-----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, RjN/OQh1VIiVEbv2TU4ncjcsCE6fbm0rjs6F0g2RsUwIJZQBxGbWyrz1oq8koPD2 OXpFJfKNObulizeNxmjxlQ== 0001047469-98-035894.txt : 19980930 0001047469-98-035894.hdr.sgml : 19980930 ACCESSION NUMBER: 0001047469-98-035894 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 6 REFERENCES 429: 333-49473 FILED AS OF DATE: 19980929 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-4 SEC ACT: SEC FILE NUMBER: 333-64665 FILM NUMBER: 98717702 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-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 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, SUITE 650 2999 NORTH 44TH STREET, SUITE 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)
-------------------------- COPY TO: RICHARD S. ROTH JACKSON WALKER L.L.P. 1100 LOUISIANA SUITE 4200 HOUSTON, TEXAS 77002 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If the securities being registered on this Form are to be offered are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, 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 delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE 1,500,000 Common Stock, par value $.001 per share..... shares(2) $4.09375 $6,140,625 $1,812 Convertible Subordinated Debt Securities(3)............................. $50,000,000 100% $50,000,000 $14,750
(1) Estimated solely for the purpose of calculating the registration fee. Pursuant to Rule 457(c), the offering price and registration fee with respect to the Common Stock are computed on the basis of the average of the high and low prices of the Common Stock on September 26, 1998, as reported on The American Stock Exchange. (2) This Registration Statement also includes 735,217 shares of Common Stock which have been previously registered by the Registrant on Registration Statement No. 333-49473 and for which the Registrant has previously paid registration fees of $3,735. (3) Includes such indeterminate number of shares of Common Stock as shall be issuable on conversion of the Convertible Subordinated Debt Securities being registered hereunder. No additional consideration will be received for the Common Stock and therefore no registration fee is required pursuant to Rule 457(i). -------------------------- Pursuant to Rule 429 under the Securities Act of 1933, as amended, the Prospectus which is a part of this Registration Statement also relates to 735,217 shares of Common Stock of the Registrant covered by Registration Statement No. 333-49473 (including all amendments thereto) previously filed by the Registrant on Form S-4. -------------------------- 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 SEPTEMBER 29, 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. [LOGO] PENTEGRA DENTAL GROUP, INC. COMMON STOCK CONVERTIBLE DEBT SECURITIES Pentegra Dental Group, Inc. ("Pentegra" or the "Company") may offer and issue 2,235,217 shares of its common stock, $.001 par value per share (the "Common Stock"), and $50,000,000 aggregate principal amount of convertible subordinated debt securities (the "Convertible Debt Securities") covered by this Prospectus in business combination transactions involving its acquisition, directly or indirectly, of businesses or other operating assets. Pentegra expects that (i) the terms of these business combination transactions will be determined by direct negotiations with the owners or controlling persons of the businesses or assets to be acquired, (ii) the shares of Common Stock issued will be valued at prices reasonably related to market prices prevailing either at the time an acquisition agreement is executed or at or about the time of delivery of the shares and (iii) the Convertible Debt Securities issued will be valued at prices reasonably related to their principal amount. It does not expect to pay any underwriting discounts or commissions, but may pay finder's fees from time to time with respect to specific business combination transactions. Any person receiving any such fees may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Pentegra will pay all expenses of this offering. The Convertible Debt Securities will be convertible in whole or in part into shares of common stock, par value $.001 per share ("Common Stock"), of Pentegra at any time on or after their respective Convertibility Commencement Date (as defined herein) and at or before maturity, unless previously redeemed, at their Conversion Price (as defined herein) as the applicable prospectus supplement or supplements (each, a "Prospectus Supplement") and pricing supplement or supplements (each, a "Pricing Supplement") hereto will specify, subject to adjustment in certain events. The Convertible Debt Securities will be (i) unsecured obligations of Pentegra, (ii) subordinate to all present and future Senior Indebtedness (as defined in the Indenture described herein or any applicable supplement to that Indenture or Prospectus Supplement relating to one or more series of Convertible Debt Securities) of Pentegra and (iii) effectively subordinated to all indebtedness and other liabilities of subsidiaries of Pentegra. Persons receiving the Convertible Debt Securities offered hereby may be contractually required to hold some portions of those Convertible Debt Securities for periods of up to two years. In addition, pursuant to the provisions of Rule 145 under the Securities Act, the volume limitations and certain other requirements of Rule 144 under the Securities Act will apply to resales of those Convertible Debt Securities by affiliates of the businesses the Company acquires for a period of one year (or such shorter period as the Securities and Exchange Commission (the "Commission") may prescribe). As of September 1, 1998, 7,581,681 shares of Common Stock were issued and outstanding, of which 2,875,000 are registered and available for unrestricted trading in public markets unless owned by affiliates of Pentegra. The Common Stock is listed on The American Stock Exchange, under the symbol "PEN." Application will be made to list the shares offered hereby on The American Stock Exchange. On September 28, 1998, the last reported sales price of the Common Stock on The American Stock Exchange was $3.875 per share. All expenses of this offering (this "Offering") will be paid by Pentegra. No underwriting discounts or commissions will be paid in connection with the issuance of shares by Pentegra in business combination transactions, although finder's fees may be paid with respect to specific acquisitions. Any person receiving a finder's fee may be deemed to be an Underwriter within the meaning of the Securities Act. ------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. --------------- 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. THE DATE OF THIS PROSPECTUS IS SEPTEMBER , 1998. PROSPECTUS SUMMARY UNLESS OTHERWISE INDICATED BY THE CONTEXT, REFERENCES HEREIN TO (I) "PENTEGRA" OR THE "COMPANY" INCLUDE PENTEGRA DENTAL GROUP, INC. AND ITS WHOLLY OWNED SUBSIDIARY, PENTEGRA INVESTMENTS, INC. ("PII") AND (II) "AFFILIATED PRACTICES" MEAN THE DENTAL PRACTICES WITH WHICH THE COMPANY HAS AFFILIATED AND THOSE DENTAL PRACTICES, IF ANY, WITH WHICH IT MAY ENTER INTO SIMILAR RELATIONSHIPS IN THE FUTURE. 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 Service Agreements with 64 professional corporations or associations owned by the dentist-owners of the Affiliated Practices, which include 95 dentists and 75 dental offices located in 20 states. The Company acquired substantially all of the tangible and intangible assets, and assumed certain liabilities, of the Affiliated Practices. The Affiliated Practices are primarily general dentistry practices, but also include specialists such as periodontists, pedodontists and oral surgeons. In addition, the Company acquired from Dr. Reed and certain of his affiliates (the "Pentegra/Napili Transaction") the assets of a consulting firm, Pentegra, Ltd., which was founded in 1988, and a seminar company, Napili, International, Inc. ("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. The Pentegra Dental Program is 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. 2 - 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 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 Service Agreements with Affiliated Practices have initial terms of 40 years, subject to earlier termination under certain circumstances. Pursuant to the Service Agreements, the Company is the exclusive manager and administrator of non-dental services relating to the operation of the Affiliated Practices and, among other things, (i) administers the billing and collections for the Affiliated Practices, (ii) provides the necessary clerical, accounting and other non-dental services to the Founding Affiliated Practices and (iii) provides facilities and equipment for the Affiliated Practices. The service fees payable by the 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." RECENT DEVELOPMENTS In connection with its initial public offering (the "IPO") in March 1998, the Company acquired substantially all the tangible and intangible assets and assumed certain liabilities of, and entered into agreements to provide long-term management services to, 77 dentists operating in 63 offices located in 18 states (the "Founding Affiliated Practices"). From the date of the IPO through August 31, 1998, the Company has affiliated with an additional 13 practices and 18 dentists operating in 12 offices, increasing 3 the total number of existing Affiliated Practices to 64. During that period, the Company also funded two dental practice acquisitions by dentists party to a Service Agreement with the Company, which practices were "tucked-in" to an existing Affiliated Practice. These additional practices expand the Company's geographical base into Illinois and Oklahoma. In addition to these affiliations, the Company is negotiating and will continue to negotiate to affiliate with additional dental practices; however, although the Company intends to aggressively pursue these and other affiliations, there can be no assurance that any of such affiliations will be consummated. THE OFFERING Common Stock offered by the Company......... 2,235,217 shares Common Stock to be outstanding after this Offering(1)............................... 9,816,898 shares American Stock Exchange symbol.............. PEN
- --------- (1) Includes 3,859,251 shares of Common Stock issued in connection with the Company's affiliation with its Affiliated Practices (the "Affiliations"), 847,430 shares of Common Stock issued pursuant to an Exchange Agreement whereby each outstanding share of Common Stock, par value $0.01 per share, of PII was exchanged for a share of Common Stock (the "Share Exchange") and 2,875,000 shares of Common Stock issued in the IPO, and excludes (i) an aggregate of 724,666 shares of Common Stock issuable upon exercise of stock options granted under the Company's 1997 Stock Compensation Plan (the "1997 Stock Compensation Plan") at an exercise price equal to $8.50 per share and (ii) 1,275,334 shares reserved for future issuance under the 1997 Stock Compensation Plan. See "Management-- 1997 Stock Compensation Plan." RISK FACTORS The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." 4 SUMMARY FINANCIAL DATA (IN THOUSANDS) Due to the fact that the Company has had no significant operations prior to March 30, 1998, no comparative results have been included in this Prospectus. The Company changed its fiscal year end from December 31, to March 31, effective for the year beginning April 1, 1998. The summary historical financial information presented below has been derived from the financial statements of Pentegra Dental Group, Inc. included in this Prospectus. 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 THREE MONTHS THREE MONTHS DECEMBER 31, ENDED ENDED 1997 MARCH 31, 1998 JUNE 30, 1998 ------------------- --------------- --------------- Statement of Operations Data: Revenue......................................... $ -- $ -- $ 7,412 Expenses Clinical salaries, wages and benefits......... -- -- 2,836 Dental supplies and lab fees.................. -- -- 1,220 Rent.......................................... -- -- 550 Advertising and marketing..................... -- -- 111 General and administrative.................... 709 550 876 Depreciation and amortization................. -- -- 171 Other expenses................................ 645 1,250 751 ------- ------- ------ Total operating expenses.................... 1,354 1,800 6,515 ------- ------- ------ Earnings (loss) from operations............... (1,354) (1,800) 897 Interest income (expense)................... -- (160) 40 ------- ------- ------ Income (loss) before income taxes............. (1,354) (1,960) 937 Income taxes................................ -- -- 263 ------- ------- ------ Net income (loss)............................. (1,354) (1,960) 674 ------- ------- ------ Preferred stock dividend...................... -- (1,070) -- ------- ------- ------ Earnings (loss) attributable to common stock.. $ (1,354) $ (3,030) $ 674 ------- ------- ------ ------- ------- ------ Earnings per share: $ 0.10 ------ ------ Weighted average number of shares outstanding: 6,886 ------ ------
JUNE 30, 1998 --------------- Balance Sheet Data: Cash and cash equivalents............................................................. $ 3,094 Working capital....................................................................... 3,792 Total assets.......................................................................... 18,812 Stockholders' equity.................................................................. 15,270 Other Financial Data: Ratio of earnings to fixed charges(1)................................................. 5.03x
- --------- (1) For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes, and fixed charges. Fixed charges include interest expense and a percentage of rents which management deems representative of an interest factor. The ratio of earnings to fixed charges is not presented as of any date other than June 30, 1998, because the Company had no significant operations prior to March 30, 1998. 5 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 conducted no operations prior to March 30, 1998 other than in connection with the IPO and the Affiliations. The Company acquired substantially all the assets and assumed certain liabilities of the Founding Affiliated Practices concurrently with the closing of the IPO. In connection with the Affiliations, the Company entered 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, substantially all of the dentist-owners of the Founding Affiliated Practices entered 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 6 judicial 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. 7 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 will 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 IPO PAID TO AFFILIATES The Company paid, out of the net proceeds from the IPO, 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 was 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 is a member of the Board of Directors of the Company (the "Board of Directors"). In addition, the Company paid $100,000 of the net proceeds from the IPO as 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 also used approximately (i) $1.7 million of the proceeds from the IPO in connection with the repurchase and redemption of all of the issued and outstanding shares of preferred stock of PII (the "Repurchase and Redemption"), 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 a member of the Board of Directors or an officer of the Company), and (ii) approximately $836,000 of the proceeds from the IPO 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 IPO and operating expenses), including principal amounts of approximately $20,000 to James H. Clarke, Jr., D.D.S., $20,000 to Mack E. Greder, D.D.S., $10,000 to Roger Allen Kay, D.D.S., $5,000 to James W. Medlock, D.D.S., $15,000 to Ronald M. Yaros, D.D.S. and approximately $35,000 to George M. Siegel. See "Certain Transactions--Organization of the Company." 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 8 (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, Illinois, Maine, Maryland, Michigan, New York, Oklahoma, 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, Illinois, Louisiana, Maine, Maryland, Michigan, New York, Oklahoma, 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 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 9 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 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 10 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 Dr. Reed, the Company's Chairman of the Board, and the other executive officers and directors of the Company as a group beneficially own approximately 1.5% and 11.2%, 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. 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 is a limited group of 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 is 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 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 11 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 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 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. The shares of Common Stock and the Convertible Debt Securities registered hereby are freely tradable unless acquired by affiliates of the Company. Concurrently with the closing of the IPO, the owners of the Founding Affiliated Practices received, in the aggregate, 3,094,468 shares of Common Stock as a portion of the consideration for the assets of their practices. Certain other stockholders of the Company hold, in the aggregate, an additional 847,430 shares of Common Stock. Those shares are not being offered and sold pursuant to this Prospectus. All of those 3,941,898 shares were issued in transactions that have not been registered under 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 IPO, 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. 12 The 2,235,217 shares of Common Stock issuable pursuant to this Prospectus will generally be freely tradable by nonaffiliates after their issuance, unless the resale thereof is contractually restricted. The Company anticipates that the agreements entered into in connection with its future acquisitions will contractually restrict the resale of all or a portion of the shares issued in those transactions for varying periods of time. In April 1998, the Company registered 1,500,000 shares of Common Stock for use by the Company as all or a portion of the consideration to be paid in future affiliation transactions. As of September 1, 1998, approximately 764,783 of these shares had been issued to the dentist owners of the Company's new Affiliated Practices. These shares are, and the remaining approximately 735,217 of these shares (which are being offered and sold pursuant to this Prospectus) will be, generally freely tradeable upon issuance; however, each party that has received these shares of Common Stock has contractually agreed with the Company not to sell any of such shares for a period of one year from receipt. The Company has outstanding under the 1997 Stock Compensation Plan options to purchase approximately 724,666 shares of Common Stock. The Company has registered 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." SUBORDINATION OF THE CONVERTIBLE DEBT SECURITIES The Convertible Debt Securities are subordinate in right of payment to all current and future Senior Indebtedness of Pentegra. Unless a Prospectus Supplement provides otherwise for one or more series of Convertible Debt Securities, Senior Indebtedness includes all secured indebtedness of Pentegra for money borrowed. As of June 30, 1998, there is no outstanding Senior Indebtedness to which the Convertible Debt Securities would have been subordinated. The Indenture under which Pentegra will issue the Convertible Debt Securities (the "Indenture") will not, unless provided otherwise by a supplement thereto relating to one or more series of Convertible Debt Securities, limit the amount of additional indebtedness, including Senior Indebtedness, which Pentegra can create, incur, assume or guarantee. By reason of the subordination of the Convertible Debt Securities, if any insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of Pentegra occurs, the assets of Pentegra will be available to pay the amounts due on the Convertible Debt Securities only after all Senior Indebtedness has been paid in full. Substantially all the subsidiaries of Pentegra have guaranteed the payment of its obligations under the Company's $15.0 million revolving credit facility (the "Credit Facility"), and the stock of those subsidiaries has been pledged by Pentegra as collateral securing those obligations. LIMITATIONS ON REPURCHASE OF CONVERTIBLE DEBT SECURITIES IF A REPURCHASE EVENT OCCURS If a Repurchase Event, which consists of either a Change in Control or a Termination of Trading (each as defined herein), occurs, each holder of Convertible Debt Securities will have the right, at his option, to require Pentegra to repurchase all or a portion of his Convertible Debt Securities at a purchase price equal to 100% of the principal amount thereof plus accrued interest to the repurchase date. Pentegra's ability to repurchase Convertible Debt Securities following a Repurchase Event (i) may be limited by the terms of the Senior Indebtedness and the subordination provisions of the Indenture and any applicable supplement to the Indenture and (ii) will depend on the availability of sufficient funds and compliance with applicable securities laws. Accordingly, no assurance can be given Pentegra will repurchase any Convertible Debt Securities following a Repurchase Event. The term "Repurchase Event" is limited to certain specified transactions and may not include other events, such as a highly leveraged business combination or reorganization not involving a Repurchase Event, that might adversely affect the financial condition of Pentegra or result in a downgrade of the credit rating (if any) of the Convertible Debt Securities. See "Description of the Convertible Debt Securities." 13 LIMITED MARKET FOR THE CONVERTIBLE DEBT SECURITIES No market currently exists for any series of the Convertible Debt Securities, and no assurance can be given (i) a market will develop for any series of the Convertible Debt Securities, (ii) as to the liquidity or sustainability of any market that may develop or (iii) as to the ability of holders to sell their Convertible Debt Securities at any price. Future trading prices of the Convertible Debt Securities will depend on many factors, including, among others, prevailing interest rates, the Company's operating results, the price of the Common Stock and the market for similar securities. NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the IPO, there was 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 IPO or this Offering. The securities markets have, from 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. In addition, a "Change of Control" (as defined in the Credit Facility) constitutes an event of default under the Credit Facility, which could impede or prevent a change of control or depress the price of the Common Stock. See "Description of Capital Stock" and "Description of the Convertible Notes." THE COMPANY The Company conducted no operations prior to March 30, 1998 other than in connection with the IPO 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 IPO, the Affiliations, the Share Exchange, the Pentegra/Napili Transaction and the Repurchase and Redemption. 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. 14 RECENT DEVELOPMENTS In connection with its initial public offering (the "IPO") in March 1998, the Company acquired substantially all the tangible and intangible assets and assumed certain liabilities of, and entered into agreements to provide long-term management services to, 77 dentists operating in 63 offices located in 18 states (the "Founding Affiliated Practices"). From the date of the IPO through August 31, 1998, the Company has affiliated with an additional 13 practices and 18 dentists operating in 12 offices, increasing the total number of existing Affiliated Practices to 64. During that period, the Company also funded two dental practice acquisitions by dentists party to a Service Agreement with the Company, which practices were "tucked-in" to an existing Affiliated Practice. These additional practices expand the Company's geographical base into Illinois and Oklahoma. In addition to these affiliations, the Company is negotiating and will continue to negotiate to affiliate with additional dental practices; however, although the Company intends to aggressively pursue these and other affiliations, there can be no assurance that any of such affiliations will be consummated. 15 PRICE RANGE OF COMMON STOCK The following table sets forth the range of high and low sale prices for the Common Stock on the American Stock Exchange for the periods indicated:
LOW HIGH --------- --------- Year ending December 31, 1998: 1st quarter (beginning March 25 through March 31, 1998).................... $ 8.00 $ 8.50 2nd quarter................................................................ $ 6.25 $ 9.00 3rd quarter (through September 28, 1998)................................... $ 3.88 $ 8.82
As of September 24, 1998 there were approximately 124 holders of record of Common Stock, as shown on the records of the transfer agent and registrar for the Common Stock. The number of record holders does not bear any relationship to the number of beneficial owners of the Common Stock. 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 on, 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. 16 SELECTED FINANCIAL DATA (IN THOUSANDS) Due to the fact that the Company has had no significant operations prior to March 30, 1998, no comparative results have been included in this Prospectus. 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 June 30, 1998 and for the periods from inception, February 21, 1997, through December 31, 1997, the three months ended March 31, 1998 and the three months ended June 30, 1998, set forth below, have been derived from the financial statements of Pentegra Dental Group, Inc. included in this Prospectus. In May 1998, the Company changed its fiscal year end from December 31 to March 31, effective for the year beginning April 1, 1998. 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 THREE MONTHS THREE MONTHS DECEMBER 31, ENDED MARCH 31, ENDED 1997 1998 JUNE 30, 1998 --------------- --------------- ------------- STATEMENT OF OPERATIONS DATA: Revenue.................................................................. $ -- $ -- $ 7,412 Expenses Clinical salaries, wages and benefits.................................. -- -- 2,836 Dental supplies and lab fees........................................... -- -- 1,220 Rent................................................................... -- -- 550 Advertising and marketing.............................................. -- -- 111 General and administrative............................................. 709 550 876 Depreciation and amortization.......................................... -- -- 171 Other expenses......................................................... 645 1,250 751 ------- ------- ------ Total operating expenses........................................... 1,354 1,800 6,515 ------- ------- ------ Earnings (loss) from operations.......................................... (1,354) (1,800) 897 Interest income (expense).............................................. -- (160) 40 ------- ------- ------ Income (loss) before income taxes........................................ (1,354) (1,960) 937 Income taxes........................................................... -- -- 263 ------- ------- ------ Net income (loss)...................................................... (1,354) (1,960) 674 ------- ------- ------ Preferred stock dividend............................................... -- (1,070) -- ------- ------- ------ Earnings (loss) attributable to common stock........................... $ (1,354) $ (3,030) $ 674 ------- ------- ------ ------- ------- ------ Earnings per share......................................................................................... $ 0.10 ------ ------ Weighted average number of shares outstanding............................................................ 6,886 ------ ------
JUNE 30, 1998 -------------- BALANCE SHEET DATA: Cash and cash equivalents............................................................................... $ 3,094 Working capital......................................................................................... 3,792 Total assets............................................................................................ 18,812 Stockholders' equity.................................................................................... 15,270 OTHER FINANCIAL DATA: Ratio of earnings to fixed charges(1)................................................................. 5.03x
- ---------- (1) For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes, and fixed charges. Fixed charges include interest expense and a percentage of rents which management deems representative of an interest factor. The ratio of earnings to fixed charges is not presented as of any date other than June 30, 1998, because the Company had no significant operations prior to March 30, 1998. 17 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 The Company provides practice management services to fee-for-service dental practices in the United States. On March 30, 1998, the Company acquired simultaneously with the closing of its IPO, substantially all of the tangible and intangible assets, and assumed the liabilities, of the 50 Founding Affiliated Practices. The Company also began to provide practice management services to professional corporations or associations owned by the dentist-owners of the Founding Affiliated Practices (one of which split into two separate dental practices immediately after the IPO) pursuant to long-term management service agreements entered into at the time of the Affiliations. Since the IPO, the Company has affiliated with 13 practices. The Company expects that its future growth will come from (i) implementing a comprehensive operating strategy designed to drive internal growth of the affiliated practices and (ii) entering into management service agreements with new affiliated practices. The Company manages 64 dental practices, which include 95 dentists and 75 dental offices in 20 states. The expenses incurred by the Company in fulfilling its obligations under the management service agreements will be generally of the same nature as the operating costs and expenses that would have otherwise been incurred by the affiliated practices, including salaries, wages and benefits of practice personnel (excluding dentists and certain other licensed dental care professionals), dental supplies and office supplies used in administering their practices and the office (general and administrative) expenses of their practices. In addition to the operating costs and expenses discussed above, the Company incurs personnel and administrative expenses in connection with maintaining a corporate office, which provides management, practice enhancements, administrative and business development services. RESULTS OF OPERATIONS (UNAUDITED) Following completion of the IPO and the Affiliations on March 30, 1998, the Company began operations effective April 1, 1998. Management service fee recognition and related expenses began April 1, 1998. The Company began managing 51 dental practices in 18 states. At August 31, 1998, the Company managed 64 practices in 75 offices in 20 states. COMPONENTS OF REVENUES AND EXPENSES Under the terms of the typical management services agreement with an Affiliated Practice, the Company becomes the exclusive manager and administrator of all non-dental services relating to the operation of the Affiliated Practice. The obligations of the Company include assuming responsibility for the operating expenses incurred in connection with managing the dental centers. These expenses include salaries, wages and related costs of non-dental personnel, dental supplies and laboratory fees, rental and lease expenses, promotion and marketing costs, management information systems and other operating expenses incurred at the Affiliated Practices. In addition, the Company incurs general and administrative expenses related to the financial and administrative management of dental operations, insurance, training and development and other typical corporate expenditures. As compensation for its services under the 18 typical services agreement and subject to applicable law, the Company is paid a management fee comprised of two components: (1) the costs incurred by it on behalf of the Affiliated Practice, and (2) a management fee either fixed in amount or an amount usually approximating 35% of the Affiliated Practice's operating profit, before dentist compensation ("Service Fee"). Therefore, net revenues represent amounts earned by the Company under the terms of its management services agreements with the Affiliated Practices, which generally equate to the sum of the Service Fees and the operating expenses that the affiliated practices paid to the Company under the service agreements. NET REVENUE Net revenue generated for the three months ended June 30, 1998 was $7.4 million. During the three months ended June 30, 1998, the Company affiliated with 10 practices in addition to the Founding Affiliated Practices, and funded one dental practice "tuck-in" acquisition by a dentist party to a Service Agreement. For the three months ended June 30, 1998, dental center revenues aggregated to approximately $10.9 million. OPERATING EXPENSES The Company incurred operating expenses of approximately $6.5 million (87.9% of net revenue) for the three months ended June 30, 1998. Operating expenses consisted primarily of salaries, wages and benefits, dental supplies and laboratory fees, rent, advertising and marketing, and general and administrative expenses. General and administrative expenses include primarily the corporate expenses of the Company. These corporate expenses include salaries, wages and benefits, rent, consulting fees, travel (primarily related to practice development), office costs and other general corporate expenses. For the three months ended June 30, 1998, general and administrative expenses totaled approximately $876,000, which represented 11.8% of net revenue. The Company expects that general and administrative expenses will increase as the Company adds personnel and related costs necessary to manage its affiliated practices and execute its affiliation strategy. INCOME TAX EXPENSE The Company incurred income tax expense of approximately $263,000 for the three months ended June 30, 1998, which represented a 28% tax rate. The difference between the effective tax rate and the statutory rate reflects the anticipated utilization of the operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had a working capital balance of approximately $3.8 million. Current assets included approximately $3.1 million in cash and $3.3 million in accounts receivable, due entirely from Affiliated Practices. Current liabilities consisted of approximately $3.0 million in accounts payable and accrued liabilities, mostly related to expenses of the Affiliated Practices. The Company believes that cash on hand, together with the availability under its Credit Facility will be sufficient to execute its affiliation strategy. On June 1, 1998 the Company closed a revolving bank credit facility with Bank One, Texas, N.A., which provides the Company with a revolving line of credit of up to $15.0 million, to be used for general corporate purposes including financing of acquisitions, capital expenditures and working capital. The credit facility is collateralized by liens on certain of the Company's assets, including its rights under the management service agreements and accounts receivable. The credit facility contain restrictions on the incurrence of additional indebtedness and payment of dividends on the Common Stock. Additionally, compliance with certain financial covenants is required and the lender has approval rights with respect with acquisitions exceeding certain limits. At June 30, 1998, no amounts were outstanding under the revolving line of credit. 19 Cash used for investing activities for the three months ended June 30, 1998 included $252,000 for purchases of capital equipment, mostly for assets acquired in new practice affiliations, and $2.8 million for the purchase of intangibles associated with those new practice affiliations. Cash generated from financing activities in the three-month period ended June 30, 1998 included the issuance of 375,000 shares of stock with the exercise of the over-allotment option which provided cash to the Company of approximately $2.9 million. Uses of cash during the three-month period ended June 30, 1998 by financing activities included the payment of costs related to the IPO totaling approximately $1.0 million, and the repayment of debt assumed in the initial public offering of $392,000. These payments related to liabilities recognized at March 31, 1998. 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) has been accounted for by the Company at the transferors' historical cost basis. The Common Stock issued in the Affiliations has been 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 has been treated for accounting purposes as a dividend to the promoters. See "Business--Summary of Terms of Affiliations" and "Certain Transactions--Organization of the Company." RECENT PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standards ("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. 20 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 Service Agreements with its Affiliated Practices, which include 95 dentists and 75 dental offices located in 20 states. In addition, the Company acquired 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. The Pentegra Dental Program is 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-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- 21 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 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 22 training and services to small groups of dentists. Pentegra, Ltd. and Napili no longer operate independently and their services are 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. MANAGEMENT INFORMATION SYSTEMS The Company utilizes 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 allows the Company to collect from each Affiliated Practice, on a daily basis, data on patients 23 seen, number and type of procedures performed, billing and collections, and other data needed for financial reporting and analysis. The Company then compiles 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 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's financial reporting system is operational at all of the Founding Affiliated Practices, 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. OTHER PRACTICE MANAGEMENT SERVICES The Company provides 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 is designed to 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 has negotiated, 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. 24 LOCATIONS The Company provides management services to the Founding Affiliated Practices, with offices in the following states:
NUMBER OF -------------------- STATE OFFICES DENTISTS - --------------------------------------------------------------------------- --------- --------- Alaska..................................................................... 1 1 Arizona.................................................................... 6 7 California................................................................. 2 3 Colorado................................................................... 6 6 Florida.................................................................... 4 5 Illinois................................................................... 1 1 Louisiana.................................................................. 4 5 Maine...................................................................... 1 1 Maryland................................................................... 1 1 Massachusetts.............................................................. 1 2 Michigan................................................................... 1 1 Nebraska................................................................... 2 4 New Mexico................................................................. 1 2 New York................................................................... 4 4 North Dakota............................................................... 2 2 Oklahoma................................................................... 1 1 Oregon..................................................................... 1 1 Texas...................................................................... 33 45 Washington................................................................. 2 2 Wisconsin.................................................................. 1 1 --------- --------- Totals................................................................... 75 95 --------- --------- --------- ---------
