-----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, I5xd3hZrPD2QWmF6wj1uN9aDOIO+xpcAtmVwhWtg/cpOZLLb722UV4O+M5fv6LUl cosXplPp4gLNMY+NQl0adw== 0001047469-98-041233.txt : 19981118 0001047469-98-041233.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041233 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-13725 FILM NUMBER: 98752331 BUSINESS ADDRESS: STREET 1: 2999 NORTH 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 BUSINESS PHONE: 6029521200 MAIL ADDRESS: STREET 1: 2999 N 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________ to _________. Commission file number PENTEGRA DENTAL GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-045043 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2999 N. 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 952-1200 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of Common Stock of the Registrant, par value $.001 per share, outstanding at November 12, 1998, was 7,581,681. FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO. PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . PAGE Item 1 - Consolidated Financial Statements. . . . . . . . . . . . . . 3 Consolidated Balance Sheets as of March 31, 1998 and September 30, 1998 (unaudited). . . . . . . . . . . . . . . 3 Consolidated Statements of Operations for the Three and Six Months Ended September 30, 1997 and September 30, 1998 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statement of Changes in Shareholders' Equity as of September 30, 1998 (unaudited) . . . . . . . . 5 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1997 and September 30, 1998 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . 11 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 15 Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PENTEGRA DENTAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (000s)
March 31, September 30, Assets 1998 1998 - --------------------------------------------------- ---------- ------------- Current assets: Cash and cash equivalents $ 6,708 $ 697 Receivables from affiliated practices 4,851 Prepaid and other current assets 101 352 ---------- ------------- Total current assets 6,809 5,900 Property and equipment, net 3,577 4,387 Intangible assets, net 183 7,502 Notes receivables from affiliated practices 1,058 Other assets, net 64 172 ---------- ------------- Total assets $ 10,633 $ 19,019 ---------- ------------- ---------- ------------- Liabilities and Shareholders' Equity - --------------------------------------------------- Current liabilities: Accounts payable and accrued liabilities $ 1,313 $ 1,325 Accrued employment agreement 1,250 1,130 ---------- ------------- Total current liabilities 2,563 2,455 Long-term debt 1,074 502 ---------- ------------- Total liabilities 3,637 2,957 ---------- ------------- Shareholders' equity Common stock 6 8 Additional paid-in capital 10,304 18,400 Retained earnings (deficit) (3,314) (2,346) ---------- ------------- Total shareholders' equity 6,996 16,062 ---------- ------------- Total liabilities and shareholders' equity $ 10,633 $ 19,019 ---------- ------------- ---------- -------------
The accompanying notes are an integral part of these financial statements. 3 PENTEGRA DENTAL GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except share amounts)
For the three For the three For the six For the six months ended months ended months ended months ended September 30, September 30, September 30, September 30, 1997 1998 1997 1998 Net revenue $ -- $ 8,761 $ -- $ 16,173 Operating expenses: Clinical salaries, wages and benefits -- 3,534 -- 6,370 Dental supplies and lab fees -- 1,586 -- 2,806 Rent -- 703 -- 1,253 Advertising and marketing -- 155 -- 266 General and administrative 320 960 400 1,836 Compensation expense in connection with issuance of common stock 191 -- 339 -- Other operating expenses -- 1,231 -- 1,982 Depreciation and amortization -- 225 -- 396 ------------- ------------- ------------- ------------- Total operating expenses 511 8,394 739 14,909 Earnings (loss) from operations (511) 367 (739) 1,264 Interest income, net -- 39 -- 79 ------------- ------------- ------------- ------------- Income (loss) before income taxes (511) 406 (739) 1,343 Income taxes -- 112 -- 375 ------------- ------------- ------------- ------------- Net income (loss) $ (511) $ 294 $ (739) $ 968 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Basic and diluted earnings per share $ 0.04 $ 0.13 Weighted average number of shares outstanding: Basic 7,526,000 7,206,000 ------------- ------------- ------------- ------------- Diluted 7,526,000 7,206,000 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. 4 PENTEGRA DENTAL GROUP, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands, except share amounts)
Additional Total Common Stock Paid-In Retained Stockholders' Shares Amount Capital Earnings/(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 affliated practices 764,783 2 5,167 5,169 Net income 968 968 --------- ------ ---------- ----------------- ------------- Balance at September 30, 1998 7,581,681 $ 8 $ 18,400 $ (2,346) $ 16,062 --------- ------ ---------- ----------------- -------------
The accompanying notes are an integral part of these financial statements. 5 PENTEGRA DENTAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000s)
For the six For the six months ended months ended September 30, September 30, 1997 1998 ------------- ------------- Net cash used in operating activities $ (341) $ (2,896) ------------- ------------- Cash used in investing activities: Capital expenditures (67) (566) Acquisition of intangible assets (2,925) Issuance of notes receivable to affiliated practices (1,058) ------------- ------------- Net cash used in investing activities (67) (4,549) ------------- ------------- Cash flows provided by financing activities: Issuance of common stock 703 2,964 Issuance of preferred stock 763 Repayment of indebtedness (392) Payment of offering costs (700) (1,088) Payment of organization costs (5) Payment of financing costs (50) ------------- ------------- Net cash provided by financing activities 761 1,434 ------------- ------------- Net increase (decrease) in cash and cash equivalents 353 (6,011) Balance at beginning of period 1 6,708 ------------- ------------- Balance at end of period $ 354 $ 697 ------------- ------------- ------------- ------------- Non-cash activities: Stock subscription receivable $ 326
The accompanying notes are an integral part of these financial statements. 6 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 throughout the United States. In July 1997, Pentegra Dental Group, Inc., changed its name to Pentegra Investments, Inc. and formed a new wholly owned subsidiary named Pentegra Dental Group, Inc. ("Pentegra Dental" or "the Company"). On March 30, 1998, simultaneously with the Company's initial public offering, PII repurchased (the "Share Repurchase") from the stockholders of PII, on a pro rata basis, at a purchase price of $0.015 per share, that number of shares as was necessary so that the aggregate number of shares of Pentegra Dental common stock, par value $.001 per share (the "Common 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 PII 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 shares of Common Stock was exercised at a price of $8.50 per share, yielding additional net proceeds to the Company of approximately $2.9 million. 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 September 30, 1998, 764,783 shares registered under this filing had been issued. In May 1998, the Company changed its fiscal year from December 31 to March 31, effective for the year beginning April 1, 1998. On September 29, 1998, the Company filed a registration statement on Form S-4 for 1,500,000 shares of Common Stock, and $50,000,000 in Convertible Subordinated Debt Securities, 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 and convertible subordinated debt securities are determined through negotiations with the security holders or principal owners of the businesses whose securities or assets are to be acquired. The shares of Common Stock that are issued are valued at prices reasonably related to prevailing market prices for the Common Stock. The convertible debt securities will be convertible in whole or in part into shares of Common Stock at any time on or after their convertibility commencement date, and at or before the convertibility termination date, unless previously redeemed. The convertible debt securities will be (i) unsecured and (ii) subordinate to all present and future Senior Indebtedness of Pentegra and (iii) effectively subordinated to all indebtedness and other liabilities of subsidiaries of Pentegra. The convertible debt securities issued will be valued at prices reasonably related to their principal amount. 7 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 principles have been condensed or omitted. The Company believes the presentation and disclosures herein are adequate to make the information not misleading, but do not purport to be a complete presentation inasmuch as all note disclosures required by generally accepted accounting principles are not included. In the opinion of management, the consolidated financial statements reflect all elimination entries and normal adjustments that are necessary for a fair presentation of the results for the interim period ended September 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 that 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 714,666 shares of Common Stock at exercise prices above the market value of Common Stock were excluded from the calculation of earnings per share for the three and six months ended September 30, 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 contains 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 September 30, 1998, no amounts 8 were outstanding under the revolving line of credit. Subsequent to September 30, 1998, draws totaling $8.0 million were made under the revolving credit facility to fund additional affiliations and working capital requirements. 4. RETAINED EARNINGS (DEFICIT) The Company's retained earnings (deficit) at September 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 September 30, 1998, a bonus payable of $1,130,000 remained outstanding. 5. NEW DENTIST AFFILIATIONS During the period from March 30, 1998 through September 30, 1998, the Company completed new dentist affiliations with 13 practices representing 17 dentists and 13 office locations. Total consideration paid by the Company in the new affiliations consisted of 764,783 shares of Common Stock and $3,042,000 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 aggregating to $7,502,000. 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. 6. SUBSEQUENT EVENTS On November 13, the Company and Liberty Dental Alliance, Inc. ("Liberty") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Liberty will become a wholly owned subsidiary of the Company, and James M. Powers, Jr., D.D.S. was named President of the Company, replacing Gary S. Glatter. The Merger Agreement provides the Company will pay (a) $0.01 per share for each outstanding share of Liberty common stock, par value $0.01 per share (the "Liberty Common Stock") at closing and (b) up to $3.99 per share and options to purchase up to 0.25 shares of Common Stock with an exercise price of $6.125 per share for each share of Liberty Common Stock (collectively, the "Additional Common Merger Consideration") in accordance with the following: (i) One-third of the Additional Common Merger Consideration is payable upon completion of affiliations with dental practices under a letter of intent with Liberty ("Liberty Affiliations") that had collected revenues for the year ended December 31, 1997 ("1997 Practice Revenues") aggregating to at least $10,000,000; (ii) One-third of the Additional Common Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000; and (iii) One-third of the Additional Common Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000. The holders of shares of Liberty Common Stock will forfeit any right to receive the Additional Common Merger Consideration related to Liberty Affiliations not consummated by June 30, 1999. As of November 13, 1998, there are 315,750 shares of Liberty Common Stock outstanding, which would result in the Company paying an aggregate of up to $1,263,000 cash and issuing options to acquire up to 78,938 shares of Common Stock. The Merger Agreement also provides that the Company pay (a) $0.01 per share for each outstanding share of Liberty Class B common stock, par value $0.01 per share (the "Class B Stock") at closing and (b) up to one share of Common Stock for each outstanding share of Class B Stock (the "Additional Class B Merger Consideration") in accordance with the following: (i) One-fifth of the Additional Class B Merger Consideration is payable upon completion of Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000; 9 (ii) Three-tenths of the Additional Class B Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000; (iii) Two-fifths of the Additional Class B Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $20,000,000; and (iv) One-tenth of the Additional Class B Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000. The holders of shares of Class B Stock will forfeit any right to receive Additional Class B Merger Consideration related to Liberty Affiliations not consummated by June 30, 1999. As of November 13, 1998, there are 545,000 shares of Liberty Class B Stock outstanding, which would result in the Company paying an aggregate of up to $5,450 cash and up to 545,000 shares of Common Stock. Consummation of the Merger Agreement, which is anticipated to occur prior to December 31, 1998, is subject to, among other things, the Company obtaining the consent of its lenders. In connection with Merger Agreement, the Company has agreed to pay investment banking fees of up to $600,000 to SunTrust Equitable Securities Corporation, $166,667 of which is payable upon completion of Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000, $166,667 of which is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000 and $266,666 of which is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000. The Company also agreed to issue an aggregate of 145,000 options to acquire Common Stock to certain consultants of the Company with an exercise price of $6.125 per share, in the same proportions and upon completion of Liberty Affiliations as the Additional Common Merger Consideration is payable. On November 13, 1998, the Company completed Liberty Affiliations with five dental practices as well as one affiliation with an additional dental practice not affiliated with Liberty. These six dental practices generated aggregate annual patient revenue of approximately $4.1 million during their most recently completed fiscal year, and include nine dentists treating patients in six dental offices. The aggregate consideration paid by the Company for these practices consisted of approximately $1.6 million, 369,639 shares of Common Stock and approximately $1.2 million aggregate principal amount of 6% Series A convertible subordinated notes, due November 2003. Dr. Powers has entered into an employment agreement with the Company, effective November 13, 1998, pursuant to which he will initially serve as President. Once the Company has consummated Liberty Affiliations aggregating to at least $10,000,000 in 1997 Practice Revenues, Dr. Powers will also serve as the Company's Chairman of the Board and Chief Executive Officer. Omer K. Reed, D.D.S. will continue to serve as a director and Chief Clinical Officer of the Company once Dr. Powers is elected to those additional positions. Dr. Power's two year employment agreement also provides for a base annual salary of $200,000, bonus payments of up to 25% of the base salary upon achievement of certain earnings per share targets and the issuance of options to acquire 150,000 shares of Common Stock with an exercise price of $6.125 per share and an additional 150,000 shares with an exercise price of $3.1875 per share (the closing sale price on November 13, 1998). Mr. Glatter has entered into a severance agreement with the Company effective November 13, 1998 pursuant to which he has resigned as President, Chief Executive Officer and a director of the Company. Mr. Glatter will receive payment of $350,000 from the Company pursuant to the agreement and forfeit all options to acquire shares of Common Stock previously issued to him. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF THE COMPANY AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND RISKS DETAILED IN THE COMPANY'S SEC FILINGS. OVERVIEW The Company provides practice management services to fee-for-service dental practices in the United States. On March 30, 1998, the Company acquired simultaneously with the closing of its 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. As of September 30, 1998, the Company had affiliated with 13 additional practices and provided funding to affiliated dentists who purchased the patient records of four retiring dentists. As of September 30, 1998, the Company expects 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. As of September 30, 1998 the Company manages 64 dental practices, which include 97 dentists and 76 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 and the Company began managing 51 dental practices in 18 states. At September 30, 1998, the Company managed 64 practices in 77 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 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. 