (16%) of the Affiliated Practice's dental service revenues, not to exceed a percentage (35%) of the difference between those revenues and operating expenses associated with the operation of the Affililated Practice; or (iii) the greater of (a) a percentage (not to exceed 35%) of the Affiliated Practice's revenues related to dental services less operating expenses associated with the operation of the Affiliated Practice or (b) a specified fixed fee. In addition, with respect 33 to four of the Founding Affiliated Practices, the Service Fees are based on fixed fees that are subject to renegotiation on an annual basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Planned Operations." Pursuant to each Service Agreement, the Company will, among other things, (i) act as the exclusive manager and administrator of non-dental services relating to the operation of the Founding Affiliated Practice, subject to certain matters reserved to the Founding Affiliated Practice, (ii) administer the billing of patients, insurance companies and other third-party payors and collect on behalf of the Founding Affiliated Practice the fees for professional dental and other services and products rendered or sold by the Founding Affiliated Practice, (iii) provide, as necessary, clerical, accounting, payroll, legal, bookkeeping and computer services and personnel, information management, printing, postage and duplication services and transcribing services, (iv) supervise and maintain custody of substantially all files and records (other than patient records if prohibited by applicable law), (v) provide facilities, equipment and furnishings for the Founding Affiliated Practice, (vi) order and purchase inventory and supplies as reasonably requested by the Founding Affiliated Practice and (vii) implement, in consultation with the Founding Affiliated Practice, public relations or advertising programs. Pursuant to each Service Agreement, the respective Founding Affiliated Practice retains the decision-making power and responsibility for, among other things, (i) hiring, compensating and supervising dentist-employees and other licensed dental professionals, (ii) ensuring that dentists have the required licenses, credentials, approvals and other certifications appropriate for the performance of their duties and (iii) complying with federal and state laws, regulations and ethical standards applicable to the practice of dentistry. In addition, the Founding Affiliated Practice will be exclusively in control of all aspects of the practice of dentistry and the provision of dental services. Each Service Agreement is for an initial term of 40 years, with automatic extensions (unless specified notice is given) of five years. The Service Agreement may be terminated by either party if the other party (i) files a petition in bankruptcy or other similar events occur or (ii) defaults on the performance of a material duty or obligation, which default continues for a specified term after notice. In addition, the Service Agreement may be terminated by the Company (i) if the Founding Affiliated Practice or a dental employee engages in conduct for which the dental employee's license to practice dentistry is revoked or suspended or is the subject of any restrictions or limitations by any governmental authority to such an extent that he, she or it cannot engage in the practice of dentistry or (ii) upon a breach by the dentist of the employment agreement between the Founding Affiliated Practice and the dentist. The Service Agreement requires the Founding Affiliated Practice to enforce the employment agreements between the Founding Affiliated Practice and the dentists associated with the Founding Affiliated Practice (the "Dentist Employment Agreements"). If the Founding Affiliated Practice does not enforce such employment agreement, the Company may, at its option, require the Founding Affiliated Practice to either assign (i) such employment agreement or (ii) the rights to enforce the covenant not to compete set forth therein to the Company or its designee. The Founding Affiliated Practice is responsible for obtaining professional liability insurance for the employees of the Founding Affiliated Practice and the Company is responsible for obtaining general liability and property insurance for the Founding Affiliated Practice. Upon termination of a Service Agreement, the Founding Affiliated Practice has the option to purchase and assume, and the Company has the option to require the Founding Affiliated Practice to purchase and assume, the assets and liabilities related to the Founding Affiliated Practice at the fair market value thereof, except in certain circumstances where the Founding Affiliated Practice or the Company, as applicable, was in breach of the Service Agreement. 34 DENTIST AGREEMENT Each dentist who has an ownership interest in a Founding Affiliated Practice will enter 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 Founding Affiliated Practice) of the Founding 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 Founding Affiliated Practice, the dentist agreement provides that the Company may, at its option, require the Founding Affiliated Practice to convey its patient records and the capital stock of the Founding 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. DENTIST EMPLOYMENT AGREEMENTS Upon consummation of the Affiliations, each Founding Affiliated Practice will be a party to a Dentist Employment Agreement with each dentist owner, including the dentist who owns such Founding Affiliated Practice. The Dentist Employment Agreements with dentists who will receive cash or Common Stock in the Affiliations are for an initial term of five years and continue thereafter on a year-to-year basis until terminated under the terms of the agreements. The Dentist Employment Agreements provide that the employee dentist will not compete with the Affiliated Practice during the term of the agreement and following the termination of the agreement for a term of two years in a specified geographical area. If employment of a dentist is terminated during the initial five-year term without the consent of Pentegra for any reason other than the dentist's death or disability or the occurrence of certain events outside the dentist's control, an event of default will occur under the Service Agreement. In certain jurisdictions a covenant not to compete may not be enforceable under certain circumstances. See "Risk Factors-- Reliance on Affiliated Practices and Dentists." COMPETITION The Company anticipates facing substantial competition from other companies to establish affiliations with additional dental practices. The Company is aware of several publicly traded dental practice management companies that have operations in jurisdictions where one or more Founding Affiliated Practices conduct business (including Apple Orthodontix, Inc., Birner Dental Management Services, Inc., Castle Dental Centers, Inc., Coast Dental Services, Inc., Dental Care Alliance, Inc., Gentle Dental Service Corp., Monarch Dental Corporation, OrthAlliance, Inc. and Orthodontic Centers of America, Inc.) and several companies pursuing similar strategies in other segments of the health care industry. Certain of these competitors have greater financial and other resources than the Company and have operations in areas where the Company may seek to expand in the future. Additional companies with similar objectives are expected to enter the Company's markets and compete with the Company. In addition, the business of providing dental services is highly competitive in each market in which the Company will operate. Each of the Founding Affiliated Practices faces local competition from other dentists, pedodontists and other providers of specialty dental services (such as periodontists, orthodontists and oral surgeons), some of whom have more established practices. There can be no assurance that the Company or the Affiliated Practices 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 or the Affiliated Practices. EMPLOYEES As of January 31, 1998, the Company employed three persons. Upon consummation of the Affiliations, the Company expects that it will have approximately 390 employees, of which approximately 15 will be employed at the Company's headquarters in Phoenix, Arizona or at the Company's regional office in 35 Houston, Texas, and approximately 375 will be employed at the locations of the Founding Affiliated Practices. None of the Company's employees is, or upon consummation of the Affiliations will be, represented by collective bargaining agreements. The Company considers its employee relations to be good. LITIGATION AND INSURANCE The Affiliated Practices provide dental services to the public and are exposed to the risk of professional liability and other claims. In recent years, dentists have become subject to an increasing number of lawsuits alleging malpractice and related legal theories. Some of these lawsuits involve large claims and significant defense costs. Any suits or claims involving the Company or dentists at the Affiliated Practices, if successful, could result in substantial damage awards to the claimants that may exceed the limits of any applicable insurance coverage. 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 to comply with all applicable regulations and legal requirements, and the Company maintains liability insurance for itself. 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. The Company is currently not a party to any claims, suits or complaints. The Company may become subject to certain pending claims (each of which is an ordinary routine proceeding incidental to the business of the applicable Founding Affiliated Practice) as the result of successor liability in connection with the Affiliations; however, it is management's opinion that the ultimate resolution of those claims will not have a material adverse effect on the financial position, operating results or cash flows of the Company. The Founding Affiliated Practices have maintained professional liability insurance coverage, generally on a claims-made basis. Such insurance provides coverage for claims asserted when the policy is in effect regardless of when the events that caused the claim occurred. The Company intends to acquire similar coverage after the closing of the Affiliations, since the Company, as a result of the Affiliations, will in some cases succeed to the liabilities of the Founding Affiliated Practices. Therefore, claims may be asserted against the Company after the closing of Affiliations for events that occurred prior to such closing. GOVERNMENT REGULATION The dental services industry is regulated extensively at both the state and federal levels. Regulatory oversight includes, but is not limited to, considerations 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. CORPORATE PRACTICE OF DENTISTRY AND FEE-SPLITTING RESTRICTIONS The laws of many states, including all of the states in which the Founding Affiliated Practices are located other than New Mexico and Wisconsin, 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 36 advertising or professional practice. The laws of many states, including all of the states in which the Founding Affiliated Practices are located other than Alaska, Maine, Massachusetts, New Mexico and Wisconsin, also prohibit dentists from sharing professional fees with non-dental entities. State dental boards do not generally interpret these prohibitions as preventing a non-dental entity from owning non-professional assets used by a dentist in a dental practice or providing management services to a dentist for a fee, provided certain conditions are met. The Company believes that its operations will not contravene any restriction on the corporate practice of dentistry. There can be no assurance, however, that a review of the Company's business relationships by courts or regulatory authorities will not result in determinations that could prohibit or otherwise adversely affect the operations of the Company or that the regulatory environment will not change, requiring the Company to reorganize or restrict its existing or future operations. The laws regarding fee-splitting and the corporate practice of dentistry and their interpretation are enforced by regulatory authorities with broad discretion. There can be no assurance that the legality of the Company's business or its 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. In many states in which the Founding Affiliated Practices are located, there is no case law or other authority interpreting the foregoing provisions. There are, however, interpretations in some states of analogous medical provisions. One recent example is in the State of Florida, where the Florida Board of Medicine recently considered the issue of whether a physician practice is permitted to enter into a management agreement pursuant to which the managing entity earns a management fee which includes a percentage of the practice's net income as consideration for providing certain management and operational services. The Florida Board of Medicine issued an opinion indicating that such a management agreement is prohibited by applicable fee-splitting statutes. However, that order has been stayed pending its appeal to the Florida courts. Although the Florida Board of Medicine's decision did not apply to dental practices, the court considering the appeal of the Board of Medicine's order could reach conclusions or make statements that affect the application of fee-splitting provisions applicable to dental management agreements. Pursuant to the terms of the Service Agreements, in the event such a Service Agreement were determined to be in violation of applicable law, the agreement would have to be amended in a manner that complies with applicable law and preserves, to the greatest extent possible, the economic interests of the parties thereto. FRAUD AND ABUSE LAWS AND RESTRICTIONS ON REFERRALS AND SELF-REFERRALS Many states in which the Founding Affiliated Practices are located, including California, Florida, Maine, Maryland, Michigan, New York, Texas and Washington, have fraud and abuse laws that, in many cases, apply to referrals for items or services reimbursable by any insurer, not just by Medicare and Medicaid. A number of states, including many of the states in which the Founding Affiliated Practices are located, also impose significant penalties for submitting false claims for dental services. In addition, most states in which the Founding Affiliated Practices are located, including Alaska, Arizona, California, Florida, Louisiana, Maine, Maryland, Michigan, New York, Texas and Washington, have laws prohibiting paying or receiving any remuneration, direct or indirect, that is intended to induce referrals for health care items or services, including dental items and services. Many states in which the Founding Affiliated Practices are located either prohibit or require disclosure of self-referral arrangements and impose penalties for the violation of these laws. Many states, including Alaska, Florida and Maine, limit the ability of a person other than a licensed dentist to own or control equipment or offices used in a dental practice. Some of these states allow leasing of equipment and office space to a dental practice under a bona fide lease, if the equipment and office remain under the control of the dentist. The Service Agreements that will be entered into by the Company with respect to Affiliated Practices in Florida and Maine will provide that equipment and offices owned or leased by the Company and used at an Affiliated Practice will remain under the exclusive control of the dentists employed by that Affiliated Practice. 37 Federal laws regulating the provision of dental care apply only to dental services which are reimbursed under the Medicare and Medicaid programs. Because none of the Founding Affiliated Practices receive any revenue under Medicare or Medicaid, the impact of these laws on the Company is anticipated to be negligible. There can be no assurance, however, that Affiliated Practices will not have patients in the future covered by these laws, or that the scope of these laws will not be expanded in the future, and if expanded, such laws or interpretations thereunder could have a material adverse effect on the Company. The federal fraud and abuse statute prohibits, subject to certain safe harbors, the payment, offer, solicitation or receipt of any form of remuneration in return for, or in order to induce: (i) the referral of a person for service, (ii) the furnishing or arranging to furnish items or services or (iii) the purchase, lease or order or the arrangement or recommendation of a purchase, lease or order of any item or service which is, in each case, reimbursable under Medicare or Medicaid. The statute reflects the federal government's policy of increased scrutiny of joint ventures and other transactions among healthcare providers in an effort to reduce potential fraud and abuse related to Medicare and Medicaid costs. Because dental services are covered under various government programs, including Medicare and Medicaid, this federal law applies to dentists and the provision of dental services under those programs. Significant prohibitions against dentist self-referrals for services covered by Medicare and Medicaid programs were enacted, subject to certain exceptions, by Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions, commonly known as Stark II, amended prior physician and dentist self-referral legislation known as Stark I (which applied only to clinical laboratory referrals) by dramatically enlarging the list of services and investment interests to which the self-referral prohibitions apply. Stark II prohibits a physician or dentist, or a member of his or her immediate family, from making referrals for certain "designated health services" to entities in which the physician or dentist has an ownership or investment interest, or with which the physician or dentist has a compensation arrangement. "Designated health services" include, among other things, clinical laboratory services, radiology and other diagnostic services, radiation therapy services, durable medical equipment, prosthetics, outpatient prescription drugs, home health services and inpatient and outpatient hospital services. Stark II prohibitions include referrals within the physician's or dentist's own group practice (unless such practice satisfies the "group practice" exception) and referrals in connection with the physician's or dentist's employment arrangements with the practice (unless the arrangement satisfies the employment exception). Stark II also prohibits billing the Medicare or Medicaid programs for services rendered following prohibited referrals. Noncompliance with, or violation of, Stark II can result in exclusion from the Medicare and Medicaid programs and civil and criminal penalties. The Company believes that its operations as presently conducted do not pose a material risk under Stark II, primarily because the Company does not provide "designated health services." Nevertheless, there can be no assurance that Stark II will not be interpreted or hereafter amended in a manner that has a material adverse effect on the Company's operations. OTHER FEDERAL REGULATIONS Federal regulations also allow state licensing boards to revoke or restrict a dentist's license in the event such dentist defaults in the payment of a government-guaranteed student loan, and further allow the Medicare program to offset such overdue loan payments against Medicare income due to the defaulting dentist's employer. The Company cannot assure compliance by dentists with the payment terms of their student loans, if any. The operations of the Affiliated Practices are also subject to compliance with regulations promulgated by the Occupational Safety and Health Administration ("OSHA"), relating to such matters as heat sterilization of dental instruments and the use of barrier techniques such as masks, goggles and gloves. 38 LICENSURE, ADVERTISING RESTRICTIONS AND LIMITATIONS ON DELEGATION The dentists associated with the Affiliated Practices must possess a license from the applicable state Board of Dental Examiners and a permit from the U.S. Drug Enforcement Agency. Some states prohibit the advertising of dental services under a trade or corporate name. Some states, including Texas, require all advertisements to be in the name of the dentist. A number of states also regulate the content of advertisements of dental services and the use of promotional gift items. In addition, many states impose limits on the tasks that may be delegated by dentists to hygienists and dental assistants. These laws and their interpretations vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. INSURANCE REGULATION There are certain state insurance regulatory risks associated with the Company's anticipated role in negotiating and administering managed care contracts on behalf of the Affiliated Practices. The application of state insurance laws to third-party payor arrangements, other than fee-for-service arrangements, is an unsettled area of law with little guidance available. State insurance laws are subject to broad interpretation by regulators and, in some states, state insurance regulators may determine that the Company or the Affiliated Practices are engaged in the business of insurance because of the capitation features (or similar features under which an Affiliated Practice assumes financial risk) that may be contained in managed care contracts. In the event that the Company or an Affiliated Practice is determined to be engaged in the business of insurance, the Company or the Affiliated Practice could be required to either seek licensure as an insurance company or change the form of its relationships with the third-party payors. There can be no assurance that the Company's operations would not be adversely affected if the Company or any of the Affiliated Practices were to become subject to state insurance regulations. HEALTH CARE REFORM The United States Congress has considered various types of health care reform, including comprehensive revisions to the current health care system. It is uncertain what legislative proposals, if any, will be adopted in the future or what actions federal or state legislatures or third-party payors may take in anticipation of or in response to any health care reform proposals or legislation. There can be no assurance that applicable federal or state laws and regulations will not change or be interpreted in the future either to restrict or adversely affect the Company's relationships with dentists or the operation of Affiliated Practices. 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS As required by the Company's Bylaws, after the closing of the Offering, a majority of the Company's Board of Directors will be dentists who are affiliated with Affiliated Practices. The following table sets forth certain information concerning the Company's directors, the nine persons nominated to become directors on the closing of the Offering and the executive officers of the Company (ages are as of February 20, 1997):
NAME AGE POSITION - --------------------------------------- --- ---------------------------------------------------------------- Omer K. Reed, D.D.S.................... 66 Chairman of the Board and Clinical Officer Gary S. Glatter........................ 44 President, Chief Executive Officer and Director Sam H. Carr(1)......................... 41 Senior Vice President, Chief Financial Officer and Director James L. Dunn, Jr.(2).................. 36 Senior Vice President, Chief Development Officer and Director John G. Thayer......................... 44 Senior Vice President and Chief Operating Officer Kimberlee K. Rozman.................... 37 Senior Vice President, General Counsel and Secretary Ronnie L. Andress, D.D.S.(1)........... 42 Director J. Michael Casas....................... 35 Director James H. Clarke, Jr., D.D.S.(1)........ 49 Director Ronald E. Geistfeld, D.D.S.(1)......... 64 Director Allen M. Gelwick(2).................... 38 Director Mack E. Greder, D.D.S.(1).............. 54 Director Roger Allen Kay, D.D.S.(1)............. 52 Director Gerald F. Mahoney(1)................... 54 Director Anthony P. Maris(1).................... 64 Director George M. Siegel....................... 60 Director Ronald M. Yaros, D.D.S.(1)............. 51 Director
- --------- (1) Appointment as a director will become effective upon the closing of the Offering. (2) Each of Mr. Dunn and Mr. Gelwick intends to resign as a director upon the closing of the Offering. OMER K. REED, D.D.S. has served as the Company's Chairman of the Board and Clinical Officer since May 1997. He founded Pentegra, Ltd. in 1988 and Napili in 1963, and is a practicing dentist with one of the Founding Affiliated Practices. Since inception, Pentegra, Ltd. and Napili have provided comprehensive management and consulting services to dental practices around the nation. In 1965, Dr. Reed founded the CeramDent Laboratory and he has maintained a private dental practice in Phoenix since 1959. He has held associate professorships in the Departments of Ecological Dentistry at the University of North Carolina, Chapel Hill (1978-1988) and the University of Minnesota (1982-1991), and has lectured extensively around the world on various subjects related to the practice of dentistry. Dr. Reed also serves on the Board of Directors of Century Companies of America, CUNA Mutual Insurance Group and the American Volunteer Medical Team. Pursuant to the terms of his employment agreement with the Company, the Company has undertaken to use its best efforts to elect Dr. Reed as a director of the Company. GARY S. GLATTER has served as the Company's President, Chief Executive Officer and a Director since May 1997. From January 1994 to March 1997, he was President and Chief Operating Officer of H.E.R.C. Products Incorporated, a public company engaged in manufacturing and selling chemical rehabilitation products for water distribution systems. From 1989 until 1993, Mr. Glatter served as President and Chief Executive Officer of Classic Properties, a New York-based real estate company. Pursuant to the terms of his employment agreement with the Company, the Company has undertaken to use its best efforts to elect Mr. Glatter as a director of the Company. 40 SAM H. CARR has served as the Company's Senior Vice President and Chief Financial Officer since September 1997. From September 1996 until August of 1997, Mr. Carr served as Vice President--Finance and Corporate Development of Ankle & Foot Centers of America, LLP, a podiatry practice management company. From February 1995 until July 1996, Mr. Carr was a Senior Manager with Arthur Andersen LLP. Prior thereto, Mr. Carr was Chief Financial Officer of Columbia/HCA's Bellaire Hospital in Houston, Texas from January 1994 until January 1995, and Vice President of Finance of St. Vincent Hospital in Santa Fe, New Mexico from 1990 until 1994. From 1978 to 1990, Mr. Carr was an accountant with Arthur Andersen L.L.P. Mr. Carr is a certified public accountant. Pursuant to the terms of his employment agreement with the Company, the Company has undertaken to use its best efforts to elect Mr. Carr as a director of the Company. JAMES L. DUNN, JR. has served as the Company's Senior Vice President and Chief Development Officer since July 1997 and as a Director since March 1997. Since 1987, Mr. Dunn has been an attorney practicing as a sole practitioner in Houston, Texas. His legal practice is focused on providing services to members of the dental community. He has been actively involved in the valuation and sale of dental practices over the past five years. In 1995, Mr. Dunn was appointed to the Texas Medical Disclosure Panel, the body that determines which dental procedures require informed consent. Mr. Dunn is a member of the American Society of Pension Actuaries and is a certified public accountant. JOHN G. THAYER has served as the Company's Senior Vice President and Chief Operating Officer since March 1997. Prior thereto, Mr. Thayer was Managing General Partner of England and Company, a public accounting firm he co-founded in 1983, which provides accounting and practice management counseling to health care professionals in the Texas Gulf Coast area. In 1994, he co-founded Medtek Management, Inc., a privately held management information company specializing in the data processing needs of health care professionals. KIMBERLEE K. ROZMAN has served as the Company's Senior Vice President, General Counsel and Secretary since July 1997. Prior thereto, she served as Vice President, Senior Counsel (January to July 1997) and Associate General Counsel (1996) of Physicians Resource Group, Inc., a public company engaged in providing ophthalmic practice management services. From 1990 to 1996, Ms. Rozman was an associate with the law firm of Jackson Walker L.L.P. RONNIE L. ANDRESS, D.D.S. has been engaged in the private practice of dentistry in Freeport, Texas since 1995 and is President of Ronnie L. Andress, D.D.S., Inc., one of the Founding Affiliated Practices. Prior to 1995, Dr. Andress was engaged in the private practice of dentistry in Houston, Texas for over 12 years. J. MICHAEL CASAS has been the President of Gustavia Investments, L.L.C. (a newly organized venture capital firm) since October 1997. Prior thereto, he served as a Vice President of Physicians Resource Group, Inc. from June 1995 to October 1997. From October 1991 to June 1995, Mr. Casas served as Administrator of Texas Eye Institute Assoc., a comprehensive eye care provider in the greater Houston, Texas area. JAMES H. CLARKE, JR., D.D.S. has been engaged in the private practice of dentistry in Houston, Texas since 1974 and is President of James H. Clark, Jr., D.D.S., Inc., one of the Founding Affiliated Practices. RONALD E. GEISTFELD, D.D.S. is Professor Emeritus at the University of Minnesota School of Dentistry, where he has taught since 1982. Dr. Geistfeld also maintained a part-time dental practice in Minnesota from 1973 to 1992. He is a member of the Minnesota Dental Association, the Minneapolis District Dental Society, the American College of Dentists, the Academy of Operative Dentistry, the Minnesota Academy of Restorative Dentistry and the Minnesota Academy for Gnathological Research. ALLEN M. GELWICK has served as a Senior Vice President of Alexander & Alexander, an insurance brokerage firm, since 1995 and was previously a member of Alexander & Alexander's Chairman's Council. From 1992 until 1994, he served as Senior Vice President for Minet Insurance Services. Prior thereto, Mr. Gelwick served as Senior Vice President for Frank B. Hall & Co. and was an underwriter for Chubb Insurance. 