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. SERVICE AGREEMENTS The Company has entered into a Service Agreement with each Affiliated Practice under which the Company is the exclusive manager and administrator of non-dental services relating to the operation of the Affiliated Practices. The following is intended to be a brief summary of the typical form of Service Agreement the Company entered into with each 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 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 formed by the dentist-owners of the 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 25 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 to four of the 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, among other things, (i) acts as the exclusive manager and administrator of non-dental services relating to the operation of the Affiliated Practice, subject to certain matters reserved to the Affiliated Practice, (ii) administers 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 Affiliated Practice, (iii) provides, as necessary, clerical, accounting, payroll, legal, bookkeeping and computer services and personnel, information management, printing, postage and duplication services and transcribing services, (iv) supervises and maintain custody of substantially all files and records (other than patient records if prohibited by applicable law), (v) provides facilities, equipment and furnishings for the Affiliated Practice, (vi) orders and purchase inventory and supplies as reasonably requested by the Affiliated Practice and (vii) implements, in consultation with the Affiliated Practice, public relations or advertising programs. Pursuant to each Service Agreement, the respective 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 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 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 Affiliated Practice and the dentist. The Service Agreement requires the Affiliated Practice to enforce the employment agreements between the Founding Affiliated Practice and the dentists associated with the Affiliated Practice (the "Dentist Employment Agreements"). If the Affiliated Practice does not enforce such employment agreement, the Company may, at its option, require the 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 Affiliated Practice is responsible for obtaining professional liability insurance for the employees of the Affiliated Practice and the Company is responsible for obtaining general liability and property insurance for the Affiliated Practice. Upon termination of a Service Agreement, the Affiliated Practice has the option to purchase and assume, and the Company has the option to require the Affiliated Practice to purchase and assume, the assets and liabilities related to the Affiliated Practice at the fair market value thereof, except in certain 26 circumstances where the Affiliated Practice or the Company, as applicable, was in breach of the Service Agreement. DENTIST AGREEMENT Substantially all of the dentist-owners of the Affiliated Practices entered into a dentist agreement, which provides the Company such dentist's guarantee (for the initial five years and for so long thereafter as he or she owns any interest in the Affiliated Practice) of the Affiliated Practice's obligations under the applicable Service Agreement. In addition, such agreement provides that the dentist may not sell his or her ownership interest during the dentist's five-year employment term without the Company's prior written consent. In the event of a default under the Service Agreement by the Affiliated Practice, the dentist agreement provides that the Company may, at its option, require the Affiliated Practice to convey its patient records and the capital stock of the Affiliated Practice to the Company's authorized designee, who, in any such case, the Company anticipates will be a dentist affiliated with an Affiliated Practice. DENTIST EMPLOYMENT AGREEMENTS Each Affiliated Practice will be a party to a Dentist Employment Agreement with each dentist owner. The Dentist Employment Agreements with substantially all of the dentists who received 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 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. 27 EMPLOYEES As of September 15, 1998, the Company employed 502 persons. None of the Company's employees is 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 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 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 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 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 advertising or professional practice. The laws of many states, including all of the states in which the 28 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 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 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 Affiliated Practices are located, also impose significant penalties for submitting false claims for dental services. In addition, most states in which the 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 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. 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 Affiliated Practices receive any revenue under Medicare or Medicaid, the impact of these laws on the Company is anticipated to be negligible. 29 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. 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 30 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. 31 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS As required by the Company's Bylaws, a majority of the Company's Board of Directors are dentists who are affiliated with Affiliated Practices. The following table sets forth certain information concerning the Company's directors and the executive officers of the Company (ages are as of September 1, 1998):
NAME AGE POSITION - --------------------------------------- --- ---------------------------------------------------------------- Omer K. Reed, D.D.S.................... 66 Chairman of the Board and Clinical Officer Gary S. Glatter........................ 45 President, Chief Executive Officer and Director Sam H. Carr............................ 42 Senior Vice President, Chief Financial Officer and Director James L. Dunn, Jr...................... 36 Senior Vice President and Chief Development Officer John G. Thayer......................... 45 Senior Vice President and Chief Operating Officer Kimberlee K. Rozman.................... 38 Senior Vice President, General Counsel and Secretary Ronnie L. Andress, D.D.S............... 43 Director J. Michael Casas....................... 36 Director James H. Clarke, Jr., D.D.S............ 50 Director Ronald E. Geistfeld, D.D.S............. 64 Director Mack E. Greder, D.D.S.................. 54 Director Roger Allen Kay, D.D.S................. 54 Director Gerald F. Mahoney...................... 55 Director Anthony P. Maris....................... 64 Director George M. Siegel....................... 60 Director Ronald M. Yaros, D.D.S................. 52 Director
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. 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. 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. 32 JAMES L. DUNN, JR. has served as the Company's Senior Vice President and Chief Development Officer since July 1997 and served as a Director from March 1997 to March 1998. 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. 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. 33 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 is 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 1999, 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." There are five committees of the Board: Audit, Compensation, Acquisition, Nominating and Executive. The members of the Audit Committee are Messrs. Maris and Mahoney. The members of the Compensation Committee are Messrs. Maris, Siegel and Casas. The sole member of the Acquisition Committee is Mr. Glatter, who has been delegated the authority to approve the terms of any business combination transaction involving the payment by the Company of consideration with a value of up to $3,000,000. The members of the Nominating Committee are Dr. Reed and Messrs. Glatter and Maris. The members of the Executive Committee are 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 an Affiliated Practice do not receive additional compensation for serving as directors. Each director who is not an employee of the Company or an 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 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 conducted no operations prior to March 30, 1998 other than in connection with the IPO 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." 34 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 approved the grant of 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 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 IPO. 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 IPO 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 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. 35 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 also received a $25,000 bonus on the closing of the IPO and will receive a $25,000 bonus on the first anniversary of that closing. Mr. Carr also received compensation on the closing of the IPO of approximately $29,000. 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"). The 1997 Stock Compensation Plan is administered by the Compensation Committee of the Board of Directors, which must be comprised of not less than two members of the Board of Directors (the "Committee"). Prior to the consummation of the IPO, the 1997 Stock Compensation Plan was 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 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 36 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 generally realizes short-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 12 months, the capital gain or loss will be long-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 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 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 has (i) outstanding options to purchase a total of 724,666 shares of Common Stock under the 1997 Stock Compensation Plan and (ii) 1,275,334 additional shares available for future awards under the 1997 Stock Compensation Plan. 37 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 IPO and the Affiliations, in June 1997, PII issued capital stock to Dr. Reed (37,500 shares of preferred stock and 7,500 shares of common stock), Gary S. Glatter (37,500 shares of preferred stock and 7,500 shares of common stock), George M. Siegel (37,500 of preferred stock and 7,500 shares of common stock), Mack E. Greder, D.D.S. (25,000 shares of preferred stock and 5,000 shares of common stock) and Roger Allen Kay, D.D.S. (25,000 shares of preferred stock and 5,000 shares of common stock), at a purchase price per share of $1.00 for the preferred stock 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 preferred stock he owns at a price per share equal to the subscription price he paid to PII for those shares, which transactions were consummated concurrently with the closing of the IPO and the Affiliations. In addition, immediately after the completion of the repurchases described in the foregoing sentence, all outstanding shares of preferred stock of PII was 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 was paid in cash from the proceeds of the IPO and $0.35 per share was 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 IPO 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 IPO. In December 1997, the owners of the outstanding shares of common stock of PII agreed to sell to PII on a pro rata basis at a purchase price of $.015 per share, an aggregate of 909,237 shares (approximately 51.8% of each such stockholder's shares), which sale has been consummated in accordance with that agreement. The Company purchased substantially all the tangible and intangible assets of Pentegra, Ltd. and Napili for consideration of $200,000 upon completion of the IPO. Of the $200,000 in consideration, $100,000 was paid from the proceeds of the IPO and $100,000 was 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 acquired 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 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, 38 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 March 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 March 31, 1998, the Company 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 the Affiliations with the directors of the Company who own an Affiliated Practice:
CONSIDERATION RECEIVED DEBT AND --------------------------------------- ASSETS LIABILITIES NUMBER OF VALUE OF FOUNDING AFFILIATED PRACTICE CONTRIBUTED(1) ASSUMED SHARES SHARES CASH - ----------------------------------------- -------------- ------------ ---------- ------------- ------------ Ronnie L. Andress, D.D.S., Inc........... 111,690 181,623 101,801 865,308 216,326 James H. Clarke, Jr., D.D.S., Inc........ 148,515 54,000 70,632 600,372 150,092 Mack E. Greder, D.D.S., P.C.............. 48,067 37,505 67,380 572,730 143,183 Roger Allen Kay, D.D.S., P.A............. 2,837 4,816 67,773 576,070 144,017 Omer K. Reed, D.D.S...................... 5,495 0 36,821 312,978 -- Ronald M. Yaros, D.D.S., P.C............. 139,371 29,570 139,214 1,183,319 295,830
- --------- (1) Assets contributed reflects the historical book value of the nonmonetary assets of each practice 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. The consideration paid by the Company for each of these Founding Affiliated Practices 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 shares of Common Stock issued to the dentists named in the foregoing table and all of 847,430 shares of Common Stock issued in the Share Exchange 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. 39 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of September 1, 1998 the "beneficial ownership" of the Common Stock of (i) each director, (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 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(1) ----------------------- NUMBER PERCENT ---------- ----------- Omer K. Reed, D.D.S......................................................................... 112,800 1.5% Gary S. Glatter............................................................................. 51,859 * Sam H. Carr................................................................................. 32,161 * James L. Dunn, Jr........................................................................... 45,025 * John G. Thayer.............................................................................. 32,161 * Kimberlee K. Rozman......................................................................... 16,080 * Ronald M. Yaros, D.D.S...................................................................... 142,214 1.9% George M. Siegel............................................................................ 116,180 1.5% Ronnie L. Andress, D.D.S.................................................................... 102,101 1.3% J. Michael Casas............................................................................ 96,482 1.3% James H. Clarke, Jr., D.D.S................................................................. 70,632 * Roger Allen Kay, D.D.S...................................................................... 70,185 * Mack E. Greder, D.D.S....................................................................... 71,192 * Ronald E. Geistfeld, D.D.S.................................................................. 1,000 * Gerald F. Mahoney........................................................................... 0 -- Anthony P. Maris............................................................................ 0 -- All executive officers and directors as a group (17 persons)................................ 960,072 12.7%
- --------- * 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. 40 DESCRIPTION OF THE CONVERTIBLE DEBT SECURITIES The Convertible Debt Securities offered hereby (the "Convertible Securities") will be issued under an Indenture dated as of , 1998 (the "Indenture") between Pentegra and U.S. Trust Company of Texas, N.A., as trustee (the "Trustee"). The following description of the Convertible Securities summarizes certain general terms and provisions of the Convertible Securities to which any Prospectus Supplement (including any Pricing Supplement) may relate (the "Offered Convertible Securities"). The particular terms of the Offered Convertible Securities and the extent to which the general terms and provisions of the Indenture will apply will be described in a Prospectus Supplement relating to the Offered Convertible Securities. The terms of the Offered Convertible Securities also will include those made a part of the Indenture by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The statements under this caption relating to the Convertible Securities and the Indenture are summaries only, do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Indenture, including the definitions therein of certain terms, and the Trust Indenture Act. Certain terms defined in the Indenture are capitalized herein. The Indenture is an exhibit to the registration statement on Form S-4, as amended, of which this Prospectus is a part (the "Acquisition Shelf Registration Statement") and is incorporated herein by this reference. GENERAL The Indenture will provide that Convertible Securities may be issued from time to time thereunder in one or more series, each in such aggregate principal amount as Pentegra may authorize from time to time. All Convertible Securities of one series need not be issued at the same time and, unless otherwise provided in a Prospectus Supplement with respect to any series, that series may be reopened, without the consent of the Holders of the Convertible Securities of that series, for issuance of additional Convertible Securities of that series. The Indenture will not limit either (i) the aggregate principal amount of Convertible Securities which can be issued thereunder or (ii) the amount of other indebtedness or liabilities, secured or unsecured, which Pentegra or its subsidiaries may incur. Unless otherwise indicated in a Prospectus Supplement with respect to one or more series, the Convertible Securities will not benefit from any covenant or other provision that would provide protection to Holders of the Convertible Securities against any sudden and dramatic decline in credit quality of the Company resulting from any takeover or highly leveraged transaction, including a recapitalization or similar restructuring. The Convertible Securities are unsecured obligations of Pentegra. Unless otherwise indicated in a Prospectus Supplement with respect to one or more series, principal of, and any premium or interest on, the Convertible Securities will be payable at the office of the Trustee in New York, New York, and the Convertible Securities may be surrendered for registration of transfer, exchange or conversion at that office. Pentegra may, at its option, pay any interest on the Convertible Securities by check mailed to the address of each person entitled thereto as it appears in the applicable Securities Register for the Convertible Securities or by wire transfer on the Regular Record Date for that interest payment. No service charge will be made for any registration of transfer or exchange of the Convertible Securities, but Pentegra may require payment of a sum sufficient to cover any tax or other governmental charge and any other expenses (including the fees and expenses of the Trustee) payable in connection therewith. If a Prospectus Supplement provides for the redemption of a series of Convertible Securities, Pentegra will not be required (i) to issue, register the transfer of or exchange any of those Convertible Securities during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption and ending at the close of business on the day of that mailing or (ii) to register the transfer of or exchange any of those Convertible Securities selected for redemption in whole or in part, except the unredeemed portion of those Convertible Securities being redeemed in part. 41 All monies paid by Pentegra to the Trustee or any Paying Agent, or held by Pentegra, in trust for the payment of principal of and any premium and interest on any Convertible Security which remain unclaimed for two years after that principal, premium or interest becomes due and payable may be repaid to Pentegra or released from trust, as the case may be. Thereafter, the Holder of that Convertible Security may, as an unsecured general creditor, look only to Pentegra for payment thereof. Reference is made to the Prospectus Supplement for the following terms of the Offered Convertible Securities: (i) the title and aggregate principal amount of the Offered Convertible Securities; (ii) the date or dates, or the method for determining the date or dates, the Offered Convertible Securities will be issued (each an "Original Issue Date") and the date or dates on which the Offered Convertible Securities will mature; (iii) the rate or rates (which may be fixed or variable) per annum, if any, at which the Offered Convertible Securities will bear interest or the method of determining such rate or rates; (iv) the date or dates from which that interest, if any, will accrue and the date or dates on which that interest, if any, will be payable; (v) the terms for redemption or early payment, if any, including any mandatory or optional sinking fund or analogous provision; (vi) the date or dates (each, a Convertibility Commencement Date) on which the Offered Convertible Securities first become convertible into Common Stock and their initial Conversion Price; (vii) whether the Offered Convertible Securities will be issued in fully registered form or bearer form or any combination thereof; (viii) whether the Offered Convertible Securities will be issued in the form of one or more global securities and whether those global securities are to be issuable in temporary global form or permanent global form; (ix) whether the Senior Indebtedness to which the Offered Convertible Securities will be subordinated by the Indenture will be as defined in the Indenture or as defined in the Prospectus Supplement; and (x) any other specific terms of the Offered Convertible Securities. Reference is also made to the Prospectus Supplement for information with respect to any additional covenants that may be included in the terms of the Offered Convertible Securities. The Convertible Securities may be issued as Original Issue Discount Securities. An Original Issue Discount Security is a Security issued at a price lower than the amount payable on the Stated Maturity thereof and which provides that on redemption or acceleration of the maturity thereof an amount less than the amount payable on the Stated Maturity thereof and determined in accordance with the terms of the Convertible Security will become due and payable. CONVERSION RIGHTS Each Convertible Security will be convertible into Common Stock, at the option of its Holder, at any time on or after its Convertibility Commencement Date and prior to its redemption (if redeemable) or final maturity, initially at its Conversion Price per share, subject to adjustment as described below. The right to convert Convertible Securities that the applicable Prospectus Supplement provides are subject to redemption will, with respect to those Convertible Securities that have been called for redemption, terminate at the close of business on the second business day preceding the Redemption Date therefor unless Pentegra defaults in making the payment due on that redemption. The applicable Prospectus Supplement will set forth, or describe the method for determining, the first date on which a Convertible Security may be converted into Common Stock (the "Convertibility Commencement Date"). In the case of Convertible Securities to be issued as purchase consideration in any acquisition for which installment-sale treatment is sought for federal income tax purposes, their Convertibility Commencement Date will be the first day following the first anniversary of the closing of the acquisition, unless the Prospectus Supplement provides otherwise. The applicable Prospectus Supplement also will set forth, or describe the method for determining, the initial conversion price of each Convertible Security (the "Conversion Price"). The conversion price of each Convertible Security will be subject to adjustment as and when any of the following events occurs after its Original Issue Date (or the Original Issue Date of any of its Predecessor Securities): (i) the subdivision, combination or reclassification of outstanding shares of 42 Common Stock; (ii) the payment of a dividend or distribution on the Common Stock exclusively in Common Stock or any other class of capital stock of Pentegra which includes Common Stock; (iii) the issuance of rights or warrants to all holders of Common Stock entitling them to acquire shares of Common Stock (or securities convertible into Common Stock) at a price per share less than the then Current Market Price; (iv) the distribution to all holders of Common Stock of shares of capital stock of Pentegra other than Common Stock, evidences of indebtedness of Pentegra, cash or assets (including securities, but excluding (a) dividends or distributions paid exclusively in cash, (b) dividends or distributions provided for in clause (ii) above and (c) rights and warrants provided for in clause (iii) above); (v) a distribution consisting exclusively of cash (excluding any cash distributions referred to in clause (iv) above) to all holders of Common Stock in an aggregate amount that, together with (a) all other cash distributions (excluding any cash distributions referred to in clause (iv) above) made within the 12 months preceding the record date for that distribution and (b) any cash and the fair market value of other consideration paid in respect of any tender offer subject to the provisions of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), made by Pentegra or a subsidiary of Pentegra for Common Stock consummated within the 12 months preceding that distribution, exceeds the greater of (1) 12.5% of Pentegra's market capitalization (being at any time the product of the then Current Market Price times the number of shares of Common Stock then outstanding) on that record date and (2) the Company's consolidated retained earnings on that record date (determined without giving effect to that distribution); and (vi) the consummation of a tender offer made by Pentegra or any subsidiary of Pentegra for Common Stock which involves an aggregate consideration that, together with (a) any cash and other consideration payable in respect of any tender offer made by Pentegra or a subsidiary of Pentegra for Common Stock consummated within the 12 months preceding the last time on which tenders of Common Stock may be made pursuant to the current tender offer (the "Expiration Time") and (b) the aggregate amount of all cash distributions (excluding any cash distributions referred to in clause (iv) above) to all holders of Common Stock within the 12 months preceding the consummation of that tender offer, exceeds the greater of (1) 12.5% of Pentegra's market capitalization immediately prior to that Expiration Time (determined using all then tendered shares) and (2) the Company's consolidated retained earnings at the Expiration Time (determined without giving effect to the purchase of tendered shares). No adjustment of any conversion price will be required to be made until cumulative adjustments amount to at least 1.0% of that conversion price, as last adjusted. Any adjustment that would otherwise be required to be made will be carried forward and taken into account in any subsequent adjustment. Pentegra will be permitted to reduce the conversion price of any Convertible Security as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of Common Stock or, if that is not possible, to diminish any income taxes that are otherwise payable because of that event. In the case of any consolidation or merger of Pentegra with or into any other corporation (other than one in which no change is made in the outstanding Common Stock), or the sale or transfer of all or substantially all the properties and assets of Pentegra, the Holder of any Convertible Security then Outstanding will, with certain exceptions, have the right thereafter to convert that Convertible Security only into the kind and amount of securities, cash and other property receivable on that consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock into which that Convertible Security might have been converted immediately prior to that consolidation, merger, sale or transfer; and adjustments will be provided for events subsequent thereto which are as nearly equivalent as practical to the conversion price adjustments described above. Pentegra will not issue fractional shares of Common Stock on conversion of any Convertible Security, but, in lieu thereof, will pay a cash adjustment based on the Closing Price at the close of business on the day of conversion. Pentegra will not pay any interest on converted Convertible Securities with respect to any Interest Payment Date subsequent to the date of conversion. No other payment or adjustment for interest or dividends will be made on conversion of any Convertible Security. 43 SUBORDINATION The payment of the principal of and any premium or interest on the Convertible Securities and any other payment obligations of Pentegra in respect of the Convertible Securities (including any obligation to repurchase the Convertible Securities) are, to the extent set forth in the Indenture, subordinated in right of payment to the prior payment in full in cash or cash equivalents of all Senior Indebtedness, whether outstanding on the date of the Indenture or thereafter incurred. If there is a payment or distribution of assets to creditors on any liquidation, dissolution, winding up, receivership, reorganization, assignment for the benefit of creditors, marshaling of assets and liabilities or any bankruptcy, insolvency or similar case or proceeding of Pentegra, the holders of all Senior Indebtedness will be entitled to receive payment in full in cash or cash equivalents of all Obligations due or to become due in respect of that Senior Indebtedness (including interest after the commencement of any such case or proceeding, notwithstanding that Pentegra may be excused as a result of such case or proceeding from the obligation to pay all or any part of the interest otherwise payable in respect of any Senior Indebtedness) before the Holders of the Convertible Securities will be entitled to receive any payment in respect of the principal of or any premium or interest on the Convertible Securities, and until all Obligations with respect to the Senior Indebtedness are paid in full in cash or cash equivalents, any distribution to which the Holders of the Convertible Securities would be entitled must be made to the holders of the Senior Indebtedness. Pentegra also may not make any payment (whether by redemption, purchase, retirement, defeasance or otherwise) on or in respect of the Convertible Securities if (i) a default in the payment of the principal of or any premium or interest on any Designated Senior Indebtedness (a "Payment Default") occurs or (ii) any other default occurs and is continuing with respect to any Designated Senior Indebtedness which permits holders of Designated Senior Indebtedness as to which that default relates to accelerate its maturity (a "Nonpayment Default") and the Trustee receives notice of that default (a "Payment Blockage Notice") from (a) if that Nonpayment Default shall have occurred under the Credit Facility or any other secured debt facility with banks or other lenders which provides revolving credit loans, term loans, receivables financing (including through the sale of receivables) or letters of credit (each an "Other Debt Facility"), the representative of the Credit Facility or that Other Debt Facility, as the case may be, or (b) if that Nonpayment Default shall have occurred with respect to any other issue of Designated Senior Indebtedness, the holders, or a representative of the holders, of at least 20% of that Designated Senior Indebtedness. The payments on or in respect of the Convertible Securities shall be resumed (i) in the case of a Payment Default respecting Designated Senior Indebtedness, on the date on which that default is cured or waived, and (ii) in the case of a Nonpayment Default respecting Designated Senior Indebtedness, the earliest of (a) the date on which that Nonpayment Default is cured or waived, (b) the date the applicable Payment Blockage Notice is retracted by written notice to the Trustee from a representative of the holders of the Designated Senior Indebtedness which have given that Payment Blockage Notice and (c) 179 days after the date on which the applicable Payment Blockage Notice is received by the Trustee, unless any Payment Default has occurred and is continuing or an Event of Default of the type referred to in clause (vii) of the first sentence under "--Events of Default" has occurred. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the date of commencement of the payment blockage period resulting from the immediately prior Payment Blockage Notice, and no Nonpayment Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. If the Maturity of any Convertible Securities is accelerated because of an Event of Default with respect thereto, (i) the Indenture requires Pentegra to promptly notify holders of Designated Senior Indebtedness of that event and (ii) the Holders of those Convertible Securities will, to the extent permitted by law, be prohibited for a period of 180 days thereafter from making any bankruptcy filing with respect to Pentegra or, to the extent permitted by law, from filing suit to enforce their rights under the Indenture. Unless a Prospectus Supplement provides otherwise for one or more series of Convertible Securities, the Indenture's definition of "Senior Indebtedness" will apply to the Convertible Securities. The Indenture 44 will define "Senior Indebtedness" as the principal of and premium, if any, and interest on and other Obligations in respect of (i) all secured indebtedness of Pentegra for money borrowed (including any secured indebtedness under the Credit Facility and any successor thereto and any secured indebtedness under all Other Debt Facilities), whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, and (ii) any amendments, renewals, extensions, modifications, refinancings and refundings of any of the foregoing. For purposes of this definition, "indebtedness for money borrowed" when used with respect to Pentegra means (i) any obligation of, or any obligation guaranteed by, Pentegra for the repayment of borrowed money (including fees, penalties and other obligations in respect thereof), whether or not evidenced by bonds, debentures, notes or other written instruments, (ii) any deferred payment obligation of, or any such obligation guaranteed by, Pentegra for the payment of the purchase price of property or assets evidenced by a note or similar instrument and (iii) any obligation of, or any such obligation guaranteed by, Pentegra for the payment of rent or other amounts under a lease of property or assets, which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of Pentegra under generally accepted accounting principles. As used in the Indenture: (i) "Obligations" in respect of the Senior Indebtedness include any principal, interest, premiums, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any such indebtedness; and (ii) "Designated Senior Indebtedness" means (a) Obligations under the Credit Facility and all secured Other Debt Facilities and (b) any other Senior Indebtedness the principal amount of which is $1.0 million or more and that has been designated by Pentegra as "Designated Senior Indebtedness." The Prospectus Supplement relating to any series of Convertible Securities may provide that the "Senior Indebtedness" to which the Convertible Securities of that series will be subordinated by the Indenture will include all indebtedness of Pentegra for money borrowed, whether secured or unsecured, except any such indebtedness that, by the terms of the instrument or instruments by which it was created or incurred, expressly provides that it (i) is junior in right of payment to those Convertible Securities or (ii) ranks pari passu in right of payment with those Convertible Securities. The Convertible Securities will be obligations exclusively of Pentegra. Pentegra currently conducts its operations through its subsidiaries, which are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due in respect of the Convertible Securities or to make any funds available therefor, whether by dividends, loans or other payments. The ability of any subsidiary of Pentegra to loan or advance funds or pay dividends to Pentegra (i) may be subject to contractual or statutory restrictions, (ii) will be contingent on the subsidiary's earnings and cash flows and (iii) will be subject to various business considerations. The Convertible Securities will be effectively subordinated to all indebtedness and other liabilities and commitments (including trade payables and lease obligations) of subsidiaries of Pentegra. Any right of Pentegra to receive assets of any of its subsidiaries on the liquidation or reorganization of that subsidiary (and any consequent right of the Holders of the Convertible Securities to participate in those assets) will be effectively subordinated to the claims of that subsidiary's creditors, except to the extent that Pentegra is itself recognized as a creditor of that subsidiary, in which case the claims of Pentegra would still be subordinated to any security in the assets of that subsidiary and any indebtedness of that subsidiary senior to that held by Pentegra. The Indenture does not limit or prohibit the incurrence of (i) Senior Indebtedness or (ii) indebtedness, liabilities or other commitments by Pentegra or its subsidiaries. As of June 30, 1998, there is no outstanding Senior Indebtedness to which the Convertible Securities would have been subordinated. CONSOLIDATION, MERGER AND SALE OF ASSETS The Indenture provides that Pentegra will not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person in one 45 transaction or a series of related transactions, unless (i) if applicable, the Person formed by such consolidation or into which Pentegra is merged or the Person or corporation which acquires the properties and assets of the Company substantially as an entirety is a corporation, limited liability company, partnership or trust organized and validly existing under the laws of the United States or any state thereof or the District of Columbia and expressly assumes payment of the principal of and any premium and interest on the Convertible Securities and the performance or observance of each obligation of Pentegra under the Indenture, (ii) immediately after giving effect to such transaction, no Event of Default will have occurred and be continuing, (iii) such consolidation, merger, conveyance, transfer or lease does not adversely affect the validity or enforceability of the Convertible Securities and (iv) Pentegra has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease complies with the provisions of the Indenture. EVENTS OF