11 NET REVENUE Net revenue generated for the three and six months ended September 30, 1998 was $8.8 and $16.2 million, respectively. During the three months ended September 30, 1998, the Company affiliated with three practices in addition to the 61 at the beginning of the quarter. For the three and six months ended September 30, 1998, dental center revenues aggregated to approximately $11.7 and $22.6 million, respectively. OPERATING EXPENSES The Company incurred operating expenses of $8.4 million (95.8% of net revenue) and $14.9 million (92.2% of net revenue) for the three and six months ended September 30, 1998, respectively. 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 September 30, 1998, general and administrative expenses totaled $960,000, which represented 11.0% of net revenue. For the six months ended September 30, 1998, general and administrative expenses totaled $1,836,000, which represented 11.4% of net revenue. INCOME TAX EXPENSE The Company incurred income tax expense of $112,000 and $375,000 for the three and six months ended September 30, 1998, respectively, which represented a 28% tax rate. The difference between the effective tax rate and the statutory rate reflects the anticipated utilization of the operating losses that were carried forward into fiscal 1999 from 1998. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had a working capital balance of approximately $3.4 million. Current assets included approximately $.7 million in cash and $4.8 million in accounts receivable, due entirely from Affiliated Practices. Current liabilities consisted of approximately $2.5 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 the revolving line of credit will be sufficient to continue execution of 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 contains 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 September 30, 1998, no amounts were outstanding under the revolving line of credit. Subsequent to September 30, 1998, draws totaling $8.0 million were made under the revolving line of credit to fund additional affiliations and working capital requirements. Cash used for investing activities for the six months ended September 30, 1998 included $566,000 for purchases of capital equipment, mostly for assets acquired in new practice affiliations, and $2,925,000 for the purchase of intangibles associated with those new practice affiliations. Cash generated from financing activities in the six-month period ended September 30, 1998 included the issuance of 375,000 shares of stock with the exercise of the over-allotment option that provided net proceeds to the Company of approximately $2.9 million. Uses of cash during the six month period ended June 30, 1998 by financing activities included the payment of costs related to the IPO totaling approximately $1.1 million, and the repayment of debt assumed in the IPO of $392,000. These payments related to liabilities recognized at March 31, 1998. YEAR 2000 ISSUE A number of computer programs and other equipment with embedded chips or processors ("Systems") use two digits rather than four digits to define the applicable year. Any Systems that are date sensitive may recognize a date of "00" as the year 1900 rather than the year 2000. This could result in miscalculations or System failures causing disruptions of operations, as well as potentially exposing 12 the Company to third party liability. This issue is commonly referred to as the year 2000 problem ("Y2K"). The Company initiated a Y2K compliance program to ensure that all of the critical Systems and processes that are under its direct control remain functional. The Company has completed the installation of year 2000 compliant software for its operations prior to the IPO. Accordingly the Company does not expect the year 2000 issue to have a material effect on its financial position, results of operations or cash flows. Although the Company's Y2K compliance program will attempt to determine the Y2K readiness of key third parties, there may be certain Systems or processes relied on by the Company that are outside of its control, and there can be no assurance that these Systems or processes will remain functional. Non-compliance by key third parties could have a material effect on the operations of the Company. To date, the costs incurred by the Company that relate solely to the Y2K compliance program have been minimal. In the opinion of management, the costs to complete the Company's Y2K compliance program will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. RECENT EVENTS On November 13, 1998 the Company and Liberty Dental Alliance, Inc. ("Liberty") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Liberty will become a wholly owned subsidiary of the Company, and James M. Powers, Jr., D.D.S. was named President of the Company, replacing Gary S. Glatter. The Merger Agreement provides the Company will pay (a) $0.01 per share for each outstanding share of Liberty common stock, par value $0.01 per share (the "Liberty Common Stock") at closing and (b) up to $3.99 per share and options to purchase up to 0.25 shares of Common Stock with an exercise price of $6.125 per share for each share of Liberty Common Stock (collectively, the "Additional Common Merger Consideration") in accordance with the following: (i) One-third of the Additional Common Merger Consideration is payable upon completion of affiliations with dental practices under a letter of intent with Liberty ("Liberty Affiliations") that had collected revenues for the year ended December 31, 1997 ("1997 Practice Revenues") aggregating to at least $10,000,000; (ii) One-third of the Additional Common Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000; and (iii) One-third of the Additional Common Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000. The holders of shares of Liberty Common Stock will forfeit any right to receive the Additional Common Merger Consideration related to Liberty Affiliations not consummated by June 30, 1999. As of November 13, 1998, there are 315,750 shares of Liberty Common Stock outstanding, which would result in the Company paying an aggregate of up to $1,263,000 cash and issuing options to acquire 78,938 shares of Common Stock. The Merger Agreement also provides that the Company pay (a) $0.01 per share for each outstanding share of Liberty Class B common stock, par value $0.01 per share (the "Class B Stock") at closing and (b) up to one share of Common Stock for each outstanding share of Class B Stock (the "Additional Class B Merger Consideration") in accordance with the following: (i) One-fifth of the Additional Class B Merger Consideration is payable upon completion of Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000; (ii) Three-tenths of the Additional Class B Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000; (iii) Two-fifths of the Additional Class B Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $20,000,000; and (iv) One-tenth of the Additional Class B Merger Consideration is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000. The holders of shares of Class B Stock will forfeit any right to receive Additional Class B Merger Consideration related to Liberty Affiliations not consummated by June 30, 1999. As of November 13, 1998, there are 545,000 shares of Liberty Class B Stock outstanding, which would result in the Company paying an aggregate of up to $5,450 cash and up to 545,000 shares of Common Stock. Consummation of the Merger 13 Agreement, which is anticipated to occur prior to December 31, 1998, is subject to, among other things, the Company obtaining the consent of its lenders. In connection with Merger Agreement, the Company has agreed to pay investment banking fees of up to $600,000 to SunTrust Equitable Securities Corporation, $166,667 of which is payable upon completion of Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000, $166,667 of which is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000 and $266,666 of which is payable upon completion of additional Liberty Affiliations that had aggregate 1997 Practice Revenues of at least $15,000,000. The Company also agreed to issue an aggregate of 145,000 options to acquire Common Stock to certain consultants of the Company with an exercise price of $6.125 per share, in the same proportions and upon completion of Liberty Affiliations as the Additional Common Merger Consideration is payable. On November 13, 1998, the Company completed Liberty Affiliations with five dental practices as well as one affiliation with an additional dental practice not affiliated with Liberty. These six dental practices generated aggregate annual patient revenue of approximately $4.1 million during their most recently completed fiscal year, and include nine dentists treating patients in six dental offices. The aggregate consideration paid by the Company for these practices consisted of approximately $1.6 million, 369,639 shares of Common Stock and approximately $1.2 million aggregate principal amount of 6% Series A convertible subordinated notes, due November 2003. Dr. Powers has entered into an employment agreement with the Company, effective November 13, 1998, pursuant to which he will initially serve as President. Once the Company has consummated Liberty Affiliations aggregating to at least $10,000,000 in 1997 Practice Revenues, Dr. Powers will also serve as the Company's Chairman of the Board and Chief Executive Officer. Omer K. Reed, D.D.S. will continue to serve as a director and Chief Clinical Officer of the Company once Dr. Powers is elected to those additional positions. Dr. Power's two year employment agreement also provides for a base annual salary of $200,000, bonus payments of up to 25% of the base salary upon achievement of certain earnings per share targets and the issuance of options to acquire 150,000 shares of Common Stock with an exercise price of $6.125 per share and an additional 150,000 shares with an exercise price of $3.1875 per share (the closing sale price on November 13, 1998). Mr. Glatter has entered into a severance agreement with the Company effective November 13, 1998 pursuant to which he has resigned as President, Chief Executive Officer and a director of the Company. Mr. Glatter will receive payment of $350,000 from the Company pursuant to the agreement and forfeit all options to acquire shares of Common Stock previously issued to him. 14 PART II ITEM 1. LEGAL PROCEEDINGS - None ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS - none ITEM 3. DEFAULTS OF SENIOR SECURITIES - none ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - none ITEM 5. OTHER INFORMATION - none ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1* Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 (Registration No. 333-37633)) 3.2* Bylaws (incorporated herein by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 (Registration No. 333-37633)). 10.1* Credit Agreement between Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated June 1, 1998(incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly report filed on Form 10-Q (File No. 001-13725)). 10.2 Amendment to Credit Agreement between Pentegra Dental Group, Inc. and Bank One Texas, N.A. dated September 9, 1998 10.3 Second Amendment to Employment Agreement between Pentegra Dental Group, Inc. and James L. Dunn, Jr. dated April 22, 1998 10.4 Separation and Mutual Release Agreement between Pentegra Dental Group, Inc., and Gary S. Glatter dated November 13, 1998 10.5 Agreement and Plan of Merger among Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly, dated as of November 13, 1998 10.6 Employment Agreement between Pentegra Dental Group, Inc. and James M. Powers, Jr. dated November 13, 1998 27.1 Financial Data Schedule. - ------------------ *Incorporated by reference as indicated (b) Reports on Form 8-K None 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, Pentegra Dental Group, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENTEGRA DENTAL GROUP, INC. Dated: November 16, 1998 /s/ Sam H. Carr ----------------- By: Sam H. Carr Sr. Vice President - Chief Financial Officer 16 EX-10.2 2 EXHIBIT 10.2 BANK ONE, TEXAS, N.A. 1717 MAIN STREET, THIRD FLOOR DALLAS, TEXAS 75265 September 9, 1998 Gary S. Glatter, CEO PENTEGRA DENTAL GROUP, INC. 2999 N. 44th St., Ste. 650 Phoenix, AZ 85018 Re: Modification of Provisions under the Credit Agreement dated June 1, 1998 (the "Credit Agreement") between Pentegra Dental Group, Inc. ("BORROWER") and Bank One, Texas, N.A. ("BANK ONE") Ladies and Gentlemen: Reference is made to the Credit Agreement for the meaning of terms that are defined therein and that are used without further definition herein. Borrower and Bank One wish to modify the definition of the Base Rate Payment Date used in the Note. Accordingly, Borrower and Bank One hereby: 1. Amend the definition of "BASE RATE PAYMENT DATE" in Section 1.1 of the Credit Agreement to provide as follows: "'BASE RATE PAYMENT DATE' has the meaning given such term in the Note" 2. Delete the reference to Section 6.9 in Section 3.1(a), GENERAL PROCEDURES, and substitute therefor, "Section 6.10". 3. Delete the reference to Section 2.7 in the last paragraph of Section 3.1 GENERAL PROCEDURES, and substitute therefor, "Section 2.8." 4. Amend the proviso at the end of Section 7.18 of the Credit Agreement, FIXED CHARGE COVERAGE RATIO, by deleting such proviso and substituting therefor, the following: "provided that for purposes of calculating such ratio for the Fiscal Quarter ending June 30, 1998, EBITDA and Fixed Charges shall be calculated for that Fiscal Quarter only." 5. Delete Exhibit D to the Credit Agreement and substitute Exhibit D attached hereto. This letter agreement is a Loan Document, as defined in the Credit Agreement, and is subject to all provisions of the Credit Agreement applicable to Loan Documents. The Credit Agreement as amended hereby is ratified and confirmed in all respects. This letter may be Pantegra Dental Group, Inc. September 9, 1998 Page 2 executed in multiple counterparts, all of which shall constitute one letter agreement and may be validly executed and delivered by facsimile or other electronic transmission. Please execute a copy of this letter agreement in the space provided below to evidence your agreement to and acknowledgment of the foregoing. BANK ONE, TEXAS, N.A. By: /s/ James B. Lukowicz ---------------------------------- James B. Lukowicz Vice President AGREED TO AND ACKNOWLEDGED as of the date first written above: PENTEGRA DENTAL GROUP, INC. By: /s/ Gary S. Glatter, CEO ----------------------------------- Gary S. Glatter, CEO EXHIBIT D CERTIFICATE ACCOMPANYING FINANCIAL STATEMENTS Reference is made to that certain Credit Agreement dated as of June 1, 1998 (as from time to time amended, the "Agreement"), by and among PENTEGRA DENTAL GROUP, Inc. ("Borrower"), Bank One, Texas, N.A., as Agent, and certain financial institutions ("Lenders"), which Agreement is in full force and effect on the date hereof. Terms which are defined in the Agreement are used herein with the meanings given them in the Agreement. This Certificate is furnished pursuant to Section 6.2(b) of the Agreement. Together herewith Borrower is furnishing to Agent and each Lender Borrower's *[audited/unaudited] financial statements (the "Financial Statements") as at ____________ (the "Reporting Date"). Borrower hereby represents, warrants, and acknowledges to Agent and each Lender that: (a) the officer of Borrower signing this instrument is the duly elected, qualified and acting ____________ of Borrower and as such is Borrower's chief financial officer; (b) the Financial Statements are accurate and complete and satisfy the requirements of the Agreement; (c) attached hereto is a schedule of calculations showing Borrower's compliance as of the Reporting Date with the requirements of Sections [7.11 to 7.20] of the Agreement *[and Borrower's non-compliance as of such date with the requirements of Section(s) ____________ of the Agreement]; (d) on the Reporting Date, Borrower was, and on the date hereof Borrower is, in full compliance with the disclosure requirements of Section 6.2 of the Agreement, and no Default otherwise existed on the Reporting Date or otherwise exists on the date of this instrument *[except for Default(s) under Section(s) ____________ of the Agreement, which *[is/are] more fully described on a schedule attached hereto]; (d) on the Reporting Date, the Borrowing Availability was $______________; and (e) *[Unless otherwise disclosed on a schedule attached hereto,] The representations and warranties of Borrower set forth in the Agreement and the other Loan Documents are true