41 MACK E. GREDER, D.D.S. has been engaged in the private practice of dentistry in Omaha, Nebraska since 1970 and is President of Mack E. Greder, D.D.S., P.C., one of the Founding Affiliated Practices. ROGER ALLEN KAY, D.D.S. has been engaged in the private practice of dentistry in Farmington and Livermore Falls, Maine since 1972 and is President of Roger Allen Kay, D.D.S., P.A., one of the Founding Affiliated Practices. He is a member of the Maine Dental Association, the American Dental Association, the Academy of General Dentistry and the American Society of Dentistry for Children. GERALD F. MAHONEY has been Chairman of the Board and Chief Executive Officer of Mail-Well, Inc., a public company engaged in printing and envelope manufacturing with over 50 printing offices throughout the United States, since 1994. Prior thereto, he served as Chairman of the Board, President and Chief Executive Officer of Pavey Envelope beginning in 1991. Mr. Mahoney is a certified public accountant. ANTHONY P. MARIS is a consultant to health care businesses. From 1987 to 1996, Mr. Maris was a Director, Vice President, Chief Financial Officer and Treasurer of Roberts Pharmaceutical Corporation, a public company engaged in pharmaceuticals manufacturing. Prior thereto, Mr. Maris was a Director and Chief Financial Officer of Hoffmann--La Roche Inc., a pharmaceutical manufacturer. GEORGE M. SIEGEL was President and Chief Executive Officer of Parcelway Courier Systems, Inc., a publicly traded messenger and courier business with operations throughout North America, from 1990 to 1997. In 1993, Mr. Siegel co-founded U.S. Delivery Systems, a public company engaged in consolidating local messenger and delivery companies. Prior thereto, Mr. Siegel founded and was the President and Chief Executive Officer of U.S. Messenger & Delivery Service and Direct Dispatch Corporation, two messenger and courier service companies that he sold to Mayne Nickless Courier System, Inc. RONALD M. YAROS, D.D.S. has been engaged in the private practice of dentistry in Aurora, Colorado since 1973 and is President of Ronald M. Yaros, D.D.S., P.C., one of the Founding Affiliated Practices. He is a member of the American Dental Association, the Colorado Dental Association, the Metro Denver Dental Society and the Academy of General Dentistry. BOARD OF DIRECTORS The Board of Directors will be divided into three classes with at least four directors in each class, with the term of one class expiring at the annual meeting of stockholders in each year, commencing in 1998. At each annual meeting of stockholders, directors of the class the term of which then expires will be elected by the holders of the Common Stock to succeed those directors whose terms are expiring. The first class, whose term of office will expire at the first annual meeting of stockholders in 1998, is comprised of Drs. Andress, Geistfeld and Kay, and Mr. Casas; the second class, whose term will expire one year thereafter, is comprised of Drs. Clarke, Greder and Yaros and Mr. Carr; and the third class, whose term will expire two years thereafter, is comprised of Dr. Reed and Messrs. Glatter, Mahoney, Maris and Siegel. The Company's Bylaws provide that a majority of the members of the Board of Directors must be licensed to practice dentistry and affiliated with one of the Affiliated Practices. See "Risk Factors--Board Composition" and "--Certain Anti-takeover Provisions." On closing of the Offering, there will be three committees of the Board: Audit, Compensation and Executive. The initial members of the Audit Committee will be Messrs. Maris and Mahoney. The initial members of the Compensation Committee will be Messrs. Maris, Siegel and Casas. The initial members of the Executive Committee will be Dr. Reed and Messrs. Glatter and Siegel. The members of the Audit and Compensation Committees will not be employees of the Company. Directors who are employees of the Company or a Founding Affiliated Practice do not receive additional compensation for serving as directors. Each director who is not an employee of the Company or a Founding Affiliated Practice will receive a fee of $1,500 for attendance at each Board of Directors meeting and $750 for each committee meeting (unless held on the same day as a Board of Directors meeting), and an initial grant of nonqualified options to purchase 10,000 shares of Common Stock (except 42 with respect to Messrs. Casas and Siegel, who have waived their right to receive those options). Directors who are not employees of the Company will also receive annual grants of nonqualified options to purchase 5,000 shares on the first business day of the month following the date on which each annual meeting of the Company's stockholders is held. See "--1997 Stock Compensation Plan." All directors of the Company are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof, and for other expenses incurred in their capacity as directors of the Company. EXECUTIVE COMPENSATION Pentegra has conducted no operations to date other than in connection with the Offering and the Affiliations. The Company anticipates that during 1998 its most highly compensated executive officers will be Dr. Reed and Messrs. Glatter, Carr, Dunn and Thayer (the "Named Executive Officers"), each of whom has entered or will enter into an employment agreement providing for an annual salary of $87,500, $175,000, $175,000, $125,000 and $125,000, respectively. See "--Employment Agreements." In addition to base salary, Messrs. Glatter, Carr, Dunn and Thayer through their employment agreements are eligible for certain bonuses described under "--Employment Agreements" and performance bonuses based on the achievement of specific financial targets of the Company. Performance bonuses will not exceed 25% of base salary for each of those officers, except Mr. Glatter (whose bonus will not exceed 50% of his base salary). In September 1997, the Company granted options to purchase 333,333 shares, 66,667 shares, 33,333 shares and 33,333 shares of Common Stock to Messrs. Glatter, Carr, Dunn and Thayer, respectively, under the Company's 1997 Stock Compensation Plan, exercisable at the initial public offering price per share set forth on the cover page of this Prospectus. Of the options granted to Mr. Glatter, options to acquire 166,667 shares vest on the first anniversary of the date of this Prospectus, options to acquire 66,667 shares vest on each of the second and third anniversaries of the date of this Prospectus, and options to acquire 33,333 shares vest on the fourth anniversary of the date of this Prospectus. The options granted to Messrs. Carr, Dunn and Thayer vest annually in 20% increments beginning on the first anniversary of the date of this Prospectus. See "--1997 Stock Compensation Plan." EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Dr. Reed, Messrs. Glatter, Carr, Dunn and Thayer and Ms. Rozman. These agreements, which will be effective on the closing of the Affiliations and the Offering, have been filed as exhibits to the Registration Statement of which this Prospectus is a part. Each of these agreements provides for an annual base salary in an amount not less than the initial specified amount and entitles the employee to participate in all the Company's compensation plans in which other executive officers of the Company participate. Dr. Reed's employment agreement provides that he will serve as the Company's clinical officer and has a three-year term commencing on completion of the Offering. Dr. Reed's base salary under the employment agreement will be $87,500 per year, or as increased from time to time by the Board of Directors, and provides for bonus payments aggregating $1,250,000 payable by the Company in installments of $10,000 on closing of each future dental practice affiliation subsequent to the Offering until the bonus has been paid in full, provided that the bonus must be paid in full by the third anniversary of the date of this Prospectus. Mr. Glatter's employment agreement provides that he will serve as the Company's chief executive officer and president and has at least a four-year term commencing on July 1, 1997. Mr. Glatter's base salary under the employment agreement will be as follows: (i) $175,000 per year for the period from July 1, 1997 through June 30, 1998, (ii) $200,000 per year for the period from July 1, 1998 through June 30, 1999, (iii) $225,000 per year for the period from July 1, 1999 through June 30, 2000 and (iv) $250,000 per year from July 1, 2000 thereafter or as increased from time-to-time by the Board of Directors. Each of the agreements for Messrs. Carr, Dunn and Thayer and Ms. Rozman has a continuous five-year term with an annual base salary of $175,000 for Mr. Carr and of $125,000 for each of the other officers, and is subject to the right of the Company to terminate the 43 employee's employment at any time. Mr. Glatter is eligible to receive an annual cash bonus in an amount equal to 10%, 20%, 30%, 40% or 50% of his base salary in the event that the Company experiences from 20% to 22.5%, 22.5% to 25%, 25% to 27.5%, 27.5% to 30% or greater than 30%, respectively, growth in earnings per share on a year-to-year basis (calculated on a pro forma basis for the calendar year prior to the Company's first year of operations). For purposes of determining the applicable year's earnings per share change, the cash bonuses payable to Mr. Glatter and under all other employment agreements between the Company and its officers will be taken into account. Each of the other named officers (except Dr. Reed and Mr. Glatter) is eligible to receive an annual cash bonus in an amount equal to 5%, 10%, 15%, 20% or 25% of his or her base salary in the event that the Company experiences 20% to 22.5%, 22.5% to 25%, 25% to 27.5%, 27.5% to 30% or greater than 30%, respectively, growth in earnings per share on a year-to-year basis (calculated on a pro forma basis for the calendar year prior to the Company's first fiscal year of operations). For purposes of determining the applicable year's earnings per share change, the cash bonuses payable to the officer and under all other employment agreements between the Company and its officers will be taken into account. If the employee's employment is terminated by the Company without cause (as defined), Messrs. Carr, Dunn and Thayer and Ms. Rozman will be entitled to a payment equal to either 12 months' or six months' salary depending on whether such employee has relocated to Phoenix, Arizona, and Dr. Reed and Mr. Glatter will be entitled to a payment equal to the salary payable over the remaining term of their respective employment agreements. Mr. Thayer will also receive a $25,000 bonus on the closing of the Offering and a $25,000 bonus on the first anniversary of that closing. Mr. Carr will also receive compensation on the closing of the Offering equal to $4,583 multipled by the number of months in the period beginning on September 1, 1997 and ending on the closing of the Offering. Each of the foregoing agreements also contains a covenant limiting competition with the Company for one year following termination of employment. Each Founding Affiliated Practice will enter into an employment agreement with its dentist employees. See "Business--Dentist Employment Agreements." 1997 STOCK COMPENSATION PLAN In August 1997, the Board of Directors adopted, and the stockholders of the Company approved, the 1997 Stock Compensation Plan. The purpose of the 1997 Stock Compensation Plan is to provide the Company's employees, non-employee directors and advisors and employees and directors of Affiliated Practices with additional incentives by increasing their proprietary interest in the Company. The aggregate number of shares of Common Stock with respect to which options and awards may be granted under the 1997 Stock Compensation Plan may not exceed 2,000,000 shares. The 1997 Stock Compensation Plan provides for the grant of incentive stock options ("ISOs"), as defined in Section 422 of the Code, nonqualified stock options (collectively with ISOs, "Options") and restricted stock awards ("Awards"). Following the consummation of the Offering, the 1997 Stock Compensation Plan will be administered by the Compensation Committee of the Board of Directors, which will be comprised of not less than two members of the Board of Directors (the "Committee"). Prior to the consummation of the Offering, the 1997 Stock Compensation Plan had been administered by the Company's full Board of Directors. The Committee has, subject to the terms of the 1997 Stock Compensation Plan, the sole authority to grant Options and Awards under the 1997 Stock Compensation Plan, to interpret the 1997 Stock Compensation Plan and to make all other determinations necessary or advisable for the administration of the 1997 Stock Compensation Plan. All of the Company's employees, non-employee directors and advisors and employees and directors of Affiliated Practices are eligible to receive nonqualified stock options and Awards under the 1997 Stock Compensation Plan, but only employees of the Company are eligible to receive ISOs. Options will be exercisable during the period specified in each option agreement and will generally be exercisable in 44 installments pursuant to a vesting schedule to be designated by the Committee. Notwithstanding the provisions of any option agreement, options will become immediately exercisable in the event of certain events including certain merger or consolidation transactions and changes in control of the Company. No Option will remain exercisable later than ten years after the date of grant (or five years from the date of grant in the case of ISOs granted to holders of more than 10% of the outstanding Common Stock). An Award grants the recipient the right to receive a specified number of shares of Common Stock, which shall become vested over a period of time, not exceeding 10 years, specified by the Committee. Restricted stock transferred to a recipient shall be forfeited upon the termination of the recipient's employment or service other than for death, permanent disability or retirement unless the Committee, in its sole discretion, waives the restrictions for all or any part of an Award. The exercise price for ISOs granted under the 1997 Stock Compensation Plan may be no less than the fair market value of the Common Stock on the date of grant (or 110% of the fair market value in the case of ISOs granted to employees owning more than 10% of the Common Stock). The exercise price for nonqualified options granted under the 1997 Stock Compensation Plan may not be less than the fair market value of the Common Stock on the date of grant. Payment upon exercise of an Option may be made in cash or by check, by means of a "cashless exercise" involving the sale of shares by, or a loan from, a broker, or, in the discretion of the Committee, by delivery of shares of Common Stock, by payment of the par value of the shares subject to the Option plus a promissory note for the balance of the exercise price or in any other form of valid consideration permitted by the Committee. There are generally no federal income tax consequences upon the grant of an Option under the 1997 Stock Compensation Plan. Upon exercise of a nonqualified option, the optionee generally will recognize ordinary income in the amount equal to the difference between the fair market value of the shares at the time of exercise and the exercise price, and the Company is generally entitled to a corresponding deduction. When an optionee sells shares issued upon the exercise of a nonqualified stock option, the optionee realizes short-term, mid-term or long-term capital gain or loss, depending on the length of the holding period. If the optionee holds the shares for more than 18 months, the capital gain or loss will be long-term capital gain or loss. If the optionee holds the shares for more than one year but not more than 18 months, the capital gain or loss will be mid-term capital gain or loss. Otherwise, the capital gain or loss will be short-term capital gain or loss. The Company is not entitled to any deduction in connection with such sale. An optionee will not be subject to federal income taxation upon the exercise of ISOs granted under the 1997 Stock Compensation Plan, and the Company will not be entitled to a federal income tax deduction by reason of such exercise. A sale of shares of Common Stock acquired upon exercise of an ISO that does not occur within one year after the date of exercise or within two years after the date of grant of the option generally will result in the recognition of long-term or mid-term capital gain or loss by the optionee in an amount equal to the difference between the amount realized on the sale and the exercise price, and the Company is not entitled to any deduction in connection therewith. If a sale of shares of Common Stock acquired upon exercise of an ISO occurs within one year from the date of exercise of the option or within two years from the date of the option grant (a "disqualifying disposition"), the optionee generally will recognize ordinary income equal to the lesser of (i) the excess of the fair market value of the shares on the date of exercise of the options over the exercise price or (ii) the excess of the amount realized on the sale of the shares over the exercise price. Any amount realized on a disqualifying disposition in excess of the amount treated as ordinary income will be long-term or short-term capital gain, depending upon the length of time the shares were held. The Company generally will be entitled to a tax deduction on a disqualifying disposition corresponding to the ordinary income recognized by the optionee. For alternative minimum tax purposes, the difference between the fair market value, on the date of exercise, of Common Stock purchased upon the exercise of an ISO, and the exercise price increases 45 alternative minimum taxable income. Additional rules apply if an optionee makes a disqualifying disposition of the Common Stock. There are generally no federal income tax consequences upon the grant of an Award, except as described below regarding a section 83(b) election. Upon the expiration of the restrictions on shares of Common Stock subject to an Award, except as provided in the next sentence, the recipient of the Award will recognize taxable ordinary income equal to the fair market value of the shares at the time of such expiration. If the recipient of an Award elects, pursuant to section 83(b) of the Code, within 30 days of the date shares of restricted stock are considered transferred to the recipient, to recognize taxable ordinary income at the time of the transfer in an amount equal to the fair market value of such shares, no additional income will be recognized upon the lapse of the restrictions on the shares and no deduction will be allowed to the recipient if the shares are subsequently forfeited. A recipient who makes such an election under section 83(b) is required to give notice of such election to the Company immediately after making the election, and the Company will be entitled to a deduction equal to the amount of income recognized by the recipient. For capital gain purposes, the recipient's holding period for the shares received will begin at the time taxable income is recognized under these rules and his or her basis in the shares will be the amount of ordinary income recognized. The Company anticipates that upon the consummation of the Offering it will have (i) outstanding options to purchase a total of 671,667 shares of Common Stock under the 1997 Stock Compensation Plan and (ii) 1,328,333 additional shares available for future awards under the 1997 Stock Compensation Plan. 46 CERTAIN TRANSACTIONS ORGANIZATION OF THE COMPANY In connection with the formation of the Company, in February 1997, PII issued common stock to J. Michael Casas (200,000 shares), James L. Dunn, Jr. (100,000 shares), John G. Thayer (66,667 shares) and Allen M. Gelwick (66,667 shares), at a purchase price per share of $0.015. In May 1997, PII issued Class B Preferred to J. Michael Casas (66,667 shares) and James L. Dunn, Jr. (33,334 shares), at a purchase price per share of $0.01. In May 1997, PII issued Common Stock to George M. Siegel (300,000 shares), Dr. Reed (150,000 shares), Gary S. Glatter (100,000 shares), Kelly W. Reed (150,000 shares), Stephen E. Stapleton (33,333 shares) and Kimberlee K. Rozman (33,333 shares), at a purchase price per share of $0.015. In September 1997 and October 1997, PII repurchased 46,667 shares and 20,000 shares, respectively, of its common stock from George M. Siegel at a purchase price per share of $0.015. In September 1997, the Company issued 66,667 shares of common stock to Sam H. Carr at a purchase price per share of $0.015. In connection with the raising of $1,450,000 by PII in order to fund a portion of the expenses for the Offering and the Affiliations, in June 1997, PII issued capital stock to Dr. Reed (37,500 shares of Class B Preferred and 7,500 shares of common stock), Gary S. Glatter (37,500 shares of Class B Preferred and 7,500 shares of common stock), George M. Siegel (37,500 of Class B Preferred and 7,500 shares of common stock), Mack E. Greder, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Roger Allen Kay, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Bruce A. Kanehl, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Brian K. Kniff, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Richard W. Mains, Jr., D.M.D., RBM Trust (25,000 shares of Class B Preferred and 5,000 shares of common stock), James W. Medlock, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Thomas L. Mullooly, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Richard H. Fettig, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Marvin V. Cavallino, D.D.S. (50,000 shares of Class B Preferred and 10,000 shares of common stock), Alan H. Gerbholz, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Victor H. Burdick, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), Steve Anderson, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock) and James P. Allen, D.D.S. (25,000 shares of Class B Preferred and 5,000 shares of common stock), at a purchase price per share of $1.00 for the Class B Preferred and of $0.015 for the common stock. In September 1997, (i) each owner of shares of common stock of PII agreed to exchange those shares for shares of Common Stock on a one-for-one basis and (ii) each of Dr. Reed and Messrs. Glatter, Dunn, Casas and Siegel agreed to sell to PII all shares of Class B Preferred he owns at a price per share equal to the subscription price he paid to PII for those shares, which transactions will occur concurrently with the closing of the Offering and the Affiliations. In addition, immediately after the completion of the repurchases described in the foregoing sentence, all outstanding shares of Class A Preferred and Class B Preferred will be redeemed by PII at a redemption price, as established by resolution of the board of directors of PII, of $1.50 per share, of which $1.15 per share will be paid in cash from the proceeds of the Offering and $0.35 per share will be paid in the form of a 6.0% promissory note that becomes due and payable by the Company on the earlier of the fifth anniversary of the date of the closing of the Offering or the date on which the Company offers and sells an amount of equity securities for gross proceeds equal to or greater than the gross proceeds from the Offering. In December 1997, the owners of the outstanding shares of common stock of PII agreed that, in the event the initial public offering price is less than $12.04 per share, PII will repurchase from those stockholders, on a pro rata basis, at a purchase price of $.015 per share, that number of shares as will be necessary so that the aggregate number of shares of Common Stock issuable in connection with the Affiliations and the Share Exchange will not exceed 3,941,898 shares. Pursuant to that agreement, 47 assuming an initial public offering price of $9.00 per share, PII would repurchase approximately 42.0% of each such stockholder's shares of PII common stock, or an aggregate of 737,318 shares. The Company has entered into an agreement with Pentegra, Ltd., Napili and Dr. Reed to purchase substantially all of the tangible and intangible assets of Pentegra, Ltd. and Napili for consideration of $200,000 upon completion of the Offering. Of the $200,000 in consideration, $100,000 will be paid from the proceeds of the Offering and $100,000 will be paid in the form of a 9.0% promissory note due April 1, 1999. This purchase price was negotiated by Mr. Glatter, on behalf of the Company, by Dr. Reed, on behalf of himself, and by the administrators of the Reed Family Trust, and was approved unanimously by the Company's Board of Directors, which Dr. Reed serves on as Chairman of the Board. Dr. Reed beneficially owns approximately 51.0% of the capital stock of each of Pentegra, Ltd. and Napili and the Reed Family Trust (which is administered by, and whose beneficiaries are, the children of Dr. Reed) beneficially owns 49% of the capital stock of each of Pentegra, Ltd. and Napili. The assets that the Company will acquire from Pentegra, Ltd. and Napili include office furniture and equipment, marketing systems, recall systems, telephone systems, customer/client lists, books and records and video tapes. From February 1997 to January 1998, the Company has occupied and had access to the facilities, equipment and staff of James L. Dunn & Assoc., Inc., an affiliate of James L. Dunn, Jr. Beginning June 1, 1997, the Company agreed to compensate James L. Dunn & Assoc., Inc. for use of and access to its office facilities, equipment and staff at the rate of $10,000 per month. James L. Dunn & Assoc., Inc. also provided the Company monthly invoices for delivery, telephone, travel and other out-of-pocket expenses and obtained reimbursement for those expenses from the Company. Through January 31, 1998, the Company has reimbursed James L. Dunn & Assoc., Inc. for approximately $11,600 of such expenses. The Company believes that the compensation paid to James L. Dunn & Assoc., Inc. represents the fair market value of the services (which includes the shared use of two clerical employees, use of office furniture, copy machines, computers and other office equipment, and office supplies) provided to the Company. The Company has leased a portion of the office facilities, equipment and staff of Pentegra, Ltd., which is wholly owned by Dr. Reed, beginning June 1, 1997. The Company has agreed to compensate Pentegra, Ltd. for use of and access to its office facilities, equipment and staff at the rate of $11,000 per month. Pentegra, Ltd. will also provide the Company a monthly invoice for delivery, postage, telephone, travel and other out-of-pocket expenses and obtain reimbursement for those expenses from the Company. Through January 31, 1998, the Company has reimbursed Pentegra, Ltd. and Napili for approximately $8,000 of such expenses. The Company believes that the compensation to be paid to Pentegra, Ltd. represents the fair market value of the goods and services (which includes utilities, furniture, office equipment and clerical services) being provided to the Company under this arrangement. This lease will be assumed by the Company in the Pentegra/Napili Transaction. The following table provides certain information concerning each of the Affiliations and each person who has an ownership interest in a Founding Affiliated Practice (all of whom are promoters of the Company):
CONSIDERATION TO BE RECEIVED DEBT AND --------------------------------------- ASSETS TO BE LIABILITIES NUMBER OF VALUE OF FOUNDING AFFILIATED PRACTICE(1) CONTRIBUTED(2) ASSUMED SHARES(3) SHARES(3) CASH - ----------------------------------------- -------------- ------------ ---------- ------------- ------------ James P. Allen, D.D.S.................... $ 30,515 $ 67,069 61,467 $ 553,203 $ 138,301 Anderson Dental Group, Inc.: Walter J. Anderson, D.D.S.............. 12,759 56,581 36,611 329,499 82,376 Donald H. Plotkin, D.D.S............... 11,957 53,026 34,311 308,799 77,200 William A. Cerney, D.D.S............... 10,086 44,730 28,943 260,487 65,122 Brian M. Ellis, D.D.S.................. 10,086 44,730 28,943 260,487 65,122 Afshan Kaviani, D.D.S.................. 9,240 40,976 26,515 238,635 59,658 William H. Swilley, D.D.S.............. 2,559 11,348 7,344 66,096 16,522
(TABLE CONTINUED) 48
CONSIDERATION TO BE RECEIVED DEBT AND --------------------------------------- ASSETS TO BE LIABILITIES NUMBER OF VALUE OF FOUNDING AFFILIATED PRACTICE(1) CONTRIBUTED(2) ASSUMED SHARES(3) SHARES(3) CASH - ----------------------------------------- -------------- ------------ ---------- ------------- ------------ Ronnie L. Andress, D.D.S., Inc........... 111,690 181,623 96,145 865,305 216,326 Victor H. Burdick, D.D.S., P.C........... 351 4,344 50,722 456,498 114,126 Marvin V. Cavallino, D.D.S., A Professional Corporation............... 61,486 72,426 63,754 573,786 143,447 James H. Clarke, Jr., D.D.S., Inc........ 148,515 54,000 66,708 600,372 150,092 Henry F. Cuttler, D.D.S.................. 88,507 114,028 35,205 316,845 79,211 Edward T. Dougherty, Jr., D.D.S., P.A.... 55,356 -- 103,480 931,320 232,830 Family Dental Center, P.A.: Steve Anderson, D.D.S.................. 43,096 -- 78,539 706,851 176,711 Lindi B. Anderson, D.D.S............... 10,775 -- 19,634 176,706 44,178 Richard H. Fettig, D.D.S................. 30,613 19,836 43,246 389,214 97,303 Alan H. Gerbholz, D.D.S., P.C............ 159,202 -- 40,645 365,805 91,451 Michael J. Gershtenson, D.D.S., P.C...... 7,356 24,948 43,585 392,265 98,067 Mack E. Greder, D.D.S., P.C.............. 48,067 37,505 63,637 572,733 143,183 Salvatore Guarnieri, D.D.S............... 64,625 28,205 44,575 401,175 100,295 Kent Hamilton, D.D.S..................... 170,403 200,000 105,894 953,046 238,262 David R. Henderson, D.D.S................ 8,059 -- 37,826 340,434 85,109 Stephen Hwang, D.D.S..................... 26,446 -- 33,303 299,727 74,931 Jackson Dental Partnership: Penn Jackson, Sr., D.D.S............... 51,739 -- 28,951 260,559 -- Penn Jackson, Jr., D.D.S............... 34,492 -- 19,301 173,709 -- Bruce A. Kanehl, D.D.S................... 19,132 1,350 65,501 589,509 147,378 Roger Allen Kay, D.D.S., P.A............. 2,837 4,816 64,008 576,072 144,017 Patrick T. Kelly, D.D.S., P.C............ 24,810 -- 17,337 156,033 39,008 Brian K. Kniff, D.D.S., P.C.: Brian K. Kniff, D.D.S.................. 41,171 23,327 50,599 455,391 113,848 Gordon Ledingham, D.D.S................ 41,171 23,327 50,599 455,391 113,848 Lakeview Dental, P.C. (Kevin Gasser, D.D.S.)................................ 35,769 34,803 45,413 408,717 102,180 Donald W. Lanning, D.D.S................. 34,414 -- 27,630 248,670 40,000 David A. Little, D.D.S................... 27,417 230,859 47,040 423,360 105,840 Susan Lunson, D.D.S...................... 164,826 157,000 26,335 237,015 59,253 Richard W. Mains, Jr., D.M.D., P.C....... 94,449 -- 74,734 672,606 168,152 James M. McDonough, D.D.S................ 35,802 56,000 56,189 505,701 126,424 James W. Medlock, D.D.S., P.A............ 125,408 28,000 79,973 719,757 179,940 James Randy Mellard, D.D.S. M.S., P.C.... 51,747 65,242 14,216 127,944 31,986 Mary B. Mellard, D.D.S., P.C............. 177,249 230,733 57,139 514,251 128,562 TL Mullooly, D.D.S., Inc................. 1,743 -- 43,075 387,675 96,918 Byron L. Novosad, D.D.S., Inc............ 21,396 -- 44,410 399,690 99,923 Randy O'Brien, D.D.S., Inc............... 25,705 27,753 34,139 307,251 76,811 Terrence C. O'Keefe, D.D.S............... 51,382 52,139 27,000 243,000 81,000 Harold A. Pebbles, Jr., D.D.S., P.C...... 13,475 -- 53,174 478,566 119,641 Jimmy F. Pinner, D.D.S................... 35,807 12,000 16,275 146,475 36,619 Omer K. Reed, D.D.S...................... 5,495 0 34,775 312,975 -- Richard Reinitz, D.D.S., P.C............. 108,868 226,009 140,439 1,263,951 315,988 Greg Richards, D.D.S..................... 51,658 59,000 18,360 165,240 41,302 Richard N. Smith, D.M.D., P.C............ -- 94,998 90,280 812,520 203,129 John N. Stellpflug, D.D.S................ 7,643 36,750 44,447 400,023 100,006 Jack Stephens, D.D.S..................... 63,013 -- 114,010 1,026,090 256,523
(TABLE CONTINUED) 49
CONSIDERATION TO BE RECEIVED DEBT AND --------------------------------------- ASSETS TO BE LIABILITIES NUMBER OF VALUE OF FOUNDING AFFILIATED PRACTICE(1) CONTRIBUTED(2) ASSUMED SHARES(3) SHARES(3) CASH - ----------------------------------------- -------------- ------------ ---------- ------------- ------------ Y. Paul Suzuki, D.D.S., P.C.............. 24,337 -- 42,609 383,481 95,870 Donald F. Tamborello, D.D.S.............. 18,018 7,565 50,960 458,640 114,660 Helena Thomas, D.D.S..................... 92,752 113,013 27,362 246,258 61,566 Louis J. Thornley, D.D.S., P.C........... 26,074 -- 39,550 355,950 88,989 S. Victor Uhrenholdt, D.D.S., P.C........ 58,707 50,157 56,319 506,871 126,718 Scott Van Zandt, D.D.S................... 11,398 1,675 37,888 340,992 85,248 Ronald M. Yaros, D.D.S., P.C............. 139,371 29,570 131,480 1,183,320 295,830 -------------- ------------ ---------- ------------- ------------ $ 2,841,024 $ 2,621,461 2,922,549 $ 26,302,941 $ 6,387,000 -------------- ------------ ---------- ------------- ------------ -------------- ------------ ---------- ------------- ------------
- --------- (1) Unless otherwise noted, the dentist who owns all of the capital stock of the Founding Affiliated Practice is set forth in the name of that Founding Affiliated Practice. (2) Assets to be contributed reflects the historical book value of the nonmonetary assets of each practice to be transferred to the Company. These nonmonetary assets are reflected at historical cost in accordance with SAB No. 48. All monetary assets are recorded at fair value, which is approximated by the historical costs recorded by the practices. (3) Assumes an initial public offering price of $9.00 per share. The actual number of shares to be issued as consideration for the Affiliations may be higher or lower depending on the actual initial public offering price per share. For example, an aggregate of 2,768,734 shares of Common Stock would be issued to the dentist-owners of the Founding Affiliated Practices if that price is $9.50 per share, while an aggregate of 3,094,468 shares of Common Stock would be issued to the dentist-owners of the Founding Affiliated Practices if that price is $8.50 per share. The consideration being paid by the Company for each Founding Affiliated Practice was determined by negotiations between executive officers of the Company not affiliated with any Founding Affiliated Practice and a representative of that Founding Affiliated Practice. The Company used the same valuation method to negotiate the consideration being paid to each of the Founding Affiliated Practices, including the respective practices wholly owned by Drs. Reed, Andress, Clarke, Greder, Kay and Yaros, which method was based upon the Founding Affiliated Practice's gross revenue net of certain operating expenses, and the Company's assessment of growth potential. All of the 2,922,549 shares of Common Stock issued in the Affiliations to the dentists named in the foregoing table and all of 1,019,349 shares of Common Stock issued in the Share Exchange will have certain piggy-back registration rights. See "Shares Eligible for Future Sale." COMPANY POLICY It is anticipated that future transactions with affiliates of the Company will be minimal, will be approved by a majority of the disinterested members of the Board of Directors and will be made on terms no less favorable to the Company than could be obtained from unaffiliated third parties. The Company does not intend to incur any further indebtedness to, or make any loans to, any of its executive officers, directors or other affiliates. 50 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of January 31, 1998 (after giving effect to the Share Exchange) and immediately after giving effect to the closing of the Affiliations and the Offering, the then "beneficial ownership" of the Common Stock of (i) each director and person nominated to become a director on closing of the Offering, (ii) each executive officer, (iii) all executive officers and directors of the Company as a group and (iv) each person who owns more than 5% of the outstanding Common Stock. The table assumes none of such persons intend to acquire shares in the Offering. The address of each person in the table is c/o Pentegra Dental Group, Inc., 2999 North 44th Street, Suite 650, Phoenix, Arizona 85018.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY BEFORE OFFERING(1)(2) OWNED AFTER OFFERING(1)(3) ---------------------- ----------------------- NUMBER PERCENT NUMBER PERCENT --------- ----------- ---------- ----------- Omer K. Reed, D.D.S.................................................... 91,393 9.0% 126,168 2.0% Gary S. Glatter........................................................ 62,380 6.1% 62,380 1.0% Sam H. Carr............................................................ 38,685 3.8% 38,685 * James L. Dunn, Jr...................................................... 54,159 5.3% 54,159 * John G. Thayer......................................................... 38,685 3.8% 38,685 * Kimberlee K. Rozman.................................................... 19,342 1.9% 19,342 * George M. Siegel....................................................... 139,749 13.7% 139,749 2.2% Ronald M. Yaros, D.D.S................................................. 0 -- 131,480 2.0% J. Michael Casas....................................................... 116,055 11.4% 116,055 1.8% Ronnie L. Andress, D.D.S............................................... 0 -- 96,145 1.5% Kelly W. Reed(4)....................................................... 87,041 8.5% 87,041 1.4% Roger Allen Kay, D.D.S................................................. 2,901 * 66,909 1.0% James H. Clarke, Jr., D.D.S............................................ 0 -- 66,708 1.0% Mack E. Greder, D.D.S.................................................. 2,901 * 66,538 1.0% Allen M. Gelwick....................................................... 38,685 3.8% 38,685 * Ronald E. Geistfeld, D.D.S............................................. 0 -- 0 -- Gerald F. Mahoney...................................................... 0 -- 0 -- Anthony P. Maris....................................................... 0 -- 0 -- All executive officers and directors as a group (17 persons)........... 604,935 59.3% 1,061,688 16.5%