DEFAULT Unless otherwise provided by a Prospectus Supplement with respect to any series of the Convertible Securities, the following are Events of Default under the Indenture with respect to that series: (i) default in the payment of principal of or any premium on any Convertible Security when due (even if that payment is prohibited by the subordination provisions of the Indenture); (ii) default in the payment of any interest on any Convertible Security of that series when due, which default continues for 30 days (even if that payment is prohibited by the subordination provisions of the Indenture); (iii) failure to provide timely notice of a Repurchase Event to Holders of Affected Convertible Securities of that series as required by the Indenture; (iv) default in the payment of the Repurchase Price in respect of any Affected Convertible Security of that series on the Repurchase Date therefor (even if that payment is prohibited by the subordination provisions of the Indenture); (v) default in the performance or breach of any other covenant or warranty of Pentegra in the Indenture (other than a covenant included in the Indenture for one or more series of Convertible Securities other than Convertible Securities of that series) which continues for 60 days after written notice as provided in the Indenture; (vi) certain events in bankruptcy or reorganization of or similar events respecting Pentegra or any of its Significant Subsidiaries; and (vii) any other Event of Default as the applicable Prospectus Supplement may specify with respect to the Convertible Securities of that series. If an Event of Default with respect to any Outstanding series of Convertible Securities occurs and is continuing, the Trustee or any Holder may declare the principal of and any premium and interest on all the Outstanding Convertible Securities of the applicable series (or of all Outstanding Convertible Securities, as the case may be) to be due and payable immediately, but if a majority in principal amount of Holders of Outstanding Convertible Securities of the applicable series (or of all Outstanding Convertible Securities, as the case may be) waive any past default (except the nonpayment of any premium or interest on or principal of any Convertible Security and subject to certain other limitations), then such default will cease to exist and any Event of Default arising therefrom will be deemed cured for every purpose of the Indenture; but no such waiver will extend to any subsequent or other default. If an Event of Default occurs and is continuing as a result of an event of bankruptcy or reorganization of Pentegra or any of its Significant Subsidiaries, the principal of and any premium and accrued and unpaid interest on all Outstanding Convertible Securities will automatically become due and payable without any declaration or other act on the part of the Trustee or any Holder of any Convertible Securities. Pentegra is required to furnish to the Trustee annually a statement as to the performance by Pentegra of certain of its obligations under the Indenture and as to any default in that performance. The Indenture provides that the Trustee may withhold notice to Holders of the Convertible Securities of any series of any continuing default (except in the case of a default in payment of the principal of or any premium or interest on those Convertible Securities), if the Trustee considers it in the interest of those Holders to do so. 46 MODIFICATIONS AND AMENDMENTS Pentegra and the Trustee may modify or amend the Indenture without the consent of Holders to: (i) set forth the terms of the Convertible Securities of any series, including for purposes of that series any change in the definition of Senior Indebtedness; (ii) evidence the succession of another Person to Pentegra and the assumption by any such successor of the covenants of Pentegra in the Indenture and the Convertible Securities; (iii) for the benefit of the Holders of Convertible Securities of any or all series, add to the covenants of Pentegra, add an additional Event of Default or surrender any right or power conferred upon Pentegra; (iv) secure the Convertible Securities; (v) make provision with respect to the conversion rights of Holders in the event of a consolidation, merger or sale of assets involving Pentegra, as required by the Indenture; (vi) evidence and provide for the acceptance of appointment by a successor Trustee or successor Trustees with respect to the Convertible Securities; or (vii) cure any ambiguity in or omission from, or, correct or supplement any provision in, the Indenture or the Convertible Securities which may be defective or inconsistent with any other provision or make any other provisions with respect to matters or questions arising under the Indenture which shall not be inconsistent with the provisions of the Indenture; provided, however, that no such modification or amendment described in this clause (vii) may adversely affect the interest of Holders of Securities of any series in any material respect. Pentegra and the Trustee may modify or amend the Indenture with the consent of the Holders of a majority in principal amount of the Outstanding Convertible Securities affected thereby; provided, that no such amendment or modification may, without the consent of each Outstanding Convertible Security affected thereby, (i) change the stated maturity date of the principal of, or any installment of principal or interest on, any Convertible Security or reduce the principal amount thereof or the rate of interest thereon or any premium payable on the redemption thereof, or change the coin or currency in which any Convertible Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any payment on or with respect to any Convertible Security, (ii) reduce the percentage in principal amount of the Outstanding Convertible Securities the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of the applicable Indenture or certain defaults thereunder and their consequences or (iii) modify any of the provisions of the Indenture relating to the subordination of the Outstanding Convertible Securities in a manner adverse to the Holders thereof. SATISFACTION AND DISCHARGE Pentegra may discharge its obligations under the Indenture while Convertible Securities remain Outstanding, subject to certain conditions, if (i) all Outstanding Convertible Securities have become due and payable or will become due and payable at their scheduled maturity within one year or (ii) all Outstanding Convertible Securities are scheduled for redemption within one year, and in either case Pentegra has deposited with the Trustee an amount in cash sufficient (without any consideration of any investment of that cash) to pay and discharge all Outstanding Convertible Securities on the date of their scheduled maturity or the scheduled date of redemption. MEETINGS OF HOLDERS The Indenture contains provisions for convening meetings of the Holders of Convertible Securities of any series. A meeting may be called at any time by the Trustee or, on request, by Pentegra or (any) holder of the Outstanding Convertible Securities of any series, in any such case on notice given as provided in the Indenture. Except for any consent that must be given by the Holder of each Outstanding Convertible Security affected thereby, as described above under "--Modifications and Amendments," any resolution presented at a meeting or adjourned meeting at which a quorum is present may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Convertible Securities of that series; provided, however, that, except for any consent that must be given by the Holder of each Outstanding Convertible Security affected thereby, as described above under "--Modifications and 47 Amendments," any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that may be made, given or taken by the Holders of a specified percentage, which is less than a majority in principal amount of the Outstanding Convertible Securities of a series, may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Convertible Securities of that series. Subject to the proviso set forth above, any resolution passed or decision taken at any meeting of Holders of Convertible Securities of that series duly held in accordance with the Indenture will be binding on all Holders of Convertible Securities of that series. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be Persons holding or representing a majority in principal amount of the Outstanding Convertible Securities of a series. FORM, DENOMINATION AND REGISTRATION Unless the applicable Prospectus Supplement provides otherwise, the Convertible Securities will be issued in fully registered form, without coupons, in denominations of $1,000 and any integral multiples thereof. GOVERNING LAW The Indenture and the Convertible Securities will be governed by and construed in accordance with the laws of the State of Arizona, without giving effect to that state's conflicts of laws principles. INFORMATION CONCERNING THE TRUSTEE The Indenture contains certain limitations on the right of the Trustee, as a creditor of the Company, to obtain payment of claims in certain cases and to realize on certain property received with respect to any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions, except that, if it acquires any conflicting interest (as defined), it must eliminate that conflict or resign. Pentegra and its subsidiaries may maintain deposit accounts and conduct other banking transactions with the Trustee in the ordinary course of business. 48 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 September 1, 1998, 7,581,681 shares of Common Stock were issued and outstanding and held of record by 104 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 49 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 50 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. 51 SHARES ELIGIBLE FOR FUTURE SALE The Company has outstanding, as of September 1, 1998, 7,581,681 shares of Common Stock of which the 2,875,000 shares sold in the IPO are 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. Approximately 3,941,898 outstanding 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 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 September 1, 1998, options to purchase an aggregate of 724,666 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 has filed a registration statement covering the 2,000,000 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 entered 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 terminate on the second anniversary of the closing of the IPO. 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 52 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 IPO, there was 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. 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." In April 1998, the Company registered 1,500,000 shares of Common Stock for use by the Company as all or a portion of the consideration to be paid in future affiliation transactions. As of September 1, 1998, approximately 764,783 of these shares had been issued to the dentist owners of the Company's new Affiliated Practices. These shares are, and the remaining approximately 735,217 of these shares (which are being offered and sold pursuant to this Prospectus) will be, generally freely tradeable upon issuance; however, each party that has received these shares of Common Stock has contractually agreed with the Company not to sell any of such shares for a period of one year from receipt. The 2,235,217 shares of Common Stock being offered and sold pursuant to this Prospectus generally will be freely tradable after their issuance by persons not affiliated with the Company unless the Company contractually restricts their resale. The Company anticipates that the agreements entered into in connection with its future acquisitions will contractually restrict the resale of all or a portion of the shares issued in those transactions for varying periods of time. 53 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES The following discusses the material United States federal income tax consequences under generally applicable current law of the acquisition, ownership, conversion and disposition of Convertible Securities and Common Stock acquired from Pentegra, in connection with the direct and indirect acquisition of businesses, properties or securities in a business combination transaction (a "Business Combination Transaction") and the acquisition, ownership, conversion and disposition of Common Stock which was acquired on the conversion of one or more Convertible Securities acquired from Pentegra in a Business Combination Transaction by persons who hold those Convertible Securities and any such Common Stock as capital assets. It does not, however, discuss the effect of (i) special rules, such as those which apply to tax-exempt organizations, insurance companies, financial institutions, persons who hold the Convertible Securities or Common Stock in connection with a straddle or dealers, (ii) rules that may permit (a) gain realized on the receipt of Convertible Securities in exchange for property which is transferred to Pentegra in a Business Combination Transaction to be reported on the installment method or (b) the receipt of Convertible Securities or Common Stock in a Business Combination Transaction without the recognition of gain or loss or (iii) any foreign, state or local tax law. Accordingly, each person who is considering the acquisition of Convertible Securities or Common Stock in a Business Combination Transaction pursuant to this Prospectus is advised to consult his or her own tax advisor regarding the matters discussed herein in light of his or her particular circumstances and the application of state, local and foreign tax laws. The following statements are based upon the Internal Revenue Code of 1986, as amended (the "Code"), existing regulations thereunder and the current judicial and administrative interpretations thereof. OWNERSHIP BY U.S. PERSONS The following applies to a person who is a citizen or resident of the United States (a "U.S. Holder"), a corporation or partnership created or organized in the United States or any state thereof or an estate or trust the income of which is includible in income for United States federal income tax purposes regardless of its source. INTEREST ON CONVERTIBLE SECURITIES. The portion of any stated interest on a Convertible Security which is qualified stated interest will be taxable as ordinary income at the time that interest is paid or accrued in accordance with the U.S. Holder's method of accounting for United States federal income tax purposes. The portion of the stated interest on a Convertible Security which is not qualified stated interest and, in certain circumstances, a portion of the stated principal on a Convertible Security will be classified as original issue discount. Any such original issue discount will be included in income at times which generally precede the payment of that original issue discount. The effect of the foregoing principles on a particular Convertible Security will depend, in part, on the terms of the Convertible Security. A person who is considering the acquisition of a Convertible Security in a Business Combination Transaction pursuant to this Prospectus should consult with his or her tax advisor regarding the amount of any such original issue discount with respect to that Convertible Security and the effect thereof on such person. CONVERSION OF CONVERTIBLE SECURITIES. A U.S. Holder who does not use the installment method to report income on the receipt of a Convertible Security in a Business Combination Transaction will generally not recognize gain or loss on the conversion of that Convertible Security into Common Stock except that he or she will recognize a capital gain or loss as a result of the receipt of cash in lieu of a fractional share equal to the amount of cash reduced by the basis of the portion of the Convertible Security in respect of which that cash was paid. The basis of the Common Stock that is received on the conversion will be the adjusted basis of the converted Convertible Security at the time of conversion increased by any gain that is recognized, decreased by any loss that is recognized and decreased by any cash that is received. The holding period of that Common Stock will include the holding period of the converted Convertible Security. 54 Rev. Rul. 72-264 provides that (i) a U.S. Holder who uses the installment method to report income on the receipt of a Convertible Security (any such Convertible Security is referred to herein as an "Installment Method Convertible Security") in a Business Combination Transaction will recognize gain or loss on the conversion of that Installment Method Convertible Security into Common Stock and (ii) the amount of that gain or loss will be the amount of cash received in lieu of a fractional share increased by the fair market value of the Common Stock received reduced by the basis (as defined in Section 453B(b) of the Code) of that Convertible Security. Any gain or loss which is so recognized will be considered to result from the sale or exchange of the property in exchange for which the Installment Method Convertible Security was received. CONSTRUCTIVE DIVIDEND. A distribution to holders of Common Stock may cause a deemed distribution (which will be a dividend to the extent of the current or accumulated earnings and profits of Pentegra) to the holders of Convertible Securities if the conversion price or conversion ratio of the Convertible Securities is adjusted to reflect that distribution. SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK. Gain or loss will be recognized on the sale or exchange of Convertible Securities or of Common Stock in an amount equal to the difference between (i) the amount of cash and the fair market value of any other property received by the U.S. Holder (excluding, in the case of Convertible Securities, any amount representing accrued, but theretofore unrecognized, interest, which will be taxable as such) and (ii) the Holder's adjusted basis in the property sold or exchanged. If the Convertible Security is an Installment Method Convertible Security, then any gain or loss that is recognized on the sale or exchange thereof will be considered to result from the sale or exchange of the property in exchange for which the Installment Method Convertible Security was received. If the Convertible Security is not an Installment Method Convertible Security, then any such gain (other than gain characterized as interest under the market discount rules) or loss with respect to that Convertible Security will be a capital gain or loss and will be a long-term capital gain or loss if the holding period of that Convertible Security is more than one year. Gain or loss that is recognized on the sale or exchange of Common Stock will be a capital gain or loss and will be a long-term capital gain or loss if the holding period of the Common Stock is more than one year. DIVIDENDS ON COMMON STOCK. Distributions on the Common Stock will be dividends to the extent of the current or accumulated earnings and profits of Pentegra, then a nontaxable return of capital reducing the holder's adjusted basis in the Common Stock until such adjusted basis is reduced to zero and finally an amount received in exchange for the Common Stock. Dividends paid to domestic corporations may qualify for the dividends received deduction subject to the limiting provisions that apply thereto. OWNERSHIP BY NON-U.S. HOLDERS The following applies to a person who is not a U.S. Holder (a "Non-U.S. Holder") and to the income received thereby, such as interest, dividends and gain or loss on disposition, with respect to Convertible Securities and Common Stock which is not effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States. Any such items of income generally will be subject to the United States federal income tax that applies to U.S. Holders generally, and, in the case of such a Non-U.S. Holder that is a foreign corporation, those items also will be subject to the branch profits tax. INTEREST ON CONVERTIBLE SECURITIES. Interest paid on Convertible Securities to a Non-U.S. Holder will not be subject to United States federal income tax or to withholding in respect thereof if: (i) the beneficial owner (or if certain requirements are satisfied, a member of a class of financial institutions) certifies, under penalties of perjury, that the beneficial owner is not a U.S. Holder and provides the beneficial owner's name and address; (ii) the Non-U.S. Holder does not own actually or constructively 10% or more of the total voting power of all classes of stock of Pentegra entitled to vote (Common Stock into which a Convertible Security can be converted is constructively owned for these purposes); (iii) the Non-U.S. Holder is not a controlled foreign corporation with respect to which Pentegra is a "related person" within 55 the meaning of Section 864(d)(4) of the Code; and (iv) the Non-U.S. Holder is not a bank holding the Convertible Securities as a result of an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business. Accrued market discount on a Convertible Security is not treated for these purposes as interest income. If the foregoing conditions are not satisfied, then the interest generally will be subject to United States federal income tax withholding at a rate of 30% (or any lower rate provided by any applicable treaty). SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK; CONVERSION OF CONVERTIBLE SECURITIES. A Non-U.S. Holder generally will not be subject to United States federal income tax on gain recognized on the sale or exchange of Convertible Securities or Common Stock or on the conversion of a Convertible Security unless (i) the Holder is an individual who is present in the United States for 183 or more days in the taxable year and certain other conditions are satisfied or (ii) Pentegra is (as is not expected) a "United States real property holding corporation," as defined in Section 897 of the Code, and certain exceptions do not apply. Notwithstanding the foregoing, if any Convertible Security is received in exchange for property used in the conduct of a trade or business within the United States and the gain that was realized on the receipt of that Convertible Security was reported on the installment method, then any gain that is realized on the collection, conversion, sale, exchange or other disposition of that Convertible Security may be subject to United States income tax as though the Non-U.S. Holder were a citizen or resident of the United States. DIVIDENDS ON COMMON STOCK. Any distribution on Common Stock to a Non-U.S. Holder will be subject to United States federal income tax withholding at a rate of 30% (or any lower rate provided by any applicable treaty). ESTATE TAX. An individual Non-U.S. Holder of a Convertible Security will not be required to include the value of that Convertible Security in his gross estate for United States federal estate tax purposes, provided that the Holder did not at the time of death actually or constructively own 10% or more of the combined voting power of all classes of stock of Pentegra and, at the time of the Holder's death, payments of interest on that Convertible Security would not have been effectively connected with the conduct by the Holder of a trade or business in the United States. An individual Non-U.S. Holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in the Common Stock will be required to include the value thereof in his gross estate for United States federal estate tax purposes (and may be subject to United States federal estate tax with respect thereto), unless otherwise provided by an applicable estate tax treaty. BACKUP WITHHOLDING; INFORMATION REPORTING A noncorporate U.S. Holder holding Convertible Securities or Common Stock (and any Non-U.S. Holder failing to provide a certificate that it is not a U.S. Holder) will be subject to backup withholding at the rate of 31% with respect to interest paid on the Convertible Securities, dividends paid on Common Stock and the proceeds of any sale, exchange or redemption thereof if the payee fails to furnish a taxpayer identification number and in certain other circumstances. Any amounts so withheld will be allowed as a refund or a credit against the Holder's United States federal income tax liability, provided that certain information is furnished to the Internal Revenue Service. Information reporting will be required with respect to a payment of proceeds from the sale or exchange of Convertible Securities or Common Stock through a foreign office of a broker that is a United States person or of certain foreign brokers unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no actual knowledge to the contrary. The Internal Revenue Service has proposed regulations that, if issued as final regulations, would require certain Non-U.S. Holders to provide additional information in order to establish an exemption from, or reduce the rate of, withholding tax or backup withholding tax and in particular would require that 56 foreign partnerships and partners of a foreign partnership provide certain information and comply with certain certification requirements not required under existing law. Such proposed regulations are proposed to be effective generally for payments made after December 31, 1997. It is not possible to predict whether, or in what form, the proposed regulations ultimately will be adopted. PLAN OF DISTRIBUTION THE COMPANY This Prospectus covers the offer an sale of up to 2,235,217 shares of Common Stock and $50,000,000 aggregate principal amount of Convertible Debt Securities, which the Company may issue from time to time in connection with the future direct and indirect acquisitions of other businesses, properties or securities in business combination transactions. The Company expects that the (i) terms upon which it may issue the shares of Common Stock and Convertible Debt Securities covered hereby will be determined through negotiations with the securityholders or principal owners of the businesses whose securities or assets are acquired and (ii) shares of Common Stock that are issued will be valued at prices reasonably related to market prices for the Common Stock prevailing either at the time an acquisition agreement is executed or at the time an acquisition is consummated. GENERAL All expenses of this Offering will be paid by the Company. No underwriting discounts or commissions will be paid in connection with the issuance of shares by the Company in business combination transactions, although finder's fees may be paid with respect to specific acquisitions. Any person receiving a finder's fee may be deemed to be an Underwriter within the meaning of the Securities Act. The shares of Common Stock offered hereunder will be included on The American Stock Exchange, but may be subject to certain contractual holding period restrictions. LEGAL MATTERS The validity of the shares of Common Stock and Convertible Debt Securities offered hereby will be passed upon for the Company by Jackson Walker 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 PricewaterhouseCoopers LLP, independent accountants, as 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-4 (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 57 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. 58 INDEX TO FINANCIAL STATEMENTS
PAGE --------- Audited Financial Statements Report of Independent Public Accountants................................................................... F-2 Balance Sheet as of December 31, 1997...................................................................... F-3 Statement of Operations for the period from inception, February 21, 1997, through December 31, 1997............................................................. F-4 Statement of Changes in Stockholders' Deficit for the period from inception, February 21, 1997, through December 31, 1997........................................................................................ F-5 Statement of Cash Flows for the period from inception, February 21, 1997, through December 31, 1997........ F-6 Notes to Financial Statements.............................................................................. F-7 Unaudited Financial Statements Balance Sheets--December 31, 1997 and March 31, 1998....................................................... F-17 Statements of Operations for the period from inception, February 21, 1997 through March 31, 1997 and for the Three Months ended March 31, 1998.................................................................... F-18 Statement of Changes in Stockholders' Equity for the period from inception, February 21, 1997 through December 31, 1997 and for the Three Months ended March 31, 1998.......................................... F-19 Statement of Cash Flows for the period from inception February 21, 1997, through March 31, 1997 and for the Three Months ended March 31, 1998........................................................................ F-20 Notes to Financial Statements.............................................................................. F-21 Balance Sheets--March 31 and June 30, 1998................................................................. F-25 Statements of Operations for the Three Months Ended June 30, 1997 and 1998................................. F-26 Statement of Changes in Stockholders' Equity for the Three Month Period Ended June 30, 1998................ F-27 Statements of Cash Flows for the Three Months Ended June 30, 1997 and 1998................................. F-28 Notes to Unaudited Financial Statements.................................................................... F-29
F-1 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. /s/ Coopers & Lybrand L.L.P. Houston, Texas March 24, 1998, except for the second and third paragraphs of Note 8, as to which the date is May 5, 1998 F-2 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-3 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-4 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-5 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-6 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, the Company will repurchase approximately 51.8% of each such stockholder's shares of the Company common stock, or an aggregate of 909,237 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). 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 IPO COSTS Deferred IPO costs include legal, accounting and other costs directly related to the IPO. All deferred IPO costs will be charged against the proceeds of the IPO upon its completion. Such costs would be charged to expense if the IPO were not completed. ORGANIZATIONAL COSTS Organizational costs are being amortized on a straight-line basis over a five-year period. F-7 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 IPO (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-8 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 IPO 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 IPO 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 IPO 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-9 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 3,094,468 shares of Common Stock 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, PII will repurchase approximately 51.8% of each such stockholder's shares of PII common stock, or an aggregate of 909,237 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 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 IPO and certain Promoters held common and preferred stock that was issued in connection with the funding of a portion of the expenses for the IPO, 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 ----- ----- --- ----- ----- ----- --- -----
All of the preferred stock will be repurchased or redeemed upon completion of the IPO 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 F-10 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED) the owners of the Founding Affiliated Practices is a promoter of the IPO, 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 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: F-11 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED) - 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. 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. F-12 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED) 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. 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): F-13 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PLANNED TRANSACTIONS: (CONTINUED)
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 IPO, 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 IPO. 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 IPO, 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 F-14 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. REDEEMABLE PREFERRED STOCK (CONTINUED) negotiating the IPO 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 IPO 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 IPO 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 IPO. 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 IPO 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. 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 IPO 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 IPO 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 $8.50 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. F-15 PENTEGRA DENTAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. NOTES PAYABLE (CONTINUED) 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 IPO 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 IPO or eight months from the date the notes were issued. In March 1998, the Company completed the IPO, issuing 2,500,000 shares at $8.50 per share, and closed the related transactions under the terms described in the Notes above. In April 1998, the Company's underwriters exercised their option for the overallotment of 375,000 shares at $8.50 per share, net of underwriters discount. F-16 PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS PENTEGRA DENTAL GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (000S)
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- ASSETS Current Assets: Cash and Cash Equivalents............................................................. $ 100 $ 6,708 Prepaids and Other Current Assets..................................................... -- 101 ------------ ----------- Total Current Assets................................................................ 100 6,809 Property and Equipment, Net............................................................. 409 3,577 Goodwill, Net........................................................................... -- 183 Other Assets, Net....................................................................... 2,748 64 ------------ ----------- Total Assets........................................................................ $ 3,257 $ 10,633 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts Payable and Accrued Liabilities.............................................. $ 2,095 $ 1,313 Accrued Employment Agreement.......................................................... -- 1,250 ------------ ----------- Total Current Liabilities........................................................... 2,095 2,563 Long Term Debt.......................................................................... 215 1,074 Preferred Stock--Class A................................................................ 675 -- Preferred Stock--Class B................................................................ 414 -- Shareholders' Equity (Deficit) Common Stock.......................................................................... 18 6 Additional Paid in Capital............................................................ 1,194 10,304 Accumulated Deficit................................................................... (1,354) (3,314) ------------ ----------- Total Shareholders' Equity (Deficit)................................................ (142) 6,996 ------------ ----------- Total Liabilities and Shareholders' Equity............................................ $ 3,257 $ 10,633 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements. F-17 PENTEGRA DENTAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000S)
FOR THE PERIOD FROM INCEPTION, FEBRUARY 21, 1997 FOR THE THROUGH THREE MONTHS MARCH 31, ENDED MARCH 1997 31, 1998 ------------ ------------ Revenue.............................................................................. $ -- $ -- Expenses: General and administrative expenses................................................ 11 550 Employment agreement............................................................... -- 1,250 Interest expense................................................................... -- 160 ------------ ------------ Net loss............................................................................. $ (11) $ (1,960) ------------ ------------ Preferred stock dividend............................................................. -- (1,070) ------------ ------------ Loss attributable to common stock.................................................... $ (11) $ (3,030) ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-18 PENTEGRA DENTAL GROUP, INC CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
CLASS A COMMON STOCK ADDITIONAL ACCUMULATED ------------------------- PAID IN EQUITY SHARES AMOUNT CAPITAL (DEFICIT) ------------ ----------- ----------- ------------ Balance at February 21, 1997.................................... -- -- -- -- Issuance of common stock ($0.015 per share cash on February 21, 1997)......................................................... 666,667 $ 7 $ 3 -- Issuance of common stock ($0.015 per share cash and $0.14 per share Compensation on May 22, 1997)........................... 766,667 8 107 -- Issuance of common stock ($1.27 per share on June 13, 1997)..... 290,000 3 365 -- Issuance of common stock ($0.015 per share cash and $1.26 per share Compensation on June 13, 1997).......................... 33,333 -- 42 -- Purchases of common stock....................................... (86,667) (1) -- -- Issuance of common stock ($0.015 per share cash and $7.46 per share compensation on September 1, 1997)...................... 66,667 1 497 -- Issuance of common stock with promissory notes ($9.00 per share discount on promissory notes on October 8, 1997).............. 20,000 -- 180 -- Net Loss from inception through December 31, 1997............... -- -- -- (1,354) ------------ --- ----------- ------------ Balance at December 31, 1997.................................... 1,756,667 $ 18 $ 1,194 $ (1,354) ------------ --- ----------- ------------ Issuance of common stock........................................ 2,500,000 3 16,357 -- Transfers of certain assets and liabilities From Founding Affiliated Practices.......................................... 3,094,468 3 (6,180) -- Dividend to Preferred Shareholders.............................. -- -- (1,070) -- Repurchase of Common Stock and Share exchange................... (909,237) (18) 3 -- Net loss........................................................ -- -- -- (1,960) ------------ --- ----------- ------------ Balance at March 31, 1998....................................... 6,441,898 $ 6 $ 10,304 $ (3,314) ------------ --- ----------- ------------ ------------ --- ----------- ------------
The accompanying notes are an integral part of these financial statements. F-19 PENTEGRA DENTAL GROUP, INC. STATEMENTS OF CASH FLOW FOR THE THREE MONTHS ENDED (000S)