and correct, in all material respects, on and as of the date hereof (except to the extent that the facts on which such representations and warranties are based have been changed by the extension of credit under the Agreement), with the same effect as though such representations and warranties had been made on and as of the date hereof. The officer of Borrower signing this instrument hereby certifies that he has reviewed the Loan Documents and the Financial Statements and has otherwise undertaken such inquiry as is in his opinion necessary to enable him to express an informed opinion with respect to the above representations, warranties and acknowledgments of Borrower and, to the best of his knowledge, such representations, warranties, and acknowledgments are true, correct and complete. IN WITNESS WHEREOF, this instrument is executed as of ____________, 19__. PENTEGRA DENTAL GROUP, INC. By: ------------------------------ Name: Title: EX-10.3 3 EXHIBIT 10.3 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT This Second Amendment to the Employment Agreement (the "Amendment") is executed on the underwritten date to be effective on that date, and is made by and between Pentegra Dental Group, Inc., a Delaware Corporation (the "Company"), and James L. Dunn, Jr. (the "Employee"). WITNESSETH Whereas, the Company and the Employee had entered into an employment agreement dated July 12, 1997, as previously amended by the First Amendment, (the "Employment Agreement") to be effective at the initial public offering, and Whereas, the Company and the Employee wish to amend the Employment Agreement as more fully set forth herein; Therefore, in consideration for the mutual promises and representations contained in the Employment Agreement and herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the undersigned Employee and Company do agree as follows: The Employment Agreement shall be amended to add the following paragraph to the end of Section 2 "Duties": "Notwithstanding the foregoing, the Company and the Employee agree that the Employee may act as an attorney and provide certain limited pro bono legal services to the Employee's close friends and family, but only if the Employee's legal services are approved by the Company's Chief Executive Officer (the "C.E.O.") before the engagement begins and, the Employee's legal service does not interfere with, or materially divert, the Employee's full time and best efforts from the Company. The Employee will be permitted to attend certain continuing education courses in Texas which are necessary to maintain the Employee's legal license, and/or certified public accountant license, provided that the Employee endeavors to obtain an exemption from those requirements and/or endeavors to enroll in those courses which enhance the Employee's ability to perform his duties to the Company. The Employee may serve as a director of any publicly traded company, or any privately held company which is in the process of attempting to offer its stock to the public, provided that the Employee's service on that board of directors does not interfere with or materially divert the Employee's full time and best efforts from the Company and the Employee obtains prior consent from the C.E.O.. The Employee may serve as a member of a limited liability company (the "LLC") which acts as a corporate sponsor of certain entities which are seeking their initial public offering, but only if the Employee does not serve as a "manager" or "officer" of the LLC." The Employment Agreement shall be amended to add the following paragraph to Section 6 "Termination": "(d) Termination by the Company, pursuant to Section 6(b) shall not be effective unless and until the Company provides written notice of the conduct it finds objectionable and the Employee fails to cure the Company's objections within the time specified by the Company in its written notice." It is further agreed that the remainder of the Employment Agreement, together with any prior amendments, shall remain unchanged and in effect. Executed this 22nd day of April, 1998. COMPANY EMPLOYEE Pentegra Dental Group, Inc. By: /s/ Gary S. Glatter /s/ James L. Dunn, Jr. -------------------------------- --------------------------- Gary S. Glatter, James L. Dunn, Jr. President and Chief Executive Officer 2 EX-10.4 4 EXHIBIT 10.4 SEPARATION AND MUTUAL RELEASE AGREEMENT BETWEEN GARY S. GLATTER AND PENTEGRA DENTAL GROUP, INC. PENTEGRA DENTAL GROUP, INC. ("Employer") and GARY S. GLATTER ("Employee") (Employer and Employee are hereinafter sometimes referred to as the "Parties") make this Separation and Mutual Release Agreement (this "Agreement"). Whereas, Employee is currently employed by Employer pursuant to the terms of a certain Employment Agreement dated July 1, 1997, as amended by an Amendment also dated July 1, 1997 (referred to herein as the "Employment Agreement"); Whereas, Employee and Employer are parties to a certain Incentive Stock Option Agreement dated March 24, 1998 (referred to herein as the "Option Agreement"); Whereas, Employer and Employee are parties to an Indemnity Agreement dated March 30, 1998 (referred to herein as the "Indemnity Agreement"); Whereas, the Parties desire an amicable termination of Employee's service and their mutual obligations under the Employment Agreement; Whereas, it is the intent of the Parties that the Option Agreement be terminated; Now, therefore, for and in consideration of the promises made between them and for other good and valuable consideration, the Parties agree as follows: 1. RESIGNATION. Employee hereby resigns (i) his employment and each office he holds with Employer (including without limitation his offices as President and Chief Executive Officer of Employer) and any position held by Employee in subsidiaries and affiliates of Employer and (ii) as a director of Employer and each of its subsidiaries effective at the later to occur of the close of business on November 13, 1998 or the time at which the payment called for by paragraph 3(a) hereof is placed into escrow (the "Effective Date"). 2. RELEASE FROM EMPLOYMENT AGREEMENT. In consideration of the mutual promises contained herein, Employer and Employee agree to release each other from any and all liability under the Employment Agreement or otherwise arising from the employment relationship, and enter this Agreement. 3. PAYMENT. (a) In consideration of Employee executing this Agreement, giving Employer the covenant not to solicit employees of Employer or any of its affiliates or subsidiaries, and not to compete in specified ways, and an agreement to maintain the secrecy of all confidential and trade secret information (as hereinafter described and defined in paragraphs 6 through 8 below), and in settlement of any obligation to pay severance pay which Employer may owe to Employee, Employee will receive a lump sum cash payment of $350,000 (the "Severance Payment"). Employer will withhold, as employee taxes, from the Severance Payment an aggregate of $33,075 that must be withheld to pay federal ($10,000), state ($18,000) and Medicare ($5,075) taxes. The Severance Payment (net of tax withholdings) will be placed in escrow by Employer pursuant to the terms of the Escrow Agreement in the form attached hereto as EXHIBIT A. (b) To the extent any taxes may be due on the amount paid pursuant to this Agreement, Employer shall pay related "employer taxes" and Employee shall pay related "employee taxes," such as federal income tax, social security tax and Medicare tax. Each Party hereto agrees to indemnify and hold the other Party harmless for any tax claims or penalties resulting from the failure by a Party to pay his designated taxes. (c) By execution of this Agreement, Employee acknowledges and agrees that for purposes of unemployment compensation benefits, the amount specified in subparagraph (a) of this paragraph constitutes wages in lieu of notice for the period from the Effective Date until the date 21 months following the Effective Date. Accordingly, Employee may not be eligible to receive unemployment compensation benefits during this period of time. 4. UNPAID SALARY AND BENEFITS. (a) Not conditioned upon execution of this Agreement, Employee will receive payment of all accrued but unpaid salary through the Effective Date. Employee will not receive payment for any accrued benefits. (b) Employee will have the option of continuing his group insurance for Employee and his dependents for a period of up to 18 months. Employer will pay for Employee's health insurance for himself and his dependents through December 31, 1999, or until Employee obtains other full-time employment, whichever is sooner. (c) With respect to expense reimbursements, the Parties agree as follows: (i) Employee will present to Employer his corporate American Express bill and Employer will pay the outstanding balance on Employee's corporate American Express account to the extent that items delineated in the invoice (a) were incurred by employees of Employer other than Employee or (b) were business expenses incurred by Employee. Employee agrees that he will not use his corporate American Express card after the close of business on the Effective Date; (ii) Employee will present to Employer Employee's cell phone invoice and Employer will pay the outstanding balance reflected on such invoice for service through the Effective Date, but only to the extent that the outstanding balance of such invoice does not exceed $750; and -2- (iii) Employee will present to Employer and Employer will pay the outstanding balance on invoices rendered to Employee by MCI for conference calls related to Employer's business. 5. OPTION AGREEMENT AND BONUS. (a) The Parties agree that the Option Agreement, which covers, in the aggregate, 333,333 shares of the common stock of Employer (the "Common Stock"), is terminated as of the Effective Date. Employee represents and acknowledges that, other than the Option Agreement, he and Employer do not have any agreements with each other relating to options to purchase Common Stock and to the extent any such other agreements do exist they are canceled. (b) The Parties agree that no bonus payment is or will ever become due to Employee under the terms of the Employment Agreement. 6. NONSOLICITATION OF EMPLOYEES. It is recognized and understood by the Parties hereto that the employees of Employer are an integral part of Employer's business, and that it is extremely important for Employer to use its maximum efforts to prevent the loss of such employees. It is therefore understood and agreed by the Parties that, because of the nature of the business of Employer, it is necessary to afford fair protection to Employer from the loss of any such employees. Consequently, as material inducement to Employer to pay Employee the sum specified in paragraph 3, Employee covenants and agrees that for a period commencing on the Effective Date of this Agreement and ending one year after the Effective Date of this Agreement, Employee shall not, directly or indirectly, hire or engage or attempt to hire or engage any individual who shall have been an employee of Employer or any of its affiliates or subsidiaries at any time during the one-year period prior to such Effective Date of this Agreement or during the one-year period immediately following the Effective Date, whether for or on behalf of Employee or for any entity in which Employee shall have a direct or indirect interest (or any subsidiary or affiliate of any such entity), whether as a proprietor, partner, co-venturer, financier, investor, stockholder, director, officer, employer, employee, servant, agent, representative or otherwise. Further, Employee covenants and agrees that for a period commencing on the Effective Date of this Agreement and ending one year after such Effective Date, Employee shall not, directly or indirectly, or through any other person, firm, or corporation, or in any capacity as described in this paragraph above, induce, or attempt to induce or influence any employee of Employer to terminate employment with Employer, when Employer or any of Employer's affiliates or subsidiaries desires to retain that employee's services. 7. NONCOMPETITION. As a further material inducement to Employer to pay Employee the sum specified in paragraph 3, for a period of one year after the Effective Date Employee shall not solicit, interfere, or divert any then-existing business relationship of Employer, including any existing relationships with any dentists or dental practice management companies who came to Employee's attention as the result of Employee's relationship with Employer. Employee acknowledges that this noncompetition covenant is less onerous than the noncompetition provisions of the Employment Agreement; Employee further acknowledges that his release from the noncompetition provisions of the Employment Agreement constitutes good and valuable -3- consideration for the agreements and covenants contained herein. Further, Employee acknowledges and agrees that he was a person of exceptional and unique knowledge, skill and ability in performing the tasks assigned while employed with Employer. 8. CONFIDENTIAL INFORMATION. Employee acknowledges and agrees that he had access to certain confidential information, trade secrets and proprietary data of Employer by virtue of Employee's employment with Employer, and Employee's participation in Employer's activities and business. Employee acknowledges that he has a legal obligation, independent of this Agreement, to preserve the confidentiality of Employer's trade secrets and confidential information and return such information to Employer prior to the Effective Date. As a further material inducement to Employer to pay Employee the sum specified in paragraph 3, Employee agrees to maintain the secrecy of all confidential information (as hereinafter defined) and agrees not to disclose such confidential information to any person(s), employer(s), partnership(s), corporation(s) or other entity of any nature whatsoever, and agrees to maintain such confidential information in the strictest confidence and trust. "Confidential Information" means, in whatever form (tangible or intangible, including electronic data recorded or retrieved by any means), any and all trade secrets, confidential knowledge, proprietary data, and information owned by Employer, furnished by Employer to Employee, or developed by Employer or any affiliate, agent, contractor or employee of Employer and which relates to the business or activities of Employer, including strategic marketing plans, product development plans, cost or pricing information, vendor or supplier information, confidential customer information, information regarding proposed joint ventures, mergers, acquisitions, and other such anticipated or contemplated business ventures of Employer, and confidential financial information, technical specifications, diagrams, flow charts, methods, processes, procedures, discoveries, concepts, calculations, techniques, formulae, systems, production plans, designs, research and development plans, customer records and lists, manufacturing, financial and marketing know-how, copyrightable works and applications for registrations thereof, pending applications for letters patent of the United States and foreign countries, and any such that are issued, granted or published, in common law, state and federal rights relating to and under any trademarks, trade names or service marks (and also including any of the foregoing provided to Employee by or on behalf of Employer prior to the Effective Date of this Agreement). The term "Confidential Information" expressly excludes information which (1) was available to the public prior to the time of disclosure to, or discovery of production by Employee; (2) becomes available to the public through no act or omission of Employee; or (3) becomes available to Employee through or from a third party who is not under any obligation of confidentiality to Employer. 9. INJUNCTIVE RELIEF. Employee further agrees and acknowledges that should he breach his obligation under paragraphs 6, 7, or 8, Employer will be entitled to enforce the provisions of this paragraph by seeking injunctive relief, in addition to recovering any monetary damages Employer may sustain as a result of such breach. 10. UNDERSTANDING OF EMPLOYEE. EMPLOYEE HAS CAREFULLY READ AND CONSIDERED THE PROVISIONS OF THIS AGREEMENT AND, HAVING DONE SO, AGREES THAT THE RESTRICTIONS SET FORTH HEREIN ARE REASONABLE AND ARE REASONABLY REQUIRED FOR THE PROTECTION OF THE BUSINESS -4- INTERESTS AND GOODWILL OF EMPLOYER AND ITS BUSINESS, OFFICERS, DIRECTORS AND EMPLOYEES. EMPLOYEE FURTHER AGREES THAT THE RESTRICTIONS SET FORTH IN THIS AGREEMENT ARE NOT MEANT TO IMPAIR EMPLOYEE'S ABILITY TO SECURE EMPLOYMENT WITHIN THE FIELD OR FIELDS OF EMPLOYEE'S CHOICE, INCLUDING THOSE AREAS IN WHICH EMPLOYEE HAS BEEN EMPLOYED BY EMPLOYER BUT INSTEAD TO PROTECT THE CONFIDENTIALITY OF ITS CONFIDENTIAL INFORMATION, TRADE SECRETS, AND LEGITIMATE BUSINESS INTERESTS. 