- --------- * less than 1%. (1) Shares shown in the above table do not include shares that could be acquired upon exercise of currently outstanding stock options which do not vest within 60 days of the date of this Prospectus. (2) Gives effect to the Share Exchange. See Note (3). (3) Gives effect to the Share Exchange and the Affiliations. The number of shares of Common Stock to be issued in connection with the Affiliations (2,922,549 shares) and the Share Exchange (1,019,349 shares) assumes an initial public offering price of $9.00 per share. The actual number of such shares may be higher or lower depending on the actual initial public offering price per share. However, in any event, the number of shares of Common Stock to be issued in connection with the Affiliations and the Share Exchange will not exceed 3,941,898 shares in the aggregate. For example, an aggregate of 2,768,734 shares of Common Stock would be issued to the dentist-owners of the Founding Affiliated Practices if that price is $9.50 per share (in which event, 1,173,164 shares of Common Stock would be issued in the Share Exchange), while an aggregate of 3,094,468 shares of Common Stock would be issued to the dentist-owners of the Founding Affiliated Practices if that price is $8.50 per share (in which event, 847,430 shares would be issued in the Share Exchange). (4) Kelly W. Reed, Vice President of Operations of the Company, is the son of Omer K. Reed, D.D.S. 51 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 40,000,000 shares of Common Stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par value $.001 per share ("Preferred Stock"). At December 31, 1997, 1,756,667 shares of Common Stock were issued and outstanding and held of record by 52 stockholders. The following summary is qualified in its entirety by reference to the Certificate of Incorporation, which is included as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Common Stock possesses ordinary voting rights for the election of directors and in respect of other corporate matters, and each share has one vote. The Common Stock affords no cumulative voting rights, and the holders of a majority of the shares voting for the election of directors can elect all the directors if they choose to do so. The Common Stock carries no preemptive rights, is not convertible, redeemable or assessable. The holders of Common Stock are entitled to dividends in such amounts and at such times as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy" for information regarding the Company's dividend policy. PREFERRED STOCK The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. Subject to the provisions of the Certificate of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series and to provide for or change the voting powers, designations, preferences and relative, participating, optional, exchange or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the holders of Common Stock. Although the Company has no present intention to issue shares of Preferred Stock, the issuance of shares of Preferred Stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For example, the issuance of a series of Preferred Stock might impede a business combination by including class voting rights that would enable the holders to block such a transaction; or such issuance might facilitate a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition, under certain circumstances, the issuance of Preferred Stock could adversely affect the voting power of the holders of the Common Stock. Although the Board of Directors is required to make any determination to issue such stock based on its judgment as to the best interests of the stockholders of the Company, the Board of Directors could act in a manner that would discourage an acquisition attempt or other transaction that some or a majority of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then-market price of such stock. The Board of Directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized stock, unless otherwise required by law or the rules of any market on which the Company's securities are traded. STATUTORY BUSINESS COMBINATION PROVISION The Company is a Delaware corporation and is subject to Section 203 of the DGCL. In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (as defined) with a Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the corporation 52 approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination, (ii) upon consummation of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by employee stock plans that do not provide employees with the rights to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer) or (iii) following the transaction in which such person became an interested stockholder, the business combination was approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of 66 2/3% of the outstanding voting stock of the corporation not owned by the interested stockholder. Under Section 203, the restrictions described above also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation's directors, if such extraordinary transaction is approved or not opposed by a majority of the directors who were directors prior to any person becoming an interested stockholder during the previous three years or were recommended for election or elected to succeed such directors by a majority of such directors. OTHER MATTERS Delaware law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of a director's fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, directors must exercise an informed business judgment based on all material information reasonably available to them. Absent the limitations authorized by Delaware law, directors are accountable to corporations and their stockholders for monetary damages for conduct constituting gross negligence in the exercise of their duty of care. Delaware law enables corporations to limit available relief to equitable remedies such as injunction or rescission. The Certificate of Incorporation limits the liability of directors of the Company to the Company or its stockholders to the fullest extent permitted by Delaware law. Specifically, directors of the Company will not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL. The inclusion of this provision in the Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its stockholders. The Company's Bylaws provide indemnification to the Company's officers and directors and certain other persons with respect to certain matters. The Bylaws provide that, from and after the first date that the Company has received funding from the sale of capital stock in an initial public offering, the stockholders may act only at an annual or special meeting of stockholders and may not act by written consent. The Bylaws provide that special meetings of the stockholders can be called only by the Chairman of the Board, the Chief Executive Officer, the President or the Board of Directors. The Certificate of Incorporation provides that the Board of Directors shall consist of three classes of directors serving for staggered terms. As a result, it is currently contemplated that approximately one-third of the Company's Board of Directors will be elected each year. The classified board provision could prevent a party who acquires control of a majority of the outstanding voting stock of the Company from obtaining control of the Board of Directors until the second annual stockholders' meeting following the date the acquirer obtains the controlling interest. In addition, the Company's Bylaws provide that a 53 majority of the members of the Board of Directors must be licensed dentists affiliated with one of the Affiliated Practices. See "Management--Directors and Executive Officers." The Certificate of Incorporation provides that the number of directors shall be as specified in the Bylaws. The Bylaws provide that the number of directors shall be determined by the Board of Directors from time to time, but shall be at least one and not more than nineteen. It also provides that directors may be removed only for cause, and then only by the affirmative vote of the holders of at least a majority of all outstanding voting stock entitled to vote. This provision, in conjunction with the provision of the Bylaws authorizing the Board of Directors to fill vacant directorships, will prevent stockholders from removing incumbent directors without cause and filling the resulting vacancies with their own nominees. STOCKHOLDER PROPOSALS The Company's Bylaws contain provisions (i) requiring that advance notice be delivered to the Company of any business to be brought by a stockholder before an annual meeting of stockholders and (ii) establishing certain procedures to be followed by stockholders in nominating persons for election to the Board of Directors. Generally, such advance notice provisions provide that written notice must be given to the Secretary of the Company by a stockholder (i) in the event of business to be brought by a stockholder before an annual meeting, not less than 90 days nor more than 180 days prior to the earlier of the date of the meeting or the corresponding date on which the immediately preceding annual meeting of stockholders was held, and (ii) in the event of nominations of persons for election to the Board of Directors by any stockholder, (a) with respect to an election to be held at the annual meeting of stockholders, not less than 90 days nor more than 180 days prior to the earlier of the date of the meeting or the corresponding date on which the immediately preceding annual meeting of stockholders was held, and (b) with respect to an election to be held at a special meeting of stockholders for the election of directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting was mailed to stockholders or public disclosure of the date of the special meeting was made, whichever first occurs. Such notice must set forth specific information regarding such stockholder and such business or director nominee, as described in the Company's Bylaws. The foregoing summary is qualified in its entirety by reference to the Company's Bylaws, which are included as an exhibit to the Registration Statement of which this Prospectus is a part. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Continental Stock Transfer & Trust Company. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Affiliations and the Offering, the Company will have outstanding 6,441,898 shares of Common Stock (6,816,898 if the Underwriters' over-allotment option is exercised in full) of which the 2,500,000 shares sold in the Offering (2,875,000 if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restriction or further registration under the Securities Act, except for those held by "affiliates" (as defined in the Securities Act) of the Company, which shares will be subject to the resale limitations of Rule 144 under the Securities Act. The remaining 3,941,898 shares of Common Stock are deemed "restricted securities" under Rule 144 in that they were originally issued and sold by the Company in private transactions in reliance upon exemptions under the Securities Act, and may be publicly sold only if registered under the Securities Act or sold in accordance with an applicable exemption from registration, such as those provided by Rule 144 promulgated under the Securities Act as described below. In general, under Rule 144 as currently in effect, if a minimum of one year has elapsed since the date of acquisition of restricted securities from the issuer or from an affiliate of the issuer, the acquirer or 54 subsequent holder would be entitled to sell within any three-month period a number of those shares that does not exceed the greater of one percent of the number of shares of such class of stock then outstanding or the average weekly trading volume of the shares of such class of stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the issuer. In addition, if a period of at least two years has elapsed since the later of the date of acquisition of restricted securities from the issuer or from any affiliate of the issuer, and the acquirer or subsequent holder thereof is deemed not to have been an affiliate of the issuer of such restricted securities at any time during the 90 days preceding a sale, such person would be entitled to sell such restricted securities under Rule 144(k) without regard to the requirements described above. Rule 144 does not require the same person to have held the securities for the applicable periods. The foregoing summary of Rule 144 is not intended to be a complete description thereof. The Commission has proposed certain amendments to Rule 144 that would, among other things, eliminate the manner of sale requirements and revise the notice provisions of that rule. The Commission has also solicited comments on other possible changes to Rule 144, including possible revisions to the one- and two-year holding periods and the volume limitations referred to above. As of December 31, 1997, options to purchase an aggregate of 671,667 shares of Common Stock were authorized for issuance under the Company's 1997 Stock Compensation Plan. See "Management--1997 Stock Compensation Plan." In general, pursuant to Rule 701 under the Securities Act, any employee, officer or director of, or consultant to, the Company who purchased his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permit non-affiliates to sell such shares without compliance with the public information, holding period, volume limitation or notice provisions of Rule 144, and permit affiliates to sell such shares without compliance with the holding period provisions of Rule 144, in each case commencing 90 days after the date of this Prospectus. In addition, the Company intends to file a registration statement covering the 1,500,000 shares of Common Stock issuable upon exercise of stock options that may be granted in the future under the 1997 Stock Compensation Plan, in which case such shares of Common Stock generally will be freely tradable by non-affiliates in the public market without restriction under the Securities Act. The Company and its executive officers, directors and current stockholders have agreed not to offer for sale, sell, contract to sell, grant any option or other right for the sale of, or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or any securities, indebtedness or other rights exercisable for or convertible or exchangeable into shares of Common Stock owned or acquired in the future in any manner prior to the expiration of 180 days after the date of this Prospectus (the "180-Day Lockup Period") without the prior written consent of Dain Rauscher Incorporated, except that the Company may, subject to certain conditions, issue shares of Common Stock in connection with future acquisitions and may grant Options or Awards (or issue shares of Common Stock upon exercise of Options or Awards) under the 1997 Stock Compensation Plan. These restrictions will be applicable to any shares acquired by any of those persons in the Offering or otherwise during the 180-Day Lockup Period. In addition, the Company's executive officers, directors and current stockholders and the persons acquiring shares of Common Stock in connection with the Affiliations have agreed with the Company that they generally will not sell, transfer or otherwise dispose of any of their shares for one year following the closing of the Offering. In connection with the Affiliations, the Company will enter into registration rights agreements with former stockholders of the Founding Affiliated Practices (the "Registration Rights Agreements"), which will provide certain registration rights with respect to the Common Stock issued to such stockholders in the Affiliations. Each Registration Rights Agreement will provide the holders of Common Stock subject to such agreement with the right to participate in registrations by the Company of its equity securities in underwritten offerings. The registration rights conferred by the Registration Rights Agreements will 55 terminate on the second anniversary of the closing of the Offering. The Company is generally required to pay the costs associated with such an offering, other than underwriting discounts and commissions and transfer taxes attributable to the shares sold on behalf of the selling stockholders. The Registration Rights Agreements provide that the number of shares of Common Stock to be registered on behalf of the selling stockholders is subject to limitation if the managing underwriter determines that market conditions require a limitation. Under the Registration Rights Agreements, the Company will indemnify the selling stockholders thereunder, and such stockholders will indemnify the Company against, certain liabilities in respect of any registration statement or offering covered by the Registration Rights Agreements. The Company and each of its current stockholders are parties to a stockholders agreement, which provides those stockholders registration rights substantially equivalent to the registration rights in the Registration Rights Agreements. Prior to the Offering, there has been no established public market for the Common Stock. No prediction can be made of the effect, if any, that sales of shares under Rule 144, or otherwise, or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time after the Offering. The Company is unable to estimate the number of shares that may be sold in the public market under Rule 144, or otherwise, because such amount will depend on the trading volume in, and market price for, the Common Stock and other factors. Nevertheless, sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could adversely affect the market price of the Common Stock. See "Underwriting." Following the consummation of the Offering, the Company intends to register 1,500,000 shares of Common Stock under the Securities Act for use in connection with future acquisitions. These shares generally will be freely tradable after their issuance by persons not affiliated with the Company unless the Company contractually restricts their resale. Resales of any of those shares during the 180-Day Lockup Period would require the prior written consent of Dain Rauscher Incorporated. 56 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below, and each of such Underwriters, for whom Dain Rauscher Incorporated and EVEREN Securities, Inc. are acting as representatives (the "Representatives"), has severally agreed to purchase from the Company, the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES OF UNDERWRITER COMMON STOCK - ------------------------------------------------------------ -------------- Dain Rauscher Incorporated.................................. EVEREN Securities, Inc...................................... -------------- Total................................................... 2,500,000 -------------- --------------
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a selling concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Representatives. The Company has granted the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 375,000 additional shares of Common Stock, at the initial public offering price less the underwriting discount, as set forth on the cover page of this Prospectus. If the Underwriters exercise their over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 2,500,000 shares of Common Stock offered. The Underwriters may exercise such option only to cover over-allotments, if any, made in connection with the sale of Common Stock offered hereby. The Company and its executive officers, directors and current stockholders have agreed not to, directly or indirectly, offer for sale, sell, contract to sell, grant any option or other right for the sale of, or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or any securities, indebtedness or other rights exercisable for or convertible or exchangeable into shares of Common Stock prior to the expiration of 180 days after the date of this Prospectus, without the prior written consent of Dain Rauscher Incorporated, except for the shares of Common Stock to be issued in connection with the Offering, the Affiliations and the Share Exchange and except that the Company may, subject to certain conditions, issue shares of Common Stock in connection with future acquisitions and grant Options or Awards (or issue shares of Common Stock upon exercise of Options or Awards) under the 1997 Stock Compensation Plan. For information respecting additional restrictions on sales by the Company's executive officers, directors, current stockholders and the persons acquiring shares of Common Stock in connection with the Affiliations, see "Shares Eligible for Future Sale." 57 The Representatives have informed the Company that they do not expect sales of shares of Common Stock offered hereby to accounts over which the Underwriters exercise discretionary authority to exceed 5% of the total number of shares of Common Stock offered by them. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price will be negotiated between the Company and the Representatives. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the history of and the prospects for the industry in which the Company competes, the past and present operations of the Founding Affiliated Practices, the historical results of operations of the Founding Affiliated Practices, the Company's capital structure, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. The Common Stock has been approved for listing on the American Stock Exchange under the symbol "PEN." At the request of the Company, the Underwriters have reserved up to 125,000 of the shares of Common Stock offered hereby for sale at the initial public offering price to employees of the Company and other persons associated with the Company. In connection with the Offering, the Underwriters may purchase and sell Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Stock; and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Common Stock than they are required to purchase from the Company in the Offering. The Underwriters may also impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Stock sold in the Offering for their account may be reclaimed by the syndicate if such shares of Common Stock are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the American Stock Exchange, in the over-the-counter market or otherwise. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. In February 1998, the Company issued to Dain Rauscher Incorporated a 15% promissory note in the principal amount of $62,500 in exchange for a loan of that amount in order to fund certain offering and operating expenses of the Company. The Company intends to repay this note, together with accrued interest thereon, with proceeds of the Offering on or before the third business day following the closing of the Offering. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Jackson Walker L.L.P., Houston, Texas. Certain legal matters in connection with the sale of the Common Stock offered hereby will be passed upon for the Underwriters by Baker & Botts, L.L.P., Houston, Texas. EXPERTS The financial statements of Pentegra Dental Group, Inc. as of December 31, 1997 and for the period from inception, February 21, 1997, through December 31, 1997, as detailed in the index on page F-1, included in this Prospectus, have been audited by Coopers & Lybrand L.L.P., independent accountants, as 58 indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (together with all exhibits, schedules and amendments relating thereto, the "Registration Statement") with respect to the Common Stock offered hereby. This Prospectus, filed as part of the Registration Statement, does not contain all the information contained in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement including the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement accurately describe the material provisions of such document and are qualified in their entirety by reference to such exhibits for complete statements of their provisions. All of these documents may be inspected without charge at the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies can also be obtained from the Commission at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 59 INDEX TO FINANCIAL STATEMENTS
PAGE --------- Pentegra Dental Group, Inc. Unaudited Pro Forma Balance Sheet.............................................. F-2 Unaudited Pro Forma Balance Sheet as of December 31, 1997................................................ F-3 Notes to Unaudited Pro Forma Balance Sheet............................................................... F-4 Pentegra Dental Group, Inc. Financial Statements Report of Independent Public Accountants................................................................. F-6 Balance Sheet as of December 31, 1997.................................................................... F-7 Statement of Operations for the period from inception, February 21, 1997, through December 31, 1997........................................................... F-8 Statement of Changes in Stockholders' Deficit for the period from inception, February 21, 1997, through December 31, 1997...................................................................................... F-9 Statement of Cash Flows for the period from inception, February 21, 1997, through December 31, 1997...... F-10 Notes to Financial Statements............................................................................ F-11
F-1 UNAUDITED PRO FORMA BALANCE SHEET The unaudited pro forma balance sheet dated December 31, 1997 of Pentegra Dental Group, Inc. (together with its parent entity, Pentegra Investments, Inc., "Pentegra" or the "Company") has been prepared as if (a) the acquisition by the Company of certain assets and assumption of certain liabilities of 50 dental practices (the "Founding Affiliated Practices") for consideration consisting of a combination of cash and shares of its common stock, par value $.001 per share (the "Common Stock"), and the execution of agreements to provide management services to the Founding Affiliated Practices (collectively, the "Affiliations"), (b) the repayment of certain debt of the Founding Affiliated Practices, (c) the acquisition by the Company (the "Pentegra/Napili Transaction") of certain assets of Pentegra, Ltd. and Napili, International ("Napili"), (d) the repurchase by Pentegra Investments, Inc. ("PII") of 245,845 shares of Class B Preferred Stock of PII from affiliates of the Company at the subscription price per share paid to PII for those shares and the redemption by PII of an aggregate of 1,337,500 shares of its Class A Preferred Stock and Class B Preferred Stock for $1.50 per share, of which $1.15 per share will be paid by the Company in cash and $0.35 per share will be paid in the form of a promissory note (the "Repurchase and Redemption"), (e) the exchange of all outstanding shares of common stock of PII for shares of Common Stock on a one-for-one basis (the "Share Exchange") (after giving effect to a repurchase by PII of shares of its common stock, at a purchase price of $0.015 per share, such that the total number of shares of Common Stock issuable in connection with the Affiliations and the Share Exchange will not exceed 3,941,898 shares), (f) the repayment of $350,000 aggregate principal amount of 9.5% promissory notes (the "9.5% Promissory Notes") and (g) the initial public offering of 2,500,000 shares of Common Stock at an assumed public offering price of $9.00 per share (the "Offering") and the application of the net proceeds therefrom (as described in "Use of Proceeds, " except that the issuance and repayment (out of proceeds from the Offering) of $486,000 aggregate principal amount outstanding under the Company's 15% promissory notes, which were issued in February 1998, are not reflected in the unaudited pro forma balance sheet), all had been completed, as if those transactions had occurred on December 31, 1997. The Affiliations, the repayment of certain debt of the Founding Affiliated Practices, the Pentegra/Napili Transaction, the Repurchase and Redemption, the Share Exchange, the repayment of the 9.5% Promissory Notes and the Offering are each contingent on the occurrence of the others. The Company will not employ dental professionals or control the practice of dentistry by the dentists. As the Company will not be acquiring the future patient revenues to be earned by the Founding Affiliated Practices, the Affiliations are not deemed to be business combinations. In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary Assets by Promoters or Shareholders," the Affiliations will be accounted for at their historical cost basis with the shares of Common Stock to be issued in the Affiliations being valued at the historical net book value of the nonmonetary assets acquired, net of liabilities assumed. The cash consideration will be reflected as a dividend by the Company to the owners of the Founding Affiliated Practices. The acquisition of certain assets of Pentegra, Ltd. and Napili will be accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. The unaudited pro forma balance sheet has been prepared by the Company based on the audited historical financial statements of the Company, included elsewhere in this Prospectus, including the audited combined financial information of the Founding Affiliated Practices included in the notes to the Company's financial statements, and assumptions deemed appropriate by the Company. The Company has not presented a pro forma statement of operations for the transactions described above based on the requirements set forth in Article 11 of Regulation S-X, because it is a newly formed entity with no significant operations to date and no operating history in the business of managing a large number of geographically diverse dental practices. F-2 PENTEGRA DENTAL GROUP, INC. UNAUDITED PRO FORMA BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS)
TOTAL AFFILIATION OFFERING PRO FORMA, PENTEGRA ADJUSTMENTS SUBTOTAL ADJUSTMENTS AS ADJUSTED ----------- ------------- --------- ------------- ------------ ASSETS Current assets: Cash and cash equivalents....................... $ 100 $ -- $ 100 $ (6,387)(A) $ 7,687(1) 18,973(B) (100)(C) (1,652)(D) (2,621 (E) (276 (F) (350 (I) Accounts receivable, net........................ -- -- -- 306 (F) 306 ----------- ------------- --------- ------------- ------------ Total current assets.......................... 100 -- 100 7,893 7,993 Property and equipment, net....................... 409 2,841 (A) 3,250 17 (C) 3,267 Deferred offering costs........................... 2,743 -- 2,743 (2,743 (B) -- Other noncurrent assets, net...................... 5 -- 5 183 (C) 188 ----------- ------------- --------- ------------- ------------ Total assets.................................. $ 3,257 $ 2,841 $ 6,098 $ 5,350 $ 11,448 ----------- ------------- --------- ------------- ------------ ----------- ------------- --------- ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities........ $ 2,095 $ 6,387 (A) $ 8,482 $ (6,387 (A) $ 1,580 (1,795 (B) 30 (F) 1,250 (G) Current portion of long-term debt, net.......... 215 624 (A) 839 (624 (E) -- (215 (I) ----------- ------------- --------- ------------- ------------ Total current liabilities..................... 2,310 7,011 9,321 (7,741 ) 1,580 Long-term debt.................................... -- 1,997 (A) 1,997 100 (C) 568 468 (D) (1,997 (E) Class A redeemable preferred stock................ 675 -- 675 (675 (D) -- Class B redeemable preferred stock................ 414 -- 414 (414 (D) -- Stockholders' equity (deficit): Common stock.................................... 18 3 (A) 21 3 (B) 7 (17 (H) Additional paid-in capital...................... 1,194 (6,170 (A) (4,976) 18,022 (B) 12,032 (1,031 (D) 17 (H) Accumulated deficit............................. (1,354 ) -- (1,354) (1,250 (G) (2,739 ) (135 (I) ----------- ------------- --------- ------------- ------------ Total stockholders' equity (deficit).......... (142 ) (6,167 ) (6,309) 15,609 9,300 ----------- ------------- --------- ------------- ------------ Total liabilities and stockholders' equity (deficit)................................... $ 3,257 $ 2,841 $ 6,098 $ 5,350 $ 11,448 ----------- ------------- --------- ------------- ------------ ----------- ------------- --------- ------------- ------------
- ---------- (1) See "Use of Proceeds." The accompanying notes are an integral part of this unaudited pro forma financial statement. F-3 PENTEGRA DENTAL GROUP, INC. NOTES TO UNAUDITED PRO FORMA BALANCE SHEET The accompanying unaudited pro forma balance sheet as of December 31, 1997 gives effect to the Affiliations, the payment of debt assumed from the Founding Affiliated Practices, the Pentegra/Napili Transaction, the Repurchase and Redemption, the Share Exchange, the repayment of $350,000 of the 9.5% Promissory Notes and the Offering and the application of the proceeds therefrom (as described in "Use of Proceeds," except that the issuance and repayment (out of proceeds from the Offering) of $486,000 aggregate principal amount outstanding under the Company's 15% promissory notes, which were issued in February 1998, are not reflected in the unaudited pro forma balance sheet), as if those transactions had occurred on December 31, 1997. The unaudited pro forma balance sheet does not represent the historical or future financial position of the Company. (A) Reflects completion of the Affiliations, which will involve (i) the issuance of 2,922,549 shares of Common Stock, valued at the historical net book value of the assets transferred less the liabilities assumed, and (ii) cash distributions to be treated as dividends aggregating $6,387,000. The historical net book value of the assets transferred and the liabilities assumed from the Founding Affiliated Practices are as follows (in thousands):
Property and equipment transferred.................................................. $ 2,841 Less Current portion of notes payable.................................................. (624) Long-term portion of notes payable................................................ (1,997) --------- Net assets transferred.......................................................... $ 220 --------- ---------
Certain assets and liabilities will not be transferred from the Founding Affiliated Practices. The assets not transferred are cash, certain accounts receivable, prepaids and other current assets, and certain accounts payable. Certain assets that are not reflected in the balance sheets of the Founding Affiliated Practices will be transferred to the Company in the Affiliations. These assets have no recorded book value, and therefore, are not reflected in the unaudited pro forma balance sheet. They include items such as contract rights, marketing systems, all transferable licenses, trade secrets, books, records and policy and procedure manuals. (B) Reflects the issuance of 2,500,000 shares Common Stock in the Offering, net of (i) estimated underwriters' discounts and commissions and (ii) estimated offering costs of $2,900,000 primarily consisting of legal, accounting and printing expenses, less offering costs previously funded with proceeds from the issuance of capital stock of PII, including all PII Class A Preferred Stock and Class B Preferred Stock, and the Promissory Notes. The resulting net proceeds are reflected as Common Stock and additional paid-in capital. The Company has deferred offering costs of $2,743,000, of which $948,000 had been paid at December 31, 1997. (C) Reflects completion of the Pentegra/Napili Transaction for consideration of $200,000. The Company will pay $100,000 from the proceeds of the Offering and issue a $100,000 9.0% promissory note due April 1999. As of December 31, 1997, the assets to be acquired in the Pentegra/Napili Transaction have a fair value of approximately $17,000. The cost in excess of the fair value of the net tangible assets acquired will be amortized over a five-year period. (D) Reflects (i) the repurchase of 245,835 shares of Class B Preferred Stock from affiliates of the Company at the price per share paid to PII for those shares and the redemption of an aggregate of 1,337,500 shares of Class A Preferred Stock and Class B Preferred Stock for $1.50 per share, of which F-4 PENTEGRA DENTAL GROUP, INC. NOTES TO UNAUDITED PRO FORMA BALANCE SHEET $1.15 per share will be paid in cash and $0.35 per share will be paid in the form of a 6.0% promissory note that becomes due and payable by the Company on the earlier of the fifth anniversary of the date of the closing of the Offering or the date on which the Company offers and sells an amount of equity securities for gross proceeds equal to or greater than the gross proceeds from the Offering, and (ii) the recognition of the related deemed dividend of $1,031,000. The payment for the Repurchase and Redemption and dividend are as follows (in thousands): Cash payment for Repurchase......................................... 114 Cash payment for Redemption......................................... 1,538 Promissory notes issued for Redemption.............................. 468 --------- 2,120 Less Recorded value of Class A and B Preferred Stock at December 31, 1997............................................................ 1,089 --------- Dividend to holders of Class A and B Preferred Stock.............. $ 1,031 --------- ---------