FOR THE PERIOD FROM INCEPTION, FOR THE FEBRUARY 21, THREE MONTHS 1997 THROUGH ENDED MARCH MARCH 31, 1997 31, 1998 --------------- ------------ Cash flows from operating activities: Net loss........................................................................... (11) $ (1,960) Increase in accounts payable and accrued expenses.................................. 4 1,476 Changes in operating assets and liabilities........................................ (49) Amortization of loan discount...................................................... -- 135 --- ------------ Net cash used in operating activities.............................................. (7) (398) --- ------------ Cash used in investing activities Capital expenditures............................................................... (2) (310) Acquisition........................................................................ -- (100) Dividend to Founding Affiliated Practices.......................................... -- (6,492) --- ------------ Net cash used in investing activities............................................ (2) (6,902) --- ------------ Cash flows provided by financing activities: Issuance of common stock........................................................... 10 19,762 Redemption of preferred stock...................................................... -- (1,691) Repurchase of common stock......................................................... -- (14) Proceeds from issuance of debt..................................................... -- 486 Repayment of long-term debt........................................................ -- (3,129) Offering costs..................................................................... -- (1,447) Organization costs................................................................. -- (59) --- ------------ Net cash provided by financing activities........................................ 10 13,908 --- ------------ Net increase in cash and cash equivalents............................................ 1 6,608 --- ------------ --- ------------ Balance at inception, February 21, 1997 and January 1, 1998, respectively............ -- 100 Balance at end of period............................................................. 1 6,708 --- ------------ --- ------------ Non-Cash Activities Offering cost accrued.............................................................. $ 1,008 ------------ ------------ Share exchange..................................................................... $ 17 ------------ ------------ Issuance of notes payable for prepaid assets and acquisitions...................... $ 373 ------------ ------------ Issuance of notes payable for redemption of preferred stock........................ $ 468 ------------ ------------
The accompanying notes are an integral part of these financial statements. F-20 PENTEGRA DENTAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION Pentegra Dental Group, Inc. together with its wholly owned subsidiary, Pentegra Investments, Inc. ("Pentegra" or the "Company"), provides practice management services to dental practices in the United States. In July 1997, the Company changed its name to Pentegra Investments, Inc. ("PII") and formed a new wholly owned subsidiary named Pentegra Dental Group, Inc. ("Pentegra Dental"). On March 30, 1998, simultaneously with the initial public offering, PII repurchased (the "Share Repurchase") from the stockholders of PII, on a pro rata basis, at a purchase price of $0.015 per share, that number of shares as was necessary so that the aggregate number of shares of Pentegra Dental common stock issued in connection with the Affiliations (as defined below) and the Share Exchange (as defined below) would not exceed 3,941,898 shares. Pursuant to that agreement, PII repurchased 909,237 shares for approximately $14,000. The shareholders exchanged on a share-for-share basis, shares of PII common stock, par value $0.015 per share, for 1,756,667 shares of common stock of Pentegra Dental (the "Share Exchange"). On March 30, 1998, Pentegra Dental acquired (the "Affiliations") simultaneously with the closing of its initial public offering (the "Offering" or "IPO") of its common stock, par value $.001 per share (the "Common Stock"), substantially all of the tangible and intangible assets, and assumed the liabilities, of 50 dental practices (collectively, the "Founding Affiliated Practices") in exchange for 3.1 million shares of Common Stock, $6.5 million in cash and net assets assumed of approximately $300,000. The net proceeds of the 2.5 million shares of Common Stock issued in the IPO (after deducting the underwriting discounts and commissions) were $19.8 million. Total related offering costs were $3.4 million. The acquisitions of the Founding Affiliated Practices have been accounted for in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 48. In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers of Nonmonetary Assets by Promoters or Shareholders", published by the SEC, the acquisition of the assets and assumption of certain liabilities for all of the Founding Affiliated Practices pursuant to the Acquisitions has been accounted for by the Company at the transferors' historical cost basis, with the shares of common stock issued in those transactions being valued at the historical cost of the nonmonetary assets acquired net of liabilities assumed. The cash consideration of $6.5 million, paid at closing on March 30, 1998, less net assets acquired of approximately $300,000, is reflected as a dividend by Pentegra to the owners of the Founding Affiliated Practices in the quarter ended March 31, 1998. SAB No. 48 is not applicable to any acquisitions made by the Company subsequent to the IPO. It is currently anticipated that the Company's future acquisitions of certain of the assets and liabilities of Affiliated Practices may result in substantial annual noncash amortization charges for intangible assets in the Company's statements of operations. In May 1998, the Board of Directors approved the change of Pentegra's fiscal year from December 31 to March 31, effective for the year beginning April 1, 1998. The unaudited condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting and disclosures, but do not purport to be a complete presentation inasmuch as all note disclosures required are not included. In the opinion of management, the financial statements reflect all elimination entries and normal adjustments that are necessary for a fair presentation of the results for the interim period ended March 31, 1998. F-21 PENTEGRA DENTAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Operating results for interim periods are not necessarily indicative of the results for full years. It is suggested that these consolidated financial statements be read in conjunction with the Financial Statements of Pentegra and related notes thereto, and management's discussion and analysis related thereto, all of which are included in the Company's Registration Statement on Form S-1 (No. 333-37633), as amended (the "Registration Statement"), filed with the SEC in connection with the Offering. 2. SIGNIFICANT ACCOUNTING POLICIES 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 balance sheets, the Company incurred a deficit of $3,314,000 during the period from inception, February 21, 1997, through March 31, 1998. 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. 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. 3. REDEEMABLE PREFERRED STOCK Prior to the IPO, certain officers and directors agreed to permit PII to repurchase their shares of Class B Preferred Stock at the subscription price. Accordingly, the Company used a portion of the net proceeds of the IPO to repurchase 245,835 shares of PII 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. The remaining 1,337,500 shares of Class A and B preferred stock outstanding were redeemed at a price of $1.50 per share, of which $1.15 per share was paid in cash and $0.35 per share was paid in the form of 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 IPO 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 IPO. The Company F-22 PENTEGRA DENTAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. REDEEMABLE PREFERRED STOCK (CONTINUED) recognized a dividend on the preferred stock for the difference between the redemption amount and the recorded value at the date of the IPO of approximately $1,070,000. 4. 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 IPO 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 $8.50 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 notes and interest were repaid in March 1998. The Company recognized the remaining unamortized discount of $135,000 in interest expense during the three-month period ending March 31, 1998. 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 IPO or July 1998. The notes and interest were repaid in March 1998. In February 1998, the Company issued $486,000 of 15% promissory notes due on the earlier of three days after the closing of the IPO or eight months from the date the notes were issued. The notes and interest were repaid on March 30, 1998. In connection with the IPO, the Company issued approximately $468,000 notes payable to certain shareholders formerly owning preferred stock. The notes bear 6% interest and are payable on the earlier of the fifth anniversary of the IPO, or the date upon which the Company offers and sells an amount of equity securities equal or greater to the gross proceeds of the IPO. 5. ACCUMULATED DEFICIT The Company's accumulated deficit at March 31, 1998 is primarily attributable to compensation costs and other costs of managing the Company prior to its IPO. On March 30, 1998, an employment bonus of $1,250,000 to the Chairman of the Board of Directors (the "Chairman") was recorded, and therefore is included in the Company's accumulated deficit. 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. 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. 6. YEAR 2000 The year 2000 issue is the result of computer programs using two digits to define the applicable year rather than four. Any programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. A computer system that is not year 2000 compliant would not be able to correctly process certain data, or, in extreme situations, system failure could result. F-23 PENTEGRA DENTAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. YEAR 2000 (CONTINUED) The Company has recently completed the purchase and installation of year 2000 compliant software for its operations. Accordingly the Company does not expect the year 2000 issue to have a material effect on its financial position, results of operations or cash flows. 7. SUBSEQUENT EVENTS In April 1998, the underwriters of the IPO exercised their option to sell an additional 375,000 shares of common stock for $8.50 per share. The net proceeds after commissions provided an additional $3 million in cash to the Company. Also in April 1998, the Company filed a Form S-4, registering an additional 1.5 million shares of Common Stock in the Company. The shares will be issued by the Company as consideration for the affiliation of practices. F-24 PENTEGRA DENTAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (000S)
MARCH 31, JUNE 30, 1998 1998 ----------- --------- ASSETS Current assets: Cash and cash equivalents................................................................ $ 6,708 $ 3,094 Receivables from affiliated practices.................................................... -- 3,447 Prepaid and other current assets......................................................... 101 291 ----------- --------- Total current assets................................................................... 6,809 6,832 Property and equipment, net................................................................ 3,577 4,245 Intangible assets, net..................................................................... 183 6,988 Notes receivables from affiliated practices................................................ -- 657 Other assets, net.......................................................................... 64 90 ----------- --------- Total assets........................................................................... $ 10,633 $ 18,812 ----------- --------- ----------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities................................................. $ 1,313 $ 1,850 Accrued employment agreement............................................................. 1,250 1,190 ----------- --------- Total current liabilities.............................................................. 2,563 3,040 Long-term debt............................................................................. 1,074 502 ----------- --------- Total liabilities.................................................................... 3,637 3,542 ----------- --------- Shareholders' equity Common stock............................................................................. 6 7 Additional paid-in capital............................................................... 10,304 17,903 Retained earnings (deficit).............................................................. (3,314) (2,640) ----------- --------- Total shareholders' equity............................................................. 6,996 15,270 ----------- --------- Total liabilities and shareholders' equity............................................. $ 10,633 $ 18,812 ----------- --------- ----------- ---------
The accompanying notes are an integral part of these financial statements. F-25 PENTEGRA DENTAL GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE THREE FOR THE THREE MONTHS ENDED MONTHS ENDED JUNE 30, 1997 JUNE 30, 1998 --------------- ------------- Net revenue......................................................................... $ -- $ 7,412 ----- ------------- Operating expenses: Clinical salaries, wages and benefits............................................. -- 2,836 Dental supplies and lab fees...................................................... -- 1,220 Rent.............................................................................. -- 550 Advertising and marketing......................................................... -- 111 General and administrative........................................................ 80 876 Compensation expense in connection with issuance of common stock.................. 148 -- Other operating expenses.......................................................... -- 751 Depreciation and amortization..................................................... -- 171 ----- ------------- Total operating expenses........................................................ 228 6,515 ----- ------------- Earnings (loss) from operations..................................................... (228) 897 Interest income, net.............................................................. -- 40 ----- ------------- Income (loss) before income taxes................................................... (228) 937 Income taxes...................................................................... -- 263 ----- ------------- Net income (loss)................................................................... $ (228) $ 674 ----- ------------- ----- ------------- Basic and diluted earnings per share................................................ $ 0.10 ------------- ------------- Weighted average number of shares outstanding: Basic............................................................................. 6,886,000 ------------- ------------- Diluted........................................................................... 6,886,000 ------------- -------------
The accompanying notes are an integral part of these financial statements. F-26 PENTEGRA DENTAL GROUP, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL RETAINED TOTAL ------------------------- PAID-IN EARNINGS SHAREHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ---------- ------------- ----------- --------- ------------- Balance at April 1, 1998............................ 6,441,898 $ 6 $ 10,304 $ (3,314) $ 6,996 Issuance of common stock............................ 375,000 2,929 2,929 Issuance of common stock to affiliated practices.... 677,592 1 4,670 4,671 Net income.......................................... 674 674 -- ---------- ----------- --------- ------------- Balance at June 30, 1998............................ 7,494,490 $ 7 $ 17,903 $ (2,640) $ 15,270 -- -- ---------- ----------- --------- ------------- ---------- ----------- --------- -------------
The accompanying notes are an integral part of these financial statements. F-27 PENTEGRA DENTAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000S)
FOR THE THREE FOR THE THREE MONTHS ENDED MONTHS ENDED JUNE 30, 1997 JUNE 30, 1998 --------------- ------------- Net cash used in operating activities............................................... $ (88) $ (1,358) ----- ------------- Cash used in investing activities: Capital expenditures.............................................................. (3) (252) Acquisition of intangible assets.................................................. -- (2,782) Issuance of notes receivable to affiliated practices.............................. -- (718) ----- ------------- Net cash used in investing activities........................................... (3) (3,752) ----- ------------- Cash flows provided by financing activities: Issuance of common stock.......................................................... 378 2,964 Issuance of preferred stock....................................................... 763 -- Repayment of indebtedness......................................................... -- (392) Payment of offering costs......................................................... (200) (1,076) Payment of organization costs..................................................... (6) -- ----- ------------- Net cash provided by financing activities....................................... 935 1,496 ----- ------------- Net increase (decrease) in cash and cash equivalents................................ 844 (3,614) ----- ------------- Balance at beginning of period...................................................... 1 6,708 ----- ------------- Balance at end of period............................................................ $ 845 $ 3,094 ----- ------------- ----- ------------- Non-cash activities: Stock subscription receivable..................................................... 326 --
The accompanying notes are an integral part of these financial statements. F-28 PENTEGRA DENTAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION Pentegra Dental Group, Inc. (the "Company") together with its wholly owned subsidiary, Pentegra Investments, Inc. ("PII"), provides practice management services to dental practices in the United States. In July 1997, the Pentegra Dental Group, Inc., changed its name to Pentegra Investments, Inc. and formed a new wholly owned subsidiary named Pentegra Dental Group, Inc. ("Pentegra Dental" or "the Company"). On March 30, 1998, simultaneously with the Company's initial public offering, PII repurchased (the "Share Repurchase") from the stockholders of PII, on a pro rata basis, at a purchase price of $0.015 per share, that number of shares as was necessary so that the aggregate number of shares of Pentegra Dental common stock, par value $.001 per share (the "Common Stock") issued in connection with the Affiliations (as defined below) and the Share Exchange (as defined below) would not exceed 3,941,898 shares. Pursuant to that agreement, PII repurchased 909,237 shares for approximately $14,000. The shareholders exchanged on a share-for-share basis, shares of PII common stock, par value $0.015 per share, for 1,756,667 shares of Common Stock (the "Share Exchange"). On March 30, 1998, Pentegra Dental acquired (the "Affiliations") simultaneously with the closing of its initial public offering (the "Offering" or "IPO"), substantially all of the tangible and intangible assets, and assumed the liabilities, of 50 dental practices (collectively, the "Founding Affiliated Practices") in exchange for 3.1 million shares of Common Stock, $6.5 million in cash and net assets assumed of approximately $300,000. The net proceeds of the 2.5 million shares of Common Stock issued in the IPO (after deducting the underwriting discounts and commissions) were $19.8 million. Total related offering costs were $3.4 million. The acquisitions of the Founding Affiliated Practices have been accounted for in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 48, "Transfers of Nonmonetary Assets by Promoters or Shareholders". In accordance with SAB No. 48, the acquisition of the assets and assumption of certain liabilities for all of the Founding Affiliated Practices pursuant to the Affiliations has been accounted for by the Company at the transferors' historical cost basis, with the shares of Common Stock issued in those transactions being valued at the historical cost of the nonmonetary assets acquired net of liabilities assumed. The cash consideration of approximately $6.5 million, paid at closing on March 30, 1998, less net assets acquired of approximately $300,000, is reflected as a dividend by the Company to the owners of the Founding Affiliated Practices in the quarter ended March 31, 1998. SAB No. 48 is not applicable to any acquisitions made by the Company subsequent to the IPO. Acquisitions of certain of the assets and liabilities of practices that affiliate with the Company after the IPO will generally be accounted for as purchases, and may result in substantial annual noncash amortization charges for intangible assets in the Company's statements of operations. In April, 1998, the over allotment option to sell 375,000 share of common stock was exercised at a price of $8.50 per share, yielding additional net proceeds to the Company of approximately $2.9 million. On April 17, 1998, the Company filed a registration statement on Form S-4 for 1,500,000 shares of Common Stock, which the Company may issue from time to time in connection with the direct and indirect acquisitions of other businesses, properties or securities in business combination transactions. The terms upon which it issues the shares in business combination transactions are determined through negotiations with the security holders or principal owners of the businesses whose securities or assets are to be acquired. The shares that are issued are valued at prices reasonably related to prevailing market prices for the Common Stock. Persons receiving Common Stock in connection with such acquisitions may be contractually required to hold all or some portion of the Common Stock for varying periods of time. As of June 30, 1998, 677,592 shares registered under this filing had been issued. F-29 PENTEGRA DENTAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) In May 1998, the Company changed its fiscal year from December 31 to March 31, effective for the year beginning April 1, 1998. The unaudited consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting and disclosures, but do not purport to be a complete presentation inasmuch as all note disclosures required are not included. In the opinion of management, the consolidated financial statements reflect all elimination entries and normal adjustments that are necessary for a fair presentation of the results for the interim period ended June 30, 1998. Operating results for interim periods are not necessarily indicative of the results for full years. It is suggested that these consolidated financial statements be read in conjunction with the Financial Statements of Pentegra Dental Group, Inc., and related notes thereto, and management's discussion and analysis related thereto, all of which are included in the Company's Registration Statement on Form S-1 (No. 333-37633), as amended (the "Registration Statement"), filed with the SEC in connection with the Offering. 2. SIGNIFICANT ACCOUNTING POLICIES INTANGIBLE ASSETS Intangible assets consist primarily of management service fee intangibles which are amortized over a 25-year period. The Company's management periodically evaluates the realizability of the intangible assets on a practice by practice basis considering such factors as profitability and net cash flow. Should this evaluation result in an assessment that the value of the intangible asset is impaired, a loss will be recorded in the period that the impairment is identified. If it is determined that the estimated amortization period requires revision, that revision will be made on a prospective basis. 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. The Company's effective tax rate for the period was 28%. The difference between the effective tax rate and the statutory rate reflects the utilization of operating loss carryforwards. EARNINGS PER SHARE Earnings per share are computed based upon the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Diluted earnings per share are not separately presented because such amounts would be the same as amounts computed for basic earnings per share. Outstanding options to purchase 686,666 shares of Common Stock at exercise prices above the F-30 PENTEGRA DENTAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) market value of Common Stock were excluded from the calculation of earnings per share for the three months ended June 30, 1998 because their effect would have been antidilutive. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. 3. NOTES PAYABLE On June 1, 1998, the Company closed a revolving bank credit facility with Bank One, Texas, N.A., which provides the Company with a revolving line of credit of up to $15.0 million, to be used for general corporate purposes including financing of acquisitions, capital expenditures and working capital. The credit facility is collateralized by liens on certain of the Company's assets, including its rights under the management service agreements and accounts receivable. The credit facility contain restrictions on the incurrence of additional indebtedness and payment of dividends on the Common Stock. Additionally, compliance with certain financial covenants is required and the lender has approval rights with respect to acquisitions exceeding certain limits. At June 30, 1998, no amounts were outstanding under the revolving line of credit. 4. RETAINED EARNINGS (DEFICIT) The Company's retained earnings (deficit) at June 30, 1998 is primarily attributable to compensation costs and other costs of managing the Company prior to its IPO. On March 30, 1998, an employment bonus of $1,250,000 to the Chairman of the Board of Directors (the "Chairman") was recorded, and therefore is included in the Company's retained earnings (deficit). Payments of the bonus have been and will continue to be made in increments of $10,000 on the closing of each future dental practice affiliation until the bonus has been paid in full. 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 IPO. At June 30, 1998, a bonus payable of $1,190,000 remained outstanding. 5. NEW DENTIST AFFILIATIONS During the period from March 30, 1998 through June 30, 1998, the Company completed new dentist affiliations with 10 practices representing 14 dentists and 10 office locations. Total consideration related to the new affiliations consisted of 677,592 shares of Common Stock and $2,782,000 cash. The cost of each of the above new dental practice affiliations has been allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed, resulting in intangibles of $6,861,000. These allocations may be adjusted to the extent that management becomes aware of additional information within one reporting year of the affiliation date which results in a material change in the amount of any contingency or changes in the estimated fair market value of assets acquired and liabilities assumed. F-31 - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- ---------------- TABLE OF CONTENTS
PAGE ----- Prospectus Summary................................ 2 Risk Factors...................................... 6 The Company....................................... 14 Recent Developments............................... 15 Price Range of Common Stock....................... 16 Dividend Policy................................... 16 Selected Financial Data........................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations............. 18 Business.......................................... 21 Management........................................ 32 Certain Transactions.............................. 38 Security Ownership of Certain Beneficial Owners and Management.................................. 40 Description of Convertible Debt Securities........ 41 Description of Capital Stock...................... 49 Shares Eligible for Future Sale................... 52 Certain United States Federal Income Tax Consequences.................................... 54 Plan of Distribution.............................. 57 Legal Matters..................................... 57 Experts........................................... 57 Additional Information............................ 57 Index to Financial Statements..................... F-1
[LOGO] PENTEGRA DENTAL GROUP, INC. --------------- PROSPECTUS ---------------- SEPTEMBER , 1998 - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. 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 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. II-1 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 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 Restated 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. Furthermore, the Company will, to the fullest extent permitted by the DGCL, as the DGCL currently exists or may hereafter be amended, indemnify any and all persons it has power to indemnify under the DGCL from and against any and all of the expenses, liabilities or other matters referred to in or covered by such law. 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, and may, if and to the extent authorized by the Board of Directors, so indemnify such other persons whom it has the power to indemnify against any liability, reasonable expense or other matter whatsoever. UNDERWRITING AGREEMENT The Underwriting Agreement provides for the indemnification of the directors and officers of the Company in certain circumstances. II-2 INSURANCE The Company intends to maintain liability insurance for the benefit of its directors and officers. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 2.1(1) -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a sole proprietorship 2.2(1) -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a partnership 2.3(1) -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and an entity 2.4(1) -- Form of Agreement and Plan of Reorganization between Pentegra Dental Group, Inc. and an entity 2.5(1) -- Exchange Agreement dated as of July 31, 1997 among Pentegra Investments, Inc., Pentegra Dental Group, Inc. and the stockholders named therein 2.6(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James P. Allen, D.D.S. 2.8(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Henry Cuttler, D.D.S. 2.14(1) -- 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(1) -- 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.
II-3
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 2.16(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Richard H. Fettig, D.D.S. 2.17(1) -- 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(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Salvatore J. Guarnieri, D.D.S. 2.21(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David R. Henderson, D.D.S. 2.23(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Stephen Hwang, D.D.S. 2.24(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Bruce A. Kanehl, D.D.S. 2.26(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald W. Lanning, D.D.S. 2.31(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David A. Little, D.D.S. 2.32(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James M. McDonough, D.D.S.
II-4
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 2.35(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Terrence C. O'Keefe, D.D.S. 2.42(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jimmy F. Pinner, D.D.S. 2.44(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Greg Richards, D.D.S. 2.47(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and John N. Stellpflug, D.D.S. 2.49(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jack Stephens, D.D.S. 2.50(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald F. Tamborello, D.D.S. 2.52(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Helena Thomas, D.D.S.
II-5
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 2.53(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and S. Victor Uhrenholdt, D.D.S. 2.55(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Scott Van Zandt, D.D.S. 2.56(1) -- 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(1) -- Restated Certificate of Incorporation of Pentegra Dental Group, Inc. 3.2(1) -- Bylaws of Pentegra Dental Group, Inc. 4.1(1) -- Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc. 4.2(1) -- Form of Registration Rights Agreement for Owners of Founding Affiliated Practices 4.3(1) -- Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named therein 4.4 -- Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust Company of Texas, N.A., as Trustee relating to the Convertible Debt Securities 5.1 -- Opinion of Jackson Walker L.L.P. 10.1(1) -- Pentegra Dental Group, Inc. 1997 Stock Compensation Plan 10.2(1) -- Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.3(1) -- Employment Agreement dated July 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter 10.4(1) -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer 10.5(1) -- Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr 10.6(1) -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James Dunn, Jr. 10.7(1) -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee K. Rozman 10.8(1) -- Form of Service Agreement 10.9(1) -- Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.10(1) -- Second Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.11(1) -- Amendment to Employment Agreement dated May 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter
II-6
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 10.12(1) -- Amendment to Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr 10.13(1) -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James L. Dunn, Jr. 10.14(1) -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer 10.15(1) -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee Rozman 10.16(1) -- 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. 10.17(2) -- Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A. and Pentegra Dental Group, Inc. 12.1 -- Statement of Ratio of Earnings to Fixed Charges 23.1 -- Consent of PricewaterhouseCoopers LLP 23.2 -- Consent of Jackson Walker L.L.P. (contained in Exhibit 5.1) 24.1 -- Power of Attorney (contained on the signature page of this Registration Statement) 25.1 -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of U.S. Trust Company of Texas, N.A., as Trustee under Exhibit 4.4
- --------- (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 333-37633), and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (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 22. UNDERTAKINGS. (a) The Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; II-7 (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment 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. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company 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 payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company 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 Company will, unless in the 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. (5) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (6) That every prospectus (i) that is filed pursuant to paragraph (5) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment 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. (b) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (c) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-8 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 September 29, 1998. PENTEGRA DENTAL GROUP, INC. By: /s/ GARY S. GLATTER ----------------------------------------- Gary S. Glatter PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each person whose signature appears below hereby appoints Kimberlee K. Rozman and Sam H. Carr and each of them, each of whom may act without joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute in the name of each such person who is then an officer or director of the Registrant, and to file, any amendments (including post-effective amendments) to this Registration Statement and any registration statement for the same offering filed pursuant to Rule 462 under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing appropriate or necessary to be done, as fully and for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. 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 September 29, 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, Chief Financial Officer - ------------------------------ and Director (Principal Financial and Sam H. Carr Accounting Officer) /s/ OMER K. REED - ------------------------------ Chairman of the Board Omer K. Reed, D.D.S. /s/ J. MICHAEL CASAS - ------------------------------ Director J. Michael Casas /s/ GEORGE M. SIEGEL - ------------------------------ Director George M. Siegel /s/ RONNIE L. ANDRESS, D.D.S. - ------------------------------ Director Ronnie L. Andress, D.D.S.
II-9
SIGNATURES TITLE - ------------------------------ ---------------------------------------------- /s/ JAMES H. CLARKE, JR. D.D.S. - ------------------------------ Director James H. Clarke, Jr. D.D.S. /s/ RONALD E. GEISTFELD - ------------------------------ Director Ronald E. Geistfeld, D.D.S. /s/ MACK E. GREDER, D.D.S. - ------------------------------ Director Mack E. Greder, D.D.S. /s/ ROGER ALLEN KAY, D.D.S. - ------------------------------ Director Roger Allen Kay, D.D.S. /s/ GERALD F. MAHONEY - ------------------------------ Director Gerald F. Mahoney /s/ ANTHONY P. MARIS - ------------------------------ Director Anthony P. Maris /s/ RONALD M. YAROS - ------------------------------ Director Ronald M. Yaros, D.D.S.
II-10 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 2.1(1) -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a sole proprietorship 2.2(1) -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and a partnership 2.3(1) -- Form of Asset Contribution Agreement between Pentegra Dental Group, Inc. and an entity 2.4(1) -- Form of Agreement and Plan of Reorganization between Pentegra Dental Group, Inc. and an entity 2.5(1) -- Exchange Agreement dated as of July 31, 1997 among Pentegra Investments, Inc., Pentegra Dental Group, Inc. and the stockholders named therein 2.6(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James P. Allen, D.D.S. 2.8(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Henry Cuttler, D.D.S. 2.14(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Richard H. Fettig, D.D.S. 2.17(1) -- 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(1) -- 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.
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 2.19(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Salvatore J. Guarnieri, D.D.S. 2.21(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David R. Henderson, D.D.S. 2.23(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Stephen Hwang, D.D.S. 2.24(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Bruce A. Kanehl, D.D.S. 2.26(1) -- 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(1) -- 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(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald W. Lanning, D.D.S. 2.31(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and David A. Little, D.D.S. 2.32(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and James M. McDonough, D.D.S. 2.35(1) -- 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(1) -- 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(1) -- 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(1) -- 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.
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 2.39(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Terrence C. O'Keefe, D.D.S. 2.42(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jimmy F. Pinner, D.D.S. 2.44(1) -- 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(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Greg Richards, D.D.S. 2.47(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and John N. Stellpflug, D.D.S. 2.49(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Jack Stephens, D.D.S. 2.50(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Donald F. Tamborello, D.D.S. 2.52(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Helena Thomas, D.D.S. 2.53(1) -- 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(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and S. Victor Uhrenholdt, D.D.S. 2.55(1) -- Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc. and Scott Van Zandt, D.D.S. 2.56(1) -- 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(1) -- Restated Certificate of Incorporation of Pentegra Dental Group, Inc.