11. FURTHER RELEASES OF RELEASED PARTIES AND EMPLOYEE. (a) For and in consideration of the promises made in this Agreement, Employee agrees to RELEASE, ACQUIT AND FOREVER DISCHARGE Employer, its directors, officers, employees, agents, attorneys, affiliates, subsidiaries, stockholders, predecessors, transferees, trustees, assignees, insurers, and all other persons or entities affiliated with or in privity with any of them (collectively the "Released Parties") from any and all claims, demands, causes of action, debts, liens, judgments, damages or liabilities of any nature whatsoever, that arose prior to the Effective Date of this Agreement. The intent and purpose of this Agreement is to release and discharge all claims, demands and causes of action, whether known or unknown, unless otherwise expressly excluded by this Agreement and excluding any breach of this Agreement. The release of liabilities is intended to include, but not be limited to, the following: any and all claims arising from Employee's Employment Agreement and employment with any of the Released Parties or arising from the termination of that employment and Employment Agreement; any claims of violation of Title VII of the Civil Rights Act of 1964, the Employee Retirement Income Security Act of 1974, the Fair Credit Reporting Act, or the Americans with Disabilities Act, any state antidiscrimination statute or any and all claims for breach of contract or wrongful discharge; any and all claims for defamation, damage to personal or business reputation, or impairment of economic opportunity; any and all claims for intentional or negligent infliction of emotional distress; any and all claims for loss of consortium, damage to family or business relationships, and any alleged breach of the covenant of good faith and fair dealing; any and all claims for an alleged breach of fiduciary duties or breach of corporate officer or director responsibilities; any and all claims for personal injury; any and all claims for tortious interference with contractual relationships or any other tortious conduct; any and all claims for reimbursement, bonus, commission or other incentives; any and all claims for employment discrimination including, but not limited to, any age discrimination claims brought under the Age Discrimination in Employment Act; any and all claims for injunctive or other equitable relief; any and all claims arising under federal, state or local statute, common law, regulation or ordinance; and any and all other clauses for compensatory, statutory, or punitive damages. (b) For and in consideration of the promises made in this Agreement, Employer agrees to release, acquit and forever discharge Employee from any and all claims, demands, causes of action, derivative suits, debts, liens, judgments, damages or liabilities of any nature whatsoever that arose prior to the Effective Date of this Agreement. The intent and purpose of this Agreement is to release and discharge all claims, demands and causes of action, whether known or unknown, -5- unless otherwise expressly excluded by this Agreement and excluding any breach of this Agreement. The release of liabilities is intended to include, but not be limited to, the following: any and all claims arising from Employee's employment with any of the Released Parties; any and all claims for an alleged breach of fiduciary duties or breach of corporate officer or director responsibilities, including, without limitation, all matters concerning Employer's public offerings of common stock and convertible debt; any and all claims for tortious interference with contractual relationships or any other tortious conduct; claims for back wages, future wages, bonuses, reinstatement, accrued vacation benefits and sick time, any and all claims for injunctive or other equitable relief; any and all claims arising under federal, state, or local statute, common law, regulation or ordinance; and any and all other claims for compensatory, statutory, or punitive damages. 12. NONDISPARAGEMENT AND REFERENCES. Employee and the Released Parties further promise and agree that they will not damage, or attempt to damage, the business reputation or goodwill of each other. The Released Parties further agree that should any third party contact them for reference information concerning Employee, the Released Parties will express a favorable opinion of Employee's performance while employed by Employer. Employer will not use Employee's name in any press release, annual report, proxy statement or other documents that will receive widespread public circulation without Employee's prior consent or, in the absence of such consent, without the advise of outside counsel to Employer that the use of Employee's name is legally required. 13. INDEMNITIES AND ASSURANCES. (a) It is understood and agreed that the releases of liability described in this Agreement are material provisions of this Agreement. Accordingly, Employee and Employer, covenant and promise not to sue or otherwise pursue legal action against the other with respect to any released claim, demand or cause of action, and further covenant and promise to indemnify and defend the other from any and all such claims, demands and causes of action, including the payment of reasonable costs and attorneys' fees. Employee agrees that should any legal action be pursued on his behalf by any person or other entity against Employer regarding the claims released in paragraph 11, Employee will not accept recovery from such action, will assign any recovery to Employer, and agrees to indemnify Employer against such claims and any assessment of damages. Employer and its subsidiaries agree that should any legal action be pursued on their behalf by any person or other entity against Employee regarding the claims released in paragraph 11, they will not accept recovery from such action, will assign any recovery to Employer, and agree to indemnify Employee against such claims and assessment of damages. (b) The Indemnity Agreement shall survive the Effective Date and remain in full force and effect. In the event of a conflict between the terms of this Agreement and the terms of the Indemnity Agreement, the terms of the Indemnity Agreement shall control. -6- 14. NOTICE AND CURE. If Employee or Employer determine that the other has breached this Agreement, the non-breaching party will notify the party in breach of that fact in writing and the party in breach and will be afforded ten (10) days to cure the breach. 15. RETURN OF PROPERTY. Employee acknowledges that, in addition to signing this Agreement, he agrees to return on the Effective Date to Employer any and all of Employer's property entrusted to him, such as (but not limited to) marketing plans and related information, product development plans and related information, trade secret information, pricing information, customer information, vendor information, financial information, telephone lists, computer software and hardware, keys, credit cards, vehicle, telephone, computer, and office equipment and that he will not retain copies of any Confidential Information. 16. NO ADMISSION OF LIABILITY. The Parties understand and agree that neither the making of this Agreement nor the fulfillment of any condition or obligation of this Agreement constitutes an admission of any liability or wrongdoing on the part of the other or any Released Party from liability by this Agreement. All liability by either Party to the other has been and is expressly denied. 17. FUTURE COOPERATION. Employee agrees that in all future litigation involving Employer for which Employer requests Employee's cooperation that he will fully cooperate with Employer subject to Employee's reasonable availability. In return for this cooperation, Employer agrees to pay Employee all reasonable costs incurred by Employee due to his cooperation and compensate him at the rate of $180 per hour (including travel) for such services. Employer agrees to pay Employee all such costs and compensation within thirty (30) days of receiving an appropriate invoice. 18. LAW APPLICABLE AND SEVERABILITY. It is intended that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement of this Agreement is sought. The provisions of this Agreement shall be construed in accordance with the laws of the State of Arizona. In the event any term or condition or provision of this Agreement shall be determined to be invalid, illegal or unenforceable by a court of competent jurisdiction, the remaining terms, conditions and provisions of this Agreement shall remain in full force and effect to the extent permitted by law. 19. STATEMENT OF FULL UNDERSTANDING. The Parties acknowledge by signing this Agreement that they have read this Agreement, that they fully understand it, that they have been advised by legal counsel, that they have not transferred, assigned or conveyed any of the claims, rights or entitlements covered by this Agreement, that they have had sufficient time to consider the terms of this Agreement, that they have received and relied on no representations, promises or inducements not otherwise expressed in this Agreement, and that they have signed this Agreement KNOWINGLY AND VOLUNTARILY AND WITH THE FULL UNDERSTANDING THAT THIS AGREEMENT AFFECTS THEIR LEGAL RIGHTS. -7- 20. ATTORNEY CONSULTATION. EMPLOYEE ACKNOWLEDGES THAT HE HAS BEEN ADVISED TO CONSULT WITH AN ATTORNEY OF HIS CHOICE, DANIEL A. BOCK, ABOUT THE TERMS AND CONDITIONS OF THIS AGREEMENT AND THAT HE HAS HAD THE BENEFIT OF INDEPENDENT LEGAL ADVICE WITH RESPECT TO THIS AGREEMENT AND THE MATTERS PROVIDED FOR HEREIN. EMPLOYEE HAS NOT RELIED UPON EMPLOYER OR ITS EMPLOYEES OR ADVISORS FOR SUCH PURPOSES. 21. TIME TO REVIEW. Employee understands that this Agreement includes a release of claims arising under the Age Discrimination in Employment Act. Employee understands and warrants that he has been offered a period of twenty-one days to review and consider this Agreement. By his signature below, Employee warrants that he has been fully and fairly advised by his legal counsel as to the terms of this Agreement. Employee further warrants that he has used as much or all of his twenty-one day period as he wished before signing, and warrants that he has done so. 22. REVOCATION AND NOTICE. Employee further warrants that he understands that he has until 5 p.m. (Arizona Time) on the seventh day following the execution of this Agreement to revoke this Agreement by notice in writing to Kimberlee K. Rozman, Senior Vice President and General Counsel, of Employer. Such notice shall be delivered to Ms. Rozman by facsimile at 214/953-5736 with a copy to Sam H. Carr, Senior Vice President and Chief Financial Officer by facsimile at 602/952-0544 and the original delivered by regular mail, return receipt requested to Ms. Rozman's attention at 901 Main Street, Suite 6000, Dallas, Texas 75202. This Agreement shall be binding, effective, and enforceable upon the Parties upon the expiration of this seven-day revocation period if Ms. Rozman has not received Employee's revocation. 23. WAIVER AND AMENDMENT. No waiver of any of the terms of this Agreement shall be valid unless in writing and signed by all Parties to this Agreement. No waiver or default of any term of this Agreement shall be deemed a waiver of any subsequent breach or default of the same or similar nature. This Agreement may not be amended except by writing signed by all Parties. 24. PARAGRAPH HEADINGS. Paragraph headings are for ease of reading and do not alter the meaning of any terms of this Agreement. This document was signed to become effective on the 13th day of November, 1998. /s/ Gary S. Glatter ---------------------------------- Gary S. Glatter PENTEGRA DENTAL GROUP, INC. -8- BY: /s/ Sam H. Carr --------------------------------------------- Sam H. Carr, Senior Vice President and Chief Financial Officer -9- EXHIBIT A ESCROW AGREEMENT EXHIBIT A ESCROW AGREEMENT This Escrow Agreement (this "Agreement"), entered into effective as of the 13th day of November, 1998, by and among Pentegra Dental Group, Inc. ("Employer"), Gary S. Glatter ("Employee"), and Jackson Walker L.L.P., a Texas limited liability partnership (the "Escrow Agent"), W I T N E S S E T H: WHEREAS, Employer and Employee have entered into that certain Separation and Mutual Release Agreement dated November 13, 1998 (the "Separation Agreement"), pursuant to which, the parties have negotiated an amicable termination of Employee's service and their mutual obligations under the Employment Agreement between the Employer and Employee dated July 1, 1997, as amended by an Amendment also dated July 1, 1997 ( the "Employment Agreement"); and WHEREAS, in consideration of the Employee executing the Separation Agreement, and in settlement of any obligation to pay severance pay or any other amounts of pay which Employer may owe to Employee, Employee is entitled to receive a lump sum cash payment of $350,000, net of federal, state and Medicare taxes that Employer is obligated to withhold aggregating $33,075 (the "Severance Payment"); and WHEREAS, under the terms of the Separation Agreement, the Severance Payment is to be held in escrow by Escrow Agent until such time that the conditions set forth in this Agreement have been satisfied; NOW THEREFORE, in consideration of the mutual representations, warranties and covenants herein contained, and on the terms and subject to the conditions herein set forth, the parties hereto agree as follows: 1. APPOINTMENT OF ESCROW AGENT. Employer and Employee hereby designate Jackson Walker L.L.P., as Escrow Agent, and Escrow Agent accepts such appointment for the purposes hereinafter set forth. 2. DEPOSIT IN ESCROW. On the date of this Agreement, Employer shall deliver to Escrow Agent the Severance Payment ($316,925). The Severance Payment and interest earned thereon shall be distributed by Escrow Agent only in accordance with Section 3 below. Escrow Agent will place the Severance Payment in an interest bearing account of its choice. 3. DISTRIBUTION FROM ESCROW. The Severance Payment and interest earned thereon shall be held in escrow under the terms of this Agreement and released by the Escrow Agent upon the following terms: (a) Upon the delivery of a written notice from Employee to both Employer and Escrow Agent (in the form of EXHIBIT A) indicating that Employee will not exercise his right under the Age Discrimination in Employment Act to revoke the Separation Agreement, with such delivery occurring at any time on or after November 23, 1998 but in no case later than November 29, 1998, the Escrow Agent shall deliver the Severance Payment to Employee by wire transfer to the address set forth in the notice. (b) In the event that prior to November 30, 1998 neither Escrow Agent nor Employer has received notice from Employee indicating that Employee will exercise his right under the Age Discrimination in Employment Act to revoke the Separation Agreement, Escrow Agent shall deliver the Severance Payment and interest earned thereon to Employee by wire transfer in accordance with the instructions set forth in the form of notice attached hereto as EXHIBIT A. (c) Except as provided above the Escrow Agent shall not release or make any disbursements of the Severance Payment. Upon disbursement of the Severance Payment in -2- accordance with this Section 3, this Agreement shall be terminated and the Escrow Agent shall be released and discharged from any further obligations hereunder. 4. LIABILITY OF THE ESCROW AGENT. The duties of the Escrow Agent hereunder shall be limited to the observance of the express provisions of this Agreement. The Escrow Agent shall not be subject to, or be obliged to recognize, any other agreement between the parties hereto or directions or instructions not specifically set forth or provided for herein. The Escrow Agent may rely upon and act upon any instrument received by it pursuant to the provisions of this Agreement which it in good faith believes to be genuine and in conformity with the requirements of this Agreement. Except as expressly provided in this Agreement, the Escrow Agent shall have no duty to determine or inquire into the happening or occurrence of any event or the performance or failure of performance of any of Employer or Employee with respect to arrangements or contracts between them or with others. Anything in this Agreement to the contrary notwithstanding, the Escrow Agent shall not be liable to any person for anything which it may do or refrain from doing in connection with this Agreement, unless the Escrow Agent is guilty of gross negligence or willful misconduct. 5. INDEMNIFICATION OF THE ESCROW AGENT. Employer and Employee shall indemnify and hold the Escrow Agent, its employees, officers, agents, successors and assigns harmless from and against any and all loss, cost, damages or expenses (including reasonable attorneys' fees) it or they may sustain by reason of the Escrow Agent's service as escrow agent hereunder, except such a loss, cost, damage or expense (including reasonable attorneys' fees) incurred by reason of such acts or omissions by the Escrow Agent constituting gross negligence or willful misconduct. 