(E) Reflects the use of proceeds from the Offering to repay the debt assumed in the Affiliations. (F) Reflects the purchase of net monetary assets from the Founding Affiliated Practices for cash of $276,000, which assets will be recorded at fair value. The fair value of the net assets purchased are as follows (in thousands): Accounts receivable, net............................................. $ 306 Less Accounts payable................................................... (30) --------- Total................................................................ $ 276 --------- ---------
(G) Reflects the accrual of an employment bonus of $1,250,000 to the Chairman of the Board of Directors (the "Chairman"). Payment of the bonus will be made in increments of $10,000 on the closing of each future dental practice affiliation until the bonus has been paid in full. Management expects the bonus will be paid within the year following the Offering. In any event, pursuant to the terms of the Company's employment agreement with the Chairman, the employment bonus must be paid in full within three years of the Offering. The bonus will be expensed in the fourth quarter of 1997 because its payment is not contingent on future services actually being provided by the Chairman. (H) Reflects repurchase by PII of 737,318 shares of its common stock and the exchange at the closing of the Offering of 1,019,349 shares of Common Stock for 1,019,349 shares of PII common stock. (I) Reflects the repayment of the 9.5% Promissory Notes at their aggregate face value of $350,000, with the discount of $135,000 recorded as a charge to the accumulated deficit. F-5 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pentegra Dental Group, Inc.: We have audited the accompanying balance sheet of Pentegra Dental Group, Inc. as of December 31, 1997, and the related statements of operations, changes in stockholders' deficit, and cash flows for the period from inception, February 21, 1997, through December 31, 1997. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pentegra Dental Group, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the period from inception, February 21, 1997, through December 31, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas February 20, 1998 F-6 PENTEGRA DENTAL GROUP, INC. BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents........................................................ $ 100 --------- Total current assets........................................................... 100 --------- Property and equipment............................................................. 409 Deferred offering costs............................................................ 2,743 Organizational costs............................................................... 5 --------- Total assets............................................................... $ 3,257 --------- --------- LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities......................................... $ 2,095 Notes payable, net of discount of $135........................................... 215 --------- Total current liabilities...................................................... 2,310 --------- Commitments and contingencies (See Notes).......................................... Class A redeemable preferred stock, $0.01 par value, 5,000,000 shares authorized, 900,000 shares issued and outstanding (liquidation preference of $900)........... 675 Class B redeemable preferred stock, $0.01 par value, 5,000,000 shares authorized, 683,335 shares issued and outstanding (liquidation preference of $683)........... 414 Stockholders' deficit: Common stock, $0.01 par value, 40,000,000 shares authorized, 1,756,667 shares issued and outstanding......................................................... 18 Additional paid-in capital....................................................... 1,194 Accumulated deficit.............................................................. (1,354) --------- Total stockholders' deficit.................................................... (142) --------- Total liabilities and stockholders' deficit................................ $ 3,257 --------- ---------
The accompanying notes are an integral part of the financial statements. F-7 PENTEGRA DENTAL GROUP, INC. STATEMENT OF OPERATIONS FOR THE PERIOD FROM INCEPTION, FEBRUARY 21, 1997, THROUGH DECEMBER 31, 1997 (IN THOUSANDS)
Revenue............................................................................ $ -- Expenses: General and administrative expenses.............................................. 709 Compensation expense in connection with issuance of common stock................. 645 --------- Total expenses............................................................... 1,354 --------- Net loss........................................................................... $ (1,354) --------- ---------
The accompanying notes are an integral part of the financial statements. F-8 PENTEGRA DENTAL GROUP, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT FOR THE PERIOD FROM INCEPTION, FEBRUARY 21, 1997, THROUGH DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK ADDITIONAL TOTAL ------------------------ PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT DEFICIT ----------- ----------- ----------- ------------ ------------ Balance at February 21, 1997........................... -- $ -- $ -- $ -- $ -- Issuance of common stock ($0.015 per share cash on February 21, 1997)......... 667 7 3 -- 10 Issuance of common stock ($0.015 per share cash and $0.14 per share compensation on May 22, 1997)........................ 767 8 107 -- 115 Issuance of common stock ($1.27 per share cash on June 13, 1997).............. 290 3 365 -- 368 Issuance of common stock ($0.015 per share cash and $1.26 per share compensation on June 13, 1997)....................... 33 -- 42 -- 42 Purchases of common stock.............................. (87) (1) -- -- (1) Issuance of common stock ($0.015 per share cash and $7.46 per share compensation on September 1, 1997)... 67 1 497 -- 498 Issuance of common stock with promissory notes ($9.00 per share discount on promissory notes on October 8, 1997)................................................ 20 -- 180 -- 180 Net loss............................................... -- -- -- (1,354) (1,354) ----- ----- ----------- ------------ ------------ Balance at December 31, 1997........................... 1,757 $ 18 $ 1,194 $ (1,354) $ (142) ----- ----- ----------- ------------ ------------ ----- ----- ----------- ------------ ------------
The accompanying notes are an integral part of the financial statements. F-9 PENTEGRA DENTAL GROUP, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM INCEPTION, FEBRUARY 21, 1997, THROUGH DECEMBER 31, 1997 (IN THOUSANDS)
Cash flows from operating activities: Net loss......................................................................... $ (1,354) Accretion of discount on notes payable........................................... 45 Compensation associated with issuance of common stock............................ 645 Increase in accounts payable and accrued liabilities............................. 57 --------- Net cash used by operating activities........................................ (607) --------- Net cash used in investing activities--additions to property and equipment......... (166) --------- Cash flows provided by financing activities: Proceeds from issuance of common and preferred stock............................. 1,476 Proceeds from issuance of notes payable.......................................... 350 Offering costs................................................................... (948) Organizational costs............................................................. (5) --------- Net cash provided by financing activities.................................... 873 --------- Net increase in cash and cash equivalents.......................................... 100 Balance at inception, February 21, 1997............................................ -- --------- Balance at December 31, 1997....................................................... $ 100 --------- --------- Non-cash activities: Offering costs accrued........................................................... $ 1,795 --------- --------- Acquisition of property and equipment accrued.................................... $ 243 --------- --------- Discount on notes payable........................................................ $ 180 --------- ---------
The accompanying notes are an integral part of the financial statements. F-10 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Pentegra Dental Group, Inc. (the "Company") was organized as a Delaware corporation on February 21, 1997, for the purpose of creating a dental practice management company. In July 1997, the Company changed its name to Pentegra Investments, Inc. and formed a new wholly owned subsidiary named Pentegra Dental Group, Inc. ("Pentegra Dental"). Pentegra Dental's operations to date have consisted primarily of seeking affiliations with dental practices, negotiating to acquire the tangible assets of those practices, and negotiating agreements to provide management services to those practices. Pentegra Dental plans to complete an initial public offering of its common stock, par value $0.001 per share (the "Offering") and simultaneously exchange cash and shares of its common stock for selected assets and liabilities (the "Affiliations") of 50 dental practices (the "Founding Affiliated Practices" and, together with dental practices with which the Company may enter into similar transactions in the future, the "Affiliated Practices") (see Note 4). In December 1997, the owners of the outstanding shares of the Company's common stock agreed that, in the event the initial public offering price is less than $12.04 per share, it will repurchase (the "Share Repurchase") from those stockholders, on a pro rata basis, at a purchase price of $0.015 per share, that number of shares as will be necessary so that the aggregate number of shares of Pentegra Dental common stock issuable in connection with the Affiliations and the Share Exchange (as defined below) will not exceed 3,941,898 shares. Pursuant to that agreement, assuming an initial public offering price of $9.00 per share, the Company would repurchase approximately 42.0% of each such stockholder's shares of the Company common stock, or an aggregate of 737,318 shares. The current shareholders will exchange on a share-for-share basis, their remaining shares of the Company's common stock, par value $0.015 per share, for shares of common stock of Pentegra Dental (the "Share Exchange"). It is contemplated that 245,835 shares of Class B preferred stock held by affiliates of the Company will be repurchased at their original issuance prices ranging from $0.01 to $1.00 per share and 1,337,500 shares of Class A and Class B preferred stock held by nonaffiliates will be redeemed at a price of $1.50 per share (See Note 5). Pentegra Dental has also entered into an agreement to acquire substantially all the assets and operations of a dental management consulting firm, Pentegra, Ltd., and a dental management seminar company, Napili, International (the "Pentegra/Napili Transaction") (see Note 3). The Affiliations, the Pentegra/Napili Transaction and the Offering are each contingent on the occurrence of the others. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS Cash and cash equivalents are defined as highly liquid financial instruments with maturities of three months or less at the date of purchase. DEFERRED OFFERING COSTS Deferred offering costs include legal, accounting and other costs directly related to the Offering. All deferred offering costs will be charged against the proceeds of the Offering upon its completion. Such costs would be charged to expense if the Offering were not completed. ORGANIZATIONAL COSTS Organizational costs are being amortized on a straight-line basis over a five-year period. F-11 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) STOCK OPTION PLAN In September 1997, the board of directors of Pentegra Dental adopted the 1997 Stock Compensation Plan (the "Plan"). Employees, non-employee directors and advisors and directors will be eligible to receive awards under the Plan and only employees of the Company will be eligible to receive incentive stock options. The aggregate number of options to purchase shares of common stock and other awards of shares of common stock that may be granted under the Plan may not exceed 2,000,000 shares. As of December 31, 1997, Pentegra Dental had authorized for issuance options to acquire approximately 672,000 shares to employees, practice employees and directors on the date the initial public offering price is determined. The exercise price of these options will be the initial public offering price per share. The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which establishes accounting and reporting standards for stock-based compensation plans. The Company will account for options issued to employees and non-employee directors under the Plan in accordance with APB Opinion No. 25 and provide disclosure of the pro forma effect of using the fair value of options granted to employees to measure compensation. Of the amounts authorized as of December 31, 1997, options to purchase approximately 58,000 shares will be issued to owners of Founding Affiliated Practices, practice employees and other advisors. The fair value of such options will be charged to operations over their vesting period. EARNINGS PER SHARE Earnings per share has been excluded from the financial statements because the Company has limited historical operations and does not have a significant operating history. Additionally, the historical operations do not reflect the planned distribution to promoters in connection with the Affiliations, which will be paid with a portion of the proceeds of the Offering (See Note 4). USE OF ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may in some instances differ from previously estimated amounts. 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 bases of assets and liabilities and are measured using the enacted marginal tax rates currently in effect when the differences reverse. As reflected in the accompanying statement of operations, the Company incurred a net loss of $1,354,000 during the period from inception, February 21, 1997, through December 31, 1997. The Company has recognized no tax benefit from this net loss. Due to the limited operations of the Company since its inception, a valuation allowance has been established to offset the deferred tax asset related to these net losses that have been capitalized for tax purposes. There is no other significant difference in the tax and book bases of the Company's assets or liabilities that would give rise to deferred tax balances. F-12 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) RECENT PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation, presentation and disclosure requirements of earnings per share and supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128 requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the impact of common stock equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share as opposed to the greater of the average market price per share or ending market price per share when applying the treasury stock method in determining common stock equivalents, replaces fully diluted earnings per share. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 131 establishes standards for reporting segment information by public enterprises in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. Both these statements are effective for fiscal years beginning after December 15, 1997. The Company believes implementation of SFAS Nos. 130 and 131 will not have a material effect on its financial position, results of operations or cash flows. In November 1997, the Emerging Issues Task Force of the FASB (the "EITF") reached a consensus relating to the conditions under which a physician or dental practice management company would consolidate the accounts of an affiliated physician or dental practice. The Company believes that its accounting policies conform to the EITF consensus. 3. RELATED PARTY TRANSACTIONS: Pentegra Dental has entered into an agreement with the Chairman of its Board of Directors effective at the date the Offering closes, 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 from the proceeds of the Offering and a $100,000 principal amount 9.0% promissory note due April 1999. Pentegra Dental will enter into an employment agreement effective at the date the Offering closes, that provides for the payment to the Chairman of the Board of Directors of an employment bonus of $1,250,000. The bonus is due in installments of $10,000 on the closing of each future dental practice affiliation subsequent to the Affiliations. However, the bonus must be paid in full within three years. The employment bonus will be charged to operations at its effective date because its payment is not contingent on any future services to be provided by the Chairman. Since the Company's inception, it has occupied and had access to the facilities, equipment and staff of a relative of an executive officer and director of the Company. Prior to June 1, 1997, that use was insignificant. From June 1, 1997 through January 31, 1998, the Company compensated the affiliate for use of and access to its office facilities, equipment and staff at the rate of $10,000 per month. The Company has agreed to lease a portion of the office facilities, equipment and staff of Pentegra, Ltd., which is owned by the Company's Chairman of the Board, members of his family and other related entities. The Company has agreed to compensate Pentegra, Ltd. for use of and access to its office facilities, F-13 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. RELATED PARTY TRANSACTIONS: (CONTINUED) equipment and staff at the rate of $11,000 per month until the Pentegra/Napili Transaction is completed, whereupon the entire lease of those facilities will be assumed by Pentegra Dental. The Company believes that the compensation being paid to these related parties represents the fair market value of the services that are being provided to the Company. 4. PLANNED TRANSACTIONS: Pentegra Dental plans to complete the Affiliations through a series of mergers and asset transfers. Owners of the Founding Affiliated Practices (the "Promoters") will receive shares of Common Stock having a value of approximately $26.3 million, based on the initial public offering price (2,922,549 shares of Common Stock, based on an assumed initial public offering price of $9.00 per share), and approximately $6,400,000 in cash. In December 1997, the owners of the outstanding shares of common stock of PII agreed that, in the event the initial public offering price is less than $12.04 per share, PII will repurchase from those stockholders, on a pro rata basis, at a purchase price of $0.015 per share, that number of shares as will be necessary so that the aggregate number of shares of Common Stock issuable in connection with the Affiliations and the Share Exchange will not exceed 3,941,898 shares. Pursuant to that agreement, assuming an initial public offering price of $9.00 per share, PII would repurchase approximately 42.0% of each such stockholder's shares of PII common stock, or an aggregate of 737,318 shares. Each Founding Affiliated Practice transaction was individually negotiated between the Company and the Founding Affiliated Practice as to all material terms, including, but not limited to, valuation. The shares to be issued were based on a common allocation method that considered each Founding Affiliated Practice's gross revenue, net of certain operating expenses, and the Company's assessment of growth potential. No independent appraisals of the Founding Affiliated Practices were obtained. Of the total consideration for each transaction, each Founding Affiliated Practice could elect to receive up to 20% in cash and the balance in shares of Common Stock. The actual number of shares will be calculated by subtracting the cash portion from the total consideration and dividing the resulting amount by the initial public offering price per share. The assets to be transferred in the Affiliations include supplies inventory, equipment and certain other current and non-current assets. The liabilities to be transferred primarily consist of long-term debt. In connection with the Affiliations, the Promoters and their professional corporations, professional associations or other entities (collectively, the "PCs") will enter into long-term service agreements with Pentegra Dental (the "Service Agreements"). Additionally, those Promoters will enter into employment and noncompete agreements with their respective PCs. As of December 31, 1997, officers and directors of the Company, those who will become officers and directors of the Company in connection with the Offering and certain Promoters held common and preferred stock that was issued in connection with the funding of a portion of the expenses for the Offering, as follows (in thousands):
COMMON STOCK PREFERRED STOCK ------------------------ ------------------------ CARRYING CARRYING SHARES AMOUNT SHARES AMOUNT ----------- ----------- ----------- ----------- Officers and directors........................................... 1,049 $ 303 263 $ 123 Promoters and affiliates who are not officers and directors...... 80 101 400 300 ----- ----- --- ----- 1,129 $ 404 663 $ 423 ----- ----- --- ----- ----- ----- --- -----
F-14 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED) All of the preferred stock will be repurchased or redeemed upon completion of the Offering as described in Note 5. Pentegra Dental will not employ dentists or control the practice of dentistry by the dentists employed by the PCs. As Pentegra Dental will be executing management service agreements and will not hold any equity ownership in the PCs, the Affiliations are deemed not to be business combinations. Because each of the owners of the Founding Affiliated Practices is a promoter of the Offering, Securities and Exchange Commission's Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary Assets by Promoters or Shareholders" requires (i) the transferred nonmonetary assets to be accounted for at the historical cost basis of the Founding Affiliated Practices, (ii) any monetary assets and assumed monetary liabilities included in the Affiliations to be recorded at fair value and (iii) cash consideration paid and assumed liabilities in excess of net assets transferred, to be reflected as a dividend paid by Pentegra Dental. The information set forth below assumes all the Founding Affiliated Practices will participate in the Affiliations. Although management expects that all the practices will participate, there is no assurance that will be the case. The net assets to be transferred and liabilities to be assumed from the Founding Affiliated Practices are summarized, on a combined basis, in the following table (in thousands):
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Property, equipment and improvements, net........................ 2,912 2,841 ------------ ------------ Assets transferred............................................. 2,912 2,841 Current portion of notes payable................................. (1,078) (624) Long-term portion of notes payable............................... (1,411) (1,997) ------------ ------------ Net assets transferred, net of liabilities assumed............. $ 423 $ 220 ------------ ------------ ------------ ------------
The Company will also purchase certain net monetary assets from the founding Affiliated Practices for a cash amount of $276,000. The net assets purchased will be recorded at their fair value as of December 31, 1997. The fair value of the net monetary assets to be acquired as of December 31, 1997 was as follows (in thousands):
Accounts receivable, net....................................... $ 306 Less accounts payable.......................................... (30) ----- Net monetary assets to be acquired........................... $ 276 ----- -----
Upon consummation of the Affiliations, Pentegra Dental will enter into a Service Agreement with each Founding Affiliated Practice under which Pentegra Dental will become the exclusive manager and administrator of non-dental services relating to the operation of the Founding Affiliated Practices. The actual terms of the various Service Agreements vary from the description below on a case-by-case basis, depending on negotiations with the individual Founding Affiliated Practices and the requirements of applicable law and governmental regulations. The management service revenues that will be earned by Pentegra Dental subsequent to the closing of the Affiliations and the execution of the Service Agreements will be based on various arrangements. In general, the resulting fee will be based primarily on the patient revenues less operating expenses associated with each PC excluding dentists' salaries and depreciation. Patient revenues are determined based on net F-15 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED) patient revenues, as determined under generally accepted accounting principles, including adjustments for contractual allowances and other discounts, less an adjustment for uncollectable accounts. The Company will pay all operating expenses incurred by each Affiliated Practice that are required to operate a dental office, and the Affiliated Practice will be responsible for reimbursing the Company for such expenses. These expenses will include the following: - Salaries, benefits, payroll taxes, workers compensation, health insurance and other benefit plans, and other direct expenses of all employees of the Company at each location of the Affiliated Practice, excluding those costs associated with the dentists and any other classification of employee which the Company is prohibited from employing by law; - Direct costs of all employees or consultants that provide services to each location of the Affiliated Practice; - Dental and office supplies, as permitted by law; - Lease or rent payments, as permitted by law, and utilities, telephone and maintenance expenses for practice facilities; - Property taxes on the Company's assets located at the Affiliated Practice's offices; - Property, casualty, liability and malpractice insurance premiums relating to the operations of the Affiliated Practice; - Dentist recruiting expenses relating to the operations of the Affiliated Practice; and - Advertising and other marketing costs attributable to the promotion of the Affiliated Practice's offices. All of the above expenses will be incurred and paid by the Company directly to the third-party provider of the goods or services indicated. In exchange for incurring these expenses and providing management services, the Company will record revenues in amounts equal to those incurred expenses, which the Affiliated Practice will reimburse to the Company, together with a service fee based on the type of Service Agreement entered into by the Affiliated Practice. F-16 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED) The Founding Affiliated Practices will retain responsibility for the payment of any and all direct employment expenses, including benefits, for any dentist or other employee that the Company is prohibited from employing by law. The management service fees (the "Service Fees") payable to the Company by the Founding Affiliated Practices under the Service Agreements, together with operating and non-operating expenses of each Affiliated Practice to be paid to the Company pursuant to the Service Agreements, are payable monthly and consist of various combinations of the following: (i) "Standard Service Agreement", which provides for (a) a percentage (ranging from 30% to 40%) of the Affiliated Practice's revenues related to dental services less operating expenses associated with the operation of the Affiliated Practice or (b) a percentage (16%) of the Affiliated Practice's dental service revenues, not to exceed a percentage (35%) of the difference between those revenues and operating expenses associated with the operation of the Affiliated Practice; or (ii) "Alternative Service Agreement," which provides for the greater of (a) a percentage (35%) of the Affiliated Practice's revenues related to dental services less operating expenses associated with the operation of the Affiliated Practice or (b) a specified fixed Service Fee (ranging from $54,000 to $305,000 annually). In addition, with respect to four of the Founding Affiliated Practices, the Service Fees are based on fixed fees that are subject to renegotiation on an annual basis. Service Fees payable to the Company under clause (i)(a) above are payable by 37 of the Founding Affiliated Practices, located in each state in which the Founding Affiliated Practices are located other than New York and California, and are calculated by subtracting the operating expenses of the Founding Affiliated Practice (including non-dental salaries, insurance, rent and other non-dentist costs) from the net revenues of the Founding Affiliated Practice and multiplying the resulting amount by 30%, 35% or 40%, depending on the terms of the particular Service Agreement. One Founding Affiliated Practice located in California will pay its Service Fee according to the formula set forth in clause (i)(b) above, equal to the greater of 16% of its net revenues or 35% of the difference between its net revenues and operating expenses. Service Fees to be received by the Company under clause (ii)(b) above are payable by eight of the Founding Affiliated Practices in Texas and will result in a minimum service fee being received by the Company (ranging from $54,000 to $305,000 annually). The annual fixed fees payable by the four Founding Affiliated Practices in New York are $66,009, $115,251, $83,579 and $140,127 and will be subject to renegotiation each year based on the fair value of the services to be received by those Founding Affiliated Practices from the Company. On a monthly basis, the Company will calculate the Service Fee due from each Founding Affiliated Practice pursuant to the terms of each Service Agreement. In addition, if the costs related to providing dental services pursuant to capitated managed care arrangements exceed the revenues received for those services, the Affiliated Practice will remain responsible for reimbursing the Company for all of the costs associated with providing those services, even if no Service Fee is due to the F-17 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED) Company under its Service Agreement. The patient revenues and operating expenses (excluding depreciation and dentists' salaries) of the Founding Affiliated Practices are summarized, on a combined basis, in the following tables for the years ended December 31, 1996 and 1997 (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1997 ---------------------- ---------------------- PATIENT OPERATING PATIENT OPERATING REVENUES EXPENSES REVENUES EXPENSES --------- ----------- --------- ----------- Practices participating under the Standard Service Agreement......... $ 28,371 $ 16,913 $ 29,156 $ 17,071 Practices participating under the Alternative Service Agreement...... 6,921 4,776 6,602 4,470 Practices participating under fixed-fee agreements................... 2,599 1,393 2,519 1,408 --------- ----------- --------- ----------- Totals for Founding Affiliated Practices............................. $ 37,891 $ 23,082 $ 38,277 $ 22,949 --------- ----------- --------- ----------- --------- ----------- --------- -----------
Subsequent to the Affiliations, substantially all the operating expenses of the Founding Affiliated Practices (excluding dentists' salaries) will be paid by Pentegra Dental and billed to the PCs. The historical operating expenses of the Founding Affiliated Practices for the years ended December 31, 1996 and 1997, excluding those employment expenses for any dentist or other employee that the Company is prohibited from employing by law, are summarized, on a combined basis, in the following table (in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 1996 1997 ------------ ------------- Salaries, wages and benefits of employees, excluding the dentists...................................................... $ 8,495 $ 8,214 Dental supplies................................................. 5,680 5,572 Rent............................................................ 1,884 2,055 Advertising and marketing expenses.............................. 567 567 General and administrative expenses............................. 5,716 5,790 Other expenses.................................................. 740 751 ------------ ------------- Total operating expenses.................................... 23,082 22,949 Depreciation and amortization................................... 879 833 ------------ ------------- Total expenses.............................................. $ 23,961 $ 23,782 ------------ ------------- ------------ -------------