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 3.2(1) -- Bylaws of Pentegra Dental Group, Inc. 4.1(1) -- Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc. 4.2(1) -- Form of Registration Rights Agreement for Owners of Founding Affiliated Practices 4.3(1) -- Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named therein 4.4 -- Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust Company of Texas, N.A., as Trustee relating to the Convertible Debt Securities 5.1 -- Opinion of Jackson Walker L.L.P. 10.1(1) -- Pentegra Dental Group, Inc. 1997 Stock Compensation Plan 10.2(1) -- Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.3(1) -- Employment Agreement dated July 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter 10.4(1) -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer 10.5(1) -- Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr 10.6(1) -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James Dunn, Jr. 10.7(1) -- Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee K. Rozman 10.8(1) -- Form of Service Agreement 10.9(1) -- Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.10(1) -- Second Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S. 10.11(1) -- Amendment to Employment Agreement dated May 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter 10.12(1) -- Amendment to Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr 10.13(1) -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James L. Dunn, Jr. 10.14(1) -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer 10.15(1) -- Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee Rozman 10.16(1) -- 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. 10.17(2) -- Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A. and Pentegra Dental Group, Inc. 12.1 -- Statement of Ratio of Earnings to Fixed Charges 23.1 -- Consent of PricewaterhouseCoopers LLP 23.2 -- Consent of Jackson Walker L.L.P. (contained in Exhibit 5.1) 24.1 -- Power of Attorney (contained on the signature page of this Registration Statement)
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 25.1 -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of U.S. Trust Company of Texas, N.A., as Trustee under Exhibit 4.4
- --------- (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 333-37633), and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. EX-4.4 2 EXHIBIT 4.4 - ------------------------------------------------------------------------------- PENTEGRA DENTAL GROUP, INC. to U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee ------------- FORM OF INDENTURE Dated as of September ___, 1998 ------------- Convertible Subordinated Securities - -------------------------------------------------------------------------------
TABLE OF CONTENTS ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION . . . . 1 SECTION 1.01. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS. . . . . . . . . . 6 SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. . . . . . . . . 7 SECTION 1.04. ACTS OF HOLDERS; RECORD DATES . . . . . . . . . . . . . 7 SECTION 1.05. NOTICES, ETC., TO TRUSTEE AND COMPANY . . . . . . . . . 8 SECTION 1.06. NOTICE TO HOLDERS; WAIVER . . . . . . . . . . . . . . . 8 SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT . . . . . . . . . . . 9 SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS. . . . . . . . 9 SECTION 1.09. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . 9 SECTION 1.10. SEPARABILITY CLAUSE . . . . . . . . . . . . . . . . . . 9 SECTION 1.11. BENEFITS OF INDENTURE . . . . . . . . . . . . . . . . . 9 SECTION 1.12. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . 9 SECTION 1.13. LEGAL HOLIDAYS. . . . . . . . . . . . . . . . . . . . . 9 SECTION 1.14. NO SECURITY INTEREST CREATED. . . . . . . . . . . . . .10 SECTION 1.15. LIMITATION ON INDIVIDUAL LIABILITY. . . . . . . . . . .10 ARTICLE II SECURITY FORMS. . . . . . . . . . . . . . . . . . . . . . . . .10 SECTION 2.01. FORMS GENERALLY . . . . . . . . . . . . . . . . . . . .10 SECTION 2.02. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTIFICATION . . .11 ARTICLE III THE SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . .11 SECTION 3.01. AMOUNT UNLIMITED; ISSUABLE IN SERIES. . . . . . . . . .11 SECTION 3.02. DENOMINATIONS . . . . . . . . . . . . . . . . . . . . .13 SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. . . . .13 SECTION 3.04. TEMPORARY SECURITIES. . . . . . . . . . . . . . . . . .14 SECTION 3.05. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE . .14 SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. . . .15 SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. . . . .16 SECTION 3.08. PERSONS DEEMED OWNERS . . . . . . . . . . . . . . . . .17 SECTION 3.09. CANCELLATION. . . . . . . . . . . . . . . . . . . . . .17 SECTION 3.10. COMPUTATION OF INTEREST . . . . . . . . . . . . . . . .17 ARTICLE IV SATISFACTION AND DISCHARGE. . . . . . . . . . . . . . . . . . .17 SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE . . . . . . . .17 SECTION 4.02. APPLICATION OF TRUST MONEY. . . . . . . . . . . . . . .18 SECTION 4.03. REINSTATEMENT . . . . . . . . . . . . . . . . . . . . .18 ARTICLE V REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .19 SECTION 5.01. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . .19 SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. . . . . . . . . . . . . . . . .20 SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIM. . . . . . . . . . . .21 SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . .21 SECTION 5.06. APPLICATION OF MONEY COLLECTED. . . . . . . . . . . . .22 SECTION 5.07. LIMITATION ON SUITS . . . . . . . . . . . . . . . . . .22 SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, i PREMIUM, INTEREST AND TO CONVERT. . . . . . . . . . . .22 SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES. . . . . . . . . . .23 SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE. . . . . . . . . . . . .23 SECTION 5.11. DELAY OR OMISSION NOT WAIVER. . . . . . . . . . . . . .23 SECTION 5.12. CONTROL BY HOLDERS. . . . . . . . . . . . . . . . . . .23 SECTION 5.13. WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . .24 SECTION 5.14. UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . .24 ARTICLE VI THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . .24 SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES . . . . . . . . . .24 SECTION 6.02. NOTICE OF DEFAULTS. . . . . . . . . . . . . . . . . . .25 SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE . . . . . . . . . . . . . . .25 SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . .26 SECTION 6.05. MAY HOLD SECURITIES . . . . . . . . . . . . . . . . . .26 SECTION 6.06. MONEY HELD IN TRUST . . . . . . . . . . . . . . . . . .26 SECTION 6.07. COMPENSATION AND REIMBURSEMENT. . . . . . . . . . . . .26 SECTION 6.08. DISQUALIFICATION; CONFLICTING INTERESTS . . . . . . . .27 SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY . . . . . . . .27 SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR . . . . . . . . . . . . . . . . . . . . . . .28 SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. . . . . . . . .29 SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. . . . . . . . . . . . . . . . .30 SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 6.14. APPOINTMENT OF AUTHENTICATING AGENT . . . . . . . . . .30 ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY . . . . . . .32 SECTION 7.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. . . . . . . . . . . . . . . . . . . . . . .32 SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATION TO HOLDERS . . . . . . . . . . . . . . . . . . . . . . . .32 SECTION 7.03. REPORTS BY TRUSTEE. . . . . . . . . . . . . . . . . . .32 SECTION 7.04. REPORTS BY COMPANY. . . . . . . . . . . . . . . . . . .33 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. . . . . .33 SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS . . . . . . . . . . . . . . . . . . . . . . . . .33 SECTION 8.02. SUCCESSOR SUBSTITUTED . . . . . . . . . . . . . . . . .34 ARTICLE IX SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . .34 SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS . . . .35 SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES. . . . . . . . . .36 SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES . . . . . . . . . . .36 SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT . . . . . . . . . .36 SECTION 9.06. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES. . . . . . . . . . . . . . . . . . . . . . .36 SECTION 9.07. NOTICE OF SUPPLEMENTAL INDENTURE. . . . . . . . . . . .36 ARTICLE X COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . .37 SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. . . . . . .37 SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . .37 SECTION 10.03. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST . . . .37 SECTION 10.04. STATEMENT BY OFFICERS AS TO DEFAULT . . . . . . . . . .38 SECTION 10.05. EXISTENCE . . . . . . . . . . . . . . . . . . . . . . .38 ii SECTION 10.06. WAIVER OF CERTAIN COVENANTS . . . . . . . . . . . . . .38 SECTION 10.07. ADDITIONAL AMOUNTS. . . . . . . . . . . . . . . . . . .39 ARTICLE XI REDEMPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . .39 SECTION 11.01. APPLICABILITY OF ARTICLE. . . . . . . . . . . . . . . .39 SECTION 11.02. ELECTION TO REDEEM; NOTICE TO TRUSTEE . . . . . . . . .39 SECTION 11.03. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED. . . . . . . . . . . . . . . . . . . . . . . .40 SECTION 11.04. NOTICE OF REDEMPTION. . . . . . . . . . . . . . . . . .40 SECTION 11.05. DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . .41 SECTION 11.06. SECURITIES PAYABLE ON REDEMPTION DATE . . . . . . . . .41 SECTION 11.07 SECURITIES REDEEMED IN PART . . . . . . . . . . . . . .41 ARTICLE XII SUBORDINATION OF SECURITIES . . . . . . . . . . . . . . . . . .41 SECTION 12.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS. . . . .42 SECTION 12.02. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. . . . .42 SECTION 12.03. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. . . . .43 SECTION 12.04. PAYMENT PERMITTED IF NO DEFAULT . . . . . . . . . . . .44 SECTION 12.05. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . .44 SECTION 12.06. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS . . . . . .45 SECTION 12.07. TRUSTEE TO EFFECTUATE SUBORDINATION . . . . . . . . . .45 SECTION 12.08. NO WAIVER OF SUBORDINATION PROVISIONS . . . . . . . . .45 SECTION 12.09. NOTICE TO TRUSTEE . . . . . . . . . . . . . . . . . . .45 SECTION 12.10. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT . . . . . . . . . . . . . . . . . . .46 SECTION 12.11. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . .46 SECTION 12.12. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS; PRESERVATION OF TRUSTEE'S RIGHTS. . . . .46 SECTION 12.13. ARTICLE APPLICABLE TO PAYING AGENTS . . . . . . . . . .47 SECTION 12.14. CERTAIN CONVERSIONS DEEMED PAYMENT. . . . . . . . . . .47 SECTION 12.15. NO SUSPENSION OF REMEDIES . . . . . . . . . . . . . . .47 ARTICLE XIII CONVERSION OF SECURITIES. . . . . . . . . . . . . . . . . . . .47 SECTION 13.01. CONVERSION PRIVILEGE AND CONVERSION PRICE . . . . . . .47 SECTION 13.02. EXERCISE OF CONVERSION PRIVILEGE. . . . . . . . . . . .48 SECTION 13.03. FRACTIONS OF SHARES . . . . . . . . . . . . . . . . . .48 SECTION 13.04. ADJUSTMENT OF CONVERSION PRICE. . . . . . . . . . . . .48 SECTION 13.05. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE . . . . . . .53 SECTION 13.06. NOTICE OF CERTAIN CORPORATE ACTION. . . . . . . . . . .53 SECTION 13.07. COMPANY TO RESERVE COMMON STOCK . . . . . . . . . . . .54 SECTION 13.08. TAXES ON CONVERSIONS. . . . . . . . . . . . . . . . . .54 SECTION 13.09. COVENANT AS TO COMMON STOCK . . . . . . . . . . . . . .54 SECTION 13.10. CANCELLATION OF CONVERTED SECURITIES. . . . . . . . . .55 SECTION 13.11. PROVISIONS OF CONSOLIDATION, MERGER OR SALE OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . .55 SECTION 13.12. TRUSTEE'S DISCLAIMER. . . . . . . . . . . . . . . . . .55 ARTICLE XIV MEETINGS OF HOLDERS OF SECURITIES . . . . . . . . . . . . . . .56 SECTION 14.01. PURPOSES FOR WHICH MEETINGS MAY BE CALLED . . . . . . .56 SECTION 14.02. CALL, NOTICE AND PLACE OF MEETINGS. . . . . . . . . . .56 SECTION 14.03. PERSONS ENTITLED TO VOTE AT MEETINGS. . . . . . . . . .56 SECTION 14.04. QUORUM; ACTION. . . . . . . . . . . . . . . . . . . . .56 SECTION 14.05. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT iii OF MEETINGS . . . . . . . . . . . . . . . . . . . . . .57 SECTION 14.06. COUNTING VOTES AND RECORDING ACTION OF MEETINGS . . . .57
iv Certain Sections of this Indenture relating to Sections 310 through 318 of the Trust Indenture Act of 1939:
SECTION OF TRUST SECTION OF INDENTURE ACT THIS INDENTURE ---------------- -------------- Section 310(a)(1) 6.09 (a)(2) 6.09 (a)(3) Not Applicable (a)(4) Not Applicable (a)(5) 6.09 (b) 6.08 Section 311(a) 6.13 (b) 6.13 Section 312(a) 7.01 7.02(a) (b) 7.02(b) (c) 7.02(c) Section 313(a) 7.03(a) (b) 7.03(a) (c) 7.03(a) (d) 7.03(b) Section 314(a) 7.04 (a)(4) 10.04 (b) Not Applicable (c)(1) 1.02 (c)(2) 1.02 (c)(3) Not Applicable (d) Not Applicable (e) 1.02 Section 315(a) 6.01 (b) 6.02 (c) 6.01 (d) 6.01 (e) 5.14 Section 316(a)(1)(A) 5.02 5.12 (a)(1)(B) 5.13 (a)(2) Not Applicable (b) 5.08 (c) 1.04(c) Section 317(a)(1) 5.03 (a)(2) 5.04 (b) 10.03 Section 318(a) 1.07
- ------------------------ Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. v INDENTURE, dated as of September __, 1998, between PENTEGRA DENTAL GROUP, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), and U.S. TRUST COMPANY OF TEXAS, N.A., a national banking association, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured convertible subordinated debentures, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series as in this Indenture provided. This Indenture is subject to the provisions of the Trust Indenture Act and the rules and regulations of the Commission promulgated thereunder which are required to be part of this Indenture and, to the extent applicable, shall be governed by such provisions. All things necessary to make this Indenture a valid agreement of the Company in accordance with its terms have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article I and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required and permitted hereunder shall mean such accounting principles as are generally accepted and adopted by the Company at the date of this Indenture; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and references herein to "Articles" and "Sections" are to Articles and Sections of this Indenture unless otherwise specified. Certain terms used in Articles V, XII and XIII are defined in those Articles. "Act" when used with respect to any Holder, has the meaning specified in Section 1.04. 1 "Additional Amounts" means any additional amounts that are required by the express terms of a Security or by or pursuant to a Board Resolution, under circumstances specified therein or pursuant thereto, to be paid by the Company with respect to certain taxes, assessments or other governmental charges imposed on certain Holders and that are owing to those Holders. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with the specified Person. For purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of the specified Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 6.14 to act on behalf of the Trustee to authenticate Securities. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in Houston, Texas, Dallas, Texas or New York, New York are authorized or obligated to close by law or executive order. "Commission" means the Securities and Exchange Commission as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Instrument that Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing those duties at such time. "Common Stock" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 13.11, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; PROVIDED, that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this Indenture until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean that successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Chief Executive Officer, its President or a Vice President, and by its Chief Financial Officer, Controller, its Treasurer or an Assistant Treasurer, or its Secretary or an Assistant Secretary, and delivered to the Trustee. 2 "Consolidated Subsidiary" means a Subsidiary whose financial statements are included in the most recent annual consolidated financial statements of the Company and its Subsidiaries. "Conversion Price" when used with respect to any Security to be converted, means the price per share of Common Stock which is fixed for the conversion of that Security by or pursuant to this Indenture, subject to adjustment after this issuance (or the earliest issuance of any of its Predecessor Securities) pursuant to Article XIII. "Convertibility Period" when used with respect to any Security, has the meaning specified in Section 13.01. "Corporate Trust Office" means the principal office of the Trustee at which at any particular time its corporate trust business shall principally be administered which is, as of the date of this Indenture, located at 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Credit Facility" means, in each case as amended, restated, modified, renewed, extended, increased, refunded, replaced or refinanced in whole or in part from time to time: (a) the Credit Agreement dated June 1, 1998, between the Company and Bank One, Texas as Agent and Issuing Lender, and the lenders party thereto from time to time and (b) one or more debt facilities with banks or other lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit. "Current Market Price" has the meaning specified in Section 13.04. "Defaulted Interest" has the meaning specified in Section 3.07. "Designated Senior Indebtedness" means (a) the Credit Facility and (b) any other Senior Indebtedness of the Company the principal amount of which is $1,000,000 or more and that has been designated by the Company as "Designated Senior Indebtedness." "Dollar" or "$" means at any time a dollar or other equivalent unit in such coin or currency of the United States as at that time shall be legal tender for the payment of public and private debts. "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including the terms of one or more series of Securities established as contemplated by Section 3.01 and, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and to govern this instrument and any such supplemental indenture, respectively. "Interest Payment Date" when used with respect to any Security, means the dates specified in that Security as the fixed dates on which an installment of interest on that Security is due and payable. "Maturity" when used with respect to any Security, means the date or dates on which the principal of such Security becomes due and payable as therein or herein provided, whether at the final Principal Payment Date thereof or by declaration of acceleration, redemption or otherwise. 3 "Obligations" in respect of Senior Indebtedness means any principal, interest, premiums, fees, indemnifications, reimbursements, damages and other liabilities payable under the documents governing any such indebtedness. "Officers' Certificate" means a certificate, in form satisfactory to the Trustee, signed by the Chairman of the Board, the Chief Executive Officer, the President or a Vice President, and by the Chief Financial Officer, Controller, the Treasurer or an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion, in form and substance satisfactory to the Trustee, of counsel, who may be counsel for or an employee of the Company, and who shall be acceptable to the Trustee. "Original Issue Discount Security" means any Security that provides for an amount less than the principal amount thereof to be due and payable on a declaration of acceleration of the Maturity thereof pursuant to Section 5.02. "Outstanding" when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (a) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount have been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of those Securities; PROVIDED, that if those Securities, or portions thereof, are to be redeemed, notice of that redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (c) Securities that have been paid pursuant to Section 3.06 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor on the Securities or any Affiliate of the Company shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying on any such request, demand, authorization, direction, notice, consent or waiver, only Securities that the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor on the Securities or any Affiliate of the Company. "Paying Agent" means any Person, which may include the Company, authorized by the Company to pay the principal of and premium, if any, or interest on any one or more series of Securities on behalf of the Company. "Person" means any individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment" when used with respect to the Securities of any series, means Phoenix, Arizona and is the place where the principal of (and premium, if any) and interest on the Securities of that series are payable as specified in accordance with Section 3.01, subject to the provisions of Section 10.02. 4 "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by that particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Principal Payment Date" when used with respect to any Security, means the dates specified in that Security as the fixed dates on which the principal of such Security or a portion of principal is due and payable. "Record Date" means either a Regular Record Date or a Special Record Date, as applicable. "Redemption Date" when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price" when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture on the applicable Redemption Date. "Regular Record Date" for the interest payable on any Interest Payment Date means the date specified for that purpose as contemplated by Section 3.01, or, if not so specified, the last day of the calendar month preceding that Interest Payment Date if that Interest Payment Date is the 15th day of the calendar month or the 15th day of the calendar month preceding that Interest Payment Date if that Interest Payment Date is the last day of a calendar month, whether or not that day is a Business Day. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Indebtedness. "Responsible Officer" means, when used with respect to the Trustee, the chairman of the Board of Directors, any vice chairman of the Board of Directors, the chairman of the trust committee, the chairman of the executive committee, any vice chairman of the executive committee, the president, any vice president (whether or not designated by numbers or words added before or after the title "vice president"), the cashier, the secretary, the treasurer, any trust officer, any assistant trust officer, any assistant cashier, any assistant secretary, any assistant treasurer, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Security Register" and "Security Registrar" have the respective meanings specified in Section 3.05. "Senior Indebtedness" means the principal of and premium, if any, and interest on (a) all secured indebtedness of the Company, or any subsidiary of the Company, for money borrowed under any Credit Facility, whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, and (b) all secured indebtedness of the Company, or any subsidiary of the Company, for money borrowed, whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, and any amendments, renewals, extensions, modifications, refinancings, replacements, and refundings of any or all thereof. For the purposes of this definition, "indebtedness for money borrowed" when used with respect to the Company means (a) any obligation of, or any obligation guaranteed by, the Company, or any subsidiary of the Company, for the repayment of borrowed money (including without limitation fees, penalties or other obligations in respect thereof), whether or not evidenced by bonds, debentures, notes or other written instruments, (b) any deferred payment obligation of, or any such obligation guaranteed by, the Company, or any subsidiary of the Company, for the payment of the purchase price of property or assets evidenced by a note or similar instrument, and (c) any obligation of, or any such obligation guaranteed by, the Company, or any subsidiary of the Company, for the payment of rent or other amounts under a lease of property or assets which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of the Company, or any subsidiary of the Company, under generally accepted accounting principles. 5 "Significant Subsidiary" means at any time a Subsidiary that is at that time a "significant subsidiary" of the Company within the meaning of Rule 1.02(w) of Regulation S-X under the Securities Act of 1933, as amended and in effect on the date of this Indenture. "Special Record Date" for the payment of any Defaulted Interest on the Securities of any series means a date fixed by the Trustee pursuant to Section 3.07. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock that ordinarily has voting power in the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed; PROVIDED, HOWEVER, that in the event the Trust Indenture Act of 1939 is amended after that date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Vice President" when used with respect to the Company, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." "Yield to Maturity" when used with respect to any Original Issue Discount Security, means the yield to maturity, if any, set forth on the face thereof. SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS. On any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by officers of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual or firm signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a statement that, in the opinion of each such individual or such firm, he has or they have made such examination or investigation as is necessary to enable him or them to express an informed opinion as to whether or not such covenant or condition has been complied with; and (c) a statement as to whether, in the opinion of each such individual or such firm, such condition or covenant has been complied with. 6 SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, on a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters on which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, on a certificate of public officials or on a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.04. ACTS OF HOLDERS; RECORD DATES. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. The record of any meeting of Holders shall be proved in the manner provided in Section 14.06. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 7.01) prior to such first solicitation or vote, as the case may be. With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. Notwithstanding the foregoing, the 7 Company shall not set a record date for, and the provisions of this paragraph shall not apply with respect to, any Act by the Holders pursuant to Section 5.01, 5.02 or 5.12. (d) The ownership of Securities shall be proved by the Security Register. (e) Any Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued on the registration of transfer therefor or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (f) Without limiting the foregoing, a Holder entitled hereunder to give or take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any different part of such principal amount. SECTION 1.05. NOTICES, ETC., TO TRUSTEE AND COMPANY. Any Act of Holders or other documents provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201, Attention: Corporate Trust Administration, or at such superseding other addresses previously furnished in writing to the Holders and the Company by the Trustee; or (b) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, addressed to it at 2999 N. 44th Street, Suite 650, Phoenix, Arizona 85018 or at such superseding address as has been previously furnished in writing to the Trustee by the Company. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, registered or certified with postage prepaid, if mailed; when answered back if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by nationally recognized overnight air courier guaranteeing next day delivery. SECTION 1.06. NOTICE TO HOLDERS; WAIVER. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if made, given, furnished or filed in writing to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, registered or certified with postage prepaid, if mailed; when answered back if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by nationally recognized overnight air courier guaranteeing next day delivery. 8 In the case of any notice this Indenture provides shall be given by mail, if, by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act or another provision that would be required or deemed under such Act to be a part of and govern this Indenture if this Indenture were subject thereto, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.09. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company and the Trustee shall bind each of their respective successors and assigns, whether so expressed or not. SECTION 1.10. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.11. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the Holders of Securities and, with respect to Article Twelve, the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.12. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF [NEW YORK, TEXAS OR ARIZONA], BUT WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. SECTION 1.13. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date or Principal Payment Date of any Security or the last date on which a Holder has the right to convert his Securities shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal and premium, if any, or conversion of the Securities need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date, or on a Principal Payment Date, or on such last day for conversion; PROVIDED, that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Principal Payment Date, as the case may be, to the next succeeding Business Day. 9 SECTION 1.14. NO SECURITY INTEREST CREATED. Nothing in this Indenture or in the Securities, express or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect in any jurisdiction where property of the Company or its Subsidiaries is or may be located. SECTION 1.15. LIMITATION ON INDIVIDUAL LIABILITY. No recourse under or on any obligation, covenant or agreement contained in this Indenture or in any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, officer, attorney, employee, representative or director, as such, past, present or future, of the Company or any successor corporation, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, shareholders, officers, attorneys, employees, representatives or directors, as such, of the Company or any successor Person, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, shareholder, officer, attorney, employee, representative or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Security. ARTICLE II SECURITY FORMS SECTION 2.01. FORMS GENERALLY. The Securities of each series shall be in substantially such form or forms as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. A copy of the Board Resolution establishing the form or forms of Securities or of any series of Securities shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 3.03 for the authentication and delivery of those Securities. The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing those Securities, as evidenced by their execution thereof. SECTION 2.02. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTIFICATION. The Trustee's certificate of authentification shall be in substantially the following form: "This is one of the Securities of the series designated, described or provided for in the within-mentioned Indenture. 10 ---------------------------------, U.S. TRUST COMPANY OF TEXAS, N.A. By: ------------------------------ AUTHORIZED SIGNATORY". ARTICLE III THE SECURITIES SECTION 3.01. AMOUNT UNLIMITED; ISSUABLE IN SERIES. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution, and set forth in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (a) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (b) any limit on the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered on registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.07 or 13.02); (c) the date or dates on which the principal of and any premium on the Securities of the series is payable or the method of determination thereof; (d) the rate or rates, or the method of determination thereof, at which the Securities of the series shall bear interest, if any, whether and under what circumstances Additional Amounts with respect to such Securities shall be payable, the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable and, if other than as set forth in Section 1.01, the Regular Record Date for the interest payable on any Securities on any Interest Payment Date; (e) the place where, subject to the provisions of Section 10.02, the principal of, any premium or interest on and any Additional Amounts with respect to the Securities of the series shall be payable; (f) the period or periods within which, the price or prices (whether denominated in cash, securities or otherwise) at which and the terms and conditions on which Securities of the series may be redeemed, in whole or in part, at the option of the Company, if the Company is to have that option, and the manner in which the Company must exercise any such option; (g) the obligation, if any, of the Company to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices (whether denominated in cash, securities or otherwise) at which and the terms and conditions on which, Securities of the series shall be redeemed or purchased in whole or in part pursuant to such obligation; (h) the denomination in which any Securities of that series shall be issuable, if other than denominations of $1,000 and any integral multiple thereof; 11 (i) if the principal of, any premium or interest on or any Additional Amounts with respect to the Securities of the series are to be payable, at the election of the Company or a Holder thereof, in a currency or currencies (including composite currencies) other than that in which the Securities are stated to be payable, the currency or currencies (including composite currencies) in which payment of the principal of or any premium or interest on or any Additional Amounts with respect to Securities of the series as to which such election is made shall be payable, and the periods within which and the terms and conditions on which such election is to be made; (j) if the amount of payments of principal of, any premium or interest on or any Additional Amounts with respect to the Securities of the series may be determined with reference to any commodities, currencies or indices, or values, rates or prices, the manner in which those amounts shall be determined; (k) if other than the entire principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable on declaration of acceleration of the Maturity thereof pursuant to Section 5.02; (l) any additional means of satisfaction and discharge of this Indenture with respect to Securities of the series pursuant to Section 4.01 and any additional conditions to discharge pursuant to Section 4.01; (m) any deletions or modifications of or additions to the Events of Default set forth in Section 5.01 or covenants of the Company set forth in Article X pertaining to the Securities of the series; (n) if the Securities are to be subordinated pursuant to Article XII to unsecured indebtedness or other liabilities, the modification for purposes only of the series of the definition of "Senior Indebtedness" herein; (o) the convertibility provisions contemplated by Article XIII; and (p) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any one series shall be substantially identical, except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 3.03) set forth, or determined in the manner provided, in the Officers' Certificate referred to above or in any such indenture supplemental hereto. At the option of the Company, interest on the Securities of any series that bears interest may be paid by mailing a check to the address of any Holder as such address shall appear in the Security Register or by wire transfer at the Holder's expense. If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of that action together with that Board Resolution shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. SECTION 3.02. DENOMINATIONS. The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 3.01. In the absence of any such provisions with respect to the Securities of any series, the Securities of that series denominated in Dollars shall be issuable in denominations of $1,000 and any integral multiple thereof. 12 SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, its Chief Financial Officer or one of its Vice Presidents, under its corporate seal or a facsimile thereof reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of those Securities; and the Trustee in accordance with such Company Order shall either at one time or from time to time pursuant to such instructions as may be described therein authenticate and deliver such Securities as in this Indenture provided and not otherwise. Such Company Order shall specify the amount of Securities to be authenticated and the date on which the original issue of Securities is to be authenticated, and shall certify that all conditions precedent to the issuance of such Securities contained in this Indenture have been complied with. If the form or terms of the Securities of any series have been established in or pursuant to one or more Board Resolutions as permitted by Sections 2.01 and 3.01, in authenticating those Securities, and accepting the additional responsibilities under this Indenture in relation to those Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying on, an Opinion of Counsel stating: (a) if the form of those Securities has been established by or pursuant to Board Resolution as permitted by Section 2.01, that such form has been established in conformity with the provisions of this Indenture; (b) if the terms of those Securities have been established by or pursuant to Board Resolution as permitted by Section 3.01, that such terms have been established in conformity with the provisions of this Indenture; and (c) that those Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute legal, valid and binding obligations of the Company, enforceable in accordance with their terms, except as such enforcement is subject to the effect of (i) bankruptcy, insolvency, fraudulent conveyance, reorganization or other laws relating to or affecting creditors' rights generally, (ii) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law) and (iii) any implied covenants of good faith or fair dealing. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not acceptable to the Trustee. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature, and such certificate on any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of the Indenture. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 3.09 together with a written statement (which need not comply with Section 1.03 and need not be 13 accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. The Trustee may appoint an Authenticating Agent pursuant to the terms of Section 6.14. SECTION 3.04. TEMPORARY SECURITIES. Pending the preparation of definitive Securities of any series, the Company may execute, and on Company Order the Trustee shall authenticate and deliver, temporary Securities of that series which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing those Securities may determine, as evidenced by their execution of those Securities. Every such temporary Security shall be executed by the Company and shall be authenticated and delivered by the Trustee on the same conditions and in substantially the same manner, and with the same effect, as the definitive Security or Securities in lieu of which it is issued. If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of any series, the temporary Securities of that series shall be exchangeable for those definitive Securities on surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 10.02, without charge to the Holder. On surrender for cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series and of like tenor, of any authorized denominations and of a like aggregate principal amount. Until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of that series in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 3.05. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The Security Registrar shall cause to be kept for each series of Securities at one of the offices or agencies maintained pursuant to Section 10.02 a register (the register maintained in such office and in any other office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities of that series. The Company is hereby initially appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. (b) On surrender for registration of transfer of any Security of any series at the office or agency in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series and of like tenor, of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series and of like tenor, of any authorized denominations and of a like aggregate principal amount, on surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange is entitled to receive. (c) All Securities issued on any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered on such registration of transfer or exchange. 14 (d) Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Trustee and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. (e) No service charge shall be made for any registration of transfer or exchange of Securities, except as provided in Section 3.06 or if the Holder has requested such registration of transfer or exchange. The Security Registrar may require payment of a sum sufficient to cover any tax or other governmental charge (including the fees and expenses of the Trustee) that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06, 11.07 or 13.02 not involving any transfer. (f) The Security Registrar shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities of that series selected for redemption and ending at the close of business on the day of the mailing of the relevant notice of redemption or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. If any mutilated Security of any series is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (a) evidence to their satisfaction of the destruction, loss or theft of any Security and (b) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. The Trustee may charge the Company for the Trustee's expenses in replacing such Security. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. On the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of any series issued pursuant to this Section 3.06 in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Unless otherwise provided with respect to the Securities 15 of any series, payment of interest may be made at the option of the Company by check mailed or delivered to the address of any Person entitled thereto as such address shall appear in the Securities Register. Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) of that series are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities of that series at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) of that series are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which those Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause (b), such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section 3.07, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security of any series which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Security whose Maturity is prior to such Interest Payment Date), interest on that Security which has a Principal Payment Date on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or one or more of its Predecessor Securities) is registered at the close of business on such Regular Record Date, PROVIDED, HOWEVER, that Securities of any series so surrendered for conversion shall (except in the case of those Securities called for redemption) be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount being surrendered for conversion. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security of any series which is converted, interest which has a Principal Payment Date after the date of conversion of that Security shall not be payable. SECTION 3.08. PERSONS DEEMED OWNERS. 16 Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name that Security is registered as the owner of that Security for the purpose of receiving payment of principal of and premium, if any, and (subject to Section 3.07) interest on that Security and for all other purposes whatsoever, whether or not that Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.09. CANCELLATION. All Securities surrendered for payment, redemption, registration of transfer, exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of as directed by a Company Order. SECTION 3.10. COMPUTATION OF INTEREST. Except as otherwise specified as contemplated by Section 3.01 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE IV SATISFACTION AND DISCHARGE SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall on Company Request cease to be of further effect (except as expressly provided for in this Article IV), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) either (i) all Securities theretofore authenticated and delivered (other than (A) Securities that have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 and (B) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (ii) all those Securities not theretofore delivered to the Trustee for cancellation (A) have become due and payable, or (B) will become due and payable at their Principal Payment Date within one year, or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, or (D) are delivered to the Trustee for conversion in accordance with Article XIII, and the Company, in the case of (A), (B), (C) or (D) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of paying an amount in cash sufficient (without consideration of any investment of such cash) to pay and discharge the entire indebtedness on those Securities not theretofore delivered to the Trustee for 17 cancellation for principal and premium, if any, and interest and Additional Amounts, if any, to the date of such deposit (in the case of Securities that have become due and payable) or to the Principal Payment Date or Redemption Date, as the case may be; PROVIDED that the Trustee is irrevocably instructed to apply such amount to said payments with respect to those Securities; (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the following rights or obligations under the Securities and this Indenture shall survive until otherwise terminated or discharged hereunder: (a) Article XIII and the Company's obligations under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, in each case with respect to any Securities described in subclause (ii) of clause (a) of this Section 4.01, (b) this Article IV, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, including the obligations of the Company to the Trustee under Section 6.07, and the obligations of the Trustee or the Company to any Authenticating Agent under Section 6.14 and (d) if money shall have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of this Section 4.01, the rights of Holders of any Securities described in that subclause (ii) to receive, solely from the trust fund described in that subclause (ii), payments in respect of the principal of, and premium (if any) and interest on and Additional Amounts (if any) with respect to, those Securities when such payments are due. SECTION 4.02. APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal, premium, if any, interest and Additional Amounts, if any, for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 4.01 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company on Company Request. SECTION 4.03. REINSTATEMENT. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article IV by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article IV until such time as the Trustee or Paying Agent is permitted to apply all money held in trust with respect to the Securities; PROVIDED, HOWEVER, that if the Company makes any payment of principal of, any premium or interest on or any Additional Amounts with respect to any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of the Securities to receive such payment from the money so held in trust. 18 ARTICLE V REMEDIES SECTION 5.01. EVENTS OF DEFAULT. "Event of Default," wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for that Event of Default and whether it shall be occasioned by the provisions of Article XII or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), unless it either is inapplicable to a particular series of Securities or is specifically deleted or modified in or pursuant to the supplemental indenture or Board Resolution establishing that series or in the form of the Security for that series: (a) default in the payment of the principal of or premium, if any, on any Security of that series at its Maturity, whether or not such payment is prohibited by the provisions of Article XII; or (b) default in the payment of any interest on or any Additional Amounts with respect to any Security of that series when it becomes due and payable, whether or not such payment is prohibited by the provisions of Article XII, and continuance of such default for a period of 30 days; or (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section 5.01 specifically dealt with or which has been expressly included in this Indenture solely for the benefit of one or more series of Securities other than that series), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by any Holder a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) the filing or commencement of an involuntary case or other proceeding against the Company or any Significant Subsidiary of the Company seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or thereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or an order for relief shall be entered against the Company or any Significant Subsidiary of the Company under the federal bankruptcy laws as now or hereafter in effect; or (e) the filing or commencement by the Company or any Significant Subsidiary of the Company of a voluntary case or other proceeding seeking liquidation, reorganization or other similar relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or the Company or any Significant Subsidiary of the Company shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors; or (f) any other Event of Default provided with respect to Securities of that series as contemplated by Section 3.01. 19 SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default with respect to any Outstanding Securities of any series occurs and is continuing, then in every such case the Trustee or any Holder may declare the outstanding principal amount and any accrued interest of all the Securities of the series affected by such default or all series, as the case may be, to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by any Holder), and on any such declaration such outstanding principal amount and any accrued interest (or specified amount) shall become immediately due and payable. If an Event of Default described in clause (e) or (f) of Section 5.01 shall occur, the outstanding principal amount and any accrued interest of the Outstanding Securities of all series IPSO FACTO shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after such a declaration of acceleration with respect to Securities of any series (or of all series, as the case may be) has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article V provided, any Holder of that series (or of all series, as the case may be), by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (a) the Company has paid or deposited with the Trustee or a Holder or Holders a sum sufficient to pay: (i) all overdue interest on, and any Additional Amounts with respect to, all Securities of that series (or of all series, as the case may be), (ii) the principal of (and premium, if any, on) any Securities of that series (or of all series, as the case may be) which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in such Securities (in the case of Original Issue Discount Securities, the Securities' Yield to Maturity), (iii) to the extent that payment of such interest is lawful, interest on overdue interest and any Additional Amounts at the rate or rates prescribed therefor in such Securities (in the case of Original Issue Discount Securities, the Securities' Yield to Maturity) and (iv) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (b) all Events of Default with respect to such Security of that series (or of all series), other than the non-payment of the principal of Securities of that Security (or of all series) which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company covenants that if (a) default is made in the payment of any interest on or any Additional Amounts with respect to any Security of any series when such interest or Additional Amounts shall have become due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of or premium, if any, on any Security of any series at the Maturity thereof, the Company will, on demand of the Trustee, pay to it, for the benefit of the Holders of the Securities of that series, the whole amount then due and payable on those Securities for principal and premium, if any, and interest and any Additional Amounts, and, to the extent that payment of such interest shall be legally enforceable, interest on 20 any overdue principal and premium, if any, and on any overdue interest and Additional Amounts, at the rate borne by those Securities (or in the case of Original Issue Discount Securities, the Yield to Maturity of those Securities), and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee and each predecessor Trustee, their respective agents and counsel, and any other amounts due the Trustee or any predecessor Trustee under Section 6.07. If the Company fails to pay such amounts forthwith on such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid and may prosecute any such proceeding to judgment or final decree, and may enforce the same against the Company (or any other obligor on those Securities) and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company (or any other obligor on those Securities), wherever situated. If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of those Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of any judicial proceeding relative to the Company (or any other obligor on the Securities of any series), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have the claims of the applicable Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each applicable Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the applicable Holders, to pay to the Trustee any amount due it and each predecessor Trustee for the reasonable compensation, expenses, disbursements and advances of the Trustee and each predecessor Trustee and their respective agents and counsel, and any other amounts due the Trustee under Section 6.07. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of Securities of any series any plan of reorganization, arrangement, adjustment or composition affecting those Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of that Holder in any such proceeding; PROVIDED, HOWEVER, that the Trustee may, on behalf of the Holders of those Securities, vote for the election of a trustee in bankruptcy or similar official and may be a member of the Creditors' Committee. SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. All rights of action and claims under this Indenture or the Securities of any series may be prosecuted and enforced by the Trustee without the possession of any of those Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee and each predecessor Trustee and their respective agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. 21 SECTION 5.06. APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal of, premium, if any, or interest on or any Additional Amounts with respect to the Securities of any series, on presentation of those Securities and the notation thereon of the payment if only partially paid and on surrender thereof if fully paid: FIRST: Subject to Article XII, to the holders of Senior Indebtedness; SECOND: To payment of all amounts due the Trustee under Section 6.07; THIRD: To the payment of the amounts then due and unpaid for principal of, premium, if any, and interest on and any Additional Amounts with respect to the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on those Securities for principal, premium, if any, interest and Additional Amounts, respectively; and FOURTH: The balance, if any, to the Company or any other Person or Persons determined to be entitled thereto. SECTION 5.07. LIMITATION ON SUITS. No Holder of any Security of any series will have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) an Event of Default with respect to Securities of that series has occurred and is continuing and that Holder has previously given written notice to the Trustee of that continuing Event of Default; (b) any Holder of a particular series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by any Holder of a particular series; it being understood and intended that no one or more of those Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of those Holders, or to obtain or to seek to obtain priority or preference over any other of those Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all those Holders. SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM, INTEREST AND TO CONVERT. 22 Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and premium, if any, and (subject to Section 3.07) interest on and any Additional Amounts with respect to such Security on the respective Principal Payment Dates expressed in that Security (or, in the case of redemption, on the Redemption Date) and to convert such Security in accordance with Article XIII and to institute suit for the enforcement of any such payment and right to convert, and such rights shall not be impaired without the consent of that Holder. SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder of Securities of any series has instituted any proceeding to enforce any right or remedy under this Indenture and that proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to that Holder, then and in every such case, subject to any determination in that proceeding, the Company, the Trustee and the Holders of Securities of that series shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and those Holders shall continue as though no such proceeding had been instituted. SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in Section 3.06, no right or remedy herein conferred on or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing on any Event of Default with respect to that Security shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 5.12. CONTROL BY HOLDERS. With respect to Securities of any series, any Holder of that series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee relating to or arising under an Event of Default described in clause (a), (b) or (f) of Section 5.01, and with respect to all Securities any Holder shall have the right to direct the time, method and place of conducting any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, not relating to or arising under such an Event of Default; PROVIDED, that: (a) such direction shall not be in conflict with any rule of law or with this Indenture; (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; and (c) subject to the provisions of Section 6.01, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall determine that the action so directed would involve the Trustee in personal liability or would be unduly prejudicial to Holders not joining in such direction. 23 SECTION 5.13. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of that series waive any past default hereunder with respect to that series and its consequences, and the Holders of a majority in principal amount of all Outstanding Securities may on behalf of the Holders of all Securities waive any other past default hereunder and its consequences, except in each case a default (a) in the payment of the principal of or premium, if any, or interest on or any Additional Amounts with respect to any Security, or (b) in respect of a covenant or provision hereof which under Article IX cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. On any such waiver, the waived default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 5.14. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess costs, including attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.14 shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, or premium, if any, or interest on or any Additional Amounts with respect to any Security on or after the Principal Payment Date or Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date). ARTICLE VI THE TRUSTEE SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES. 24 The duties and responsibilities of the Trustee shall be as provided by this Indenture and the Trust Indenture Act for securities issued pursuant to indentures qualified thereunder. Except as otherwise provided herein, notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability or risk in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.01. The Trustee shall not be liable (a) for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts or (b) with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in aggregate principal amount of the then Outstanding Securities of any series or all series, determined as provided in Section 5.12, relating to the time, method and place of conducting any proceeding or any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, under this Indenture with respect to those Securities. Prior to the occurrence of an Event of Default with respect to Securities of any series and after the curing or waiving of all Events of Default with respect to all series which may have occurred: (a) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture and in the Trust Indenture Act, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and in the Trust Indenture Act, and no implied covenants or obligations shall be read in to this Indenture against the Trustee; and (b) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions therein, on any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture and believed by the Trustee to be genuine and to have been signed or presented by the proper party or parties; but in the case of any such statements, certificates or options which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture. If a default or an Event of Default with respect to Securities of any series has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. SECTION 6.02. NOTICE OF DEFAULTS. The Trustee shall give the Holders of Securities of each series notice of any default hereunder with respect to the Securities of that series known to it as and to the extent provided by the Trust Indenture Act; PROVIDED, HOWEVER, that in the case of any default with respect to the Securities of that series of the character specified in Section 5.01(d), no such notice to those Holders shall be given until at least 30 days after the occurrence thereof; and PROVIDED, FURTHER, that, except in the case of a default in payment of principal of, premium, if any, or interest on or any Additional Amounts with respect to any Securities of any series, the Trustee may withhold notice to the Holders of those Securities if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of those Holders. For the purpose of this Section 6.02, the term "default" with respect to the Securities of any series means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to those Securities. SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of Section 6.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting on any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; 25 (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely on an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be required to give any bond or surety in respect of the performance of its power and duties hereunder; and (g) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney. SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The statements and recitals contained herein and in the Securities and in any other document in connection with the sale of the Securities, except the Trustee's certificate of authentication, shall be taken as the statements of the Company, and the Trustee and any Authenticating Agent assume no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 6.05. MAY HOLD SECURITIES. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.08 and 6.13, may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 6.06. MONEY HELD IN TRUST. Money held by the Trustee or any Paying Agent in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee or any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. 26 SECTION 6.07. COMPENSATION AND REIMBURSEMENT. The Company agrees: (a) to pay to the Trustee from time to time compensation for all services rendered by it hereunder (including its services as Security Registrar or Paying Agent, if so appointed by the Company) as may be mutually agreed on in writing by the Company and the Trustee (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee and each predecessor Trustee promptly on its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in connection with the performance of its duties under any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel and all other persons not regularly in its employ) except to the extent any such expense, disbursement or advance may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee and each predecessor Trustee (each, an "indemnitee") for, and to hold the indemnitee harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder (including its services as Security Registrar or Paying Agent, if so appointed by the Company), including enforcement of this Indenture (including this Section 6.07) and including the costs and expenses of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Company shall defend any claim or threatened claim asserted against an indemnitee for which it may seek indemnity, and the indemnitee shall cooperate in the defense unless, in the reasonable opinion of the indemnitee's counsel, the indemnitee has an interest adverse to the Company or a potential conflict of interest exists between the indemnitee and the Company, in which case the indemnitee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel; PROVIDED that the Company shall only be responsible for the reasonable fees and expenses of one law firm (in addition to local counsel) in any one action or separate substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, such law firm to be designated by the indemnitee. When the Trustee or any predecessor Trustee incurs expenses or renders services in connection with the performance of its obligations hereunder (including its services as Security Registrar or Paying Agent, if so appointed by the Company) after an Event of Default specified in Section 5.01(f) or (g) occurs, those expenses and the compensation for those services are intended to constitute expenses of administration under any applicable bankruptcy, insolvency or other similar federal or state law to the extent provided in Section 503(b)(5) of Title 11 of the United States Code, as now or hereafter in effect. SECTION 6.08. DISQUALIFICATION; CONFLICTING INTERESTS. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section 6.08, with respect to the Securities of any series, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate that conflicting interest or resign with respect to the Securities of that series in the manner and with the effect hereinafter specified in this Article VI. (b) In the event that the Trustee shall fail to comply with the provisions of paragraph (a) of this Section 6.08 with respect to the Securities of any series, the Trustee shall, within 10 days after the expiration of the 90-day period referred to in that paragraph (a), transmit by mail to all Holders of Securities of that series, as their names and addresses appear in the Security Register for that series, notice of that failure. 27 (c) For the purposes of this Section, the term "conflicting interest" shall have the meaning specified in Section 310(b) of the Trust Indenture Act and the Trustee shall comply with Section 310(b) of the Trust Indenture Act; PROVIDED, that there shall be excluded from the operation of Section 310(b)(1) of the Trust Indenture Act with respect to the Securities of any series any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if the requirements for such exclusion set forth in Section 310(b)(1) of the Trust Indenture Act are met. For purposes of the preceding sentence, the optional provision permitted by the second sentence of Section 310(b)(9) of the Trust Indenture Act shall be applicable. SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee hereunder which shall be a Person that (i) is eligible pursuant to the Trust Indenture Act to act as such, (ii) has (or, in the case of a corporation included in a bank holding company system, whose related bank holding company has) a combined capital and surplus of at least $50,000,000 and (iii) has a Corporate Trust Office in the Borough of Manhattan, The City of New York, or a designated agent. If such Person publishes reports of conditions at least annually, pursuant to law or to the requirements of a Federal or state supervising or examining authority, then for the purposes of this Section 6.09, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VI. SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article VI shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.11. (b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee for those Securities which is required by Section 6.11 shall not have been delivered to the resigning Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee for those Securities. (c) The Trustee may be removed at any time with respect to the Securities of any series by an Act of the Holders of a majority in principal amount of the Outstanding Securities of that series delivered to the Trustee and to the Company. (d) If at any time: (i) the Trustee shall fail to comply with Section 6.08 with respect to the Securities of any series after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security of that series for the last six months, or (ii) the Trustee shall cease to be eligible under Section 6.09 with respect to the Securities of any series and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security of that series for the last six months, or (iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may remove the Trustee with respect to the Securities of all series, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of 28 himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee or Trustees. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to those Securities (it being agreed that any such successor Trustee may be appointed with respect to the Securities of one or more or all of those series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and such successor Trustee or Trustees shall comply with the applicable requirements of Section 6.11. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company and accepted appointment in the manner required by Section 6.11, any Holder who has been a bona fide Holder of a Security of that series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of that series. (f) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of the Securities of that series in the manner provided in Section 1.06. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, on payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. (b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each such successor Trustee so appointed shall execute and deliver an indenture supplemental hereto wherein each such successor Trustee shall accept such appointment and which (i) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each such successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (ii) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee and (iii) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and on the execution and delivery of such supplemental indenture, the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any such successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. 29 (c) On request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section 6.11, as the case may be. (d) No successor Trustee shall accept its appointment unless, at the time of that acceptance, that successor Trustee shall be qualified and eligible under this Article VI. SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article VI, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated those Securities. SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and when the Trustee shall be or become a creditor of the Company (or any other obligor on the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 6.14. APPOINTMENT OF AUTHENTICATING AGENT. The Trustee may appoint an Authenticating Agent or Agents with the consent of the Company and at the expense of the Company which shall be authorized to act on behalf of the Trustee to authenticate Securities issued on original issue and on exchange, registration of transfer, partial conversion or partial redemption or pursuant to Section 3.06, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a Person organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having (or, in the case of a corporation included in a bank holding company system, whose related bank holding company has) a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section 6.14, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.14, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 6.14. Any Person into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Person succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such Person shall be otherwise eligible under this Section 6.14, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. 30 An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. On receiving such a notice of resignation or on such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.14, the Trustee may appoint a successor Authenticating Agent acceptable to the Company and shall mail notice of such appointment by first-class mail, postage prepaid, to all Holders of Securities for which such successor Authenticating Agent has been appointed as their names and addresses appear in the Security Register. Any successor Authenticating Agent on acceptance of its appointment under this Section 6.14 shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible to act as such under the provisions of this Section 6.14. Any Authenticating Agent by the acceptance of its appointment shall be deemed to have represented to the Trustee that it is eligible for appointment as Authenticating Agent under this Section 6.14 and to have agreed with the Trustee that: it will perform and carry out the duties of an Authenticating Agent as herein set forth, including, among other duties, the duties to authenticate Securities when presented to it in connection with the original issuance and with exchanges, registrations of transfer or redemptions or conversions thereof or pursuant to Section 3.06; it will keep and maintain, and furnish to the Trustee from time to time as requested by the Trustee, appropriate records of all transactions carried out by it as Authenticating Agent and will furnish the Trustee such other information and reports as the Trustee may require; and it will notify the Trustee promptly if it shall cease to be eligible to act as Authenticating Agent in accordance with the provisions of this Section 6.14. Any Authenticating Agent by the acceptance of its appointment shall be deemed to have agreed with the Trustee to indemnify the Trustee against any loss, liability or expense incurred by the Trustee and to defend any claim asserted against the Trustee by reason of any acts or failures to act of such Authenticating Agent, but such Authenticating Agent shall have no liability for any action taken by it in accordance with the specific written direction of the Trustee. The Trustee shall not be liable for any act or any failure of the Authenticating Agent to perform any duty either required herein or authorized herein to be performed by such person in accordance with this Indenture. The Company agrees to pay to each Authenticating Agent from time to time compensation for its services under this Section. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: "This is one of the Securities of the series designated, described or provided for in the within-mentioned Indenture. ------------------------------------ U.S. TRUST COMPANY OF TEXAS, N.A. By: -------------------------------- AS AUTHENTICATING AGENT By: -------------------------------- AUTHORIZED SIGNATORY" 31 Notwithstanding any provision of this Section 6.14 to the contrary, if at any time any Authenticating Agent appointed hereunder with respect to any series of Securities shall not also be acting as the Security Registrar hereunder with respect to that series of Securities, then, in addition to all other duties of an Authenticating Agent hereunder, such Authenticating Agent shall also be obligated to furnish to the Security Registrar for that series of Securities promptly all information necessary to enable that Security Registrar to maintain at all times an accurate and current Security Register for that series of Securities. Furthermore, the Security Registrar for that series of Securities shall also be obligated to furnish the Authenticating Agent promptly all information necessary to enable that Authenticating Agent to maintain at all times accurate and current records for that series of Securities. ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 7.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. The Company will furnish or cause to be furnished to the Trustee with respect to each series of Securities: (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of the Securities of that series as of such Regular Record Date and (b) not less than 15 days prior to the date on which the Trustee is required or permitted to send any notice, report, or other information to Holders, and (c) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished. Notwithstanding the foregoing, so long as the Trustee is the Security Registrar, no such list shall be required to be furnished. SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATION TO HOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of Securities of each series contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders of those Securities. The Trustee may destroy any list furnished to it as provided in Section 7.01 on receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act or otherwise in accordance with this Indenture. SECTION 7.03. REPORTS BY TRUSTEE. 32 (a) Not later than 60 days following each May 15, the Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange on which the Securities of any series are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange. SECTION 7.04. REPORTS BY COMPANY. (a) The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to the Trust Indenture Act; PROVIDED, that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. (b) The Company shall file with the Trustee an Officer's Certificate and supporting documentation, along with such other information and documentation as may be required by the Trustee to document the payment by the Company of all obligations hereunder within 15 days after any such payment is made. ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person in one transaction or a series of related transactions unless: (a) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person in one transaction or a series of related transactions, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership, limited liability company or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of, premium, if any, and interest on and any Additional Amounts with respect to all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 13.11; (b) immediately after giving effect to such transaction, no Event of Default with respect to Securities of any series, and no event which, after notice or lapse of time or both, would become an Event of Default with respect to Securities of any series, shall have occurred and be continuing; (c) such consolidation, merger, conveyance, transfer or lease does not adversely affect the validity or enforceability of the Securities of any series; and (d) the Company or the successor Person has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture 33 is required in connection with such transaction, such supplemental indenture comply with this Article VIII and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.02. SUCCESSOR SUBSTITUTED. On any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease the properties and assets of the Company substantially as an entirety to any Person in one transaction or a series of related transactions in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a transfer by lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to set forth the terms of the Securities of any unissued series, including the additional indebtedness or other liabilities to which the Securities of that series will be subordinated as contemplated by Section 3.01; or (b) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (c) for the benefit of the Holders of Securities of any or all series, to add to the covenants of the Company, add an additional Event of Default or surrender any right or power conferred herein or in the Securities of any series on the Company (and if any such covenant, Event of Default or surrender is to be for the benefit of Holders of Securities of less than all series, stating that such covenants, Event of Default or surrender is or are being included solely for the benefit of the Holders of Securities of those series referred to in the supplemental indenture); or (d) to secure the Securities of any or all series; or (e) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Section 13.11; or (f) to change or eliminate any of the provisions of this Indenture, PROVIDED that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is adversely affected by such change in or elimination of such provision; or (g) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Section 4.01; PROVIDED, HOWEVER, that any such action shall not adversely affect the interest of the Holders of Securities of such series or any other series of Securities in any material respect; or 34 (h) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.11(b); or (i) to cure any ambiguity or omission, to correct or supplement any provision herein or in the Securities of any or all series which may be defective or inconsistent with any other provision herein or in the Securities of any or all series, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture; PROVIDED, that such action pursuant to this clause (i) shall not adversely affect the interests of the Holders of Securities of any series in any material respect and the Trustee may rely on an Opinion of Counsel to that effect. SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, or, if the rights of one or more, but less than all, series of Outstanding Securities are to be affected, then with the consent of the Holders of not less than a majority in principal amount of all the series of Outstanding Securities so to be affected, by Act of said Holders (acting as one class) delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (a) change the Principal Payment Date of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon, any Additional Amounts with respect thereto or any premium payable on the redemption thereof, or reduce the amount of the principal of any Original Issue Discount Security that would be due and payable on a declaration of acceleration of the Maturity thereof pursuant to Section 5.02, where, or the coin or currency or currencies (including composite currencies) in which, any Security or any premium or any interest thereon or Additional Amount with respect thereto is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Principal Payment Date thereof (or, in the case of redemption, on or after the Redemption Date), or adversely affect the right to convert any Security as provided in Article XIII (except as permitted by Section 9.01(e)), or the provisions of this Indenture with respect to the subordination of the Securities (except as contemplated by Section 3.01 and permitted by Section 9.01(a)), in a matter adverse to the Holders; or (b) reduce the percentage in principal amount of Outstanding Securities the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture; or (c) modify any of the provisions of this Section 9.02, Section 5.13 or Section 10.06, except to increase any percentage provided herein or therein or to provide with respect to any particular series the right to condition the effectiveness of any supplemental indenture as to that series on the consent of the Holders of a specified percentage of the aggregate principal amount of Outstanding Securities of that series (which provision may be made pursuant to Section 3.01 without the consent of any Holder) or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, PROVIDED, that this clause (c) shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section 9.02 and Section 10.06, or the deletion of this proviso, in accordance with the requirements of Sections 6.11(b) and 9.01(g). 