6. REMEDIES OF THE ESCROW AGENT. (a) In the event of any dispute hereunder, or if conflicting demands or notices are made upon the Escrow Agent, or in the event the Escrow Agent in good faith is in doubt as to what action it should take hereunder, the Escrow Agent shall have the right to (i) stop all further -3- proceedings in, and performance of, this Agreement and instructions received hereunder; and/or (ii) file a suit in interpleader and obtain an order from a court of competent jurisdiction requiring all persons involved to interplead and litigate in such court their several claims and rights with respect to the Severance Payment. (b) While any legal proceeding arising out of this Agreement is pending, the Escrow Agent shall have the right to stop all further proceedings in, and performance of, this Agreement and instructions received hereunder until all differences shall have been resolved by agreement or a final order. (c) The Escrow Agent may from time to time consult with legal counsel of its own choosing in the event of any disagreement, controversy, question or doubt as to the construction of any of the provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in good faith in accordance with the opinion and instructions of such counsel. 7. NOTICES. Unless otherwise expressly indicated, any notice or communication hereunder or in any agreement entered into in connection with the transactions contemplated hereby must be in writing and given by depositing the same in the United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person or by facsimile transmission. Such notice shall be deemed received on the date on which it is hand-delivered or received by facsimile transmission or on the second -4- business day following the date on which it is so mailed. For purposes of notice, the addresses of the parties shall be: If to Employer: Kimberlee K. Rozman Senior Vice President and General Counsel Pentegra Dental Group, Inc. 901 Main Street, Suite 6000 Dallas, Texas 75202 fax #: (214) 953-5736 with a copy to: Sam H. Carr Senior Vice President and Chief Financial Officer Pentegra Dental Group, Inc. 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 fax #: (602) 952-0544 with a copy to: Daniel A. Bock Cruse, Firetag & Bock, P.C. 5611 North 16th Street Phoenix, Arizona 85016 fax #: (602) 241-1260 If to Employee: Gary S. Glatter 11160 E. Cochise Ave. Scottsdale, Arizona 85259 fax #: (602) 860-6679 If to the Escrow Agent: James S. Ryan, III Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas 75201 fax #: (214) 953-5736 Any party may change its address for notice by written notice given to the other parties in accordance with this Section. 8. AMENDMENT. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all the parties hereto. -5- 9. ASSIGNMENT. Neither this Agreement nor any right created hereby or in any agreement entered into in connection with the transactions contemplated hereby shall be assignable by any party hereto except by Employer to an affiliate of Employer. 10. ENTIRE AGREEMENT. This Agreement and the agreements contemplated hereby constitute the entire agreement of the parties regarding the subject matter hereof, and supersede all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. 11. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 12. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS. 13. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [Intentionally Left Blank] -6- IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement to be executed by their respective officers hereunto duly authorized, as of the day and year first above written. JACKSON WALKER L.L.P. By: -------------------------------- Its: ------------------------------- EMPLOYER By: -------------------------------- Its: ------------------------------- EMPLOYEE ----------------------------------- Gary S. Glatter -7- EX-10.5 5 EXHIBIT 10.5 AGREEMENT AND PLAN OF MERGER TABLE OF CONTENTS ARTICLE 1 The Merger 1.1. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2. THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE 2 Articles of Incorporation and Bylaws of the Surviving Corporation 2.1. ARTICLES OF INCORPORATION . . . . . . . . . . . . . . . . . . . . . .2 2.2. BYLAWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 ARTICLE 3 Directors and Officers of the Surviving Corporation 3.1. DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 3.2. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 ARTICLE 4 Conversion of Shares in the Merger 4.1. CONVERSION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . .3 4.2. DELIVERY OF MERGER CONSIDERATION; CERTAIN DEFINITIONS . . . . . . . .4 4.3. EXCHANGE OF CERTIFICATES REPRESENTING SHARES. . . . . . . . . . . . .7 ARTICLE 5 Representations and Warranties of the Corporation and the Class B Holders 5.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 5.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. . . . . . . . . . .8 5.3. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .8 5.4. TARGET PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . .9 5.5. OTHER INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . .9 5.6. NONCONTRAVENTION. . . . . . . . . . . . . . . . . . . . . . . . . . .9 5.7. PRIVATE PLACEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.8. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 10 5.9. NO UNDISCLOSED LIABILITIES. . . . . . . . . . . . . . . . . . . . . 11 5.10. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.11. ABSENCE OF CERTAIN CHANGES. . . . . . . . . . . . . . . . . . . . . 11 5.12. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.13. PROPRIETARY RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . 13 5.14. EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . . . 13 5.15. LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.16. RELATED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.17 NO BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.18. VOTE REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 -i- 5.19. CONTRACTS; NO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 16 5.20. REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.21. INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.22. COMPLIANCE WITH APPLICABLE LAWS . . . . . . . . . . . . . . . . . . 17 5.23. ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.24. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.25. TITLE TO ASSETS; LIENS. . . . . . . . . . . . . . . . . . . . . . . 19 5.26. NO MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 6 Representations and Warranties of Acquiror 6.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. . . . . . . . . . 20 6.3. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.4. SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.5. NONCONTRAVENTION. . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.6. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 21 6.7. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.8. ABSENCE OF CERTAIN CHANGES. . . . . . . . . . . . . . . . . . . . . 22 6.9. TAXES AND TAX RETURNS . . . . . . . . . . . . . . . . . . . . . . . 22 6.10. LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.11. NO BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.12. CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.13. COMPLIANCE WITH APPLICABLE LAWS . . . . . . . . . . . . . . . . . . 22 6.14. CERTAIN AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 23 6.15. NO MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . 23 6.16. INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.17. ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.18. TITLE TO ASSETS; LIENS. . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 7 Covenants 7.1. ACQUISITION PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . 24 7.2. INTERIM OPERATIONS OF THE CORPORATION . . . . . . . . . . . . . . . 24 7.3. FILINGS; OTHER ACTION . . . . . . . . . . . . . . . . . . . . . . . 25 7.4. ACCESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.5. MERGER INDEMNIFICATION AND INSURANCE. . . . . . . . . . . . . . . . 26 7.6. FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.7. PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.8. LISTING APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . 27 7.9. FURTHER ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.10. NOTIFICATION OF CERTAIN MATTERS . . . . . . . . . . . . . . . . . . 27 7.11. LEGAL CONDITIONS TO MERGER. . . . . . . . . . . . . . . . . . . . . 28 -ii- 7.12. ACQUIROR BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.13. LIBERTY ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . . 28 7.14. BANK ONE CONSENT. . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 8 Conditions 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. . . . . 28 8.2. CONDITIONS TO OBLIGATION OF THE CORPORATION TO EFFECT THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.3. CONDITIONS TO OBLIGATION OF ACQUIROR AND MERGER SUB TO EFFECT THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.4. FRUSTRATION OF CLOSING CONDITIONS . . . . . . . . . . . . . . . . . 30 ARTICLE 9 Termination 9.1. TERMINATION BY MUTUAL CONSENT . . . . . . . . . . . . . . . . . . . 31 9.2. TERMINATION BY EITHER ACQUIROR OR THE CORPORATION . . . . . . . . . 31 9.3. TERMINATION BY THE CORPORATION. . . . . . . . . . . . . . . . . . . 31 9.4. TERMINATION BY ACQUIROR . . . . . . . . . . . . . . . . . . . . . . 31 9.5. EFFECT OF TERMINATION AND ABANDONMENT . . . . . . . . . . . . . . . 31 9.6. EXTENSION; WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE 10 Indemnity 10.1. INDEMNIFICATION BY CLASS B HOLDERS. . . . . . . . . . . . . . . . . 33 10.2. PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS . . . . . . . . 33 10.3. PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS . . . . . . . . . . . 34 10.4. LIMITATION ON AMOUNT. . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE 11 General Provisions 11.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS . . . . . 35 11.2. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.3. BINDING EFFECT; BENEFIT . . . . . . . . . . . . . . . . . . . . . . 36 11.4. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.5. AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.6. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.7. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.8. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.9. INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.10. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.11. INCORPORATION OF EXHIBITS AND DISCLOSURE LETTERS. . . . . . . . . . 37 11.12. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.13. OBLIGATION OF ACQUIROR. . . . . . . . . . . . . . . . . . . . . . . 37 11.14 MEDIATION AND ARBITRATION . . . . . . . . . . . . . . . . . . . . . 37 -iii- EXHIBITS 4.1(i) Form of Advisor Agreement; Form of Option (Merger Consideration) 4.2(i)(A) Acquisition Agreement 4.2(i)(C) MSA 4.2(i)(D) Dentist Owner Employment Agreement 5.1 Articles of Incorporation and Bylaws of the Corporation 5.3 Options 5.4 Target Practices 5.6 Required Consents 5.9 No Undisclosed Liabilities 5.13 Proprietary Rights 5.14 Employee Benefit Plans 5.16 Related Parties 5.17 No Brokers 5.19 Contracts 5.24 Insurance Policies 5.25 Title to Assets; Liens 6.5 Noncontravention 6.14 Certain Agreements 6.18 Title to Assets; Liens 8.1(iii) Powers Form of Employment Agreement 8.1(iv) McAlister Form of Employment Agreement 8.2(ii) Form of Opinion of Counsel to Acquiror 8.3(ii) Form of Opinion of Counsel to the Corporation 8.3(iii) Form of Option 8.3(iv) SunTrust Equitable Securities Corporation Agreement 8.3(vi) Termination and Release Agreement
-iv- AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of November 13, 1998, is among PENTEGRA DENTAL GROUP, INC., a Delaware corporation ("Acquiror"), LIBERTY DENTAL ALLIANCE, INC., a Tennessee corporation (the "Corporation"), and LIBERTY ACQUISITION CORPORATION, a Tennessee corporation and a wholly-owned subsidiary of Acquiror ("Merger Sub"), James M. Powers, Jr. ("Powers"), Sylvia H. McAlister ("McAlister"), and William Kelly ("Kelly") (Powers, McAlister and Kelly being collectively referred to in this Agreement as the "Class B Holders"). RECITALS A. The Board of Directors of the Corporation and Acquiror each have determined that a business combination between Acquiror and the Corporation is in the best interests of their respective companies and stockholders, and presents an opportunity for their respective companies to achieve long-term strategic objectives, and accordingly have agreed to effect the merger provided for herein upon the terms and subject to the conditions set forth herein. B. The Corporation, Acquiror, Merger Sub and the Class B Holders desire to make certain representations, warranties and agreements in connection with the Merger. NOW, THEREFORE, in consideration of the foregoing, and of the representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 THE MERGER 1.1. THE MERGER. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in SECTION 1.3), Merger Sub shall be merged with and into the Corporation in accordance with this Agreement and the separate corporate existence of the Corporation shall thereupon cease (the "Merger"). The Corporation shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and shall continue to be governed by the laws of the State of Tennessee, and the separate corporate existence of the Corporation with all its rights, privileges, powers, immunities, purposes and franchises shall continue unaffected by the Merger, except as set forth in ARTICLES 2 AND 3. The Merger shall have the effects specified in Section 48-21-108 of the Tennessee Business Corporation Act (the "TBCA"). 1.2. THE CLOSING. The closing of the Merger (the "Closing") shall take place (i) at the offices of Jackson Walker L.L.P., 901 Main Street, Dallas, Texas, at 9:00 a.m., local time, on the first business day immediately following the day on which the last to be fulfilled or waived of the conditions set forth in ARTICLE 8 shall be fulfilled or waived in accordance herewith or (ii) at such other time and place and/or on such other date as the Corporation and Acquiror may agree. The date on which the Closing occurs is hereafter referred to as the "Closing Date." 1.3. EFFECTIVE TIME. If all the conditions to the Merger set forth in ARTICLE 8 shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated in accordance with ARTICLE 9, the parties hereto shall, on the Closing Date, cause Articles of Merger meeting the requirements of Section 48-21-107 of the TBCA to be properly executed and filed with the Secretary of State of the State of Tennessee in accordance with such section. The Merger shall become effective at the time of the filing of Articles of Merger in accordance with the TBCA or at such later time as the parties hereto have theretofore agreed upon and designated in such filing as the effective time of the Merger (the "Effective Time"). ARTICLE 2 ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION 2.1. ARTICLES OF INCORPORATION. Effective at the Effective Time, the Articles of Incorporation of the Corporation shall be the Articles of Incorporation of the Surviving Corporation. 2.2. BYLAWS. The Bylaws of the Corporation in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, until duly amended in accordance with their terms and the TBCA. ARTICLE 3 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION 3.1. DIRECTORS. The persons who are directors of Merger Sub immediately prior to the Effective Time shall, from and after the Effective Time, be and become directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Articles of Incorporation and Bylaws. 