The Company will continue to recognize depreciation and amortization on assets transferred in connection with the Affiliations. However, such charges are not considered operating expenses under the Service Agreements and will not enter into the calculation of the service fees. The combined historical financial information of the Founding Affiliated Practices presented herein does not represent the financial position or results of operations of Pentegra Dental or the Company. Because of the significant relationship that will exist among the Company and the Founding Affiliated Practices upon completion of the Offering, this information is presented solely for the purpose of providing disclosures to potential investors regarding the group of entities with which Pentegra Dental will be contracting to provide future services. The Founding Affiliated Practices were not operated under common control or management during the fiscal years ended December 31, 1996 or 1997. However, combined financial information has been presented because entering into the Service Agreements with all of the Founding Affiliated Practices is contingent upon a single event, the completion of the Offering. F-18 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. REDEEMABLE PREFERRED STOCK In May 1997, the Company authorized the designation, out of the authorized and unissued preferred stock, of two classes of 5,000,000 shares each, designated as "Class A" and "Class B." In May 1997, the Company issued 133,335 shares of Class B nonvoting preferred stock for cash of approximately $1,000. In June 1997, the Company issued 900,000 shares of Class A nonvoting preferred stock, 550,000 shares of Class B nonvoting preferred stock and 435,000 shares of common stock for $1,457,000. The Company allocated $675,000 of the proceeds to the Class A preferred stock, $413,000 to the Class B preferred stock and $369,000 to the common stock based on the value of $0.75, $0.75 and $0.85 per share, respectively, as determined by an independent valuation of the fair value of those shares as of the date of issuance. The proceeds from these stock issuances were reserved for legal and accounting costs associated with the Offering, as well as operating costs. Holders of both classes of preferred stock are entitled to per share dividends equivalent to any dividends that may be declared on the common stock, but not to cumulative dividends. The preferred stock entitles the holders thereof to preference in liquidation over the common stock. The terms of the Class A and B preferred stock provide for it to be redeemed for $1.00 to $3.00 per share, as determined by the Company's Board of Directors, upon completion of an initial public offering. The Board of Directors has established the redemption price at $1.50 per share. In connection with negotiating the Offering and the Affiliations, certain officers and directors agreed that the Company may repurchase their shares of Class B Preferred Stock at the subscription price. Accordingly, the Company will use a portion of the net proceeds of the Offering to repurchase 245,835 shares of its Class B preferred stock held by those officers and directors at repurchase prices equal to the subscription prices, which ranged from $0.01 to $1.00 per share (aggregating to $114,000). The remaining 1,337,500 shares of Class A and B preferred stock outstanding will be redeemed at a price of $1.50 per share (aggregating to $2,006,000), of which $1.15 per share will be paid in cash and $0.35 per share will be paid in the form of a 6.0% promissory note that becomes due and payable by the Company on the earlier of the fifth anniversary of the date of the closing of the Offering or the date on which the Company offers and sells an amount of equity securities with gross proceeds equal to or greater than the gross proceeds of the Offering. The Company will recognize a dividend on the preferred stock for the difference between the redemption amount and the recorded value at the date of redemption. That difference has not been accreted to the redemption amount during the current period because the date of the Offering is not determinable. 6. COMMON STOCK All share information in the accompanying financial statements has been retroactively restated to reflect a two-for-three share reverse stock split of the Company's common stock, which was effected in October 1997. In February 1997, the Company issued 666,667 shares of common stock for cash at a price of $0.015 per share. The Company issued an additional 766,667 shares of common stock to members of management during May 1997 for cash at a price of $0.015 per share. The Company valued these shares at $0.15 per share, based on an independent valuation of the fair value of those shares as of the date of issuance. In June 1997, in addition to the 290,000 shares of common stock issued in connection with the issuance of the Class A and Class B preferred stock, described in Note 5 above, the Company issued 33,333 shares of common stock for cash at a price of $0.015 per share. Those shares were valued at $1.27 per share, based on an independent valuation of the fair value of those shares as of the date of issuance. F-19 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. COMMON STOCK (CONTINUED) In September 1997, the Company repurchased 66,667 shares of its common stock at a purchase price of $0.01 per share, of which 46,667 shares were repurchased from a director of the Company. The Company issued 66,667 shares of common stock to an officer of the Company at a purchase price of $0.015 per share. Those shares were valued at the number of shares to be received by that officer in the Share Exchange at the Offering price. The differences between the cash received for shares of common stock and the fair value of those shares as of the respective dates of issuance have been recognized as compensation expense. 7. NOTES PAYABLE In October 1997, the Company repurchased an additional 20,000 shares of its common stock from a director at a purchase price per share of $0.015, and issued (i) 20,000 shares of common stock and (ii) $300,000 of 9.5% promissory notes due on the earlier of 30 days after the closing of the Offering or October 1998. The Company allocated the $300,000 proceeds between the promissory notes and the common stock based on their relative fair values, with the value of the shares based on an assumed initial public offering price of $9.00 per share. The amount of the proceeds allocated to those shares of common stock was recorded as a discount on the promissory notes of approximately $180,000. The Company is accreting the discount over the term of the promissory notes. In November 1997, the Company issued an additional $50,000 of 9.5% promissory notes due on the earlier of 30 days after the closing of the Offering or July 1998. 8. SUBSEQUENT EVENTS In February 1998, the Company issued $486,000 of 15% promissory notes due on the earlier of three days after the closing of the Offering or eight months from the date the notes were issued. F-20 - --------------------------------------------------------- --------------------------------------------------------- - --------------------------------------------------------- --------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ---------------- TABLE OF CONTENTS
PAGE ----- Prospectus Summary................................ 3 Risk Factors...................................... 8 The Company....................................... 17 Use of Proceeds................................... 18 Dividend Policy................................... 18 Dilution.......................................... 19 Capitalization.................................... 20 Selected Financial Data........................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations............. 23 Business.......................................... 28 Management........................................ 40 Certain Transactions.............................. 47 Security Ownership of Certain Beneficial Owners and Management.................................. 51 Description of Capital Stock...................... 52 Shares Eligible for Future Sale................... 54 Underwriting...................................... 57 Legal Matters..................................... 58 Experts........................................... 58 Additional Information............................ 59 Index to Financial Statements..................... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,500,000 SHARES [LOGO] PENTEGRA DENTAL GROUP, INC. COMMON STOCK --------------- PROSPECTUS ---------------- Dain Rauscher Incorporated EVEREN Securities, Inc. , 1998 - --------------------------------------------------------- --------------------------------------------------------- - --------------------------------------------------------- --------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses to be paid by the Company (other than underwriting compensation expected to be incurred) in connection with the offering described in this Registration Statement. All amounts are estimates, except the SEC Registration Fee, the NASD Filing Fee and the American Stock Exchange. SEC Registration Fee............................................ $ 12,197 NASD Filing Fee................................................. 4,525 American Stock Exchange Listing Fee............................. 35,000 Blue Sky Fees and Expenses...................................... 10,000 Printing Costs.................................................. 350,000 Legal Fees and Expenses......................................... 600,000 Accounting Fees and Expenses.................................... 1,800,000 Transfer Agent and Registrar Fees and Expenses.................. 5,000 Miscellaneous................................................... 83,278 --------- Total......................................................... $2,900,000 --------- ---------
- --------- * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. DELAWARE GENERAL CORPORATION LAW Section 145(a) of the General Corporation Law of the State of Delaware (the "DGCL") provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person's conduct was unlawful. Section 145(b) of the DGCL states that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the II-1 corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145(c) of the DGCL provides that to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 145(d) of the DGCL states that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors or, if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 145(e) of the DGCL provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in Section 145. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 145(f) of the DGCL states that the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 145(g) of the DGCL provides that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of Section 145. Section 145(j) of the DGCL states that the indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. RESTATED CERTIFICATE OF INCORPORATION The Restated Certificate of Incorporation of the Company provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided for in Section 174 of the DGCL. If the DGCL is amended to II-2 authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Company, in addition to the limitation on personal liability described above, shall be limited to the fullest extent permitted by the amended DGCL. Further, any repeal or modification of such provision of the Certificate of Incorporation by the stockholders of the Company shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Company existing at the time of such repeal or modification. BYLAWS The Bylaws of the Company provide that the Company will indemnify any director or officer of the Company to the fullest extent permitted by applicable law, from and against judgments, fines, amounts paid in settlement and expenses (including attorneys' fees) whatsoever arising out of any event or occurrence related to the fact that such person is or was a director or officer of the Company and further provide that the Company may, but is not required to, indemnify any employee or agent of the Company or a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise who is or was serving in such capacity at the request of the Company; provided, however, that the Company is only required to indemnify persons serving as directors and officers (and to the extent authorized by the Board of Directors, such other persons) for the expenses incurred in a proceeding if such person has met the standards of conduct that make it permissible under the laws of the State of Delaware for the Company to indemnify the claimant for the amount claimed. The Bylaws further provide that, in the event of any threatened, or pending action, suit or proceeding in which any director or officer of the Company is a party or is involved and that may give rise to a right of indemnification under the Bylaws, following written request by such person, the Company will promptly pay to such person amounts to cover expenses reasonably incurred by such person in such proceeding in advance of its final disposition upon such person undertaking to repay the advance if it is ultimately determined that such person is not entitled to be indemnified by the Company as provided in the Bylaws. UNDERWRITING AGREEMENT The Underwriting Agreement provides for the indemnification of the directors and officers of the Company in certain circumstances. INSURANCE The Company intends to maintain liability insurance for the benefit of its directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information relates to securities issued or sold by the Company within the last three years: (i) In connection with the formation of the Company, on February 22, 1997 PII issued shares of its common stock to J. Michael Casas (200,000 shares), James L. Dunn, Jr. (100,000 shares), John G. Thayer (66,667 shares), Allen M. Gelwick (66,667 shares), Stephen P. Schmitt (33,333 shares), Dunn Family Trust, James L. Dunn, Jr., Trustee (33,333 shares), JoAn Majors (66,667 shares), John W. Parsons (66,667 shares) and Richard M. Vento (33,333 shares), at a purchase price per share of $0.015. On May 12, 1997, PII issued Class B Preferred to J. Michael Casas (66,667 shares), James L. Dunn, Jr. (33,334 shares) and John W. Parsons (33,334 shares), at a purchase price per share of $0.01. On May 22, 1997, PII issued shares of its common stock to George M. Siegel (300,000 shares), Omer K. Reed, D.D.S. (150,000 shares), Gary S. Glatter (100,000 shares), Kelly W. Reed (150,000 shares), Stephen E. Stapleton (33,333 shares) and Kimberlee K. Rozman (33,333 shares), at a purchase price per share of $0.015. On June 13, 1997, (i) PII issued shares of its Class A Preferred to Marie Adamo (50,000 shares), Peter Anderson, Aurous, Ltd. (25,000 shares), Scott Bolding (25,000 shares), William II-3 Decker (100,000 shares), Peter Anderson, Dufo, Ltd. (25,000 shares), Daniel Goldman, Goldfam, Ltd. (75,000 shares), Peter Anderson, Laguna Enterprises, Ltd. (25,000 shares), James Landers (50,000 shares), Gary Nagler (25,000 shares), Debra Novosad (50,000 shares), Edward Pitts, P/S Plan (125,000 shares), RTT Investments (150,000 shares), Candy Segall (25,000 shares), Annie Smith (50,000 shares) and Ken W. Smith (100,000 shares), at a purchase price per share of $1.00; (ii) PII issued shares of its Class B Preferred to Omer K. Reed, D.D.S. (37,500 shares), Gary S. Glatter (37,500 shares), George M. Siegel (37,500 shares), Stephen E. Stapleton (12,500 shares), Mack E. Greder, D.D.S. (25,000 shares), Roger Allen Kay, D.D.S. (25,000 shares), Debra Novosad (50,000 shares), Bruce A. Kanehl, D.D.S. (25,000 shares), George King, D.D.S. (25,000 shares), Brian K. Kniff, D.D.S. (25,000 shares), Richard W. Mains, D.D.S., RBM Trust (25,000 shares), James W. Medlock, D.D.S. (25,000 shares), Thomas L. Mullooly, D.D.S. (25,000 shares), Richard H. Fettig, D.D.S. (25,000 shares), Marvin V. Cavallino, D.D.S. (50,000 shares), Alan H. Gerbholz, D.D.S. (25,000 shares), Victor H. Burdick, D.D.S. (25,000 shares), Steve Anderson, D.D.S. (25,000 shares) and James P. Allen, D.D.S. (25,000 shares), at a purchase price per share of $1.00; and (iii) PII issued shares of its common stock to Omer K. Reed, D.D.S. (7,500 shares), Gary S. Glatter (7,500 shares), George M. Siegel (7,500 shares), Stephen E. Stapleton (2,500 shares), Mack E. Greder, D.D.S. (5,000 shares), Roger Allen Kay, D.D.S. (5,000 shares), Marie Adamo (10,000 shares), Peter Anderson, Aurous, Ltd. (5,000 shares), Scott Bolding (5,000 shares), William Decker (20,000 shares), Peter Anderson, Dufo, Ltd. (5,000 shares), Daniel Goldman, Goldfam, Ltd. (35,000 shares), Peter Anderson, Laguna Enterprises, Ltd. (5,000 shares), James Landers (10,000 shares), Gary Nagler (5,000 shares), Debra Novosad (20,000 shares), Edward Pitts, P/S Plan (38,333 shares), RTT Investments (30,000 shares), Candy Segall (5,000 shares), Annie Smith (10,000 shares), Ken W. Smith (20,000 shares), Marvin V. Cavallino, D.D.S. (10,000 shares), Bruce A. Kanehl, D.D.S. (5,000 shares), Richard H. Fettig, D.D.S. (5,000 shares), Victor H. Burdick, D.D.S. (5,000 shares), Thomas L. Mullooly, D.D.S. (5,000 shares), James W. Medlock, D.D.S. (5,000 shares), Alan H. Gerbholz, D.D.S. (5,000 shares), Richard W. Mains, D.D.S., RBM Trust (5,000 shares), Brian K. Kniff, D.D.S. (5,000 shares), George King, D.D.S. (5,000 shares), Steve Anderson, D.D.S. (5,000 shares) and James P. Allen, D.D.S. (5,000 shares), at a purchase price of $0.015 per share. On September 1, 1997, PII issued 66,667 shares of its common stock to Sam H. Carr at a purchase price of $0.015 per share. On October 8, 1997, PII issued 6,667 shares of its common stock to Manhattan Group Funding and 13,333 shares of its common stock to Daniel A. Bock, at a purchase price of $0.015 per share. Each of the above-mentioned issuances was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof as transactions not involving any public offering. (ii) ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement 2.1+ -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a sole proprietorship 2.2+ -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a partnership 2.3+ -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and an entity 2.4+ -- Form of Agreement and Plan of Reorganization between Pentegra Dental Group, Inc. and an entity
II-4
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------- 2.5+ -- Exchange Agreement dated as of July 31, 1997 among Pentegra Investments, Inc., Pentegra Dental Group, Inc. and the stockholders named therein 2.6+ -- Asset Contribution Agreement dated as of August 20, 1997 among Pentegra Dental Group, Inc., Pentegra, Ltd., Napili International and Omer K. Reed, D.D.S. 2.7+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James P. Allen, D.D.S. 2.8+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Walter J. Anderson, D.D.S, Donald H. Plotkin, D.D.S, William H. Swilley, D.D.S., William A. Cerny, D.D.S. and Graham A. Satchell, D.D.S., Inc., dba Anderson Dental Group and Walter J. Anderson, D.D.S., Donald H. Plotkin, D.D.S., William A. Cerny, D.D.S., Brian M. Ellis, D.D.S. and Afshan Kaviani, D.D.S. 2.9+ -- Asset Contribution Agreement dated August 15, 1997 by and among Pentegra Dental Group, Inc., Ronnie Andress, D.D.S., Inc., and Ronnie Andress, D.D.S. 2.10+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Victor H. Burdick, D.D.S., P.C., and Victor H. Burdick, D.D.S. 2.11+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Marvin V. Cavallino, D.D.S., A Professional Corporation, and Marvin Cavallino, D.D.S. 2.12+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., James H. Clarke, Jr., D.D.S., Inc. and James H. Clarke, Jr., D.D.S. 2.13+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Henry Cuttler, D.D.S. 2.14+ -- Agreement and Plan of Reorganization dated August 11, 1997 by and among Pentegra Dental Group, Inc., Edward T. Dougherty, Jr., D.D.S., P.A., and Edward T. Dougherty, Jr., D.D.S. 2.15+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Family Dental Centers, P.A., Steve Anderson, D.D.S. and Lindi B. Anderson, D.D.S. 2.16+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Richard H. Fettig, D.D.S. 2.17+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Alan H. Gerbholz, D.D.S., P.C. and The AMG Trust. 2.18+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Michael J. Gershtenson, D.D.S., P.C. and Michael J. Gershtenson, D.D.S. 2.19+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Mack E. Greder, D.D.S, P.C. and Mack Greder, D.D.S. 2.20+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Salvatore J. Guarnieri, D.D.S. 2.21+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Kent M. Hamilton, D.D.S, P.C. and Kent M. Hamilton, D.D.S. 2.22+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David R. Henderson, D.D.S. 2.23+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Stephen Hwang, D.D.S.
II-5
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------- 2.24+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Jackson Dental Partnership, Penn Jackson, Sr. and Penn Jackson, Jr. 2.25+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Bruce A. Kanehl, D.D.S. 2.26+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Roger Allen Kay, D.D.S, P.A. and Roger A. Kay, D.D.S. 2.27+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Patrick T. Kelly, D.D.S, P.C. and Patrick T. Kelly, D.D.S. 2.28+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Brian K. Kniff, D.D.S, P.C., Brian K. Kniff, D.D.S and Gordon Ledingham, D.D.S. 2.29+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Lakeview Dental, P.C. and Kevin Gasser, D.D.S. 2.30+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald W. Lanning, D.D.S. 2.31+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David A. Little, D.D.S. 2.32+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Susan E. Lunson, D.D.S., P.C. and Susan E. Lunson, D.D.S. 2.33+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Richard W. Mains, Jr., D.M.D, P.C. and Richard W. Mains, Jr., D.M.D. 2.34+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James M. McDonough, D.D.S. 2.35+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., James W. Medlock, D.D.S., P.A. and James Medlock, D.D.S. 2.36+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., James Randy Mellard, D.D.S., M.S., P.C. and James Randy Mellard, D.D.S., M.S. 2.37+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Mary B. Mellard, D.D.S., P.C. and Mary B. Mellard, D.D.S. 2.38+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., T.L. Mullooly, D.D.S., Inc. and T.L. Mullooly, D.D.S. 2.39+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Byron L. Novosad, D.D.S., Inc. and Byron L. Novosad, D.D.S. 2.40+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Randy O'Brien, D.D.S., Inc. and Randy O'Brien, D.D.S. 2.41+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Terrence C. O'Keefe, D.D.S. 2.42+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Harold A. Pebbles, D.D.S., P.C. and Harold Pebbles, D.D.S. 2.43+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jimmy F. Pinner, D.D.S. 2.44+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Omer K. Reed, D.D.S., Ltd. and Omer K. Reed, D.D.S. 2.45+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Richard Reinitz, D.D.S., P.C. and Richard Reinitz, D.D.S.
II-6
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------- 2.46+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Greg Richards, D.D.S. 2.47+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Richard N. Smith, DMD, P.C. and The Paradise Trust 2.48+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and John N. Stellpflug, D.D.S. 2.49+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jack Stephens, D.D.S. 2.50+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Y. Paul Suzuki, D.D.S., P.S. and Paul Suzuki, D.D.S. 2.51+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald F. Tamborello, D.D.S. 2.52+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Helena Thomas, D.D.S. 2.53+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Louis J. Thornley, D.D.S., P.S. and Louis J. Thornley, D.D.S. 2.54+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and S. Victor Uhrenholdt, D.D.S. 2.55+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Scott Van Zandt, D.D.S. 2.56+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Ronald M. Yaros, D.D.S., P.C. and Ron Yaros, D.D.S. The schedules and exhibits to the foregoing acquisition agreements have not been filed as exhibits to this Registration Statement. Pursuant to Item 601(b)(2) of Regulation S-K, Pentegra Dental Group, Inc. agrees to furnish a copy of such schedules and exhibits to the Commission upon request. 3.1+ -- Restated Certificate of Incorporation of Pentegra Dental Group, Inc. 3.2+ -- Bylaws of Pentegra Dental Group, Inc. 4.1+ -- Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc. 4.2+ -- Form of Registration Rights Agreement for Owners of Founding Affiliated Practices 4.3+ -- Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named therein 5.1+ -- Opinion of Jackson Walker L.L.P. 10.1+ -- Pentegra Dental Group, Inc. 1997 Stock Compensation Plan 10.2+ -- Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.3+ -- Employment Agreement dated July 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter 10.4+ -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer 10.5+ -- Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr 10.6+ -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James Dunn, Jr.
II-7
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------- 10.7+ -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee K. Rozman 10.8+ -- Form of Service Agreement 10.9+ -- Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.10 -- Second Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.11 -- Amendment to Employment Agreement dated May 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter 10.12 -- Amendment to Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr 10.13 -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James L. Dunn, Jr. 10.14 -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer 10.15 -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee Rozman 10.16 -- Second Amendment to Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc., Pentegra, Ltd., Napili International, Inc. and the shareholders of Pentegra, Ltd. and Napili International, Inc. 23.1 -- Consent of Coopers & Lybrand L.L.P. 23.2+ -- Consent of Jackson Walker L.L.P. (contained in Exhibit 5.1) 23.3+ -- Consents of Director Nominees 24.1+ -- Power of Attorney (contained on the signature page of this Registration Statement) 27.1+ -- Financial Data Schedule
- --------- + Previously filed. (b) Financial Statement Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes as follows: (1) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payments by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the II-8 opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) That, for the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (4) That, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Pentegra Dental Group, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on February 23, 1998. PENTEGRA DENTAL GROUP, INC. By: /s/ GARY S. GLATTER ----------------------------------------- Gary S. Glatter PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated on February 23, 1998. SIGNATURES TITLE - ------------------------------ ---------------------------------------------- /s/ GARY S. GLATTER - ------------------------------ President, Chief Executive Officer and Gary S. Glatter Director (Principal Executive Officer) /s/ SAM H. CARR Senior Vice President and Chief Financial - ------------------------------ Officer (Principal Financial and Accounting Sam H. Carr Officer) /s/ OMER K. REED, D.D.S.* - ------------------------------ Chairman of the Board Omer K. Reed, D.D.S. /s/ J. MICHAEL CASAS* - ------------------------------ Director J. Michael Casas /s/ ALLEN M. GELWICK* - ------------------------------ Director Allen M. Gelwick /s/ GEORGE M. SIEGEL* - ------------------------------ Director George M. Siegel /s/ JAMES L. DUNN, JR.* - ------------------------------ Director James L. Dunn, Jr. *By /s/ KIMBERLEE K. ROZMAN - ------------------------------ Kimberlee K. Rozman, as ATTORNEY-IN-FACT II-10 INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ---------- -------------------------------------------------------------------------------------------- --------------- 1.1 -- Form of Underwriting Agreement 2.1+ -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a sole proprietorship 2.2+ -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a partnership 2.3+ -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and an entity 2.4+ -- Form of Agreement and Plan of Reorganization between Pentegra Dental Group, Inc. and an entity 2.5+ -- Exchange Agreement dated July 31, 1997 among Pentegra Investments, Inc., Pentegra Dental Group, Inc. and the stockholders named therein 2.6+ -- Asset Contribution Agreement dated as of August 20, 1997 among Pentegra Dental Group, Inc., Pentegra, Ltd., Napili International and Omer K. Reed, D.D.S. 2.7+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James P. Allen, D.D.S. 2.8+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Walter J. Anderson, D.D.S, Donald H. Plotkin, D.D.S, William H. Swilley, D.D.S., William A. Cerny, D.D.S. and Graham A. Satchell, D.D.S., Inc., dba Anderson Dental Group and Walter J. Anderson, D.D.S., Donald H. Plotkin, D.D.S., William A. Cerny, D.D.S., Brian M. Ellis, D.D.S. and Afshan Kaviani, D.D.S. 2.9+ -- Asset Contribution Agreement dated August 15, 1997 by and among Pentegra Dental Group, Inc., Ronnie Andress, D.D.S., Inc., and Ronnie Andress, D.D.S. 2.10+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Victor H. Burdick, D.D.S., P.C., and Victor H. Burdick, D.D.S. 2.11+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Marvin V. Cavallino, D.D.S., A Professional Corporation, and Marvin Cavallino, D.D.S. 2.12+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., James H. Clarke, Jr., D.D.S., Inc. and James H. Clarke, Jr., D.D.S. 2.13+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Henry Cuttler, D.D.S. 2.14+ -- Agreement and Plan of Reorganization dated August 11, 1997 by and among Pentegra Dental Group, Inc., Edward T. Dougherty, Jr., D.D.S., P.A., and Edward T. Dougherty, Jr., D.D.S. 2.15+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Family Dental Centers, P.A., Steve Anderson, D.D.S. and Lindi B. Anderson, D.D.S. 2.16+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Richard H. Fettig, D.D.S. 2.17+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Alan H. Gerbholz, D.D.S., P.C. and The AMG Trust. 2.18+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Michael J. Gershtenson, D.D.S., P.C. and Michael J. Gershtenson, D.D.S. 2.19+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Mack E. Greder, D.D.S, P.C. and Mack Greder, D.D.S.
2.20+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Salvatore J. Guarnieri, D.D.S. 2.21+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Kent M. Hamilton, D.D.S, P.C. and Kent M. Hamilton, D.D.S. 2.22+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David R. Henderson, D.D.S. 2.23+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Stephen Hwang, D.D.S 2.24+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Jackson Dental Partnership, Penn Jackson, Sr. and Penn Jackson, Jr. 2.25+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Bruce A. Kanehl, D.D.S. 2.26+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Roger Allen Kay, D.D.S, P.A. and Roger A. Kay, D.D.S. 2.27+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Patrick T. Kelly, D.D.S, P.C. and Patrick T. Kelly, D.D.S. 2.28+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Brian K. Kniff, D.D.S, P.C., Brian K. Kniff, D.D.S and Gordon Ledingham, D.D.S. 2.29+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Lakeview Dental, P.C. and Kevin Gasser, D.D.S. 2.30+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald W. Lanning, D.D.S. 2.31+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David A. Little, D.D.S. 2.32+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Susan E. Lunson, D.D.S., P.C. and Susan E. Lunson, D.D.S. 2.33+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Richard W. Mains, Jr., D.M.D, P.C. and Richard W. Mains, Jr., D.M.D. 2.34+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James M. McDonough, D.D.S. 2.35+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., James W. Medlock, D.D.S., P.A. and James Medlock, D.D.S. 2.36+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., James Randy Mellard, D.D.S., M.S., P.C. and James Randy Mellard, D.D.S., M.S. 2.37+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Mary B. Mellard, D.D.S., P.C. and Mary B. Mellard, D.D.S. 2.38+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., T.L. Mullooly, D.D.S., Inc. and T.L. Mullooly, D.D.S. 2.39+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Byron L. Novosad, D.D.S., Inc. and Byron L. Novosad, D.D.S. 2.40+ -- Asset Contribution Agreement dated August 20, 1997 by and among Pentegra Dental Group, Inc., Randy O'Brien, D.D.S., Inc. and Randy O'Brien, D.D.S. 2.41+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Terrence C. O'Keefe, D.D.S.
2.42+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Harold A. Pebbles, D.D.S., P.C. and Harold Pebbles, D.D.S. 2.43+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jimmy F. Pinner, D.D.S. 2.44+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Omer K. Reed, D.D.S., Ltd. and Omer K. Reed, D.D.S. 2.45+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Richard Reinitz, D.D.S., P.C. and Richard Reinitz, D.D.S. 2.46+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Greg Richards, D.D.S. 2.47+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Richard N. Smith, DMD, P.C. and The Paradise Trust 2.48+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and John N. Stellpflug, D.D.S. 2.49+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jack Stephens, D.D.S. 2.50+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Y. Paul Suzuki, D.D.S., P.S. and Paul Suzuki, D.D.S. 2.51+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald F. Tamborello, D.D.S. 2.52+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Helena Thomas, D.D.S. 2.53+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Louis J. Thornley, D.D.S., P.S. and Louis J. Thornley, D.D.S. 2.54+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and S. Victor Uhrenholdt, D.D.S. 2.55+ -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Scott Van Zandt, D.D.S. 2.56+ -- Agreement and Plan of Reorganization dated August 20, 1997 by and among Pentegra Dental Group, Inc., Ronald M. Yaros, D.D.S., P.C. and Ron Yaros, D.D.S. The schedules and exhibits to the foregoing acquisition agreements have not been filed as exhibits to this Registration Statement. Pursuant to Item 601(b)(2) of Regulation S-K, Pentegra Dental Group, Inc. agrees to furnish a copy of such schedules and exhibits to the Commission upon request. 3.1+ -- Restated Certificate of Incorporation of Pentegra Dental Group, Inc. 3.2+ -- Bylaws of Pentegra Dental Group, Inc. 4.1+ -- Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc. 4.2+ -- Form of Registration Rights Agreement for Owners of Founding Affiliated Practices 4.3+ -- Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named therein 5.1+ -- Opinion of Jackson Walker L.L.P. 10.1+ -- Pentegra Dental Group, Inc. 1997 Stock Compensation Plan 10.2+ -- Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S.