35 A supplemental indenture that changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It shall not be necessary for any Act of Holders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if that Act approves the substance thereof. The determination of the Trustee as to the series of Securities the rights of which are to be affected pursuant to this Section 9.02 shall be conclusive, and the Trustee in making that determination shall be protected in relying on an Opinion of Counsel. SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying on, an Officers' Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture that adversely affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES. On the execution of any supplemental indenture under this Article IX, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article IX shall conform to the requirements of the Trust Indenture Act. SECTION 9.06. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article IX may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and (at the specific direction of the Company) authenticated and delivered by the Trustee in exchange for Outstanding Securities of that series. SECTION 9.07. NOTICE OF SUPPLEMENTAL INDENTURE. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to Section 9.02, the Company shall transmit to the Holders of Securities of all series affected thereby a notice setting forth the substance of that supplemental indenture. 36 ARTICLE X COVENANTS SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of, premium, if any, and interest on and any Additional Amounts with respect to the Securities of that series in accordance with the terms of those Securities and this Indenture. SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in the Place of Payment for each series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange or conversion and where notices and demands to or on the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 10.03. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of, premium, if any, or interest on or any Additional Amounts with respect to any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the entire amount so becoming due until such sum shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, on or prior to each due date of the principal of, premium, if any, or interest on or any Additional Amounts with respect to any Securities of that series, deposit with a Paying Agent a sum sufficient to pay the entire amount so becoming due, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee or the Company for each series of Securities to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 10.03, that such Paying Agent will: (a) comply with the provisions of the Trust Indenture Act and this Indenture applicable to it as a Paying Agent and hold all sums held by it for the payment of principal of or any premium or interest on or any Additional Amounts with respect to the Securities of that series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to those Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Company (or any other obligor on the Securities) in the making of any payment in respect of the Securities of that series; and (c) at any time during the continuance of any 37 default by the Company (or any other obligor on the Securities of that series) in the making of any payment in respect of the Securities of that series, on the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series, and account for any funds disbursed. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee on the same trusts as those on which such sums were held by the Company or such Paying Agent; and, on such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on or any Additional Amounts with respect to any Security of any series and remaining unclaimed for two years after that principal, premium, if any, interest or Additional Amounts, if any, has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of that Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in Phoenix, Arizona or Dallas, Texas, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 10.04. STATEMENT BY OFFICERS AS TO DEFAULT. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 10.05. EXISTENCE. Subject to Article VIII, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises and the existence, rights (charter and statutory) and franchises of each Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders of Securities of any series. SECTION 10.06. WAIVER OF CERTAIN COVENANTS. The Company may omit in any particular instance to comply with any covenant or condition set forth in Section 10.05, or any covenant added for the benefit of any series of Securities as contemplated by Section 3.01 (unless otherwise specified pursuant to Section 3.01) if before or after the time for such compliance the Holders of a majority in principal amount of the Outstanding Securities of all series affected by that omission (acting as one class) shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. 38 SECTION 10.07. ADDITIONAL AMOUNTS. If the Securities of a series expressly provide for the payment of Additional Amounts, the Company will pay to the Holder of any Security of that series Additional Amounts as expressly provided therein. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of or any premium or interest on, or in respect of, any Security of any series or the net proceeds received on the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Section 10.07 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section 10.07 and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made. If the Securities of a series provide for the payment of Additional Amounts, at least 10 days prior to the first Interest Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal and any premium is made), and at least 10 days prior to each date of payment of principal and any premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers' Certificate, the Company shall furnish the Trustee and the Company's principal Paying Agent or Paying Agents, if other than the Trustee, with an Officers' Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal of and any premium or interest on the Securities of that series shall be made to Holders of Securities of that series who are United States Aliens without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of that series. If any such withholding shall be required, then such Officers' Certificate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securities and the Company will pay to such Paying Agent the Additional Amounts required by this Section. The Company covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against any loss, liability or expense reasonably incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officers' Certificate furnished pursuant to this Section 10.07. ARTICLE XI REDEMPTION OF SECURITIES SECTION 11.01. APPLICABILITY OF ARTICLE. Securities of any series which are redeemable before their Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 3.01 for Securities of any series) in accordance with this Article XI. SECTION 11.02. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Securities shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter period shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities of that series to be redeemed. In case of any redemption at the election of the Company of all the Securities of any series, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter period shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date. SECTION 11.03. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED. If less than all the Securities of any series are to be redeemed, the particular Securities of that series to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Security Registrar, from the 39 Outstanding Securities of that series not previously called for redemption, by lot or pro rata or by such other method as the Security Registrar shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of that series of a denomination larger than the minimum authorized denomination for Securities of that series. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities of any series which have been converted during a selection of Securities of that series to be redeemed shall be treated by the Security Registrar as Outstanding for the purpose of such selection. In any case where more than one Security of the same series is registered in the same name, the Security Registrar in its discretion may treat the aggregate principal amount so registered as if it were represented by one Security of that series. The Security Registrar shall promptly notify the Company and the Trustee in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 11.04. NOTICE OF REDEMPTION. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 15 nor more than 60 days prior to the Redemption Date, to the Trustee and to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall state: (a) the Redemption Date, (b) the Redemption Price, (c) if less than all the Outstanding Securities of any series are to be redeemed, the identification (and, in the ease of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed, (d) that on the Redemption Date the Redemption Price will become due and payable on each such Security to be redeemed and that (unless the Company shall default in payment of the Redemption Price) interest thereon will cease to accrue on and after said date, (e) that the redemption is for a sinking fund, if that is the case, (f) the conversion price, the date on which the right to convert the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion, and (g) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request received by the Trustee at least 25 days prior to the Redemption Date, by the Trustee in the name and at the expense of the Company. SECTION 11.05. DEPOSIT OF REDEMPTION PRICE. 40 At or prior to 7:00 a.m. Phoenix, Arizona time on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, and any Additional Amounts with respect to, all the Securities or portions thereof which are to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 3.07) be paid to the Company on Company Request or, if then held by the Company, shall be discharged from such trust. SECTION 11.06. SECURITIES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest and any Additional Amounts) such Securities shall cease to bear interest or be entitled to any Additional Amounts. On surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest and any Additional Amounts to the Redemption Date; PROVIDED, HOWEVER, that installments of interest whose Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.07. If any Security called for redemption shall not be so paid on surrender thereof for redemption, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. SECTION 11.07 SECURITIES REDEEMED IN PART. Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company maintained for that purpose pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE XII SUBORDINATION OF SECURITIES SECTION 12.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, at all times and in all respects, the indebtedness represented by the Securities and the payment of the principal of, premium, if any, and interest on and any Additional Amounts with respect to each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. Obligations in respect of Senior Indebtedness will not be deemed to have been paid in full unless the holders thereof shall have received payment in full in cash or cash equivalents with respect thereto. 41 Each Holder of the Securities by its acceptance thereof acknowledges and agrees that the subordination provisions included herein are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of Securities, to acquire and/or continue to hold such Senior Indebtedness, and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and/or continuing to hold such Senior Indebtedness. SECTION 12.02. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to its creditors, as such, or to a substantial part of its assets, or (b) any proceeding for the liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any general assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company, then and in any such event the holders of Senior Indebtedness shall be entitled to receive payment in full of all Obligations due or to become due on or in respect of all Senior Indebtedness before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities, on account of principal of, premium, if any, or interest on or any Additional Amounts with respect to the Securities, and to that end the holders of Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of the Securities, which may be payable or deliverable in respect of the Securities in any such case, proceeding, dissolution, liquidation or other winding up or event. In furtherance of the foregoing, but not by way of limitation thereof, in the event of any case or proceeding described in clause (a) above in or as a result of which the Company is excused from the obligation to pay all or any part of the interest otherwise payable in respect of any Senior Indebtedness during the period subsequent to the commencement of any such case or proceeding, all or such part, as the case may be, of such interest shall be payable out of, and to that extent shall diminish and be at the expense of, reorganization dividends or other distributions in respect of the Securities. In the event that, notwithstanding the foregoing provisions of this Section 12.02, the Trustee or the Holder of any Security shall have received any payment or distribution of any kind or character in respect of the Securities, whether in cash, property or securities, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of the Securities, before all Senior Indebtedness is paid in full, such payment or distribution shall be held by the Trustee (if the Trustee has knowledge that such payment or distribution is prohibited by this Section 12.02) or by such Holder (in trust) for the holders of Senior Indebtedness, and shall be paid forthwith over and delivered to, the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. To the extent any payment of or distribution in respect of Senior Indebtedness (whether by or on behalf of the Company, as proceeds of security or enforcement of any right of set off or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then if such payment or distribution is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person, the Senior Indebtedness or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment has not occurred. For purposes of this Article XII only, (a) a "distribution" may consist of cash, securities or other property, by set-off or otherwise and (b) the words "cash, property or securities" shall not be deemed to include securities of the 42 Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, which securities are subordinated in right of payment to all Senior Indebtedness which may at the time be outstanding to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article XII. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its properties and assets substantially as an entirety to another Person on the terms and conditions set forth in Article VIII shall not be deemed a dissolution, winding up, liquidation, reorganization, general assignment for the benefit of creditors or marshaling of assets and liabilities of the Company for the purposes of this Section 12.02 if the Person formed by such consolidation or into which the Company is merged or which acquires by conveyance or transfer such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article VIII. SECTION 12.03. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. The Company may not make any payment (whether by redemption, purchase, retirement, defeasance or otherwise) to the Trustee or any Holder on account of the principal of, premium, if any, or interest on or any Additional Amounts with respect to the Securities and may not acquire from the Trustee or any Holder any Securities (other than payments and other distributions made from any defeasance trust created pursuant to Section 4.01 if the applicable deposit does not violate Article IV or this Article XII) until all principal and other Obligations with respect to the Senior Indebtedness of the Company have been paid in full if: (a) a default in the payment of any principal of, premium, if any, or interest on Designated Senior Indebtedness occurs; or (b) a default, other than a payment default, on Designated Senior Indebtedness occurs and is continuing that then permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of the default (a "Payment Blockage Notice") from a Person who is a Representative of the holders of such Designated Senior Indebtedness, PROVIDED, that if such Designated Senior Indebtedness is of the type referred to in clause (b) of the definition thereof, the Payment Blockage Notice shall be given by a Representative of the holders of at least 20% of such Designated Senior Indebtedness. If the Trustee receives any such Payment Blockage Notice, no subsequent Payment Blockage Notice shall be effective for purposes of this Section 12.03 unless and until 360 days shall have elapsed since the date of commencement of the payment blockage period resulting from the immediately prior Payment Blockage Notice. No nonpayment default in respect of any Designated Senior Indebtedness that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for subsequent Payment Blockage Notices. The Company shall resume payments on and distributions in respect of the Securities and may acquire Securities on: (a) in the case of a default referred to in subparagraph (a) of the preceding paragraph, the date on which the default is cured or waived, or (b) in the case of a default referred to in subparagraph (b) of the preceding paragraph, the earliest of (i) the date on which such nonpayment default is cured or waived, (ii) the date the applicable Payment Blockage Notice is retracted by written notice to the Trustee from the Person who is a Representative of the holders of the relevant Designated Senior Indebtedness and (iii) 179 days after the date on which the applicable Payment Blockage Notice is received unless (A) any of the events described in subparagraph (a) of the preceding paragraph has occurred and is continuing or (B) a default or Event of Default under clause (e) or (f) of Section 5.01 has occurred, if this Article XII otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. 43 In the event that, notwithstanding the foregoing, the Company shall make any payment or distribution to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section 12.03, such payment or distribution shall be held by the Trustee (if the Trustee has knowledge that such payment or distribution is so prohibited) or by such Holder (in trust) for the holders of Senior Indebtedness, and shall be paid forthwith over and delivered (a) to the holders of Senior Indebtedness or their respective Representatives as their respective interests may appear or (b) as a court of competent jurisdiction shall direct, in each case for application to the payment of all Obligations with respect to Senior Indebtedness remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The provisions of this Section 12.03 shall not apply to any payment with respect to which Section 12.02 would be applicable. SECTION 12.04. PAYMENT PERMITTED IF NO DEFAULT. Nothing contained in this Article XII or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except under the circumstances referred to in Section 12.02 or under the conditions described in Section 12.03, from making payments at any time of principal of, premium, if any, or interest on or any Additional Amounts with respect to the Securities, or (b) the application by the Trustee of any money deposited with it hereunder to the payment of or on account of the principal of, premium, if any, or interest on or any Additional Amounts with respect to the Securities if, at the time of such application by the Trustee, it did not have knowledge within the meaning of Section 12.09 that such payment would have been prohibited by the provisions of this Article XII. SECTION 12.05. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject to the payment in full of all Obligations in respect of Senior Indebtedness, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of Senior Indebtedness pursuant to the provisions of this Article XII (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to other indebtedness of the Company to substantially the same extent as the Securities are subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments and distributions applicable to the Senior Indebtedness until the principal of, premium, if any, and interest on and any Additional Amounts with respect to the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XII, and no payments over pursuant to the provisions of this Article XII to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. 44 SECTION 12.06. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this Article XII are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall: (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of, premium, if any, and interest on and any Additional Amounts with respect to the Securities as and when the same shall become due and payable in accordance with their terms; (b) affect the relative rights against the Company or the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law on default under this Indenture, subject to the rights, if any, under this Article XII of the holders of Senior Indebtedness to receive distributions otherwise payable or deliverable to the Trustee or such Holder. SECTION 12.07. TRUSTEE TO EFFECTUATE SUBORDINATION. Each holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XII and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 12.08. NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the preceding paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Trustee or the Holders of the Securities and without impairing or releasing the subordination provided in this Article XII or the obligations hereunder of the Trustee or the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (a) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (b) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (c) release any Person liable in any manner for the collection of Senior Indebtedness; and (d) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 12.09. NOTICE TO TRUSTEE. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article XII or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any Representative therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 6.01, shall be entitled in all respects to assume that no such facts exist; PROVIDED, HOWEVER, that if the Trustee shall not have received the notice provided for in this Section 12.09 at least two Business Days prior to the date on which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of, premium, if any, or interest on or any Additional Amounts with respect to 45 any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within two Business Days prior to such date. Subject to the provisions of Section 6.01, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a Representative therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a Representative therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XII, the Trustee may request such Person to furnish evidence to the satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XII, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 12.10. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. On any payment or distribution in respect of the Securities or Senior Indebtedness referred to in this Article XII, the Trustee, subject to the provisions of Section 6.01, and, so long as the provisions of this Article XII have been brought to the attention of the court, tribunal, trustee or other Person making the payment or distribution, the Holders of the Securities shall be entitled to rely on any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XII. SECTION 12.11. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall, absent gross negligence or wilful misconduct, mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which holders of Senior Indebtedness shall be entitled by virtue of this Article XII or otherwise. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XII, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Article XII against the Trustee. SECTION 12.12. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS; PRESERVATION OF TRUSTEE'S RIGHTS. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XII with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article XII shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.07. 46 SECTION 12.13. ARTICLE APPLICABLE TO PAYING AGENTS. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article XII shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XII in addition to or in place of the Trustee; PROVIDED, HOWEVER, that Section 12.12 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 12.14. CERTAIN CONVERSIONS DEEMED PAYMENT. For the purposes of this Article XII only, (a) the issuance and delivery of junior securities on conversion of Securities in accordance with Article XIII shall not be deemed to constitute a payment or distribution on account of the principal of, premium, if any, or interest on or any Additional Amounts with respect to Securities or on account of the purchase or other acquisition of Securities, and (b) the payment, issuance or delivery of cash, property or securities (other than junior securities) on conversion of a Security shall be deemed to constitute payment on account of the principal of such Security. For the purposes of this Section 12.14, the term "junior securities" means (a) shares of any class of capital stock of the Company and (b) securities of the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article XII. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the right, which is absolute and unconditional, of the Holder of any Security to convert such Security in accordance with Article XIII. SECTION 12.15. NO SUSPENSION OF REMEDIES. Nothing contained in this Article XII shall limit the right of the Trustee or the Holders of the Securities of any series to take any action to accelerate the maturity of the Securities of that series pursuant to the provisions described under Article V and as set forth in this Indenture or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, under this Article XII of the holders, from time to time, of Senior Indebtedness to receive the cash, property or securities receivable on the exercise of such rights or remedies. ARTICLE XIII CONVERSION OF SECURITIES SECTION 13.01. CONVERSION PRIVILEGE AND CONVERSION PRICE. Subject to and on compliance with the provisions of this Article XIII, at the option of the Holder thereof, any Security of any series may be converted at any time during the convertibility period as described on the face of each Security (the "Convertibility Period") for that Security at the principal amount thereof into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock, at the conversion price for that Security, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on the last day of the Convertibility Period. In case a Security is called for redemption, such conversion right in respect of the Security shall expire at the close of business on the second business day preceding the applicable Redemption Date, unless the Company defaults in making the payment due on redemption. The price at which shares of Common Stock shall be delivered on conversion of any Security (herein called the "conversion price") shall be initially the Conversion Price per share of Common Stock which is fixed for that Security by or pursuant to this Indenture. The conversion price shall be adjusted in certain instances as provided in paragraphs (a), (b), (c), (d), (e), (f) and (i) of Section 13.04. 47 SECTION 13.02. EXERCISE OF CONVERSION PRIVILEGE. In order to exercise the conversion privilege, the Holder of any Security of any series shall surrender that Security, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained pursuant to Section 10.02 for that series, accompanied by written notice to the Company in the form provided in the Security (or such other notice as is acceptable to the Company) at such office or agency that the Holder elects to convert that Security. Securities surrendered for conversion during the period from the opening of business on any Regular Record Date for that Security next preceding any Interest Payment Date for that Security to the close of business on that Interest Payment Date (except in the case of Securities which have been called for redemption on a Redemption Date, occurring within such period) must be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest payable on that Interest Payment Date on the principal amount of Securities being surrendered for conversion. Except as provided in the immediately preceding sentence and subject to the last paragraph of Section 3.07, no payment or adjustment shall be made on any conversion on account of any interest accrued on the Securities surrendered for conversion or on account of any dividends on the Common Stock issued on conversion. Securities shall be deemed to have been converted immediately prior to the close of business on the day of their surrender for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of those Securities as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable on conversion of those Securities shall be treated for all purposes as having become the record holder or holders of such Common Stock as and after such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable on conversion, together with payment in lieu of any fraction of a share, as provided in Section 13.03. SECTION 13.03. FRACTIONS OF SHARES. No fractional share of Common Stock shall be issued on conversion of Securities of any series. If more than one Security of the same series shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable on conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable on conversion of any Security or Securities (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price (as hereinafter defined) at the close of business on the day of conversion (or, if such day is not a Trading Day (as hereafter defined), on the Trading Day immediately preceding such day). SECTION 13.04. ADJUSTMENT OF CONVERSION PRICE. (a) In case the Company shall pay or make a dividend or other distribution on the Common Stock exclusively in Common Stock or shall pay or make a dividend or other distribution on any other class of capital stock of the Company which dividend or distribution includes Common Stock, each conversion price in effect for the Securities of each series at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying that conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purpose of this paragraph (a), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. 48 (b) Subject to paragraph (g) of this Section 13.04, in case the Company shall pay or make a dividend or other distribution on the Common Stock consisting exclusively of, or shall otherwise issue to all holders of the Common Stock, rights or warrants entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (determined as provided in paragraph (h) of this Section 13.04) on the date fixed for the determination of stockholders entitled to receive such rights or warrants, each conversion price in effect for the Securities of each series at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying that conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Current Market Price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Company. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, each conversion price in effect for the Securities of each series at the opening of business on the day following the day on which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, each conversion price in effect for the Securities of each series at the opening of business on the day following the day on which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day on which subdivision or combination becomes effective. (d) Subject to the last sentence of this paragraph (d) and to paragraph (g) of this Section 13.04, in case the Company shall, by dividend or otherwise, distribute to all holders of the Common Stock evidences of its indebtedness, shares of any class of its capital stock, cash or other assets (including securities, but excluding any rights or warrants referred to in paragraph (b) of this Section 13.04, excluding any dividend or distribution paid exclusively in cash and excluding any dividend or distribution referred to in paragraph (a) of this Section 13.04), each conversion price for the Securities of each series shall be reduced by multiplying that conversion price as it was in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in paragraph (h) of this Section 13.04) on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on such date of the portion of the evidences of indebtedness, shares of capital stock, cash and other assets to be distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following such date. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (d) by reference to the actual or when-issued trading market for any securities comprising part or all of such distribution, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price pursuant to paragraph (h) of this Section 13.04, to the extent possible. For purposes of this paragraph (d), any dividend or distribution that includes shares of Common Stock, rights or warrants to subscribe for or purchase shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock shall be deemed to be (i) a dividend or distribution of the evidences of indebtedness, cash, assets or shares of capital stock other than such shares of Common Stock, such rights or warrants or such convertible or exchangeable securities (making any conversion price reduction required by this paragraph (d)) immediately followed by (ii) in the case of such shares of Common Stock or such rights or warrants, a dividend or distribution thereof (making any further conversion price reduction required by paragraphs (a) and (b) of this Section 13.04, except any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of paragraph (a) of this Section 13.04), or (iii) in the case of such convertible or 49 exchangeable securities, a dividend or distribution of the number of shares of Common Stock as would then be issuable on the conversion or exchange thereof, whether or not the conversion or exchange of such securities is subject to any conditions (making any further conversion price reduction required by paragraph (a) of this Section 13.04, except the shares deemed to constitute such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of paragraph (a) of this Section 13.04). (e) In case the Company shall, by dividend or otherwise, at any time distribute to all holders of the Common Stock cash (excluding any cash that is distributed as part of a distribution referred to in paragraph (d) of this Section 13.04 or in connection with a transaction to which Section 13.11 applies) in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of the Common Stock made exclusively in cash within the 12 months preceding the date fixed for the determination of stockholders entitled to such distribution and in respect of which no conversion price adjustment pursuant to this paragraph (e) has been made previously and (ii) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) as of such date of determination of any other consideration payable in respect of any tender offer by the Company or a Subsidiary for all or any portion of the Common Stock consummated within the 12 months preceding such date of determination and in respect of which no conversion price adjustment pursuant to paragraph (f) of this Section 13.04 has been made previously, exceeds the greater of (A) 12.5% of the product of the Current Market Price (determined as provided in paragraph (h) of this Section) on such date of determination times the number of shares of Common Stock outstanding on such date or (B) the Company's consolidated retained earnings on the date fixed for determining the stockholders entitled to such distribution (determined without giving effect to such distribution), each conversion price for the Securities of each series shall be reduced by multiplying that conversion price as it was in effect immediately prior to the close of business on such date of determination by a fraction of which the numerator shall be the Current Market Price (determined as provided in paragraph (h) of this Section 13.04) on such date less the amount of such cash previously distributed or to be distributed at such time applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day following such date. (f) In case a tender offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall be consummated and such tender offer shall involve an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) as of the last time (the "Expiration Time") that tenders may be made pursuant to such tender offer (as it shall have been amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) as of the Expiration Time of the other consideration paid in respect of any other tender offer by the Company or a Subsidiary for all or any portion of the Common Stock consummated within the 12 months preceding the Expiration Time and in respect of which no conversion price adjustment pursuant to this paragraph (f) has been made previously and (ii) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within the 12 months preceding the Expiration Time and in respect of which no conversion price adjustment pursuant to paragraph (e) of this Section 13.04 has been made previously, exceeds the greater of (A) 12.5% of the product of the Current Market Price (determined as provided in paragraph (h) of this Section 13.04) immediately prior to the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time or (B) the Company's consolidated retained earnings as of the Expiration Time (determined without giving effect to the purchase of tendered shares), each conversion price for the Securities of each series shall be reduced by multiplying that conversion price as it was in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (1) the product of the Current Market Price (determined as provided in paragraph (h) of this Section 13.04) immediately prior to the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares at the Expiration Time) minus (2) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders on consummation of such tender offer and the denominator shall be the product of (1) such Current Market Price times (2) such number of outstanding shares at the Expiration Time minus the number of shares accepted for payment in such tender offer (the "Purchased Shares"), such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time; PROVIDED, that if the number of Purchased Shares or the 50 aggregate consideration payable therefor has not been finally determined by such opening of business, the adjustment required by this paragraph (f) shall, pending such final determination, be made based on the preliminarily announced results of such tender offer, and, after such final determination shall have been made, the adjustment required by this paragraph (f) shall be made based on the number of Purchased Shares and the aggregate consideration payable therefor as so finally determined. (g) The reclassification of Common Stock into securities that include securities other than Common Stock (other than any reclassification on a consolidation or merger to which Section 13.11 applies) shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of stockholders entitled to such distribution" within the meaning of paragraph (d) of this Section 13.04), and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day on which such subdivision becomes effective" or "the day on which such combination becomes effective", as the case may be, and "the day on which such subdivision or combination becomes effective" within the meaning of paragraph (c) of this Section 13.04). Rights or warrants issued by the Company to all holders of the Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock (either initially or under certain circumstances), which rights or warrants (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 13.04 not be deemed issued until the occurrence of the earliest Trigger Event. If any such rights or warrants, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to subsequent events, on the occurrence of each of which such rights or warrants shall become exercisable to purchase different securities, evidences of indebtedness or other assets, then the occurrence of each such event shall be deemed to be such date of issuance and record date with respect to new rights or warrants (and a termination or expiration of the existing rights or warrants without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of such rights or warrants, or any Trigger Event with respect thereto, that was counted for purposes of calculating a distribution amount for which an adjustment to any conversion price under this Section 13.04 was made, (i) in the case of any such rights or warrants that shall all have been redeemed or repurchased without exercise by any holders thereof, that conversion price shall be readjusted on such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (ii) in the case of such rights or warrants that shall have expired or been terminated without exercise by any holders thereof, that conversion price shall be readjusted as if such rights and warrants had not been issued. Notwithstanding any other provision of this Section 13.04 to the contrary, rights, warrants, evidences of indebtedness, other securities, cash or other assets (including, without limitation, any rights distributed pursuant to any stockholder rights plan) shall be deemed not to have been distributed for purposes of this Section 13.04 if the Company makes proper provision so that each holder of Securities of each series who converts a Security (or any portion thereof) of that series after the date fixed for determination of stockholders entitled to receive such distribution shall be entitled to receive on such conversion, in addition to the shares of Common Stock issuable on such conversion, the amount and kind of such distributions which that holder would have been entitled to receive if such holder had, immediately prior to such determination date, converted that Security into Common Stock. (h) For the purpose of any computation under this paragraph (h) and paragraphs (b), (d) and (e) of this Section 13.04, the current market price per share of Common Stock (the "Current Market Price") on any date shall be deemed to be the average of the daily Closing Prices for the five consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than, the date in question; PROVIDED, HOWEVER, 51 that (i) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to any conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) of this Section 13.04 occurs on or after the 20th Trading Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which that conversion price is so required to be adjusted as a result of such other event, (ii) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) of this Section 13.04 occurs on or after the "ex" date for the issuance or distribution requiring such computation and on or prior to the date in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which that conversion price is so required to be adjusted as a result of such other event, and (iii) if the "ex" date for the issuance or distribution requiring such computation is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of paragraph (d) or (e) of this Section 13.04, whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For the purpose of any computation under paragraph (f) of this Section 13.04, the Current Market Price on any date shall be deemed to be the average of the daily Closing Prices for the five consecutive Trading Days selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Trading Days before the date in question, (ii) the date of commencement of the tender offer requiring such computation and (iii) the date of the last amendment, if any, of such tender offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the Expiration Time of such tender offer; PROVIDED, HOWEVER, that if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to any conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) of this Section 13.04 occurs on or after the Commencement Date and prior to the Expiration Time for the tender offer requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event. The closing price for any Trading Day (the "Closing Price") shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the American Stock Exchange or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the Nasdaq National Market or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market, the average of the closing bid and asked prices in the over-the-counter market as furnished by any American Stock Exchange member firm selected from time to time by the Company for that purpose. For purposes of this paragraph, the term "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are generally not traded on the applicable securities exchange or in the applicable securities market and the term "`ex' date," (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Prices were obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective and (iii) when used with respect to any tender offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the last time that tenders may be made pursuant to such tender offer (as it shall have been amended). (i) The Company may make such reductions in any conversion price for any Security, in addition to those required by paragraphs (a), (b), (c), (d), (e) and (f) of this Section 13.04, as it considers to be advisable (as evidenced by a Board Resolution) in order that any event treated for federal income tax purposes as a dividend of stock or stock 52 rights shall not be taxable to the recipients or, if that is not possible, to diminish any income taxes that are otherwise payable because of such event. (j) No adjustment in any conversion price for any Security shall be required unless such adjustment (plus any other adjustments not previously made by reason of this paragraph (j)) would require an increase or decrease of at least 1% in that conversion price; PROVIDED, HOWEVER, that any adjustments which by reason of this paragraph (j) are not required to be made shall be carried forward and taken into account in any subsequent adjustment of that conversion price. (k) Notwithstanding any other provision of this Section 13.04, no adjustment to any conversion price for any Security shall reduce that conversion price below the then par value per share of the Common Stock, and any such purported adjustment shall instead reduce that conversion price to that par value. The Company hereby covenants not to take any action to increase the par value per share of the Common Stock. SECTION 13.05. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE. Whenever any conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 13.04 and shall prepare an Officers' Certificate signed by the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts on which such adjustment is based, and such certificate shall forthwith be filed (with a copy to the Trustee) at each office or agency maintained pursuant to Section 10.02 for the purpose of conversion of the Securities to which the adjusted conversion price applies; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be prepared, and as soon as practicable after it is prepared, such notice shall be mailed by the Company to all Holders of Securities to which the adjusted conversion price applies at their last addresses as they shall appear in the Security Register. SECTION 13.06. NOTICE OF CERTAIN CORPORATE ACTION. In case: (a) the Company shall declare a dividend (or any other distribution) on the Common Stock payable (i) otherwise than exclusively in cash or (ii) exclusively in cash in an amount that would require any conversion price adjustment pursuant to paragraph (e) of Section 13.04; or (b) the Company shall authorize the granting to the holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding shares of capital stock or options for capital stock issued pursuant to a benefit plan for employees, officers or directors of the Company); or (c) of any reclassification of the Common Stock (other than a subdivision or combination of the outstanding shares of Common Stock), or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any Subsidiary shall commence a tender offer for all or a portion of the outstanding shares of Common Stock (or shall amend any such tender offer to change the maximum number of shares being sought or the amount or type of consideration being offered therefor); then the Company shall cause to be filed at each office or 53 agency maintained pursuant to Section 10.02, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, at least 21 days (or 11 days in any case specified in clause (a), (b) or (e) above) prior to the applicable record, effective or expiration date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record who will be entitled to such dividend, distribution, rights or warrants are to be determined, (ii) the date on which such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable on such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up, or (iii) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). Neither the failure to give any such notice nor any defect therein shall affect the legality or validity of any action described in clauses (a) through (e) of this Section 13.06. SECTION 13.07. COMPANY TO RESERVE COMMON STOCK. The Company shall at all times reserve and keep available, free from preemptive and other rights, out of the authorized but unissued Common Stock or out of the Common Stock held in the treasury of the Company, for the purpose of effecting the conversion of Securities, the full number of shares of Common Stock then issuable on the conversion of all outstanding Securities. Shares of Common Stock issuable on conversion of outstanding Securities shall be issued out of the Common Stock held in the treasury of the Company to the extent available. SECTION 13.08. TAXES ON CONVERSIONS. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 13.09. COVENANT AS TO COMMON STOCK. The Company covenants that all shares of Common Stock which may be issued on conversion of Securities will on issue be fully paid and nonassessable and, except as provided in Section 13.08, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 13.10. CANCELLATION OF CONVERTED SECURITIES. All Securities delivered for conversion shall be delivered to the Trustee to be canceled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 3.09. SECTION 13.11. PROVISIONS OF CONSOLIDATION, MERGER OR SALE OF ASSETS. In case of any consolidation of the Company with, or merger of the Company into, any other Person, (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock) or any sale or transfer of all or substantially all the assets of the Company (other than to a wholly-owned Subsidiary), the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then Outstanding shall have the right thereafter, during the period such Security shall be convertible as specified in or pursuant to this Indenture, to convert such Security only into the kind and amount of securities, cash 54 and other property, if any, receivable on such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock into which such Security might have been converted immediately prior to such consolidation, merger, sale or transfer, assuming such holder of Common Stock (i) is not a Person with which the Company consolidated or into which the Company merged or to which such sale or transfer was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable on such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable on such consolidation, merger, sale or transfer is not the same for each share of Common Stock held immediately prior to such consolidation, merger, sale or transfer by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("nonelecting share"), then for the purpose of this Section 13.11 the kind and amount of securities, cash and other property receivable on such consolidation, merger, sale or transfer by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article XIII. The above provisions of this Section 13.11 shall similarly apply to successive consolidations, mergers, sales or transfers. SECTION 13.12. TRUSTEE'S DISCLAIMER. The Trustee has no duty to determine when an adjustment under this Article XIII should be made, how it should be made or what such adjustment should be, but may accept as conclusive evidence of the correctness of any such adjustment, and shall be protected in relying on, the Officers' Certificate with respect thereto which the Company is obligated to file with the Trustee pursuant to Section 13.05. The Trustee makes no representation as to the validity or value of any securities or assets issued on conversion of Securities, and the Trustee shall not be responsible for the Company's failure to comply with any provisions of this Article XIII. The Trustee shall not be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture executed pursuant to Section 13.11, but may accept as conclusive evidence of the correctness thereof, and shall be protected in relying on, the Officers' Certificate with respect thereto which the Company is obligated to file with the Trustee pursuant to Section 1.02 in connection with that supplemental indenture. ARTICLE XIV MEETINGS OF HOLDERS OF SECURITIES SECTION 14.01. PURPOSES FOR WHICH MEETINGS MAY BE CALLED. A meeting of Holders of Securities of any or all series may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities of such series. SECTION 14.02. CALL, NOTICE AND PLACE OF MEETINGS. (a) The Trustee may at any time call a meeting of Holders of Securities of any series for any purpose specified in Section 14.01, to be held at such time and at such place in Houston, Texas, or in any other location, as the Trustee shall determine. Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 1.06, not less than 20 nor more than 180 days prior to the date fixed for the meeting. (b) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 20% in aggregate principal amount of the Outstanding Securities of any series, shall have requested the Trustee for that series to call a meeting of the Holders of Securities of that series for any purpose specified in Section 14.01, by written request 55 setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the notice of that meeting within 30 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of that series in the amount above specified, as the case may be, may determine the time and the place in Houston, Texas, for such meeting and may call such meeting for such purposes by giving notice thereof as provided in Subsection (a) of this Section 14.02. SECTION 14.03. PERSONS ENTITLED TO VOTE AT MEETINGS. To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (a) a Holder of one or more Outstanding Securities of that series or (b) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of that series by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any series shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 14.04. QUORUM; ACTION. The Persons entitled to vote a majority in aggregate principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of that series. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of that series, be dissolved. In any other case, the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Subject to Section 14.05(d), notice of the reconvening of any adjourned meeting shall be given as provided in Section 14.02(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly that Persons entitled to vote a majority in principal amount of the Outstanding Securities of that series shall constitute a quorum. Except as limited by the proviso to Section 9.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series; PROVIDED, HOWEVER, that, except as limited by the proviso to Section 9.02, any resolution with respect to any request, demand, authorization, direction, notice, consent or waiver which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage that is less than a majority in aggregate principal amount of the Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of such specified percentage in aggregate principal amount of the Outstanding Securities of that series. Except as limited by the proviso to Section 9.02, any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of that series, whether or not present or represented at the meeting. SECTION 14.05. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF MEETINGS. (a) The holding of Securities shall be proved in the manner specified in Section 1.04 and the appointment of any proxy shall be proved in the manner specified in Section 1.04 or by having the signature of the Person executing the proxy witnessed or guaranteed by any trust company, bank or banker deemed by the Trustee to be satisfactory. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 1.04 or other proof. 56 (b) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 14.02(b), in which case the Company or the Holders of Securities of the series calling the meeting, as the case may be, shall appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in aggregate principal amount of the Outstanding Securities of all series represented at the meeting. (c) At any meeting each Holder of a Security of each series represented at the meeting and each proxy shall be entitled to one vote for each $1,000 principal amount of the Outstanding Securities of such series held or represented by him; PROVIDED, HOWEVER, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of a series represented at the meeting or as a proxy. (d) Any meeting of Holders of Securities of any series duly called pursuant to Section 14.02 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in aggregate principal amount of the Outstanding Securities of all series represented at the meeting; and the meeting may be held as so adjourned without further notice. SECTION 14.06. COUNTING VOTES AND RECORDING ACTION OF MEETINGS. The vote on any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of that series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of that series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities of any series shall be prepared by the secretary of the meeting and there shall be attached to such record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that such notice was given as provided in Section 14.02 and, if applicable, Section 14.04. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ------------------------ This Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 57 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. PENTEGRA DENTAL GROUP, INC. By: ----------------------------------- Gary S. Glatter President and Chief Executive Officer Attest: - ----------------------- Name: Title: U.S. TRUST COMPANY OF TEXAS, N.A. as Trustee By: ----------------------------------- Name: Title: Attest: - ----------------------- Name: Title: 58 STATE OF ________ ) ) ss. COUNTY OF _______ ) On the ___ day of ___________ 1998, before me personally came Gary S. Glatter, to me known, who, being by me duly sworn, did depose and say that he is President and Chief Executive Officer of Pentegra Dental Group, Inc., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. ---------------------------------- Notary Public STATE OF ___________ ) ) ss.: COUNTY OF _________ ) On the __ day of _______, 1998, before me personally came ______________, to me known, who, being by me duly sworn, did depose and say that he is a Vice President of U.S. Trust Company of Texas, N.A., a national banking association, described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. ---------------------------------- Notary Public 59 EX-5.1 3 EXHIBIT 5.1 September 29, 1998 Pentegra Dental Group, Inc. 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 Re: Registration Statement on Form S-4 of Pentegra Dental Group, Inc. Ladies and Gentlemen: We have served as counsel to Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Act"), of the offering and sale of up to 1,500,000 shares of the Company's Common Stock, par value $0.001 per share (the "Shares"), $50,000,000 aggregate principal amount of Convertible Subordinated Debt Securities ("Convertible Debt Securities") and the shares of Common Stock issuable on conversion thereof (the "Conversion Shares"), which Shares and Convertible Debt Securities will be issuable from time to time in connection with the future direct and indirect acquisitions of other businesses, properties or securities in business combination transactions by the Company pursuant to Rule 415 under the Act. A Registration Statement on Form S-4 (the "Registration Statement") covering the offering and sale of the Shares was filed with the Securities and Exchange Commission (the "Commission") on September 29, 1998. In reaching the conclusions expressed in this opinion, we have examined and relied upon the Registration Statement, the Restated Certificate of Incorporation and Bylaws of the Company, the form of Indenture to be entered into by the Company and U.S. Trust Company of Texas, N.A., as trustee (the "Trustee"), relating to the Convertible Debt Securities and filed as an exhibit to the Registration Statement (the "Form of Indenture"), and the originals or certified copies of all documents, certificates and instruments as we have deemed necessary to the opinions expressed herein. In making the foregoing examinations, we have assumed the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals and the conformity to original documents of all copies submitted to us. In connection with this opinion, we have assumed that (i) the Registration Statement, and any amendments thereto (including post-effective amendments), will have become effective; and (ii) the Convertible Debt Securities and Shares will be sold in compliance with applicable federal and state securities laws and in the manner stated in the Registration Statement and any appropriate prospectus supplement. Pentegra Dental Group, Inc. September 29, 1998 Page 2 Based solely upon the foregoing, subject to the comments hereinafter stated, and limited in all respects to the laws of the State of Texas, the General Corporation Law of the State of Delaware and the federal laws of the United States of America, it is our opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. 2. With respect to the Shares, when (i) the Board of Directors of the Company or, to the extent permitted by Section 141(c) of the General Corporation Law of the State of Delaware, a duly constituted and acting committee thereof (such Board of Directors or committee being hereinafter referred to as the "Board"), has taken all necessary corporate action to approve the issuance of and the terms of the offering of the Shares and related matters and (ii) certificates representing the Shares have been duly executed, countersigned, registered and delivered in accordance with the applicable agreement and plan of reorganization or definitive purchase or similar agreement approved by the Board on payment of the consideration therefor (not less than the par value of the Common Stock) provided for therein, the Shares will be duly authorized, validly issued, fully paid and nonassessable. 3. With respect to the Convertible Debt Securities of any series, when (i) the Board has taken all necessary corporate action to approve the execution and delivery of an indenture in substantially the form of the Form of Indenture (an "Indenture") and the issuance of and the terms of the offering of the Convertible Debt Securities of that series and related matters, (ii) an Indenture has been duly executed and delivered by the Company and the Trustee or a successor Trustee, (iii) the Trustee or a successor trustee has been duly qualified under the Trust Indenture Act of 1939, as amended, and (iv) forms of securities complying with the applicable terms of the Indenture and representing the Convertible Debt Securities of that series have been duly executed and delivered by the Company and authenticated by the Trustee or its duly appointed agent in the form approved by the Board and in accordance with the Indenture and the applicable agreement and plan of reorganization or definitive purchase or similar agreement on payment of the consideration therefor provided for therein, the Convertible Debt Securities of that series will be duly authorized, validly issued, and constitute valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except as such enforcement is subject to (a) any applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally, (b) general principles of equity (regardless of whether that enforceability is considered in a proceeding in equity or at law) and (c) any implied covenants of good faith and fair dealing. Pentegra Dental Group, Inc. September 29, 1998 Page 3 4. The Conversion Shares have been duly authorized and reserved for issuance on conversion of the Convertible Debt Securities of any series and when (i) the Convertible Debt Securities of that series have been issued in compliance with clauses (i) through (iv) of the preceding paragraph and (ii) certificates representing the Conversion Shares have been duly executed, countersigned, registered and delivered in accordance with the terms of the Convertible Debt Securities of that series and the Indenture on conversion of the Convertible Debt Securities of that series, the Conversion Shares will be duly authorized, validly issued, fully paid and non-assessable. You should be aware that we are not admitted to the practice of law in the State of Delaware. Accordingly, any opinion herein as to the laws of the State of Delaware is based solely upon the latest generally available compilation of the statutes and case law of such state. We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the use of our name in the Registration Statement under the caption "Legal Matters." In giving this consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, /s/ Jackson Walker L.L.P. EX-12.1 4 EXHIBIT 12.1 EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 1998 ------------------- Income before taxes.......................................................................... $ 937 Fixed charges: Interest expense........................................................................... 2 Interest factor portion of rentals......................................................... 220 ------- 222 ------- Pretax income before fixed charges........................................................... 1,159 Less: Interest income............................................................................ (42) ------- Earnings before income taxes and fixed charges............................................... $ 1,117 ------- ------- Ratio of earnings to fixed charges........................................................... 5.03x ------- -------
EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4, relating to the registration of 1,500,000 shares of $0.001 par value common stock and $50,000,000 aggregate principal amount of convertible debt securities, of our report dated March 24, 1998, except for the second and third paragraphs of Note 8, as to which the date is May 5, 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/ PricewaterhouseCoopers LLP Houston, Texas September 29, 1998 EX-25.1 6 EXHIBIT 25.1 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)_________ --------------- U.S. TRUST COMPANY OF TEXAS, N.A. (Exact name of trustee as specified in its charter) 75-2353745 (State of incorporation (I.R.S. employer if not a national bank) identification No.) 2001 Ross Ave, Suite 2700 75201 Dallas, Texas (Zip Code) (Address of trustee's principal executive offices) Compliance Officer U.S. Trust Company of Texas, N.A. 2001 Ross Ave, Suite 2700 Dallas, Texas 75201 (214) 754-1200 (Name, address and telephone number of agent for service) --------------- Pentegra Dental Group, Inc. (Exact name of obligor as specified in its charter) Texas 76-0545043 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 2999 North 44th Street, Suite 650 Phoenix, Arizona 85018 (Address of principal executive offices) (Zip Code) --------------- Convertible Subordinated Debentures (Title of the indenture securities) - ------------------------------------------------------------------------------- GENERAL 1. GENERAL INFORMATION. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of Dallas (11th District), Dallas, Texas (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Dallas, Texas The Office of the Comptroller of the Currency, Dallas, Texas (b) Whether it is authorized to exercise corporate trust powers. The Trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS. If the obligor or any underwriter for the obligor is an affiliate of the Trustee, describe each such affiliation. None. 3. VOTING SECURITIES OF THE TRUSTEE. Furnish the following information as to each class of voting securities of the Trustee: As of September 28, 1998 - ------------------------------------------------------------------------------- Col A. Col B. - ------------------------------------------------------------------------------- Title of Class Amount Outstanding - ------------------------------------------------------------------------------- Capital Stock - par value $100 per share 5,000 shares 4. TRUSTEESHIPS UNDER OTHER INDENTURES. Not Applicable 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR UNDERWRITERS. Not Applicable 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. Not Applicable 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS. Not Applicable 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. Not Applicable 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. Not Applicable 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR. Not Applicable 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. Not Applicable 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE. Not Applicable 13. DEFAULTS BY THE OBLIGOR. Not Applicable 14. AFFILIATIONS WITH THE UNDERWRITERS. Not Applicable 15. FOREIGN TRUSTEE. Not Applicable 16. LIST OF EXHIBITS. T-1.1 - A copy of the Articles of Association of U.S. Trust Company of Texas, N.A.; incorporated herein by reference to Exhibit T-1.1 filed with Form T-1 Statement, Registration No. 22-21897. 16. (con't.) T-1.2 - A copy of the certificate of authority of the Trustee to commence business; incorporated herein by reference to Exhibit T-1.2 filed with Form T-1 Statement, Registration No. 22-21897. T-1.3 - A copy of the authorization of the Trustee to exercise corporate trust powers; incorporated herein by reference to Exhibit T-1.3 filed with Form T-1 Statement, Registration No. 22-21897. T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas, N.A., as amended to date; incorporated herein by reference to Exhibit T-1.4 filed with Form T-1 Statement, Registration No. 22-21897. T-1.6 - The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939. T-1.7 - A copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority. NOTE As of September 28, 1998, the Trustee had 5,000 shares of Capital Stock outstanding, all of which are owned by U.S. T.L.P.O. Corp. As of September 28, 1998, U.S. T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of which are owned by U.S. Trust Corporation. U.S. Trust Corporation had outstanding 19,142,000.00 shares of $5 par value Common Stock as of February 24, 1998. The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation. Inasmuch as this Form T-1 is filed prior to the ascertainment by the Trustee of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10 and 11, the answers to said Items are based upon incomplete information. Items 2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by an amendment to this Form T-1. In answering any items in this Statement of Eligibility and Qualification which relates to matters peculiarly within the knowledge of the obligors or their directors or officers, or an underwriter for the obligors, the Trustee has relied upon information furnished to it by the obligors and will rely on information to be furnished by the obligors or such underwriter, and the Trustee disclaims responsibility for the accuracy or completeness of such information. --------------- SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S Trust Company of Texas, N.A., a national banking association organized under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Dallas, and State of Texas on the 29th day of September, 1998. U.S. Trust Company of Texas, N.A., Trustee By: /s/ Melissa Scott --------------------- Melissa Scott Vice President Exhibit T-1.6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939 as amended in connection with the proposed issue of Pentegra Dental Group, Inc. Convertible Subordinated Debentures, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefore. U.S. Trust Company of Texas, N.A. By: /s/ Melissa Scott -------------------------- Melissa Scott Vice President Board of Governors of the Federal Reserve System OMB Number: 7100-0036 Federal Deposit Insurance Corporation OMB Number: 3064-005 Office of the Comptroller of the Currency Federal Financial Institutions OMB Number: 1557-008 Examination Council Expires March 31, 2001 - ------------------------------------------------------------------------------- (1) Please Refer to Page I, (LOGO) Table of Contents, for the required disclosure of estimated burden. - ------------------------------------------------------------------------------- CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC OFFICES ONLY AND TOTAL ASSETS OF LESS THAN $100 MILLION - - FFIEC 033 (19980630) (RCRI 9999) REPORT AT THE CLOSE OF BUSINESS JUNE 30, 1998 This report form is to be filed by This report is required by law: 12 banks with domestic offices only. U.S.C. Section Section 324 (State Banks with branches and consolidated member banks); 12 U.S.C. Section subsidiaries in U.S. territories and Section 1817 (State nonmember banks); possessions, Edge or Agreement and 12 U.S.C. Section Section 161 subsidiaries, foreign branches, (National banks). consolidated foreign subsidiaries, or International Banking Facilities must file FFIEC 031. - ------------------------------------------------------------------------------- NOTE: The Reports of Condition and The Reports of Condition and Income Income must be signed by an authorized are to be prepared in accordance with officer and the Report of Condition Federal regulatory authority must be attested to by not less than instructions. NOTE: these two directors (trustees) for State instructions may in some cases differ nonmember banks and three directors for from generally accepted accounting State member and National Banks. principles. I, Alfred B. Childs, SVP & Cashier We, the undersigned directors ------------------------------- (trustees), attest to the correctness Name and Title of Officer of this Report of Condition Authorized to Sign Report (including the supporting schedules) and declare that it has been examined of the named bank do hereby declare by us and to the best of our that these Reports of Condition and knowledge and belief has been Income (including the supporting prepared in conformance with the schedules) have been prepared in instructions issued by the conformance with the instructions appropriate Federal regulatory issued by the appropriate Federal authority and is true and correct. regulatory authority and are true to the best of my knowledge and belief. /s/ William Goodwin ------------------------- /s/ Alfred B. Childs Director (Trustee) - ------------------------------------ Signature of Officer Authorized to Sign Report /s/ Arthur White ------------------------- Director (Trustee) 7/15/98 - --------------------- Date of Signature /s/ Peter Denker ------------------------- Director (Trustee) - ------------------------------------------------------------------------------- SUBMISSION OF REPORTS (b) in hard-copy (paper) form and arrange for another party to Each bank must prepare its Reports of convert the paper report to Condition and Income either: electronic form. That party (if (a) in electronic form and then file other than EDS) must transmit the the computer data file directly bank's computer data file to EDS. with the banking agencies' To fulfill the signature and collection agent, Electronic Data attestation requirement for the Systems Corporation (EDS), by Reports of Condition and Income for modem or on computer diskette; or this report date, attach this signature page to the hard-copy record of the completed report that the bank places in its files. - ------------------------------------------------------------------------------- FDIC Certificate Number 33217 US TRUST COMPANY OF TEXAS, ------------- NATIONAL ASSOCIATION (RCRI 9050) -------------------------------------- Legal Title of Bank (TEXT 9010) Dallas -------------------------------------- City (TEXT 9130) TX 75201 -------------------------------------- State Abbrev. Zip Code (TEXT 9200) (TEXT 9220) Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: State #: 48-6797 FFIEC 033 2001 ROSS AVENUE, SUITE 2700 06/30/98 Cert #: 33217 RC-1 DALLAS, TX 75201 Vendor ID: D Transit #: 11101765 ------------ 9 ------------
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR JUNE 30, 1998 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter.
SCHEDULE RC - BALANCE SHEET C200 Dollar Amounts in Thousands - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS 1. Cash and balances due from depository institutions: RCON ---- ------- a. Noninterest-bearing balances and currency and coin (1,2)__________________ ______ _______ 0081 1,900 1.a ------- b. Interest bearing balances (3)________________________________________ ______ _______ 0071 241 1.b ------- 2. Securities: ------- a. Held-to-maturity securities (from Schedule RC-B, column A)____________ ______ _______ 1754 0 2.a ------- b. Available-for-sale securities (from Schedule RC-B, column D)___________ ______ _______ 1773 127,638 2.b ------- 3. Federal funds sold (4) and securities purchased under agreements to resell: 1350 2,000 3 ------- 4. Loans and lease financing receivables: RCON ---- ------- a. Loans and leases, net of unearned income (from Schedule RC-C)_________ 2122 20,749 4.a ------- b. LESS: Allowance for loan and lease losses____________________________ 3123 230 4.b ------- c. LESS: Allocated transfer risk reserve__________________________________ 3128 0 4.c ------- d. Loans and leases, net of unearned income, allowance, and reserve RCON ---- ------- (item 4.a minus 4.b and 4.c)__________________________________________ ______ _______ 2125 20,519 4.d ------- 5. Trading assets_________________________________________________________ ______ _______ 3545 0 5. ------- 6. Premises and fixed assets (including capitalized leases)___________________ ______ _______ 2145 705 6. ------- 7. Other real estate owned (from Schedule RC-M)___________________________ ______ _______ 2150 0 7. ------- 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M)__________________________________________________ ______ _______ 2130 0 8. ------- 9. Customers' liability to this bank on acceptances outstanding________________ ______ _______ 2155 0 9. ------- 10. Intangible assets (from Schedule RC-M)__________________________________ ______ _______ 2143 0 10. ------- 11. Other assets (from Schedule RC-F)______________________________________ ______ _______ 2160 1,859 11. ------- 12. Total assets (sum of items 1 through 11)__________________________________ ______ _______ 2170 154,862 12. -------
(1) Includes cash items in process of collection and unposted debits. (2) Included time certificates of deposit not held for trading.
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: State #: 48-6797 FFIEC 033 2001 ROSS AVENUE, SUITE 2700 06/30/98 Cert #: 33217 RC-2 DALLAS, TX 75201 Vendor ID: D Transit #: 11101765 ------------ 10 ------------ SCHEDULE RC - CONTINUED Dollar Amounts in Thousands LIABILITIES 13. Deposits: a. In domestic offices (sum of totals of RCON ---- -------- columns A and C from Schedule RC-E)_______________________________ RCON 2200 128,302 13.a ---- -------- -------- (1) Noninterest-bearing (1)______________________________________ 6631 18,826 13.a.1 -------- (2) Interest-bearing ____________________________________________ 6636 109,476 13.a.2 -------- b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (1) Noninterest-bearing__________________________________________ (2) Interest-bearing_____________________________________________ -------- 14. Federal funds purchased(2) and securities sold under agreements to RCON 0 14 repurchase: ---- -------- 2800 15. a. Demand notes issued to the U.S. Treasury__________________________ _______ _______ 2840 0 15.a -------- b. Trading liabilities_______________________________________________ ______ _______ 3548 0 15.b 16. Other borrowed money: -------- A. WITH A REMAINING MATURITY OF ONE YEAR OR LESS_____________________ ______ _______ 2332 1,000 16.a -------- B. WITH A REMAINING MATURITY OF MORE THAN ONE YEAR THROUGH THREE ______ _______ A547 2,000 16.b YEARS_________________________________________________________________ -------- C. WITH A REMAINING MATURITY OF MORE THAN THREE ______ _______ A548 1,000 16.c YEARS_________________________________________________________________ --------- 17. Not applicable 18. Bank's liability on acceptances executed and outstanding______________ ______ _______ 2920 0 18. --------- 19. Subordinated notes and debentures_____________________________________ ______ _______ 3200 0 19. --------- 20. Other liabilities (from Schedule RC-G)________________________________ ______ _______ 2930 2,006 20. --------- 21. Total liabilities (sum of items 13 through 20)________________________ ______ _______ 2948 134,308 21. 22. Not applicable --------- EQUITY CAPITAL RCON ---- --------- 23. Perpetual preferred stock and related surplus_________________________ ______ _______ 3838 7,000 23. --------- 24. Common stock__________________________________________________________ ______ _______ 3230 500 24. --------- 25. Surplus (exclude all surplus related to preferred ______ _______ 3839 8,384 25. stock)________________________________________________________________ --------- 26. a. Undivided profits and capital reserves____________________________ ______ _______ 3632 4,252 26.a --------- b. Net unrealized holding gains (losses) on available-for-sale ______ _______ 8434 418 26.b securities____________________________________________________________ --------- 27. Cumulative foreign currency translation adjustments___________________ --------- 28. Total equity capital (sum of items 23 through 27)_____________________ ______ _______ 3210 20,554 28. --------- 29. Total liabilities and equity capital (sum of items 21 and 28)_________ ______ _______ 2257 154,862 29. --------- MEMORANDUM TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION. NUMBER -------- 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by independent external auditors as of any date during 1997___________________________________________________________________ 6724 N/A M.1 --------
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other with generally accepted auditing standards by certified external auditors (may be required by state public accounting firm which submits a report on the bank chartering authority) 2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external conducted in accordance with generally accepted auditing auditors standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by submits a report on the consolidated holding company (but external auditors not on the bank separately) 7 = Other audit procedures (excluding tax preparation 3 = Directors' examination of the bank conducted in accordance work) with generally accepted auditing standards by a certified 8 = No external audit work public accounting firm (may be required by state chartering authority)
(1) Includes total demand deposits and noninterest-bearing time and savings deposits. (2) Includes limited-life preferred stock and related surplus. -----END PRIVACY-ENHANCED MESSAGE-----