3.2. OFFICERS. The officers of Merger Sub shall continue as officers of the Surviving Corporation until their resignation or removal. -2- ARTICLE 4 CONVERSION OF SHARES IN THE MERGER 4.1. CONVERSION OF SHARES. The manner of converting shares of the Corporation and Merger Sub in the Merger shall be as follows: (i) At the Effective Time, each share of the common stock par value $0.01 per share (the "Common Shares"), of the Corporation issued and outstanding immediately prior to the Effective Time (other than Common Shares, if any, owned by Acquiror, Merger Sub or any other subsidiary of Acquiror (the "Acquiror Group")) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive cash in the amount of $0.01. Additionally, on the dates specified in SECTION 4.2, holders of Common Shares shall be entitled to receive up to $3.99 and options to purchase up to 0.25 shares of common stock, $0.001 par value of Acquiror (the "Acquiror Common Stock") for each Common Share. Notwithstanding the foregoing, no options to purchase fractional shares will be issued. Rather, the number of shares of Acquiror Common Stock for which an option otherwise would be exercisable will be rounded up to the nearest whole number. The cash and options into which the Common Shares are converted shall be collectively referred to herein as the Common Merger Consideration. The Acquiror's obligation to issue options on conversion of Common Shares is conditioned on the execution by the holder of Common Shares of an Advisor Agreement in the form of EXHIBIT 4.1(i). The options constituting a portion of the Common Merger Consideration shall be in the form of EXHIBIT 4.1(i). (ii) At the Effective Time, each share of the Class B common stock, par value $0.01 per share (the "Class B Shares"), of the Corporation issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action of the part of the holder thereof, be converted into the right to receive cash in the amount of $0.01. Additionally, on the dates specified in SECTION 4.2, holders of Class B Shares shall be entitled to receive up to one (1) share of Acquiror Common Stock for each Class B Share. Notwithstanding the foregoing, no fractional shares of Acquiror Common Stock will be issued. Rather, the number of shares of Acquiror Common Stock into which a Class B Share is converted will be rounded up to the nearest whole number. The cash and shares of Acquiror Common Stock into which the Class B Shares are converted shall be referred to herein as the "Class B Merger Consideration" and the Common Merger Consideration and Class B Merger Consideration are collectively referred to herein as the "Merger Consideration". The Common Shares and the Class B Shares shall be collectively referred to herein as the "Shares". The Merger Consideration shall be deliverable only as set forth in SECTION 4.2. (iii) As a result of the Merger and without any action on the part of the holder thereof, all Shares shall cease to be outstanding and shall be canceled and retired and shall cease to exist, and each holder of a certificate (a "Certificate") representing any Shares shall thereafter cease to have any rights with respect to such Shares, except the right to receive, without interest, the -3- Merger Consideration in accordance with SECTION 4.1(i) or SECTION 4.1(ii), as the case may be, following the surrender of such Certificate and at the times specified in SECTION 4.2. (iv) Each Share issued and held in the Corporation's treasury at the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof, shall cease to be outstanding and shall be canceled and retired without payment of any consideration therefor and shall cease to exist. (v) At the Effective Time, each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time as a result of the Merger shall continue to be an issued and outstanding share of common stock of the Surviving Corporation. Each certificate representing immediately prior to the Effective Date issued shares of common stock of Merger Sub shall continue to evidence ownership of the same number of shares of common stock of the Surviving Corporation. (vi) Notwithstanding anything in this Agreement to the contrary, Shares outstanding immediately prior to the Effective Time held by a holder (if any) who is entitled to demand, and who properly demands, appraisal for such shares in accordance with all provisions of the Tennessee law concerning the right of such holders to dissent from the Merger and demand appraisal of his shares ("Dissenting Shares") shall not be converted into a right to receive Merger Consideration in accordance with SECTIONS 4.1(i) and 4.2 unless such holder fails to perfect or otherwise loses such holder's right to appraisal, if any. If, after the Effective Time, such holder fails to perfect or loses any such right to appraisal, such shares shall be treated as if they had been converted as of the Effective Time into the right to receive Merger Consideration in accordance with SECTION 4.1(i) and 4.2 hereof. The Corporation shall give prompt notice to Acquiror of any demands received by the Corporation for appraisal of Shares, and Acquiror shall have the right to participate in and direct all negotiations and proceedings with respect to such demands. The Corporation shall not, except with the prior written consent of Acquiror, make any payment with respect to, or settle or offer to settle, any such demands. 4.2. DELIVERY OF MERGER CONSIDERATION; CERTAIN DEFINITIONS. The Merger Consideration shall be deliverable by Acquiror as set forth below: (i) As used herein a "Liberty Practice Acquisition" is an acquisition by a member of the Acquiror Group of substantially all of the assets of or the entire equity interest in a dental practice with which the Corporation has executed a letter of intent prior to the date hereof that is listed on EXHIBIT 5.4 or that Powers or the Corporation has identified in writing to Acquiror on or before December 31, 1998 as a dental practice with which Powers or the Corporation has had communications prior to December 31, 1998 regarding a dental practice management affiliation and which Powers or the Corporation expects to execute a letter of intent with Acquiror regarding a -4- dental practice management affiliation on or prior to June 30, 1999 (a "Liberty Practice"), which acquisition meets the following criteria, unless otherwise agreed by Acquiror: (A) The Acquisition is consummated on or before June 30, 1999 pursuant to the terms of an acquisition agreement in the form of EXHIBIT 4.2(i)(A) (with such changes therein as may be approved in writing by Acquiror); (B) The aggregate consideration paid by a member of the Acquiror Group in connection with the acquisition is no greater than 95% of the Practice Gross Revenues (hereinafter defined) of the dental practice acquired. For purposes of this subparagraph (B), the value attributed to any promissory note or convertible promissory note delivered at closing will be the principal amount of the promissory note or convertible promissory note delivered at closing. For purposes of this subparagraph (B), the value of any Acquiror Common Stock delivered at closing will be the price agreed to between the dental practice acquired, the Acquiror and the Corporation; (C) Concurrently with closing, the dental practice or a successor practice formed by the equity owners of the dental practice acquired will enter into a 30-year management services agreement substantially in the form of EXHIBIT 4.2(i)(C) (an "MSA") with a member of the Acquiror Group (with such changes therein as may be approved in writing by Acquiror) providing for a service fee based on 15% of collected revenues of the dental practice, with the minimum service fee being no less than 15% of the dental practice's Practice Gross Revenues (hereinafter defined). However, in states where the management services fee legally cannot be based on a percentage of collected revenues, the management fee will be based on a methodology chosen by Acquiror's general counsel or, in the absence of a general counsel, Acquiror's principal outside counsel, based on the advice of local counsel; (D) Concurrently with closing, the equity owners of the dental practice will execute employment agreements in the form attached hereto as EXHIBIT 4.2(i)(D) ("Dentist Employment Agreements") with the dental practice pursuant to which the dentists agree to devote their full time and attention to the dental practice for a period of five years beginning on the closing date, subject to limited exceptions acceptable to Acquiror; (E) Concurrently with closing, the dentist employees of the dental practice who are not equity owners of the dental practice will execute employment agreements with the dental practice in form satisfactory to Acquiror. (F) The persons receiving shares of Acquiror Common Stock in connection with the acquisition will agree in writing not to sell or transfer such shares of Acquiror Common Stock for a period of one year following closing; (G) Acquiror's legal, financial and operational due diligence with respect to the dental practice acquired shall have been completed by Acquiror and the results of such due diligence investigation shall have been satisfactory to Acquiror. -5- (ii) As used herein "Practice Gross Revenues" refer to the collected revenues of a dental practice for the year ended December 31, 1997. (iii) Upon receipt of Certificates for Common Shares and letters of transmittal in accordance with SECTION 4.3, $0.01 per Common Share of the Common Merger Consideration shall be deliverable by Acquiror. (iv) One-third (1/3) of the remaining Common Merger Consideration shall be deliverable by Acquiror when members of the Acquiror Group have consummated Liberty Practice Acquisitions representing a total of $10,000,000 in Practice Gross Revenues. (v) One-third (1/3) of the remaining Common Merger Consideration shall be deliverable by Acquiror when members of the Acquiror Group have consummated Liberty Practice Acquisitions representing a cumulative total of $25,000,000 in Practice Gross Revenues. (vi) One-third (1/3) of the remaining Common Merger Consideration shall be deliverable by Acquiror when members of the Acquiror Group have consummated Liberty Practice Acquisitions representing a cumulative total of $40,000,000 in Practice Gross Revenues. (vii) Upon receipt of the Certificates for Series B Shares and letters of transmittal in accordance with SECTION 4.3, $0.01 in cash shall be deliverable for each Class B Share. (viii) Twenty percent (20%) of the remaining Class B Merger Consideration shall be deliverable by Acquiror when members of the Acquiror Group have consummated Liberty Practice Acquisitions representing a total of $10,000,000 in Practice Gross Revenues. (ix) An additional thirty percent (30%) of the remaining Class B Merger Consideration shall be deliverable by Acquiror when members of the Acquiror Group have consummated Liberty Practice Acquisitions representing a cumulative total of $20,000,000 in Practice Gross Revenues. However, in the event that at or before June 30, 1999, members of the Acquiror Group have consummated Liberty Practice Acquisitions representing more than a cumulative total of $10,000,000 but less than a cumulative total of $20,000,000 in Practice Gross Revenues, there shall be deliverable by Acquiror as the total remaining Class B Merger Consideration an additional percentage of Class B Merger Consideration determined by multiplying thirty percent (30%) by the quotient of (a) the difference between $10,000,000 and the cumulative total of Practice Gross Revenues in excess of $10,000,000 attributable to Liberty Practice Acquisitions consummated by members of the Acquiror Group at or before June 30, 1999 divided by (b) $10,000,000. (x) An additional forty percent (40%) of the remaining Class B Merger Consideration shall be deliverable by Acquiror when members of the Acquiror Group have consummated Liberty Practice Acquisitions representing a cumulative total of $40,000,000 in Practice Gross Revenues. However, in the event that at or before June 30, 1999, members of the -6- Acquiror Group have consummated Liberty Practice Acquisitions representing more than a cumulative total of $20,000,000 but less than a cumulative total of $40,000,000 in Practice Gross Revenues, there shall be deliverable by Acquiror as the total remaining Class B Merger Consideration an additional percentage of Class B Merger Consideration determined by multiplying forty percent (40%) by the quotient of (a) the difference between $20,000,000 and the cumulative total of Practice Gross Revenues in excess of $20,000,000 attributable to Liberty Practice Acquisitions consummated by members of the Acquiror Group at or before June 30, 1999 divided by (b) $20,000,000. (xi) The final ten percent (10%) of the remaining Class B Merger Consideration shall be deliverable by Acquiror when members of the Acquiror Group have consummated Liberty Practice Acquisitions representing a cumulative total of $50,000,000 in Practice Gross Revenues. However, in the event that at or before June 30, 1999, members of the Acquiror Group have consummated Liberty Practice Acquisitions representing more than a cumulative total of $40,000,000 but less than a cumulative total of $50,000,000 in Practice Gross Revenues, there shall be deliverable by Acquiror as the total remaining Class B Merger Consideration an additional percentage of Class B Merger Consideration determined by multiplying ten percent (10%) by the quotient of (a) the difference between $10,000,000 and the cumulative total of Practice Gross Revenues in excess of $40,000,000 attributable to Liberty Practice Acquisitions consummated by members of the Acquiror Group at or before June 30, 1999 divided by (b) $10,000,000. 4.3. EXCHANGE OF CERTIFICATES REPRESENTING SHARES. (i) At the Effective Time, Acquiror shall mail to each person who was, at the Effective Time, a holder of record (other than any of the Acquiror Group) of a Certificate or Certificates (i) a letter of transmittal which shall specify that delivery shall be effected, and a risk of loss and title to the Certificates shall pass, upon (and only upon) delivery of the Certificates to Acquiror, and which shall be in such form and have such other provisions as Acquiror may reasonably specify, and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender to the Acquiror of a Certificate for cancellation together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate shall, subject to the provisions of SECTION 4.2 hereof, be entitled to receive in exchange therefor the Merger Consideration, which such holder has the right to receive in respect of the Certificate surrendered pursuant to the provisions of this ARTICLE 4, after giving effect to any required tax withholdings, and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on the amount payable upon surrender of Certificates. (ii) At or after the date hereof, there shall be no transfers on the stock transfer books of the Corporation of Shares which were outstanding immediately prior to the date hereof. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged for certificates for Merger Consideration in accordance with the procedures set forth in this ARTICLE 4. -7- (iii) None of the Corporation, the Surviving Corporation, Merger Sub, the Acquiror or any other person shall be liable to any former holder of Shares for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (iv) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, Acquiror will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration, deliverable in respect thereof pursuant to this Agreement. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE CLASS B HOLDERS The Corporation and the Class B Holders jointly and severally represent and warrant to Acquiror as of the date of this Agreement as follows: 5.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH LAW. The Corporation is a corporation duly incorporated, validly existing and in good standing under the laws of Tennessee. The Corporation is qualified to do business and is in good standing only under the laws of the State of Tennessee, which is the only jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the business of the Corporation (a "Corporation Adverse Effect"). As used in this Agreement, the term "material adverse effect" means, with respect to any entity, a material adverse effect on the financial condition, properties, business prospects, or results of operations of such entity and its subsidiaries taken as a whole, and on the ability of such entity to perform its obligations hereunder or to consummate the transactions contemplated hereby. The Corporation has all requisite corporate power and authority to own, operate and lease its properties and carry on its business as now conducted. The Corporation has delivered to Acquiror complete and correct copies of the Articles of Incorporation and Bylaws of the Corporation, as amended to the date hereof, copies of which are attached hereto as EXHIBIT 5.1. 5.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. The Corporation has the requisite corporate power and authority to execute and deliver this Agreement and all agreements and documents contemplated hereby by Acquiror, and the consummation by the Corporation of the transactions contemplated hereby, have been duly authorized by all requisite corporate action. This Agreement constitutes, and all agreements and documents contemplated hereby (when executed and delivered pursuant hereto for value received) will constitute, the valid and legally binding obligations of the Corporation enforceable in accordance with their terms, except as the same may be limited -8- by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting generally the enforcement of creditors' rights and by general principles of equity. 