10.3+ -- Employment Agreement dated July 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter 10.4+ -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer 10.5+ -- Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr 10.6+ -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James Dunn, Jr. 10.7+ -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee K. Rozman 10.8+ -- Form of Service Agreement 10.9+ -- Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.10 -- Second Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.11 -- Amendment to Employment Agreement dated May 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter. 10.12 -- Amendment to Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr. 10.13 -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James L. Dunn, Jr. 10.14 -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer. 10.15 -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee Rozman. 10.16 -- Second Amendment to Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc., Pentegra, Ltd., Napili International, Inc. and the shareholders of Pentegra, Ltd. and Napili International, Inc. 23.1 -- Consent of Coopers & Lybrand L.L.P. 23.2+ -- Consent of Jackson Walker L.L.P. (contained in Exhibit 5.1) 23.3+ -- Consents of Director Nominees 24.1+ -- Power of Attorney (contained on the signature page of this Registration Statement) 27.1+ -- Financial Data Schedule
- --------- + Previously filed. EX-1.1 2 EXHIBIT 1.1 DRAFT: FEBRUARY 24, 1998 PENTEGRA DENTAL GROUP, INC. COMMON STOCK (PAR VALUE $.001 PER SHARE) ---------------------- UNDERWRITING AGREEMENT ---------------------- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. As Representatives of the several Underwriters named in Schedule I hereto, c/o Dain Rauscher Incorporated Cityplace 2711 North Haskell Avenue, Suite 2400 Dallas, Texas 75204-2936 Dear Sirs: Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 2,500,000 shares (the "Firm Shares") of the Company's common stock, par value $.001 per share ("Common Stock"), and, at the election of the Underwriters, up to 375,000 additional shares of the Common Stock on the terms and for the purposes set forth in Section 2 (the "Optional Shares"). The Firm Shares and the Optional Shares, if purchased, are hereinafter collectively called the "Shares." This is to confirm the agreement concerning the purchase of the Shares from the Company by the Underwriters, for whom you are acting as representatives (the "Representatives"). 1. The Company represents and warrants to, and agrees with, each of the Underwriters that: 1 (a) A registration statement on Form S-1 (File No. 333-37633) with respect to the Shares has (i) been prepared by the Company in conformity with the requirements of the United States Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rule and Regulations") of the United States Securities and Exchange Commission (the "Commission") thereunder, (ii) been filed with the Commission under the Act and (iii) become effective under the Act. Copies of such registration statement have been delivered by the Company to you as the representatives (the "Representatives") of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means each prospectus included in such registration statement, or amendments thereof, before it became effective under the Act and any prospectus filed with the Commission by the Company with the prior written consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at the Effective Time, including all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5(a) hereof and deemed to be a part of the registration statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means such final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all material respects to the requirements of the Act and the Rules and Regulations and do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an 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 not misleading; PROVIDED that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein (which written information is specifically identified in Section 8(e)). (c) After giving effect to (i) the repurchase by Pentegra Investments, Inc., a Delaware corporation ("PII"), of certain shares of common stock of PII (the "PII Common Stock Repurchases") pursuant to the terms of the Share Repurchase Agreement dated as of December 10, 1997 by and among PII and the stockholders of PII listed on the signature pages thereto (the "PII Common Stock Repurchase Agreement") and (ii) the share exchange 2 (the "Share Exchange") among the Company and the holders of the outstanding shares of common stock of PII, to be completed on the First Time of Delivery (as hereinafter defined) pursuant to the terms of the Exchange Agreement dated as of July 31, 1997 among the Company, PII and the holders of common stock of PII (the "Share Exchange Agreement") (a copy of which has been filed as an exhibit to the Registration Statement), PII will be the only subsidiary (as defined in Section 15) of the Company as of the First Time of Delivery, and the Company has never had any other subsidiary. (d) The Company, PII and each of the entities that, on or prior to the First Time of Delivery, will have entered into an Acquisition Agreement (as hereinafter defined) and/or a management service agreement or similar contract (each, a "Service Agreement") with the Company (collectively, the "PA Affiliates"), other than those PA Affiliates that are sole proprietorships, have been duly organized and are validly existing in good standing (to the extent applicable) under the laws of their respective jurisdictions of organization, are duly registered and qualified to transact business and are in good standing as foreign corporations, professional corporations, professional associations, limited liability companies or limited partnerships, as the case may be, in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own, lease, operate or hold their respective properties and to conduct the businesses in which they are engaged. The PA Affiliates are listed on Schedule II hereto, and the information contained in such Schedule is true and correct. (e) The Company has an authorized capitalization as set forth in the Prospectus, and all of the shares of capital stock of the Company that will be issued and outstanding as of the First Time of Delivery (before giving effect to the issuance and sale of the Shares hereunder) have been duly and validly authorized and, when issued and delivered pursuant to the Share Exchange Agreement and the Acquisition Agreements (as hereinafter defined) on the First Time of Delivery, will be duly and validly issued, fully paid and nonassessable, will not have been issued in violation of any preemptive or similar rights and conform to the description thereof contained in the Prospectus; and all of the issued shares of capital stock of PII have been duly and validly authorized and issued and are fully paid and nonassessable, have not been issued in violation of any preemptive or similar rights and, as of the First Time of Delivery, will be owned directly by the Company, free and clear of all liens, encumbrances, equities or claims. (f) The Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and nonassessable and will not have been issued in violation of or be subject to any preemptive or similar rights; and the Shares will conform to the description thereof contained in the Prospectus. 3 (g) The Company has the power and authority to enter into this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided herein. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to the effect of (i) any applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (h) The Company has the power and authority to enter into each of the acquisition transactions to be consummated as of the First Time of Delivery, as described in the Registration Statement and the Prospectus (collectively, the "Acquisitions"), each of the agreements pursuant to which an Acquisition is being consummated (collectively, the "Acquisition Agreements" and, together with the Service Agreements, the "Transaction Agreements") and each of the Service Agreements to which it is (or, as of the First Time of Delivery, will be) a party. Each PA Affiliate has the power and authority to enter into each Transaction Agreement to which it is (or, as of the First Time of Delivery, will be) a party. The execution and delivery of, and the performance by the Company and the PA Affiliates of their respective obligations under, the Transaction Agreements to which they are parties, respectively, have been duly and validly authorized by the Company and the PA Affiliates and each Transaction Agreement has been (or, in the case of any such Transaction Agreement to be entered into between the date of this Agreement and the time of the deliveries to be made under this Agreement on the First Time of Delivery, will, as of the First Time of Delivery, be) duly executed and delivered by the Company and each PA Affiliate that is a party to such agreement, and constitutes (or, in the case of any such Transaction Agreement to be entered into between the date of this Agreement and the time of the deliveries to be made under this Agreement as of the First Time of Delivery, will, as of the First Time of Delivery, constitute) the legal, valid and binding agreement of the Company and each such PA Affiliate, enforceable in accordance with its terms, except as that enforceability may be subject to the effect of (i) any applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (i) The execution, delivery and performance of this Agreement and each of the Transaction Agreements by the Company and the consummation of the transactions contemplated hereby and thereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company, PII or any of the PA Affiliates is a party or by which the Company, PII or any of the PA Affiliates is bound or to which any of the property or assets of the Company, PII or any of the PA Affiliates is subject, nor will such actions result in any violation of the provisions of the 4 charter, by-laws or other organizational documents of the Company, PII or any of the PA Affiliates or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, PII or any of the PA Affiliates or any of their respective properties or assets; except for the registration of the Shares under the Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company or the consummation of the transactions contemplated hereby; and no consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body is required for the execution, delivery and performance of any of the Transaction Agreements or the consummation of the transactions contemplated thereby. (j) There are no contracts, agreements or understandings between the Company and any person granting such person the right to (i) require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person, (ii) require the Company to include such securities in the securities registered pursuant to the Registration Statement or (iii) except as described in the Prospectus, require that any securities be registered pursuant to any other registration statement filed by the Company under the Act. (k) Except as described in the Registration Statement, the Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Act. (l) None of the Company, PII or any of the PA Affiliates has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, (i) there has not been any material change in the capital stock or long-term or short-term debt of the Company, PII or any of the PA Affiliates or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, consolidated financial position, stockholders' equity, results of operations or prospects of the Company, otherwise than as set forth or contemplated in the Prospectus and (ii) except as may otherwise be disclosed in the Prospectus, the Company has not (A) issued or granted any securities, (B) incurred any liability or obligation, direct, indirect or contingent, other than liabilities and obligations that were incurred in the ordinary 5 course of business, (C) entered into any transaction not in the ordinary course of business or (D) declared or paid any dividend on its capital stock. (m) The financial statements (including the related notes and any supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved; the pro forma balance sheet of the Company, together with the related notes, as set forth in the Registration Statement and the Prospectus, present fairly the information shown therein, have been prepared in accordance with the applicable provisions of Article 11 of Regulation S-X promulgated by the Commission with respect to pro forma financial statements and have been properly compiled on the pro forma basis described therein and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and has been prepared on a basis consistent with such financial statements and the books and records of the Company. (n) Coopers & Lybrand LLP, who have certified certain financial statements of the Company, whose report appears in the Prospectus and who have delivered the initial letter referred to in Section 7(i) hereof, are independent public accountants as required by the Act and the Rules and Regulations. (o) None of the Company, PII or the PA Affiliates (i) is in violation of its charter, by-laws or other organizational documents, (ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject, except, in the case of those PA Affiliates that are sole proprietorships, for any such defaults as would not, individually or in the aggregate, adversely affect the Company or (iii) is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business, except, in the case of those PA Affiliates that are sole proprietorships, for any such violations or failures as would not, individually or in the aggregate, adversely affect the Company. 6 (p) Neither the Company, PII nor any of the PA Affiliates has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (collectively, "Environmental Laws"), or any foreign, federal or state law relating to the practice of dentistry or governing the provision of dental services or the collection and/or application of fees therefrom (collectively, "Applicable Healthcare Laws"), or any foreign, federal or state law relating to discrimination in the hiring, promotion or pay of employees or any applicable foreign, federal or state wages and hours laws, or any provisions of the United States Employee Retirement Income Security Act of 1976, as amended (together with the rules and regulations thereunder, "ERISA"), or the rules and regulations promulgated thereunder, which, singly or in the aggregate, might have a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company and PII, taken as a whole ("Material Adverse Effect"). (q) Each of the Company, PII and the PA Affiliates has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including, without limitation, under any applicable Environmental Laws and Applicable Healthcare Laws and related governmental regulations, as are necessary to own its respective properties and to conduct its business in the manner described in the Prospectus, subject in each case to such qualifications as may be set forth in the Prospectus and except where the failure to have such permits would not, singly or in the aggregate, have a Material Adverse Effect; each of the Company, PII and the PA Affiliates has fulfilled and performed all of its obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permits, subject in each case to such qualifications as may be set forth in the Prospectus and except where the failure so to fulfill or perform or the occurrence of such an event would not, singly or in the aggregate, have a Material Adverse Effect; and, except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company, PII or the PA Affiliates. Each of the (i) dentists and (ii) other professionals involved in providing dental care to patients (each, a "Dental Professional") who is employed by or affiliated with a PA Affiliate has such permits under Applicable Healthcare Laws and related governmental regulations (including, as applicable, state and local licenses to practice dentistry and federal Drug Enforcement Agency Controlled Substances Registration certificates) as are necessary to provide dental care in such jurisdictions as are contemplated by the Service Agreement to be entered into between that PA Affiliate and the Company as of the First Time of Delivery; each of such Dental Professionals has fulfilled and performed all of his or her material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time (or both) would allow, revocation or termination thereof or would result in any other material impairment of the rights of the holder of such permit; and, except as described in the Prospectus, no such permit contains any restrictions that are 7 materially burdensome to the holder thereof or the PA Affiliate with which that holder is affiliated or employed. The Company's and each PA Affiliate's business practices do not violate any foreign, federal or state laws regarding dentist ownership of (or financial relationship with), and referral to, entities providing dental-related goods or services, or laws respecting financial interests held by dentists in entities to which they may refer patients for the provision of dental-related goods or services. None of the PA Affiliates (or any of their respective predecessors) has billed or accepted payment from any Medicare, Medicaid or CHAMPUS program during the two years preceding the date of this Agreement in an aggregate amount that was material to their respective total billings or payments for either of those years. (r) The Company, PII and each of the PA Affiliates have good and marketable title in fee simple to all real property that has been or, pursuant to the Acquisition Agreements, is to be acquired by the Company on or before the First Closing Date and good and marketable title to all personal property owned by them that has been or, pursuant to the Acquisition Agreements, is to be acquired by the Company on or before the First Closing Date, in each case free and clear of all liens, encumbrances and defects, except such as are described in the Prospectus or such as do not materially adversely affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company, PII and the PA Affiliates; and all real property and buildings held under lease by the Company, PII and the PA Affiliates are held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company, PII and the PA Affiliates. Each PA Affiliate has obtained all consents of third parties necessary under each lease (whether relating to real property or personal property) to which it is a party for the consummation of the transactions contemplated by the Transaction Agreements to which it is (or, as of the First Time of Delivery, will be) a party. (s) The Company, PII and each of the PA Affiliates carry, or otherwise are covered by, insurance in such amounts and covering such risks (including, without limitation, malpractice risks) as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar businesses; and none of the Company, PII or any of the PA Affiliates has received any notice of cancellation or nonrenewal with respect to such insurance. (t) Each of the Company, PII and the PA Affiliates owns or possesses adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights and licenses used in the conduct of its business and the Company has no reason to believe that the conduct of their respective businesses will conflict with, and has not received any notice of any claim of conflict with, any such rights of others. 8 (u) There are no legal or governmental proceedings (domestic or foreign) pending to which the Company, PII or any of the PA Affiliates is a party or of which any property or assets of the Company, PII or any of the PA Affiliates is the subject which, singly or in the aggregate, if determined adversely to the Company, PII or any of the PA Affiliates, might have a Material Adverse Effect; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by any governmental authorities or threatened by others. (v) There are no contracts or other documents that are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement as required. (w) No relationship, direct or indirect, exists between or among the Company, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company, on the other hand, that is required to be described in the Prospectus and that is not so described. (x) No labor disturbance by the employees of the Company, PII or any of the PA Affiliates exists or, to the knowledge of the Company, is imminent which might be expected to, singly or in the aggregate, have a Material Adverse Effect; none of the Company, PII or any of the PA Affiliates has ever been party to a collective bargaining agreement; and there are no significant unfair labor practice complaints pending against the Company, PII or any of the PA Affiliates or, to the best of the Company's knowledge, threatened against any of them. The Company is in compliance in all material respects with all presently applicable provisions of ERISA; no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the United States Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (y) The Company and each of the PA Affiliates (i) have filed all federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and (ii) have paid all taxes due thereon. No tax deficiency has been determined adversely to the Company, PII or any of the PA Affiliates which has resulted in (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the 9 Company, PII or any of the PA Affiliates, might result in), singly or in the aggregate, a Material Adverse Effect. (z) None of the Company, PII or the PA Affiliates, nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company, PII or the PA Affiliates, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (aa) The Company (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any difference. (bb) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or PII (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the property now or previously owned, leased or operated by the Company or PII in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which could require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not reasonably be expected to have, singularly or in the aggregate with all such violations and remedial actions, a Material Adverse Effect; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or PII or with respect to which the Company or PII have knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a Material Adverse Effect; and the terms "hazardous wastes," "toxic wastes," "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. 10 (cc) In connection with the offering of the Shares contemplated hereby, the Company has conducted a review of the effect of Environmental Laws on the business, operations and properties of the Company, PII and the PA Affiliates in the course of which it has identified and evaluated associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has concluded that such associated costs and liabilities would not, singly or in the aggregate, result in a Material Adverse Effect or any development involving a prospective Material Adverse Effect. (dd) The Company has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of shares of the Common Stock to facilitate the sale or resale of the Shares. (ee) Neither the Company nor PII is, and upon consummation of the transactions contemplated hereby neither will be, an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder. 2. Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $______, the number of Firm Shares set opposite that Underwriter's name in Schedule I hereto. The respective purchase obligations of the Underwriters with respect to the Firm Shares shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Optional Shares in other than 100-share amounts. The Company hereby grants to the Underwriters the right to purchase at their election up to 375,000 Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering overallotments in the sale of the Firm Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares is to be delivered, as determined by the Representatives but in no event earlier than the First Time of Delivery (as hereinafter defined) or, unless the Representatives and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice. Optional Shares shall be purchased severally for the account of the Underwriters in proportion to the number of Firm Shares set opposite the name of such Underwriters in Schedule I hereto. 11 The Company shall not be obligated to deliver any of the Shares to be delivered at the First Time of Delivery or the Second Time of Delivery (as hereinafter defined), as the case may be, except upon payment for all the Shares to be purchased at such Time of Delivery (as hereinafter defined) as provided herein. 3. Upon authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. It is understood that 175,000 of the Firm Shares will initially be reserved by the several Underwriters for offer and sale upon the terms and conditions set forth in the Prospectus and in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. to employees and persons having business relationships with the Company who have heretofore delivered to you offers or indications of interest to purchase shares of Firm Shares in form satisfactory to you, and that any allocation of such Firm Shares among such persons will be made in accordance with timely directions received by you from the Company; PROVIDED that under no circumstances will you or any Underwriter be liable to the Company or to any such person for any action taken or omitted in good faith in connection with such offering to employees and persons having business relationships with the Company. It is further understood that any shares of such Firm Shares which are not purchased by such persons will be offered by the Underwriters to the public upon the terms and conditions set forth in the Prospectus. 4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Dain Rauscher Incorporated may request in writing upon at least 48 hours' prior notice to the Company shall be delivered by or on behalf of the Company to Dain Rauscher Incorporated, for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of immediately available funds to the Company. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least 24 hours prior to the Time of Delivery (as defined below) with respect thereto at the office of Dain Rauscher Incorporated, 2711 North Haskell Avenue, Suite 2400, Dallas, Texas 75204-2936 (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:00 a.m., Dallas time, on March __, 1998 or such other time and date as Dain Rauscher Incorporated and the Company may agree upon in writing, and with respect to the Optional Shares, 9:00 a.m., Dallas time, on the date specified by Dain Rauscher Incorporated in the written notice given by Dain Rauscher Incorporated of the Underwriters' election to purchase such Optional Shares, or such other time and date as Dain Rauscher Incorporated and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery," such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the "Second Time of Delivery," and each such time and date for delivery is herein called a "Time of Delivery." 12 (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross-receipt for the Shares and any additional documents requested by the Underwriters, will be delivered at the offices of Jackson Walker L.L.P., 1100 Louisiana Street, Suite 4200, Houston, Texas 77002 (the "Closing Location"), and the Shares will be delivered at the Designated Office, all at each Time of Delivery. A meeting will be held at the Closing Location at 4:00 p.m., Houston time, on the Business Day next preceding each Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Agreement, "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in the United States are generally authorized or obligated by law or executive order to close or a day when the Commission's office in Washington, D.C. is closed. 5. The Company agrees with each of the Underwriters: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Act not later than Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (c) To deliver promptly to the Representatives such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto 13 and, (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus; and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Shares or any other securities relating thereto and if, at such time, any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Act or the Exchange Act, to notify the Representatives and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance; (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Representatives, be required by the Act or requested by the Commission; (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to the Representatives and counsel for the Underwriters and obtain the consent of the Representatives to the filing; (f) To make generally available to its securityholders as soon as practicable, but in any event not later than 18 months after the effective date of the Registration Statement (as defined in Rule 158(c)) under the Act, an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations thereunder of the Commission (including, at the option of the Company, Rule 158); (g) During a period of five years from the Effective Date, to furnish to the Representatives copies of all reports or other communications (financial or otherwise) furnished to shareholders, and deliver to the Representatives (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange or quotation system on which any class of securities of the Company is listed or included; and (ii) such additional information concerning the business and financial condition of the Company as the Representatives may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); 14 (h) Promptly from time to time to take such action as the Representatives may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as the Representatives may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation, to submit to taxation or to file a general consent to service of process in any jurisdiction; (i) During the period beginning from the date hereof and continuing to and including the date 180 days after the effective date of the Prospectus (the "180-Day Lockup Period"), not to, directly or indirectly, (1) offer for sale, sell, pledge, issue, distribute or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock, or sell or grant options, rights or warrants with respect to any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock, or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, in each case without the prior written consent of Dain Rauscher Incorporated, except for (i) the issuance of the Shares hereunder, (ii) the issuances of shares of Common Stock in connection with the Share Exchange and the Acquisitions, as described in the Prospectus, (iii) the grant of options or other awards pursuant to the Company's 1997 Stock Compensation Plan, as in effect on the date hereof, and (iv) the issuance of up to 1,500,000 shares of Common Stock in connection with future acquisitions, PROVIDED that each recipient of shares of Common Stock referred to in clause (iii) or (iv) agrees with the Company not to offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any of such shares during the 180-Day Lockup Period; and to cause each (A) director, (B) officer, (C) each person or entity (other than PII) who is, prior to the First Closing Date, a stockholder of the Company (if any), and (D) each person or entity who will receive shares of Common Stock in connection with the Share Exchange, to furnish to the Representatives, prior to the First Time of Delivery, a letter or letters, in form and substance satisfactory to the Representatives, pursuant to which each such person shall agree not to, directly or indirectly, offer for sale, sell, assign, pledge, issue, distribute, grant any option or enter into any contract for the sale or otherwise transfer or dispose of any shares of Common Stock or any other securities of the Company or any security or other instrument which by its terms is convertible into or exercisable or exchangeable for shares of Common Stock or other securities of the Company, whether now owned or hereafter acquired by such person or entity or with respect to which such person or entity has or hereafter acquires the power of disposition, including, without limitation, any shares of Common Stock issuable under any employee stock option or 15 warrant, during (A) the 180-Day Lockup Period, without the prior written consent of Dain Rauscher Incorporated, and (B) the period of one year from the date of the Prospectus (the "One-Year Lockup Period"), without the prior written consent of the Company, PROVIDED that the Company will not waive the foregoing restrictions applicable during the One-Year Lockup Period with respect to any shares of Common Stock (or other securities) without first notifying and consulting with Dain Rauscher Incorporated. The Company further agrees that, during the 180-Day Lockup Period, it will not, without the prior written consent of Dain Rauscher Incorporated, waive any provision of any agreement relating to any restriction imposed on any of its stockholders (including each person and entity who will receive shares of Common Stock in connection with the Acquisitions) with respect to the transfer or other disposition of shares of Common Stock or securities convertible into or exchangeable for Common Stock and will take all reasonable steps to enforce any such provision so as to limit the transfer or other disposition of those shares of Common Stock or securities convertible into or exchangeable for Common Stock during the 180-Day Lockup Period. (j) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption "Use of Proceeds"; and (k) Prior to filing with the Commission any reports with respect to the offering and sale of the Shares and the application of the proceeds therefrom as may be required under the Act, the Rules and Regulations, the Exchange Act or the rules and regulations of the Commission thereunder, to furnish a copy thereof to the counsel for the Underwriters and receive and consider its comments thereon, and to deliver promptly to the Representatives a signed copy of each such report filed by it with the Commission. 6. The Company covenants and agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Shares and any taxes payable in that connection; (b) the costs incident to the preparation, printing and filing under the Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement; (d) the costs of producing and distributing this Agreement and any other related documents in connection with the offering, purchase, sale and delivery of the Shares; (e) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of sale of the Shares; (f) any applicable listing or other fees; (g) the fees and expenses of qualifying the Shares under the securities laws of the several jurisdictions as provided in Section 5(h) and of preparing, printing and distributing a Blue Sky Memorandum, if any (including related fees and expenses of counsel to the Underwriters), (h) all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of the Shares by the Underwriters to employees and persons having business relationships with the Company, as described in Section 3, 16 (i) all fees and expenses of an independent underwriter; and (j) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement; PROVIDED that, except as provided in this Section 6 and in Section 11, the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Shares which they may sell and the expenses of advertising any offering of the Shares made by the Underwriters. 7. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and as of each Time of Delivery, of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 5(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Time of Delivery that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Shares, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby, shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Jackson Walker L.L.P. shall have furnished to the Representatives its written opinion, as counsel to the Company, addressed to the Underwriters and dated such Time of Delivery, in form and substance satisfactory to the Representatives, to the effect that: (i) The Company and PII have been duly incorporated and are validly existing as corporations in good standing under the laws of the State of Delaware, are duly registered and qualified to transact business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification (except where the failure to register or qualify would not have a Material Adverse 17 Effect), and have all power and authority necessary to own, lease, operate or hold their respective properties and conduct the businesses in which they are engaged and, to such counsel's knowledge, neither the Company nor PII is in violation of any provision of its charter, by-laws or other organizational documents; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (A) have been duly and validly authorized and issued, (B) are fully paid and nonassessable, (C) have not been issued in violation of any preemptive or similar rights under the Company's charter or by-laws, the laws of the State of Delaware or, to the knowledge of such counsel, otherwise and (D) conform to the description thereof contained in the Prospectus; after giving effect to the Share Exchange and the closing of the Acquisitions and the issuance of the shares of Common Stock contemplated by the Acquisition Agreements, but without giving effect to the issuance of the Shares pursuant to the terms of this Agreement, the Company has issued and outstanding ________ shares of Common Stock and no shares of preferred stock; and all of the issued shares of capital stock of PII (A) have been duly and validly authorized and issued, (B) are fully paid and nonassessable, (C) have not been issued in violation of any preemptive or similar rights under PII's charter or by-laws, the laws of the State of Delaware or, to the knowledge of such counsel, otherwise and (D) after giving effect to (1) the repurchase of an aggregate of 245,835 shares of Class B preferred stock of PII pursuant to the terms of the [Share Repurchase Agreement] dated as of __________ ___, 1997 by and among PII and ________________ (the "PII Preferred Stock Repurchase Agreement") and the redemption of all the remaining outstanding shares of preferred stock of PII pursuant to the terms of the Certificate of Designations, Rights and Preferences of Preferred Stock of PII filed with the Secretary of State of the State of Delaware on June 2, 1997 (the "PII Certificate of Designations") and the plan of redemption adopted by the Board of Directors of PII by unanimous written consent dated as of [August 16, 1997] (the "PII Plan of Redemption"), all as described in the Registration Statement and the Prospectus (collectively, the "Repurchase and Redemption Transactions"), (2) the PII Common Stock Repurchases and (3) the Share Exchange, will be owned directly by the Company, free and clear of all liens, encumbrances, equities or claims; (iii) The Shares being issued and sold by the Company to the Underwriters at such Time of Delivery have been duly and validly authorized and, when issued and delivered against payment therefor as provided in this Agreement, will be duly and validly issued, fully paid and nonassessable and will not have been issued in violation of or be subject to any preemptive or similar rights under the Company's charter or by-laws, the laws of the State of Delaware or, to the knowledge of such counsel, otherwise; 18 (iv) Except as disclosed in the Prospectus, there are no restrictions upon the voting or transfer of any of the Shares pursuant to the Company's charter or by-laws, the laws of the State of Delaware or, to the knowledge of such counsel, otherwise; (v) The form of certificate representing shares of Common Stock conforms to the applicable requirements of the Delaware General Corporation Law; (vi) Other than as set forth in the Prospectus, such counsel does not know of any legal or governmental proceedings (domestic or foreign) pending to which the Company or PII is a party or of which any property or assets of the Company or PII is the subject which is of a character required to be disclosed in the Registration Statement and the Prospectus and which, if determined adversely to the Company or PII, might, singly or in the aggregate, have a Material Adverse Effect; and such counsel does not know of any such proceedings that are threatened by any governmental authorities or threatened by others; (vii) The Registration Statement was declared effective under the Act, the Prospectus was filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations and, to the knowledge of such counsel after making telephone inquiries to the staff of the Commission at such Time of Delivery, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose is pending or threatened by the Commission; (viii) The Registration Statement and the Prospectus and any further amendments or supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and schedules (including the notes thereto and the auditors' reports thereon) and the other financial data included therein and the exhibits thereto, as to which such counsel need express no opinion) appear on their face to have been appropriately responsive in all material respects to the requirements of the Act and the Rules and Regulations; (ix) To the knowledge of such counsel, (i) there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto and (ii) the descriptions thereof or references thereto are correct; (x) The Company has full corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided herein, and this Agreement has been duly authorized, executed and delivered by the Company; 19 (xi) The execution and delivery of this Agreement, the issuance and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or PII is a party or by which the Company or PII is bound or to which any of the property or assets of the Company or PII is subject and which has been filed as an exhibit to the Registration Statement, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or PII or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body (whether domestic or foreign) having jurisdiction over the Company or PII or any of their properties or assets, other than (i) state securities laws of the various states or other jurisdictions or (ii) dental regulations (as to which such counsel shall deliver a reasoned opinion as contemplated by Subsection 7(d)(xii) below); and, except for the registration of the Shares under the Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company or the consummation of the transactions contemplated hereby; (xii) The Company has the corporate power and authority to enter into the Transaction Agreements to which it is a party and to perform its obligations thereunder; the execution and delivery of, and the performance by the Company of its obligations under, the Transaction Agreements have been duly and validly authorized by the Company, and each Transaction Agreement has been duly executed and delivered by the Company and is a legal, valid and binding agreement of the Company, enforceable in accordance with its terms, except as that enforceability may be subject to the effect of (A) any applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); PROVIDED that the opinion set forth in this subparagraph with respect to enforceability of the Transaction Agreements will be subject to a reasoned analysis of the prohibition against the corporate practice of dentistry in the State of Texas established by the Tex. Health & Safety Code Ann. arts. 4548a and 4551a(8) and the line of analogous court decisions relating to the corporate practice of medicine including FLYNN BROS., INC. V. FIRST MEDICAL ASSOC., 715 S.W.2d 782 (Tex. App.--Dallas 1986, writ ref'd n.r.e.); 20 (xiii) Each of the Acquisitions has been consummated pursuant to the terms of the Acquisition Agreement related thereto; (xiv) The PII Common Stock Repurchases have been completed pursuant to the terms of the PII Common Stock Repurchase Agreement, the Share Exchange has been completed pursuant to the terms of the Share Exchange Agreement and the Repurchase and Redemption Transactions have been completed pursuant to the terms of the PII Preferred Stock Repurchase Agreement, the PII Certificate of Designations and the PII Plan of Redemption; (xv) The Shares and the shares of Common Stock issued in connection with the Share Exchange and the Acquisitions have been approved for listing, subject to notice of issuance, on the American Stock Exchange; (xvi) Neither the Company nor any subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder; and (xvii) To such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right to (i) require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person, (ii) require the Company to include such securities in the securities registered pursuant to the Registration Statement or (iii) except as described in the Prospectus, require that any securities be registered pursuant to any other registration statement filed by the Company under the Act. In rendering such opinion, such counsel may state that its opinion is limited to matters governed by the Federal laws of the United States of America, the laws of the State of Texas and the corporate laws of the State of Delaware. Such counsel shall also have furnished to the Representatives a written statement, addressed to the Underwriters and dated such Time of Delivery, in form and substance satisfactory to the Representatives, to the effect that (x) such counsel has acted as counsel to the Company in connection with the preparation of the Registration Statement, and (y) based on the foregoing, no facts have come to the attention of such counsel which lead it to believe that the Registration Statement (other than (i) the financial statements and schedules (including the notes thereto and the auditors' reports thereon) included therein or omitted therefrom and (ii) the other financial information contained therein or omitted therefrom, and it being understood that such counsel is not, by this statement, making any statement as to the accuracy of any statement or representation contained in any exhibit to the Registration Statement), as of the Effective Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the 21 Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The foregoing opinion and statement may be qualified by a statement to the effect that such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus. (e) Kimberlee K. Rozman, general counsel of the Company, shall have furnished to the Representatives her opinion, addressed to the Underwriters and dated such Time of Delivery, in form and substance satisfactory to the Representatives, to the effect that: (i) The Company and PII have been duly incorporated and are validly existing as corporations in good standing under the laws of the State of Delaware, are duly registered and qualified to transact business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification (except where the failure so to register or qualify would not have a Material Adverse Effect), and have all power and authority necessary to own, lease, operate or hold their respective properties and conduct the businesses in which they are engaged and, to such counsel's knowledge, neither the Company nor PII is in violation of any provision of its charter, by-laws or other organizational documents; (ii) The Shares being issued and sold by the Company to the Underwriters at such Time of Delivery have been duly and validly authorized and, when issued and delivered against payment therefor as provided in this Agreement, will be duly and validly issued, fully paid and nonassessable and will not have been issued in violation of or be subject to any preemptive or similar rights under the Company's charter or by-laws, the laws of the State of Delaware or, to the knowledge of such counsel, otherwise; (iii) There are no restrictions upon the voting or transfer of any of the Shares pursuant to the Company's charter or by-laws, the laws of the State of Delaware or, to such counsel's knowledge, otherwise; (iv) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings (domestic or foreign) pending to which the Company or PII is a party or of which any property or assets of the Company or PII is the subject which, if determined adversely to the Company or PII, might, singly or in the aggregate, have a Material Adverse Effect; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by any governmental authorities or threatened by others; 22 (v) The Company has full corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided herein, and this Agreement has been duly authorized, executed and delivered by the Company; (vi) The execution and delivery of this Agreement, the issuance and sale of the Shares being delivered at such Time of Delivery by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or PII is a party or by which the Company or PII is bound or to which any of the property or assets of the Company or PII is subject and which has been filed as an exhibit to the Registration Statement, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or PII or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body (whether domestic or foreign) having jurisdiction over the Company or PII or any of their properties or assets, other than (i) state securities laws of the various states or other jurisdictions or (ii) dental regulations (as to which such counsel shall deliver a reasoned opinion as contemplated by subsection 7(e)(vii) below); and, except for the registration of the Shares under the Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company or the consummation of the transactions contemplated hereby; (vii) The Company has the corporate power and authority to enter into the Transaction Agreements to which it is a party and to perform its obligations thereunder; the execution and delivery of, and the performance by the Company of its obligations under, the Transaction Agreements have been duly and validly authorized by the Company, and each Transaction Agreement has been duly executed and delivered by the Company and is a legal, valid and binding agreement of the Company, enforceable in accordance with its terms, except as that enforceability may be subject to the effect of (A) any applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally and (B) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); PROVIDED that the opinion set forth in this subparagraph with respect to enforceability of the Transaction Agreements in each of the applicable jurisdictions may be subject to a reasoned analysis of the 23 prohibition against the corporate practice of dentistry in the applicable jurisdiction, as set forth in an opinion of other counsel delivered as provided in the last paragraph of this Section 7(e); (viii) To the best of such counsel's knowledge, (i) there are no contracts or other documents that are required to be described or referred to in the Prospectus or to be filed as exhibits to the Registration Statement that have not been described or referred to therein or filed as exhibits to the Registration Statement, (ii) the descriptions thereof or references thereto are correct and (iii) no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, referred to or filed, except for such defaults that would not, singly or in the aggregate, have a Material Adverse Effect; (ix) The Company has full corporate power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits would not, singly or in the aggregate, have a Material Adverse Effect), to own its properties and to conduct its business in the manner described in the Prospectus; (x) The Company's conduct of its business complies in all material respects with the laws and governmental regulations relating to the corporate practice of dentistry in each jurisdiction in which it conducts its business (except where the failure to comply would not, singly or in the aggregate, have a Material Adverse Effect); PROVIDED that the opinion set forth in this subparagraph may be subject to a reasoned analysis of the prohibition against the corporate practice of dentistry in each such jurisdiction, as set forth in an opinion of other counsel delivered as provided in the last paragraph of this Section 7(e); (xi) Each of the Acquisitions has been consummated pursuant to the terms of the Acquisition Agreement related thereto; (xii) The PII Common Stock Repurchases have been completed pursuant to the terms of the PII Common Stock Repurchase Agreement, the Share Exchange has been completed pursuant to the terms of the Share Exchange Agreement and the Repurchase and Redemption Transactions have been completed pursuant to the terms of the PII Preferred Stock Repurchase Agreement, the PII Certificate of Designations and the PII Plan of Redemption; 24 (xiii) To the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right to (i) require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person, (ii) require the Company to include such securities in the securities registered pursuant to the Registration Statement or (iii) except as described in the Prospectus, require that any securities be registered pursuant to any other registration statement filed by the Company under the Act; and (xiv) The statements contained in the Prospectus under the captions "Risk Factors--Absence of Combined Operating History," "Risk Factors--Reliance on Affiliated Practices and Dentists," "Risk Factors--Government Regulation," "Risk Factors--Potential Effect of Shares Eligible for Future Sale on Price of Common Stock," "Risk Factors--Certain Anti-takeover Provisions," "Business--Summary of Terms of Acquisitions," "Business--Service Agreements," "Business--Dentist Agreement," "Business--Dentist Employment Agreements," "Business--Litigation and Insurance," "Business--Government Regulation," "Management--Executive Compensation," "Management--Employment Agreements," "Management-- 1997 Stock Compensation Plan," "Certain Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting," and in Items 14 and 15 of Part II of the Registration Statement, insofar as such statements purport to summarize the provisions of the documents or agreements referred to therein or matters of law or legal conclusions, are true and correct in all material respects and constitute a fair summary thereof. In rendering such opinion, such counsel may rely, to the extent she considers such reliance appropriate, upon the opinion of other counsel retained by her or the Company (which may include local counsel referred to in Section 7(f)), PROVIDED that such other counsel is satisfactory to counsel for the Underwriters, furnishes a copy of its opinion to the Representatives and specifically addresses such opinion to the Representatives. Such counsel shall also have furnished to the Representatives a written statement, addressed to the Underwriters and dated such Time of Delivery, in form and substance satisfactory to the Representatives, to the effect that (x) she has acted as general counsel of the Company since its inception and, as such, is familiar with the Company, its operations and the terms and conditions of the Acquisitions and the Service Agreements and has acted as general counsel of the Company in connection with the preparation of the Registration Statement and (y) based on the foregoing, no facts have come to her attention which lead her to believe that the Registration Statement (other than the financial statements and schedules (including the notes thereto and the auditors' reports thereon) included therein or omitted therefrom, and it being understood that such counsel is not, by this statement, making any statement as to the accuracy of any statement or representation contained in any exhibit to the Registration Statement), as of the Effective Date, contained any untrue statement of a material fact or 25 omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (f) The Representatives shall have received from local counsel to the Company licensed to practice in each jurisdiction in which a PA Affiliate is organized or doing business, which local counsel shall be satisfactory to the Representatives, such opinions, dated such Time of Delivery and expressly addressed to the Representatives, on behalf of the Underwriters, each in substantially the form of the opinion letter set forth in Exhibit A hereto, with such changes thereto as shall be acceptable to the Representatives. The Representatives shall have received from local counsel to each of the PA Affiliates licensed to practice in each jurisdiction in which a PA Affiliate is organized or doing business, which local counsel shall be satisfactory to the Representatives, such opinions, dated such Time of Delivery and expressly addressed to the Representatives, on behalf of the Underwriters, each in substantially the form of the opinion letter set forth in Exhibit B hereto, with such changes thereto as shall be acceptable to the Representatives. (g) The Representatives shall have received from Baker & Botts, L.L.P., counsel for the Underwriters, such opinion or opinions, dated such Time of Delivery, with respect to the issuance and sale of the Shares, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (h) At the time of execution of this Agreement, the Representatives shall have received from Coopers & Lybrand LLP a letter, in form and substance satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof, (i) confirming that they are independent public accountants within the meaning of the Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (i) With respect to the letter of Coopers & Lybrand LLP referred to in the preceding paragraph and delivered to the Representatives concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Representatives a letter (the "bring-down letter") of such accountants, addressed to the 26 Underwriters and dated such Time of Delivery, (i) confirming that they are independent public accountants within the meaning of the Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter (PROVIDED that such date shall not be prior to the Effective Date)), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (j) The Company shall have furnished to the Representatives a certificate, dated such Time of Delivery, of its Chairman of the Board or its President and Chief Executive Officer and its Chief Financial Officer stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Time of Delivery; the Company has complied with all of its agreements contained herein; and the conditions set forth herein have been fulfilled; and (ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion (A) as of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus. (k) (i) None of the Company, PII or the PA Affiliates shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, or (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any material change in the capital stock or short-term or long-term debt of the Company, PII or any of the PA Affiliates or any change, or any development involving a prospective change, in or affecting the general affairs, management, consolidated financial position, stockholders' equity, results of operations or prospects of the Company and PII, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the 27 delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus. (l) On or after the date hereof, there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, (ii) or a suspension or material limitation in trading in the Company's securities, (iii) a general moratorium on commercial banking activities declared by either Federal or state authorities, (iv) the outbreak or escalation of hostilities involving the United States or a declaration by the United States of a national emergency or war or (v) such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of the Representatives or a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus. (m) The Shares to be sold by the Company at such Time of Delivery, together with the shares of Common Stock issued or to be issued in connection with the Share Exchange and the Acquisitions, shall have been approved for listing, subject to notice of issuance, on the American Stock Exchange. (n) The PII Common Stock Repurchases shall have been completed pursuant to the terms of the PII Common Stock Repurchase Agreement, the Share Exchange shall have been completed pursuant to the terms of the Share Exchange Agreement and the Repurchase and Redemption Transactions shall have been completed pursuant to the terms of the PII Preferred Stock Repurchase Agreement, the PII Certificate of Designations and the PII Plan of Redemption. (o) The Acquisitions shall have been consummated on the terms set forth in the Registration Statement and the Acquisition Agreements, without waiver or modification of any material terms or provisions of any Acquisition Agreement, except as may be approved by the Representatives. (p) The Company shall have obtained and delivered to the Underwriters executed copies of the agreements to the effect set forth in Section 5(i) from each of the persons referred to in such Section in form and substance satisfactory to the Representatives. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 28 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon 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, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Dain Rauscher Incorporated expressly for use therein (which information is identified in subsection (b) below). (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon 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, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. The Underwriters severally confirm that the statements with respect to this public offering of the Shares by the Underwriters set forth on the cover page of, the legend concerning over-allotments on the inside front cover page of, and the concession and reallowance figures appearing under the caption "Underwriting" in, the Prospectus are correct, and the Underwriters and the Company agree that such information constitutes the only information concerning any of the Underwriters furnished in writing to the Company by or on behalf of any of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such subsection, notify the indemnifying party 29 in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnified party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters with respect to the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such 30 statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within 36 hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of 36 hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notify you that they have so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to the Shares purchased by it thereunder. 31 (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Shares. 11. The obligations of the Underwriters hereunder may be terminated by you by notice given to and received by the Company prior to delivery of and payment for the Firm Shares if, prior to that time, any of the events described in Sections 7(k) or 7(l), shall have occurred or if the Underwriters shall decline to purchase the Shares for any reason permitted under this Agreement. 12. If the Company shall fail to tender the Shares for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, the Company will reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of 32 counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Shares and, upon demand, the Company shall pay the full amount thereof to you. If this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 13. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Dain Rauscher Incorporated on behalf of you as the Representatives. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you in care of Dain Rauscher Incorporated at Cityplace, 2711 North Haskell Avenue, Suite 2400, Dallas, Texas 75204-2936, Attention: Corporate Syndicate Department; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to Pentegra Dental Group, Inc., 2999 N. 44th Street, Suite 650, Phoenix, Arizona 85018, facsimile number (602) 952-0544, Attention: President; PROVIDED, HOWEVER, that any notice to an Underwriter pursuant to Section 8(d) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 14. Time shall be of the essence in the performance of this Agreement. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters and the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 17. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 33 If the foregoing is in accordance with your understanding, please sign and return to us one for the Company and for each of you plus one for each counsel counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, PENTEGRA DENTAL GROUP, INC. By: ----------------------------------------- Gary S. Glatter President and Chief Executive Officer Accepted as of the date hereof: DAIN RAUSCHER INCORPORATED EVEREN SECURITIES, INC. By DAIN RAUSCHER INCORPORATED By: --------------------------------------- On behalf of each of the Underwriters 34 SCHEDULE I Number of Underwriters Shares ------------ --------- Dain Rauscher Incorporated...................... EVEREN Securities, Inc. ........................ --------- Total.................................... 2,500,000 --------- --------- I-1 SCHEDULE II PA AFFILIATES James P. Allen, D.D.S. Walter J. Anderson, D.D.S., Donald H. Plotkin, D.D.S., William H. Swilley, D.D.S., William A. Cerny, D.D.S. and Graham A. Satchell, D.D.S., Inc., dba Anderson Dental Group Ronnie Andress, D.D.S., Inc. Victor H. Burdick, D.D.S., P.C. Marvin V. Cavallino, D.D.S., A Professional Corporation James H. Clarke, Jr., D.D.S., Inc. Henry Cuttler, D.D.S. Edward T. Dougherty, Jr., D.D.S., P.A. Family Dental Centers, P.A. Richard H. Fettig, D.D.S. Alan H. Gerbholz, D.D.S., P.C. Michael J. Gershtenson, D.D.S., P.C. Mack E. Greder, D.D.S., P.C. Salvatore J. Guarnieri, D.D.S. Kent M. Hamilton, D.D.S., P.C. David R. Henderson, D.D.S. Stephen Hwang, D.D.S. Jackson Dental Partnership II-1 Bruce A. Kanehl, D.D.S. Roger Allen Kay, D.D.S., P.A. Patrick T. Kelly, D.D.S., P.C. Brian K. Kniff, D.D.S., P.C. Lakeview Dental, P.C. Donald W. Lanning, D.D.S. David A. Little, D.D.S. Susan E. Lunson, D.D.S., P.C. Richard W. Mains, Jr., D.M.D., P.C. James M. McDonough, D.D.S. James W. Medlock, D.D.S., P.A. James Randy Mellard, D.D.S., M.S., P.C. Mary B. Mellard, D.D.S., P.C. T.L. Mullooly, D.D.S., Inc. Byron L. Novosad, D.D.S., Inc. Randy O'Brien, D.D.S., Inc. Terrence C. O'Keefe, D.D.S. Harold A. Pebbles, D.D.S., P.C. Jimmy F. Pinner, D.D.S. Omer K. Reed, D.D.S., Ltd. Richard Reinitz, D.D.S., P.C. II-2 Greg Richards, D.D.S. Richard N. Smith, DMD, P.C. John N. Stellpflug, D.D.S. Jack Stephens, D.D.S. Y. Paul Suzuki, D.D.S., P.S. Donald F. Tamborello, D.D.S. Helena Thomas, D.D.S. Louis J. Thornley, D.D.S., P.S. S. Victor Uhrenholdt, D.D.S. Scott Van Zandt, D.D.S. Ronald M. Yaros, D.D.S., P.C. James P. Allen, D.D.S., P.C. Walter J. Anderson, D.D.S., P.C. Family Dental Center, P.A. Ronnie L. Andress, D.D.S., Inc. Victor H. Burdick, Jr., D.D.S., P.C. Marvin V. Cavallino, D.D.S., Ltd. ________________________ Henry F. Cuttler, D.D.S., P.C. Dougherty Dental Corporation, P.A. Fettig Dental Corporation, P.A. II-3 Gasser Dental Corporation, P.A. Gasser Dental Corporation, P.A. Alan H. Gerbohlz, D.D.S., P.C. Front Range Dental Group, P.C. M.G., D.D.S., P.C. Salvatore J. Guarnieri, D.D.S., P.C. Kent Hamilton, D.D.S., P.C. ________________________ ________________________ Jackson Dental Partnership Kanehl Dental Group, P.A. Roger Allen Kay, D.D.S., P.C. Kelly Dental Care of Marquette, P.C. Kniff Dental Corporation, P.A. Donald W. Lanning, D.D.S., P.C. David A. Little, D.D.S., P.C. Susan E. Lunson, D.D.S., P.C. Richard W. Mains, Jr., D.M.D., P.C. James M. McDonough, D.D.S., P.C. James W. Medlock, D.D.S., P.A. Northwest Periodontics, Inc. II-4 Northwest Dental Management, Inc. Mullooly Dental Corporation Byron L. Novosad, D.D.S. Randy S. O'Brien, D.D.S., Inc. Terrence C. O'Keefe, D.D.S., P.C. Harold A. Pebbles, Jr., D.D.S., P.S. Jimmy F. Pinner, D.D.S., P.C. Concord Dental, Ltd. Reinitz Dental Services, Inc. ______________________ Smith Dental Corporation, P.C. John N. Stellpflug, D.D.S., S.C. Jack Stephens, D.D.S., P.C. Y. Paul Suzuki, D.D.S., P.S. Donald F. Tamborello, D.D.S., P.C. Helena Thomas, D.D.S., P.C. Thornley Dental Clinic, P.C. S. Victor Uhrenholdt, D.D.S., P.C. Scott Van Zandt, D.D.S., P.C. Aspenwood Dental Associates, P.C. II-5 EXHIBIT A FORM OF OPINION OF LOCAL COUNSEL FOR THE COMPANY A-1 Pentegra Dental Group, Inc. [DATE OF CLOSING] 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 Dain Rauscher Incorporated 2711 N. Haskell Avenue Dallas, TX 75204 EVEREN Securities, Inc. 77 West Wacker Drive 31st Floor Chicago, Illinois 80601 Re: [Contribution Agreement] [Agreement and Plan of Reorganization] dated ________________; Service Agreement dated _________________; Dentist Agreement dated __________________; Employment Agreement dated _________________. Ladies and Gentlemen: We have acted as special counsel in the State of [______________] to Pentegra Dental Group, Inc., a Delaware corporation ("Pentegra"), in connection with that certain [Contribution Agreement] [Agreement and Plan or Reorganization] dated ___________________, (the "Acquisition Agreement") by and among Pentegra and __________________ ("Practice"), that certain Service Agreement dated ___________________ (the "Service Agreement"), by and among Pentegra and the Practice, that certain Dentist Agreement dated __________________ (the "Dentist Agreement"), by and among ________________ ("Dentist") and Pentegra and that certain Employment Agreement dated _______________ (the "Employment Agreement"), by and among Practice and Dentist (collectively, the "Agreements"). This opinion is delivered to you pursuant to Section 7 of the Underwriting Agreement by and between Pentegra and Dain Rauscher Incorporated and EVEREN Securities, Inc., individually and as representatives of the several underwriters named in Schedule I thereto (the "Underwriters"). Pentegra Dental Group, Inc. -2- March ___, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. We understand that (i) pursuant to the terms of the Acquisition Agreement, Pentegra will acquire substantially all of the Practice's equipment, personnel and goodwill associated therewith in exchange for cash, Pentegra common stock ("Pentegra Shares"), or a combination thereof; (ii) with respect to an Agreement and Plan of Reorganization, the separate corporate existence of the Practice shall cease; (iii) with respect to an Agreement and Plan of Reorganization, prior to the statutory merger of the Practice into Pentegra, the dentists and patient records, if any, of the Practice will be transferred to a newly organized professional entity (the "New PC") which will become bound by the Service Agreement; and (iv) Pentegra and the Practice, in the case of a Contribution Agreement, or New PC in the case of an Agreement and Plan of Reorganization, will enter into the Service Agreement, pursuant to which Pentegra will provide facilities, equipment and business and administrative management services necessary for the operation of the New PC or the Practice, as applicable. In rendering such opinions we have assumed that the signatures on all documents examined are genuine, that all documents submitted to us as originals are accurate and complete, and that all documents submitted to us as copies are true, correct and complete copies of the originals thereof. Without limiting the foregoing, we have examined originals or copies otherwise identified to our satisfaction as being true and correct copies of the following documents of Pentegra, the Practice and the Dentist: (a) The Acquisition Agreement [and related Exhibits and Schedules]; (b) The Service Agreement [and related Exhibits and Schedules]; (c) The Dentist Agreement; and (d) The Employment Agreement. Based solely upon the foregoing, subject to the comments and exceptions stated herein, and limited in all respects to the laws of the State of [______________], we are of the opinion that, except as further discussed below: 1. The Service Agreement, the Acquisition Agreement, the Dentist Agreement and the Employment Agreement constitute the valid and binding obligations of each party thereto enforceable in accordance with their respective terms, except as may be limited by future determinations, rulings or opinions pursuant to any healthcare related law, rule, statute, ordinance or regulation of the state of [________________]. Specifically, the transactions and arrangements contemplated under the Acquisition Agreement, the Service Agreement, the Dentist Agreement and Pentegra Dental Group, Inc. -3- March ___, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. the Employment Agreement do not violate any [State] statute, regulation, judicial or regulatory interpretation (collectively, "State Law") prohibiting, regulating or restricting: (a) the corporate practice of dentistry; (b) sharing or dividing fees by or among dentists or other health care providers, often referred to as fee splitting laws; (c) referrals by dentists to entities providing health care services or goods with which the dentist has an ownership interest or compensation arrangement, often referred to as self-referral laws; or (d) payments to or from dentists or other health care providers as inducements for referrals of patients or purchases of health care goods or services, often referred to as illegal remuneration or anti- kickback laws. A. CORPORATE PRACTICE OF DENTISTRY [INSERT NECESSARY DISCUSSION] B. FEE SPLITTING [INSERT NECESSARY DISCUSSION] C. SELF REFERRALS [INSERT NECESSARY DISCUSSION] D. ANTI-KICKBACK [INSERT NECESSARY DISCUSSION] We further are of the opinion that: 2. No consent, license, approval or authorization of, or registration or declaration with, any state or local governmental body, authority, bureau, agency, or court is required in connection with the execution and delivery of the Agreements or other agreements contemplated thereby, or the consummation of the transactions contemplated thereby, on the part of Pentegra. Pentegra Dental Group, Inc. -4- March ___, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. 3. To our knowledge, there is no pending legislation or proposed regulations, guidelines or instructions, or pending or threatened action, suit or proceeding before any court or governmental agency, authority or arbitrator to require licensure, certificate of need or other health planning approval, accreditation or any other regulatory approval for the operation of a dental practice management company which would have a material adverse effect on Pentegra or the Practice. This opinion is furnished by us and is solely for your benefit and the benefit of all the Underwriters and their counsel, and you and they are justified in relying thereon, and such reliance is reasonable under the circumstances. No other use or distribution of this opinion may be made without our prior written consent, except in response to a valid subpoena or other lawful process. Sincerely, [FIRM] By: --------------------------- [Attorney] EXHIBIT B FORM OF OPINION OF LOCAL COUNSEL FOR THE PA AFFILIATES OPINION OF COUNSEL TO THE COMPANY AND THE STOCKHOLDERS (FOR CONTRIBUTION AGREEMENT) March __, 1998 To: Pentegra Dental Group, Inc. 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 Dain Rauscher Incorporated 2711 N. Haskell Avenue, Suite 2400 Dallas, Texas 75204 EVEREN Securities, Inc. 77 West Wacker Drive 31st Floor Chicago, Illinois 80601 (a) The Company (i) is a [professional] [association] [corporation] duly organized, validly existing and in good standing under the laws of the state of its organization, (ii) is duly qualified and has all necessary licenses, permits, approvals, consents, qualifications, authorizations and accreditations of any governmental agency or authority and under all applicable laws or regulations to own and operate its assets and properties as now owned or operated and to carry on its business as now conducted (the "Approvals"), and the continuation, validity and effectiveness of all the Approvals will not be adversely affected by the transactions and arrangements contemplated by the Agreement, the Service Agreement and the transactions contemplated thereby, and (iii) is duly qualified as a foreign [professional] [association] [corporation] to do business and is in good standing in every jurisdiction in which the failure to so qualify would have a material adverse effect upon its business. (b) Each Stockholder has all necessary licenses, permits, approvals, consents, qualifications, authorizations and accreditations of any agency or authority and under all applicable laws or regulations to practice dentistry in the state of ______________ and to provide dental services as now provided (the "Stockholder Approvals"), and the continuation, validity and Pentegra Dental Group, Inc. -2- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. effectiveness of all the Stockholder Approvals will not be adversely affected by the transactions contemplated by the Agreement, the Service Agreement and the other transactions contemplated thereby. (c) To the best of such counsel's knowledge, there is no pending legislation, or proposed regulations, guidelines or instructions, or pending or threatened action, investigation, suit or proceeding before any court or governmental agency, authority or arbitrator to require licensure, certificate of need or other health planning approval, accreditation or any other regulatory approval for the operation of a dental practice or the provision of dental services which would result in a material adverse effect with respect to the Company. (d) To the best of such counsel's knowledge, (i) no condition exists, and no event has occurred, which, with the giving of notice, the passage of time or both, would result in the suspension, revocation, impairment, forfeiture or nonrenewal of any of the Approvals or the Stockholder Approvals, and (ii) there is no claim pending challenging the validity of any of the Approvals or the Stockholder Approvals. (e) The Stockholders own all of the issued and outstanding shares of capital stock of the Company, and to the best of such counsel's knowledge, such stock is owned free and clear of any lien or adverse claim. None of those shares were issued in violation of any preemptive or other similar rights. All of those shares have been duly authorized and validly issued and are fully paid and nonassessable. To the best knowledge of such counsel, there are no existing options, warrants, subscriptions or other rights to purchase, or securities convertible into or exchangeable for, the capital stock of the Company. To the best knowledge of such counsel, except for the Agreement, neither the Company nor any Stockholder is a party to or bound by any agreement, instrument, contract, obligation, commitment or understanding of any character, whether written or oral, express or implied, relating to the sale, assignment, conveyance, encumbrance, transfer or delivery of any capital stock of the Company or substantially all of the assets of the Company. (f) The Company has all requisite corporate power and authority to execute, deliver and perform the Agreement, the Service Agreement, the Security Agreement, the Employment Agreements and the other agreements to which it is a party contemplated thereby (the "Agreements"). The execution, delivery and performance by the Company of the Agreements and the other agreements to which the Company is a party contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company, and the Agreements and the other agreements to which it is a party contemplated thereby have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as may be limited by Pentegra Dental Group, Inc. -3- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. (g) The Agreements and the other agreements to which any Stockholder is a party contemplated thereby have been duly executed and delivered by the Stockholders and constitute valid and binding obligations of the applicable Stockholder, enforceable against such Stockholder 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. (h) To the best knowledge of such counsel, except as disclosed in the Schedules, there is no action, investigation, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency now pending or threatened against the Company or any Stockholder, or affecting the assets or the business of the Company or questioning the validity of any of the Agreements. (i) To the best knowledge of such counsel, except as disclosed in the Schedules, (i) the Company is not in violation of any provision of its [Certificate] [Articles] of [Incorporation] [Association] or Bylaws, and (ii) neither the Company nor any Stockholder, is in default with respect to any judgment, writ, injunction or decree of any court or governmental instrumentality or agency or in the performance, observance or fulfillment of any obligation, covenant or agreement to which it or he is bound or to which any of the assets of the Company is subject. (j) Neither the execution, delivery and performance of the Agreements and the other agreements to which the Company is a party contemplated thereby nor the consummation of the transactions contemplated thereby will conflict with, or result in a breach of the terms, conditions and provisions of, or constitute a default under, the [Certificate] [Articles] of [Incorporation][Association] or Bylaws of the Company or, to the best knowledge of such counsel, any agreement, indenture or other instrument to which the Company or any Stockholder is bound or to which any assets of the Company are subject, or result in the creation or imposition of any security interest, lien, charge or encumbrance upon any of the assets of the Company. (k) No consent of any person, corporation, association, company, partnership or other entity, and no consent, license, approval or authorization of, or registration or declaration with, any governmental body, authority, bureau or agency or federal, state or local court is required in connection with the execution and delivery of the Agreements and the other agreements contemplated thereby, or the consummation of the transactions contemplated thereby, on the part Pentegra Dental Group, Inc. -4- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. of the Company or the Stockholders, or to the extent that any such consent or other action may be required, it has been validly procured or taken. For purposes of this opinion, "knowledge" of counsel shall mean (with respect to matters of fact) that after an examination of documents made available to counsel by the Company and the Stockholders and after inquiry of the Stockholders and officers of the Company, but without any judgment or litigation searches or any other independent factual investigation, counsel has no reason to believe that statements made to such counsel's "knowledge" are factually incorrect. "Knowledge" shall furthermore refer only to then current actual knowledge of members of counsel's firm who have worked on matters for the Company. OPINION OF COUNSEL TO THE COMPANY, THE PRACTICE AND THE STOCKHOLDERS (For use for Reorganizations and Sole Proprietor Contributions) March __, 1998 To: Pentegra Dental Group, Inc. 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 Dain Rauscher Incorporated 2711 N. Haskell Avenue, Suite 2400 Dallas, Texas 75204 EVEREN Securities, Inc. 77 West Wacker Drive 31st Floor Chicago, Illinois 80601 (a) Each of the Company and the Practice (i) is a [professional] [association] [corporation] duly organized, validly existing and in good standing under the laws of the state of its organization, (ii) is duly qualified and has all necessary licenses, permits, approvals, consents, qualifications, authorizations and accreditations of any governmental agency or authority and under all applicable laws or regulations to own and operate its assets and properties as now owned or operated and to carry on its business as now conducted, or with respect to the Practice, as proposed to be conducted (the "Approvals"), and the continuation, validity and effectiveness of all the Approvals will not be adversely affected by the transactions and arrangements contemplated by the Agreement, the Service Agreement and the transactions contemplated thereby, and (iii) is duly qualified as a foreign [professional] [association] [corporation] to do business and is in good standing in every jurisdiction in which the failure to so qualify would have a material adverse effect upon its business. (b) Each Stockholder has all necessary licenses, permits, approvals, consents, qualifications, authorizations and accreditations of any agency or authority and under all applicable laws or regulations to practice dentistry in the state of _______________ and to provide dental services as now provided (the "Stockholder Approvals"), and the continuation, validity and effectiveness of all the Stockholder Approvals will not be adversely affected by the transactions Pentegra Dental Group, Inc. -2- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. contemplated by the Agreement, the Service Agreement and the other transactions contemplated thereby. (c) To the best of such counsel's knowledge, there is no pending legislation, or proposed regulations, guidelines or instructions, or pending or threatened action, investigation, suit or proceeding before any court or governmental agency, authority or arbitrator to require licensure, certificate of need or other health planning approval, accreditation or any other regulatory approval for the operation of a dental practice or the provision of dental services which would result in a material adverse effect with respect to the Company or the Practice. (d) To the best of such counsel's knowledge, (i) no condition exists, and no event has occurred, which, with the giving of notice, the passage of time or both, would result in the suspension, relocation, impairment, forfeiture or nonrenewal of any of the Approvals or the Stockholder Approvals, and (ii) there is no claim pending challenging the validity of any of the Approvals or the Stockholder Approvals. (e) Immediately prior to the Closing, the authorized capital stock of the Company consists of (i) ________________ shares of common stock, par value $____ per share, of which _____________ shares are issued and outstanding, and no such shares of capital stock are held in the treasury of the Company. The authorized capital stock of the Practice consists of (i) ____________ shares of common stock, par value $_____ per share, of which ____________ shares are issued and outstanding, and no such shares of capital stock are held in the treasury of the Practice. All of the outstanding shares of capital stock of the Company and the Practice are duly authorized, validly issued pursuant to applicable laws, fully paid and nonassessable, and none of those shares were issued in violation of any preemptive or other similar rights. (f) The Stockholders own all of the issued and outstanding shares of capital stock of the Company and the Practice, and to the best of such counsel's knowledge, such stock is owned free and clear of any lien or adverse claim. The Stockholders have full power and authority to sell, transfer and deliver all of the issued and outstanding shares of Company Common Stock in accordance with the terms of the Agreement. To the best knowledge of such counsel, there are no existing options, warrants, subscriptions or other rights to purchase, or securities convertible into or exchangeable for, the capital stock of the Company or the Practice. To the best knowledge of such counsel, except for the Agreement, neither the Company, the Practice nor any Stockholder is a party to or bound by any agreement, instrument, contract, obligation, commitment or understanding of any character, whether written or oral, express or implied, relating to the sale, assignment, conveyance, encumbrance, transfer or delivery of any capital stock of the Company or the Practice or substantially all of the assets of the Company or the Practice. Pentegra Dental Group, Inc. -3- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. (g) The Company has all requisite corporate power and authority to execute, deliver and perform the Agreement and the other agreements to which it is a party contemplated thereby. The execution, delivery and performance by the Company of the Agreement and the other agreements to which the Company is a party contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company, and the Agreement and the other agreements to which it is a party contemplated thereby have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company, enforceable against the Company 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. (h) The Practice has the requisite corporate power and authority to execute, deliver and perform the Service Agreement, the Security Agreement and the Employment Agreements (collectively, the "Practice Agreements") and the other agreements to which it is a party contemplated thereby. The execution, delivery and performance of the Practice Agreements and the other agreements to which the Practice is a party contemplated thereby by the Practice have been duly authorized by all necessary corporate action on the part of the Practice, and the Practice Agreements and the other agreements to which it is a party contemplated thereby have been duly executed and delivered by the Practice and constitute valid and binding obligations of the Practice, enforceable against the Practice 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. (i) The Agreement, the Stockholder's Release, the Dentist Agreement, the Employment Agreement and the other agreements to which any Stockholder is a party contemplated thereby have been duly executed and delivered by the Stockholders and constitute valid and binding obligations of the applicable Stockholder, enforceable against such Stockholder 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. (j) To the best knowledge of such counsel, except as disclosed in the Schedules, there is no action, investigation, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency now pending or threatened against the Company, the Practice or any Stockholder, or affecting the assets or the business of the Company or the Practice or questioning the validity of any of the Agreements. (k) To the best knowledge of such counsel, except as disclosed in the Schedules, (i) the Company nor the Practice is in violation of any provision of its [Certificate] [Articles] of [Incorporation] [Association] or Bylaws, and (ii) neither the Company, the Practice nor any Pentegra Dental Group, Inc. -4- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. Stockholder is in default with respect to any judgment, writ, injunction or decree of any court or governmental instrumentality or agency or in the performance, observance or fulfillment of any obligation, covenant or agreement to which it or he is bound or to which any of the assets of the Company or the Practice is subject. (l) Neither the execution, delivery and performance of the Agreement and the other agreements to which the Company is a party contemplated thereby nor the consummation of the transactions contemplated thereby will conflict with, or result in a breach of the terms, conditions and provisions of, or constitute a default under, the [Certificate] [Articles] of [Incorporation][Association] or Bylaws of the Company or, to the best knowledge of such counsel, any agreement, indenture or other instrument to which the Company or any Stockholder is bound or to which any assets of the Company are subject, or result in the creation or imposition of any security interest, lien, charge or encumbrance upon any of the assets of the Company. (m) Neither the execution, delivery and performance of the Practice Agreements and the other agreements to which the Practice is a party contemplated thereby nor the consummation of the transactions contemplated thereby will conflict with, or result in a breach of the terms, conditions and provisions of, or constitute a default under, the [Certificate] [Articles] of [Incorporation] [Association] or Bylaws of the Practice or, to the best knowledge of such counsel, any agreement, indenture or other instrument to which the Practice or any Stockholder is bound or to which any assets of the Practice are subject, or result in the creation or imposition of any security interest, lien, charge or encumbrance upon any of the assets of the Practice (except as contemplated in the Security Agreement). (n) No consent of any person, corporation, association, company, partnership or other entity, and no consent, license, approval or authorization of, or registration or declaration with, any governmental body, authority, bureau or agency or federal, state or local court is required in connection with the execution and delivery of the Agreement, the Practice Agreements and the other agreements contemplated thereby, or the consummation of the transactions contemplated thereby, on the part of the Company, the Practice or the Stockholders, or to the extent that any such consent or other action may be required, it has been validly procured or taken. [(o) The Certificate of Merger complies with the applicable law of the [State] [Commonwealth] of ______________ and, following the filing thereof by the Surviving Corporation with the [Secretary of State] of the [State] [Commonwealth] of and the payment of all applicable filing fees with respect thereto, the Merger will be effective on the [Closing Date] [date the Certificate is filed with the Secretary of State].] Pentegra Dental Group, Inc. -5- March __, 1998 Dain Rauscher Incorporated EVEREN Securities, Inc. For purposes of this opinion, "knowledge" of counsel shall mean (with respect to matters of fact) that after an examination of documents made available to counsel by the Company, the Practice and the Stockholders and after inquiry of the Stockholders and officers of the Company and the Practice, but without any judgment or litigation searches or any other independent factual investigation, counsel has no reason to believe that statements made to such counsel's "knowledge" are factually incorrect. "Knowledge" shall furthermore refer only to then current actual knowledge of members of counsel's firm who have worked on matters for the Company. EX-10.10 3 EXHIBIT 10.10 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT Second Amendment to Employment Agreement (the "Amendment"), dated effective July 31, 1997, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and Omer K. Reed, D.D.S. ("Employee"). W I T N E S S E T H WHEREAS, the parties hereto entered into that certain Employment Agreement (as amended, the "Employment Agreement") dated July 31, 1997 among the Company and Employee, and that certain Amendment to Employment Agreement dated effective July 31, 1997 among the Company and Employee. WHEREAS, the parties hereto desire to further amend the Employment Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the undersigned do hereby agree as follows: 1. Section 4(a) of the Employment Agreement is hereby amended in its entirety to read as follows: (a) BASE SALARY. Commencing on the Commencement Date, Employee shall be entitled to receive a base salary of $87,500.00 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") thereof. 2. The Employment Agreement shall be hereby amended to reflect the foregoing agreement of the parties hereto. Except as amended hereby, the Employment Agreement shall remain unchanged. 3. Terms used herein with their initial letter capitalized and not otherwise defined shall have the meaning assigned to such terms in the Employment Agreement. Executed to be effective as of the day and year first set forth above. PENTEGRA DENTAL GROUP, INC. By: /s/ Gary S. Glatter -------------------------------- Gary S. Glatter, President EMPLOYEE /s/ Omer K. Reed ------------------------------------ Omer K. Reed, DDS EX-10.11 4 EXHIBIT 10.11 AMENDMENT TO EMPLOYMENT AGREEMENT Amendment to Employment Agreement (the "Amendment"), dated effective July 1, 1997, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and Gary S. Glatter ("Employee"). W I T N E S S E T H WHEREAS, the parties hereto entered into that certain Employment Agreement (as amended, the "Employment Agreement") dated July 1, 1997 among the Company and Employee. WHEREAS, the parties hereto desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the undersigned do hereby agree as follows: 1. Exhibit A to the Employment Agreement is hereby amended in its entirety to read as set forth on Exhibit A attached hereto and made a part hereof. 2. The Employment Agreement shall be hereby amended to reflect the foregoing agreement of the parties hereto. Except as amended hereby, the Employment Agreement shall remain unchanged. 3. Terms used herein with their initial letter capitalized and not otherwise defined shall have the meaning assigned to such terms in the Employment Agreement. Executed to be effective as of the day and year first set forth above. PENTEGRA DENTAL GROUP, INC. By: /s/ Kim Rozman --------------------------------- Kim Rozman, Senior Vice President EMPLOYEE /s/ Gary S. Glatter ------------------------------------ Gary S. Glatter EXHIBIT A BONUS Employee shall be eligible to receive an annual cash bonus in an amount equal to up to 50% of his base salary in the event that the Company experiences at least 20% or greater growth in earnings per share on a year to year basis (calculated on a pro forma basis for the calendar year prior to the Company's first fiscal year of operations). For purposes of determining the applicable year's earnings per share, the cash bonus payable hereunder and under all other similar agreements between the Company and its officers shall be included prior to such determination. Percentage Increase in Bonus as a Percentage Earnings Per Share Of Annual Base Salary 20.0-22.5% 10% Over 22.5-25.0% 20% Over 25.0% to 27.5% 30% Over 27.5% to 30.0% 40% Over 30.0% 50% EX-10.12 5 EXHIBIT 10.12 AMENDMENT TO EMPLOYMENT AGREEMENT Amendment to Employment Agreement (the "Amendment"), dated effective September 1, 1997, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and Sam H. Carr ("Employee"). W I T N E S S E T H WHEREAS, the parties hereto entered into that certain Employment Agreement (as amended, the "Employment Agreement") dated September 1, 1997 among the Company and Employee. WHEREAS, the parties hereto desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the undersigned do hereby agree as follows: 1. Exhibit A to the Employment Agreement is hereby amended in its entirety to read as set forth on Exhibit A attached hereto and made a part hereof. 2. The Employment Agreement shall be hereby amended to reflect the foregoing agreement of the parties hereto. Except as amended hereby, the Employment Agreement shall remain unchanged. 3. Terms used herein with their initial letter capitalized and not otherwise defined shall have the meaning assigned to such terms in the Employment Agreement. Executed to be effective as of the day and year first set forth above. PENTEGRA DENTAL GROUP, INC. By: /s/ Gary S. Glatter ----------------------------------- Gary S. Glatter, President EMPLOYEE /s/ Sam H. Carr ----------------------------------- Sam H. Carr EXHIBIT A BONUS Employee shall be eligible to receive an annual cash bonus in an amount equal to up to 25% of his base salary in the event that the Company experiences at least 20% or greater growth in earnings per share on a year to year basis (calculated on a pro forma basis for the calendar year prior to the Company's first fiscal year of operations). For purposes of determining the applicable year's earnings per share, the cash bonus payable hereunder and under all other similar agreements between the Company and its officers shall be included prior to such determination. Percentage Increase in Bonus as a Percentage Earnings Per Share Of Annual Base Salary 20.0-22.5% 5% Over 22.5-25.0% 10% Over 25.0% to 27.5% 15% Over 27.5% to 30.0% 20% Over 30.0% 25% EX-10.13 6 EXHIBIT 10.13 AMENDMENT TO EMPLOYMENT AGREEMENT Amendment to Employment Agreement (the "Amendment"), dated effective July 12, 1997, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and James L. Dunn, Jr. ("Employee"). W I T N E S S E T H WHEREAS, the parties hereto entered into that certain Employment Agreement (as amended, the "Employment Agreement") dated July 12, 1997 among the Company and Employee. WHEREAS, the parties hereto desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the undersigned do hereby agree as follows: 1. Exhibit A to the Employment Agreement is hereby amended in its entirety to read as set forth on Exhibit A attached hereto and made a part hereof. 2. The Employment Agreement shall be hereby amended to reflect the foregoing agreement of the parties hereto. Except as amended hereby, the Employment Agreement shall remain unchanged. 3. Terms used herein with their initial letter capitalized and not otherwise defined shall have the meaning assigned to such terms in the Employment Agreement. Executed to be effective as of the day and year first set forth above. PENTEGRA DENTAL GROUP, INC. By: /s/ Gary S. Glatter ---------------------------------- Gary S. Glatter, President EMPLOYEE /s/ James L. Dunn. Jr. --------------------------------------- James L. Dunn, Jr. EXHIBIT A BONUS Employee shall be eligible to receive an annual cash bonus in an amount equal to up to 25% of his base salary in the event that the Company experiences at least 20% or greater growth in earnings per share on a year to year basis (calculated on a pro forma basis for the calendar year prior to the Company's first fiscal year of operations). For purposes of determining the applicable year's earnings per share, the cash bonus payable hereunder and under all other similar agreements between the Company and its officers shall be included prior to such determination. Percentage Increase in Bonus as a Percentage Earnings Per Share Of Annual Base Salary 20.0-22.5% 5% Over 22.5-25.0% 10% Over 25.0% to 27.5% 15% Over 27.5% to 30.0% 20% Over 30.0% 25% EX-10.14 7 EXHIBIT 10.14 AMENDMENT TO EMPLOYMENT AGREEMENT Amendment to Employment Agreement (the "Amendment"), dated effective July 12, 1997, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and John Thayer ("Employee"). W I T N E S S E T H WHEREAS, the parties hereto entered into that certain Employment Agreement (as amended, the "Employment Agreement") dated July 12, 1997 among the Company and Employee. WHEREAS, the parties hereto desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the undersigned do hereby agree as follows: 1. Exhibit A to the Employment Agreement is hereby amended in its entirety to read as set forth on Exhibit A attached hereto and made a part hereof. 2. The Employment Agreement shall be hereby amended to reflect the foregoing agreement of the parties hereto. Except as amended hereby, the Employment Agreement shall remain unchanged. 3. Terms used herein with their initial letter capitalized and not otherwise defined shall have the meaning assigned to such terms in the Employment Agreement. Executed to be effective as of the day and year first set forth above. PENTEGRA DENTAL GROUP, INC. By: /s/ Gary S. Glatter ------------------------------- Gary S. Glatter, President EMPLOYEE /s/ John Thayer ----------------------------------- John Thayer EXHIBIT A BONUS Employee shall be eligible to receive an annual cash bonus in an amount equal to up to 25% of his base salary in the event that the Company experiences at least 20% or greater growth in earnings per share on a year to year basis (calculated on a pro forma basis for the calendar year prior to the Company's first fiscal year of operations). For purposes of determining the applicable year's earnings per share, the cash bonus payable hereunder and under all other similar agreements between the Company and its officers shall be included prior to such determination. Percentage Increase in Bonus as a Percentage Earnings Per Share Of Annual Base Salary 20.0-22.5% 5% Over 22.5-25.0% 10% Over 25.0% to 27.5% 15% Over 27.5% to 30.0% 20% Over 30.0% 25% In addition, on the first anniversary of the closing of the IPO, Employee shall receive a bonus in the amount of $25,000.00. EX-10.15 8 EXHIBIT 10.15 AMENDMENT TO EMPLOYMENT AGREEMENT Amendment to Employment Agreement (the "Amendment"), dated effective July 12, 1997, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and Kimberlee K. Rozman ("Employee"). W I T N E S S E T H WHEREAS, the parties hereto entered into that certain Employment Agreement (as amended, the "Employment Agreement") dated July 12, 1997 among the Company and Employee. WHEREAS, the parties hereto desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the undersigned do hereby agree as follows: 1. Exhibit A to the Employment Agreement is hereby amended in its entirety to read as set forth on Exhibit A attached hereto and made a part hereof. 2. The Employment Agreement shall be hereby amended to reflect the foregoing agreement of the parties hereto. Except as amended hereby, the Employment Agreement shall remain unchanged. 3. Terms used herein with their initial letter capitalized and not otherwise defined shall have the meaning assigned to such terms in the Employment Agreement. Executed to be effective as of the day and year first set forth above. PENTEGRA DENTAL GROUP, INC. By: /s/ Gary S. Glatter -------------------------------------- Gary S. Glatter, President EMPLOYEE /s/ Kimberlee K. Rozman ----------------------------------- Kimberlee K. Rozman EXHIBIT A BONUS Employee shall be eligible to receive an annual cash bonus in an amount equal to up to 25% of his base salary in the event that the Company experiences at least 20% or greater growth in earnings per share on a year to year basis (calculated on a pro forma basis for the calendar year prior to the Company's first fiscal year of operations). For purposes of determining the applicable year's earnings per share, the cash bonus payable hereunder and under all other similar agreements between the Company and its officers shall be included prior to such determination. Percentage Increase in Bonus as a Percentage Earnings Per Share Of Annual Base Salary 20.0-22.5% 5% Over 22.5-25.0% 10% Over 25.0% to 27.5% 15% Over 27.5% to 30.0% 20% Over 30.0% 25% EX-10.16 9 EXHIBIT 10.16 SECOND AMENDMENT TO ASSET CONTRIBUTION AGREEMENT This Second Amendment to Asset Contribution Agreement (this "Amendment"), dated to be effective August 20, 1997, is by and among Pentegra Dental Group, Inc., a Delaware corporation, Pentegra, Ltd., Napili International, Inc., Kelly Reed, MOR Limited Partnership and Reed Trust. W I T N E S S E T H WHEREAS, the parties hereto entered into that certain Asset Contribution Agreement dated August 20, 1997 (as heretofore amended, the "Agreement") as amended by that certain First Amendment to Asset Contribution Agreement dated October 1, 1997; and WHEREAS, the parties hereto desire to amend the Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the undersigned do hereby agree as follows: 1. Annex A of the Agreement shall hereby be amended in its entirety to read as follows: ANNEX A Acquisition Consideration The aggregate consideration to be received by the Contributor pursuant to the Agreement (the "Acquisition Consideration") is the following: Cash in the amount of $100,000.00. Promissory Note in the original principal amount of $100,000.00 in the form attached hereto as Exhibit A-1. 2. The Agreement shall be hereby amended to reflect the foregoing agreement of the parties hereto. Except as amended hereby, the Agreement shall remain unchanged. 3. Terms used herein with their initial letter capitalized and not otherwise defined shall have the meaning assigned to such terms in the Agreement. Executed to be effective as of the day and year first set forth above. PENTEGRA DENTAL GROUP, INC. By: /s/ Gary S. Glatter ------------------------------------ Gary S. Glatter, President /s/ Kelly W. Reed --------------------------------------- Kelly W. Reed MOR LIMITED PARTNERSHIP By: /s/ Omer K. Reed ------------------------------------ Omer K. Reed, D.D.S. By: /s/ Marcia J. Reed ------------------------------------ Marcia J. Reed REED TRUST By: /s/ Karl O. Reed ------------------------------------ Karl O. Reed, Trustee By: /s/ Kelly W. Reed ------------------------------------ Kelly W. Reed, Trustee -2- By: /s/ Kevin Reed ------------------------------------ Kevin P. Reed, Trustee By: /s/ Kary Reed ------------------------------------ Kary Reed, Trustee PENTEGRA, Ltd. By: /s/ Kelly W. Reed ------------------------------------ Kelly W. Reed, President NAPILI International, Inc. By: /s/ Marcia J. Reed ------------------------------------ Marcia J. Reed, President -3- EXHIBIT A-1 PROMISSORY NOTE Date: March __, 1998 Maker: Pentegra Dental Group, Inc., a Delaware Corporation Payee: Pentegra, Ltd. Napili International, Inc. Principal Amount: $100,000.00 For value received, the undersigned, Pentegra Dental Group, Inc., a Delaware corporation (hereinafter referred to as the "Maker") does hereby promise to pay to the order of Pentegra, Ltd. and Napili International, Inc., jointly (hereinafter referred to as the "Payee or Holder"), the sum of One Hundred Thousand and 00/100 Dollars ($100,000.00) (the "Principal"). In addition to said Principal amount, the undersigned also shall pay to the order of Payee interest equal to nine percent per annum (9.00%). The Principal and accrued interest shall be due and payable on April 1, 1999. This Note shall be immediately due and payable at the option of the Payee or Holder, after notice and failure to cure, upon the happening of any one of the following events (an "Event of Default"): (a) Maker defaults in the timely payment of interest or principal due hereunder; or, (b) 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 sixty (60) days. The Events of Default set forth in the subparagraphs 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. 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. The principal and accrued interest shall be paid by the Maker in lawful money of the United States of America. The Maker and each Holder, 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 consentsthat 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 -4- 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. 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 eighteen percent (18.0%) per annum. However, all agreements between Maker, 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 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 AND HOLDER AGREE THAT THIS WRITTEN NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THE MAKER AND HOLDER AGREE 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 March, 1998. Pentegra Dental Group, Inc. a Delaware Corporation By: ------------------------------------ Gary S. Glatter, President -5- EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-37633) relating to the registration of 2,500,000 shares of $0.001 par value common stock of our report dated February 20, 1998, on our audit of the financial statements of Pentegra Dental Group, Inc. as of December 31, 1997 and for the period from inception, February 21, 1997, through December 31, 1997. We also consent to the reference to our firm under the caption "Experts." /s/ COOPERS & LYBRAND L.L.P. Houston, Texas February 24, 1998 -----END PRIVACY-ENHANCED MESSAGE-----