5.3. CAPITALIZATION. The authorized capital stock of the Corporation consists of 100,000,000 Common Shares. At the date of this Agreement, there are 315,750 Common Shares and 545,000 Class B Shares issued and outstanding. EXHIBIT 5.3 includes a complete list of the Corporation's shareholders at the date of this Agreement. The Corporation has no Shares reserved for issuance, except that, as of the date of this Agreement, 145,000 Common Shares are reserved for issuance pursuant to outstanding options listed on EXHIBIT 5.3 (the "Options"). Except as listed on EXHIBIT 5.3, the Corporation has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or, are convertible into or exercisable for securities having the right to vote) with the stockholders of the Corporation on any matter ("Voting Debt"). All of the issued and outstanding Common Shares and Class B Shares are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Other than as set forth above or as listed on EXHIBIT 5.3, there are not at the date of this Agreement any existing options, warrants, calls, subscriptions, convertible securities, or other rights or other agreements or commitments which obligate the Corporation to issue, transfer or sell any shares of capital stock of the Corporation. EXHIBIT 5.3 includes a true and complete list of all options currently outstanding to purchase the Corporation's securities, including the names of the holders thereof and the number of securities subject to each option. After the Effective Time, assuming that all outstanding Options are exchanged as contemplated by SECTION 8.3(iii), the Surviving Corporation will have no obligation to issue, transfer or sell any Shares or common stock of the Surviving Corporation pursuant to any Employee Benefit Plan (as defined in SECTION 5.14). 5.4. TARGET PRACTICES. EXHIBIT 5.4 lists: (i) Each entity with which the Corporation has entered into a letter of intent with respect to a dental practice affiliation (each such entity is referred to herein as a "Target Practice" and collectively such entities are referred to herein as the "Target Practices"); and (ii) to the extent available to the Corporation, with respect to each Target Practice, the type of entity that comprises the Target Practice and its jurisdiction of organization or formation. 5.5. OTHER INTERESTS. The Corporation does not own, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, joint venture, business, trust or entity. 5.6. NONCONTRAVENTION. Neither the execution and delivery by the Corporation of this Agreement, nor the consummation by the Corporation of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof, will: (i) conflict with or result in a breach of any provisions of the Articles of Incorporation or Bylaws of the Corporation; (ii) result in a breach or violation of, a default under, or the triggering of any payment or other material obligations pursuant to, or accelerate vesting under the terms of any outstanding options or warrants to purchase -9- the Corporation's securities, or (iii) violate, or conflict with, or result in a material breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of the material properties of the Corporation under, or result in being declared void, voidable, or without further binding effect, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust or any material license, franchise, permit, lease, contract, agreement, management services agreement or other instrument or commitment or obligation ("Contracts") to which the Corporation is a party other than Contracts which require the consent of the other party or parties thereto to assign or transfer to Merger Sub or Acquiror by reason of the execution of this Agreement or the consummation of the transactions contemplated herein, which required consents are set forth on EXHIBIT 5.6, or by which the Corporation or any of its properties is bound or affected except with respect to matters which are not material to the business of the Corporation. 5.7. PRIVATE PLACEMENT. The Corporation has delivered to Acquiror the Corporation's Private Placement Memorandum dated January 12, 1998 and all amendments and supplements thereto filed (the "Memorandum"). The Memorandum (i) was prepared in all material respects in accordance with the requirements of the Securities Act of 1933, as amended (the "Securities Act") and all applicable state securities laws, and the rules and regulations thereunder and (ii) does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The private placement of Shares contemplated by the Memorandum was conducted and consummated in compliance with the Securities Act, all applicable state securities laws and the rules and regulations thereunder. 5.8. FINANCIAL STATEMENTS. The Corporation has delivered to Acquiror (a) an audited balance sheet of Acquiror as at December 31, 1997 (including the notes thereto, the "Balance Sheet"), and the related audited statements of income, changes in shareholders' equity and cash flows for the fiscal year then ended, including in each case the notes thereto, together with the report thereon of Arthur Andersen, LLP, independent certified public accountants, and (b) an unaudited balance sheet of the Corporation as at September 30, 1998 (the "Interim Balance Sheet") and the related unaudited statement[s] of income, changes in shareholders' equity, and cash flows for the nine (9) months then ended, including in each case the notes thereto. Such financial statements fairly present the financial condition and the results of operations, changes in shareholders' equity, and cash flows of the Corporation as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP, subject, in the case of interim financial statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse) and the absence of notes (that, if presented, would not differ materially from those included in the Balance Sheet). The financial statements referred to in this SECTION 5.8 reflect the consistent application of such accounting principles throughout the periods involved, except as disclosed in the notes to such financial statements. The financial statements have been and will be prepared from and are in accordance with the books and records of the Corporation. -10- The Corporation has also delivered to Acquiror copies of all letters from the Corporation's auditors to the Corporation's board of directors or the audit committee thereof since the Corporation's inception. 5.9. NO UNDISCLOSED LIABILITIES. Except as set forth in EXHIBIT 5.9, the Corporation has no liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise) except for liabilities or obligations reflected or reserved against in the Balance Sheet or the Interim Balance Sheet or as otherwise may be incurred in the ordinary course of business. 5.10. LITIGATION. There are no actions, suits or proceedings pending against the Corporation or, to the knowledge of the officers of the Corporation or the Class B Holders, threatened against the Corporation, at law or in equity, or before or by any federal, state or local commission, board, bureau, agency or instrumentality. 5.11. ABSENCE OF CERTAIN CHANGES. Since its incorporation, the Corporation has conducted no business other than incident to the proposed Liberty Practice Acquisitions and there has not been (i) any damage, destruction or loss (not covered by insurance) with respect to any assets of the Corporation; (ii) any change in the Corporation or any development or combination of developments of which its officers or the Class B Holders have knowledge which has resulted or is reasonably likely to result in a Corporation Adverse Effect; (iii) any declaration, setting aside or payment of any dividend or other distribution with respect to the Shares; or (iv) any material change in the Corporation's accounting principles, practices or methods. 5.12. TAXES. (i) FILING OF TAX RETURNS. The Corporation has duly and timely filed with the appropriate governmental agencies all income, excise, corporate, franchise, property, sales, use, payroll, withholding and other tax returns (including information returns) and reports required to be filed by the United States or any state or any political subdivision thereof or any foreign jurisdiction. All such tax returns or reports are complete and accurate and properly reflect the taxes of the Corporation for the periods covered thereby. (ii) PAYMENT OF TAXES. The Corporation has paid or accrued all taxes, penalties and interest which have become due with respect to any returns that it has filed and any assessments of which it is aware. The Corporation is not delinquent in the payment of any tax, assessment or governmental charge. (iii) NO PENDING DEFICIENCIES, DELINQUENCIES, ASSESSMENTS OR AUDITS. No tax deficiency or delinquency has been asserted against the Corporation. There is no unpaid assessment, proposal for additional taxes, deficiency or delinquency in the payment of any of the taxes of the Corporation that could be asserted by any taxing authority. There is no taxing authority audit of the -11- Corporation pending or threatened. The Corporation has not violated any federal state, local or foreign tax law, except as would not have a Corporation Adverse Effect. (iv) NO EXTENSION OF LIMITATION PERIOD. The Corporation has not granted an extension to any taxing authority of the limitation period during which any tax liability may be assessed or collected. (v) ALL WITHHOLDING REQUIREMENTS SATISFIED. All monies required to be withheld by the Corporation and paid to governmental agencies for all income, social security, unemployment insurance, sales, excise, use and other taxes have been collected or withheld and either paid to the respective governmental agencies or set aside in accounts for such purpose. (vi) STATE UNEMPLOYMENT TAXES. In respect of its most recently completed reporting period, the Corporation has paid state unemployment taxes to the state of Tennessee at the rate of 2.7 percent of the wages paid by the Corporation during such period that are subject to such tax. The Corporation does not know or have reason to know of any increase or proposed increase, or facts that would lead to an increase, in the rate of such state unemployment tax for any period in the future. (vii) REASONABLE EXPENDITURES. All amounts paid by the Corporation (i) to officers, employees, consultants and agents as salaries, compensation, and expenses reimbursed by the Corporation, and (ii) as rental payments, have been in amounts which are reasonable and deductible for income tax purposes. (viii) AFFILIATED GROUP. The Corporation is not, and in prior years has not been, a member of an affiliated group, as such term is defined in Section 1504 of the Code, filing a consolidated return. (ix) SAFE HARBOR LEASE. None of the assets of the Corporation constitute property that Acquiror or any member of the Acquiror Group, will be required to treat as being owned by another person pursuant to the "Safe Harbor Lease" provisions of Section 168(f)(8) of the Code prior to repeal by the Tax Equity and Fiscal Responsibility Act of 1982. (x) TAX EXEMPT ENTITY. None of the assets of the Corporation are or will be subject to a lease to a "tax exempt entity" as such term is defined in Section 168(h)(2) of the Code. (xi) COLLAPSIBLE CORPORATION. The Corporation has not at any time consented to have the provisions of Section 341(f)(2) of the Code apply to it. (xii) CHANGE IN ACCOUNTING METHOD. The Corporation has not voluntarily or involuntarily changed a method of accounting resulting in the Corporation's inclusion of amounts in income pursuant to adjustments under Section 481 of the Code. -12- (xiii) S CORPORATION. The Corporation is not currently and at no time has been an S corporation as such term is defined in Section 1361(a) of the Code. (xiv) GOLDEN PARACHUTE. The Corporation is not a party to any employment agreement, or any incentive compensation, deferred compensation, profit sharing, stock option, stock bonus, stock purchase, savings, retirement, pension or other similar plan or arrangement which would require a payment, and the Corporation will not make a payment that would not be deductible by Acquiror or the Corporation because such payment or other compensation would constitute an excess parachute payment within the meaning of Section 280G of the Code. 5.13. PROPRIETARY RIGHTS. EXHIBIT 5.13 lists all material patents, trademarks, trade names, service marks, service names, copyrights, know how, other proprietary intellectual property rights, applications therefor and licenses or other rights in respect thereof ("Intellectual Property") used or held for use in connection with the business of the Corporation. The Corporation owns or has valid, binding, enforceable and adequate rights to use all Intellectual Property without any conflict with the rights of others. The Corporation has not received any notice from any other person pertaining to or challenging its right to use any Intellectual Property or any trade secrets, proprietary information, inventions, processes and procedures owned or used by or licensed to it, except with respect to rights the loss of which, individually have not had and are not reasonably likely to result in a Corporation Adverse Effect. To the knowledge of the officers of the Corporation or the Class B Holders, none of the officers or employees of the Corporation is in violation of any term of any employment contract, or any other contract or agreement relating to the relationship of any such employee with the Corporation or any other party the result of which has had or is reasonably likely to result in a cost, loss or damage to the Corporation in excess of $1,000. 5.14. EMPLOYEE BENEFIT PLANS. (i) EXHIBIT 5.14 contains a complete and accurate list of the following: (I) all employee benefit plans (the "Employee Benefit Plans") (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) sponsored or administered by the Corporation or any ERISA Affiliate to which the Corporation or any ERISA Affiliate contributes or is required to contribute on behalf of the Corporation's current or former employees; (II) all compensation plans, funds, arrangements and practices (the "Compensation Plans") sponsored by the Corporation for the benefit of its current or former employees, including plans providing for bonuses, incentive compensation, stock options, fringe benefits, and deferred compensation; and (III) all employment agreements (the "Employment Agreements") to which the Corporation is a party with respect to the Corporation's employees, including agreements pertaining to employee leasing, services, noncompetition, and other similar matters with current or former employees. The term "ERISA Affiliate" shall include any person, entity or arrangement which is considered one employer with the Corporation within the meaning of Section 414 of the Code or Section 4001 of ERISA. No Employee Benefit Plan is a single-employer plan within the meaning of Section 4001(a)(15) of ERISA or a multiemployer plan (within the meaning of Section 4001(a)(3) of ERISA. -13- (ii) Each Employee Benefit Plan has been administered and maintained in compliance with all applicable laws, rules and regulations, and all reports required by any governmental agency have been timely filed. No Employee Benefit Plan or Compensation Plan is currently the subject of an audit, investigation, enforcement action or other similar proceeding conducted by any state or federal agency. There is no proceeding, claim (other than routine claims for benefits), lawsuit, or investigation pending or to the knowledge of the officers of the Corporation or the Class B Holders threatened, concerning or involving any Compensation Plan or Employee Benefit Plan. There is no litigation involving, and there are no proceedings before, the U.S. Department of Labor or any other commission or administrative or regulatory authority pending against the Corporation or any ERISA Affiliate, or against any fiduciary of any Compensation Plan or Employee Benefit Plan, relating to claims for benefits, breaches of duties or relating in any way to the maintenance or operation of such plans; and to the knowledge of the officers of the Corporation or the Class B Holders no such claim exists or has been threatened. (iii) The Corporation has received a current favorable determination letter or ruling from the Internal Revenue Service for each Employee Benefit Plan sponsored by the Corporation, and each amendment thereto, intended to be qualified within the meaning of Section 401(a) of the Code and/or tax-exempt within the meaning of Section 501(a) of the Code. No proceedings exist or, to the knowledge of the officers of the Corporation or the Class B Holders, have been threatened that could result in the revocation of any such favorable determination letter or ruling. (iv) All contributions due to each Employee Benefit Plan have been made in a timely manner and all liabilities of the Corporation with respect to the Employee Benefit Plans and Compensation Plans are reflected in the Corporation's balance sheet. (v) The Corporation has no obligation or commitment to provide medical, dental or life insurance benefits to or on behalf of any of the Corporation's employees who may retire or any of the Corporation's former employees who have retired from employment with the Corporation, except as provided in Section 4980B of the Code with respect to continuation coverage under COBRA. (vi) There are no restrictions on the rights of the Corporation to amend or terminate any Employee Benefit Plan or Compensation Plan without incurring any liability thereunder. 5.15. LABOR MATTERS. (i) The Corporation has never been a party to any agreement with any union, labor organization or collective bargaining unit. No employees of the Corporation are represented by any union, labor organization or collective bargaining unit. To the knowledge of the officers of the Corporation or the Class B Holders, the Corporation's employees have no intention to and have not threatened to organize or join a union, labor organization or collective bargaining unit, and there -14- are no existing or threatened labor strikes, disputes, grievances, controversies or other labor troubles affecting the Corporation, nor does any basis therefor exist. (ii) The Corporation has been and is in compliance with all applicable laws, rules, regulations and ordinances respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not liable for any arrears of wages or penalties for failure to comply with any of the foregoing. The Corporation has not engaged in any unfair labor practice or discriminated on the basis of race, color, religion, sex, national origin, age or handicap in its employment conditions or practices. There are no unfair labor practice charges or complaints or racial, color, religious, sex, national origin, age or handicap discrimination charges or complaints pending or, to the knowledge of the officers of the Corporation or the Class B Holders, threatened against the Corporation before any federal, state or local court, board, department, commission or agency nor to their knowledge, does any basis therefor exist. 5.16. RELATED PARTIES. Except as set forth on EXHIBIT 5.16, to the knowledge of the officers of the Corporation or the Class B Holders, none of the executive officers or directors of the Corporation or any entity controlled by any of the foregoing or any member of the immediate family of any of the foregoing or any Class B Holder: (i) owns, directly or indirectly, any interest in (except for stock holdings not in excess of two percent (2%) held solely for investment purposes in securities which are listed on a national securities exchange or which are regularly traded in the over-the-counter market), or is an owner, sole proprietor, stockholder, partner, director, officer, employee, provider, consultant or agent of any person which is a competitor, lessor, lessee or customer of or a party to a management services or similar agreement with, or supplier of goods or services to, the Corporation; (ii) owns, directly or indirectly, in whole or in part, any real property, leasehold interests, tangible property or intangible property which the Corporation currently uses in its business; (iii) has any cause of action or other suit, action or claim whatsoever against, or owes any amount to the Corporation. (iv) has sold to, or purchased from, the Corporation any assets or property since the incorporation of the Corporation; (v) is competing or at any time since the incorporation of the Corporation has competed, directly or indirectly, with the Corporation; or (vi) is indebted to the Corporation. -15- As used in this SECTION 5.16, a person's immediate family shall mean such person's spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law. 5.17 NO BROKERS. Except as set forth on EXHIBIT 5.17, the Corporation has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Acquiror to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. 5.18. VOTE REQUIRED. The affirmative vote of the holders of a majority of the outstanding Shares is the only vote of the holders of any class or series of capital stock of the Corporation necessary to approve the Merger. Such vote has been obtained. 5.19. CONTRACTS; NO DEFAULT. (i) EXHIBIT 5.19 sets forth as of the date of this Agreement a list of each Contract of the Corporation: (A) involving an aggregate payment or commitment per Contract on the part of any party of more than $1,000 during the 12-month period ended December 31, 1998; (B) with an individual or entity rendering services as an employee of or contractor to the Corporation; (C) concerning a partnership or joint venture with another person; or (D) involving the provision by the Corporation of dental practice management or similar services; (E) involving an acquisition of assets or securities, which acquisition has not yet been consummated or has been consummated by the Corporation since its incorporation; or (F) evidencing indebtedness of the Corporation. (ii) EXHIBIT 5.19 lists each Contract to which the Corporation is a party limiting the right of the Corporation prior to the Effective Time, or the Surviving Corporation or any of its subsidiaries or affiliates (other than individuals) at or after the Effective Time, to engage in, or to compete with any person in, any business, including each contract or agreement containing exclusivity provisions restricting the geographical area in which, or the method by which, any business may be conducted by the Corporation prior to the Effective Time, or Surviving Corporation or any of its subsidiaries or affiliates (other than individuals) after the Effective Time. -16- (iii) Each Contract, and each other contract or agreement of the Corporation which would have been required to be disclosed on EXHIBIT 5.19 had such contract or agreement been entered into prior to the date of this Agreement, is in full force and effect and is a legal, valid and binding Contract and there is no material default (or any event which, with the giving of notice or lapse of time or both, would be a material default) by the Corporation or, to the knowledge of the executive officers of the Corporation or the Class B Holders, any other party, in the timely performance of any obligation to be performed or paid under any of Contracts or any such other contract or agreement. 5.20. REAL PROPERTY. (i) The Corporation does not own or have the option or right to acquire any real property. (ii) With respect to the sublease dated January 13, 1998 relating to the Corporation's principal executive offices in Nashville, Tennessee (the "Nashville Lease"): (A) such lease is in full force and effect and is a legal, valid and binding obligation of the Corporation, enforceable by the Corporation in accordance with its terms; (B) no notice of default under such lease has been received by the Corporation which is still in effect, the Corporation is not in breach or default of such lease, and no event has occurred which, with notice or lapse of time, would constitute such a breach or default or permit termination, modification or acceleration under such lease; (C) as of the date of this Agreement, to the knowledge of the officers of the Corporation or the Class B Holders, there are no pending or threatened condemnation or eminent domain proceedings with respect to the real property subject to such lease; and (D) as of the date of this Agreement, the Corporation has not received notice of any special assessments relating to the real property subject to such lease. (iii) The Nashville Lease is the only lease to which the Corporation is a party related to real property. 5.21. INFORMATION. No representation or warranty made by the Corporation contained in this Agreement and no statement contained in any certificate, list, exhibit or other instrument specified in this Agreement contains any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. 5.22. COMPLIANCE WITH APPLICABLE LAWS. The Corporation holds all permits, licenses, variances, exemptions, orders and approvals of all courts, administrative agencies or commissions -17- or other governmental authorities or instrumentalities, domestic or foreign (each, a "Governmental Entity") necessary or required for the conduct of the business of the Corporation (the "Corporation Permits"), except for such permits, licenses, variances, exemptions, orders and approvals the failure to hold which would not have a Corporation Adverse Effect. The Corporation is in compliance with the terms of the Corporation Permits, except for such failures to comply, which, singly or in the aggregate, would not have a Corporation Adverse Effect. The business of the Corporation is not being conducted in violation of any law, ordinance or regulation of any Governmental Entity, except for possible violations which individually or in the aggregate do not and could not have a Corporation Adverse Effect. No investigation or review by any Governmental Entity with respect to the Corporation is pending, or, to the knowledge of the officers of the Corporation or the Class B Holders, threatened, nor has any Governmental Entity indicated an intention to conduct the same. 5.23. ENVIRONMENT. As used herein, the term "Environmental Laws" means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including without limitation laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or industrial, toxic or hazardous substances or wastes into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemicals, pollutants, contaminants, or industrial, toxic or hazardous substances or wastes, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder. There are, with respect to the Corporation, no past or present violations of Environmental Laws, releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law liability or any liability under the Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA") or similar state or local laws, which liabilities, either individually or in the aggregate, would have a Corporation Adverse Effect. 5.24. INSURANCE. (i) The Corporation has (A) property, fire and casualty insurance policies, with extended coverage (subject to reasonable deductibles), sufficient to allow it to replace any of its properties that might be damaged or destroyed, and (B) liability, workers compensation insurance and bond and surety arrangements reasonably adequate, in light of the business in which it is engaged, to protect it and its financial condition against the risks involved in the business conducted by it. EXHIBIT 5.24 sets forth a list of all such policies. (ii) EXHIBIT 5.24 sets forth any pending claims under each of the policies listed therein, and there are no other pending claims under any of such policies, and no event has occurred and no condition exists that could reasonably be expected to give rise to or serve as a basis for any such claim. -18- (iii) The Corporation is not in default under any insurance policy or bond listed on EXHIBIT 5.24 and no event which would (with the passage of time, notice or both) constitute a breach or default thereunder by the Corporation or, to the knowledge of the officers of the Corporation or the Class B Holders, the insurer thereunder, has occurred, or, to the knowledge of the officers of the Corporation or the Class B Holders, will occur as a result of the transactions contemplated herein. Consummation of the transactions contemplated herein will not (and will not give any person or entity a right to) terminate or modify any material rights of, or accelerate or augment any material obligation of the Corporation under any insurance policy or bond insofar as such policy or bond relates to or covers incidents that give rise to claims for incidents taking place prior to the Closing Date. The Corporation has not done anything by way of action or inaction which might invalidate or diminish coverage under any of such policies in whole or in part. There are no outstanding requirements or recommendations of any insurance company that has issued a policy to the Corporation which require or recommend any changes to the conduct of the business of the Corporation or any repair or other work with respect to any of its properties. 5.25. TITLE TO ASSETS; LIENS. Except as disclosed on EXHIBIT 5.25, the Corporation has good and marketable title to all of its assets, and such assets are free and clear of any material mortgages, liens, charges, encumbrances, or title defects of any nature whatsoever. The Corporation has valid and enforceable leases for the premises and the equipment, furniture and fixtures purported to be leased by it. All such leases are listed on EXHIBIT 5.25. 5.26. NO MATERIAL ADVERSE EFFECT. Except as disclosed in this Agreement or the exhibits hereto, the Corporation and Class B Holders are not aware of any fact which, alone or together with another fact, is likely to result in a Corporation Adverse Effect. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF ACQUIROR Acquiror represents and warrants to the Corporation and Class B Holders as of the date of this Agreement as follows: 6.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH LAW. Acquiror is a corporation duly incorporated, validly existing in good standing under the laws of Delaware. Acquiror is duly licensed or qualified to do business as a foreign corporation and in good standing under the laws of each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the business of Acquiror taken as a whole, which for purposes of this Agreement shall mean the business of Acquiror and the Acquiror Subsidiaries (hereinafter defined) taken as a whole (an "Acquiror Adverse Effect"). Acquiror has all requisite corporate power and authority to own, operate and lease its properties and carry on its business as now conducted. The copies of Acquiror's Certificate of Incorporation and -19- Bylaws previously delivered to the Corporation are true and correct. Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware. Merger Sub has not conducted any business or incurred any liabilities other than in connection with the negotiation and execution of this Agreement. Merger Sub is duly licensed or qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary. Merger Sub has the corporate power and authority to execute and deliver this Agreement and consummate the transactions contemplated hereby. 6.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. The sole stockholder of Merger Sub has approved this Agreement. The execution and delivery of this Agreement and all agreements and documents contemplated hereby by Acquiror and Merger Sub, and the consummation by them of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate action. This Agreement constitutes, and all agreements and documents contemplated hereby (when executed and delivered pursuant hereto for value received) will constitute, the valid and legally binding obligations of Acquiror and Merger Sub, enforceable in accordance with their terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting generally the enforcement of creditors' rights and by general principles of equity. 6.3. CAPITALIZATION. The authorized capital stock of Acquiror consists of 40,000,000 shares of Acquiror Common Stock and 10,000,000 shares of Preferred Stock, par value $0.001 per share ("Acquiror Preferred Stock"). As of September 30, 1998, there were 7,613,033 shares of Acquiror Common Stock issued and outstanding and no shares of Acquiror Preferred Stock issued and outstanding. Acquiror has no shares of Acquiror Common Stock or Acquiror Preferred Stock reserved for issuance, except that, as of September 30, 1998, 2,000,000 shares of Acquiror Common Stock were reserved for issuance pursuant to Acquiror's 1997 Stock Compensation Plan. Acquiror has no outstanding Voting Debt. All such issued and outstanding shares of Acquiror Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. No certificate of designation has been filed by Acquiror with the office of the Delaware Secretary of State with respect to the Acquiror Preferred Stock 6.4. SUBSIDIARIES. Acquiror owns, directly or indirectly, each of the outstanding shares of capital stock of each of Acquiror's subsidiaries (individually, an "Acquiror Subsidiary" and collectively, the "Acquiror Subsidiaries"). Each Acquiror Subsidiary is duly licensed or qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so qualified would not have an Acquiror Adverse Effect. 6.5. NONCONTRAVENTION. Except as set forth on EXHIBIT 6.5, neither the execution and delivery by Acquiror of this Agreement, nor the consummation by Acquiror of the transactions contemplated hereby in accordance with the terms hereof, will: (i) conflict with or result in a breach -20- of any provisions of the Certificate of Incorporation or Bylaws of Acquiror; (ii) violate, or conflict with, or result in a material breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any material lien, security interest, charge or encumbrance upon any of the material properties of Acquiror under, or result in being declared void, voidable, or without further binding effect, any of the terms, conditions or provisions of any Contract to which Acquiror is a party, or by which Acquiror or any of its properties is bound or affected except with respect to matters which are not material to the business of Acquiror taken as a whole; or (iii) require any material consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority, of which the failure to obtain would have an Acquiror Adverse Effect. 6.6. FINANCIAL STATEMENTS. Acquiror has delivered to the Corporation Acquiror's Registration Statement on Form S-4 (No. 333-49473) together with all amendments thereto and Acquiror's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, each in the form (including exhibits and any amendments thereto) filed with the Securities and Exchange Commission ("SEC") (collectively, the "Acquiror Reports"). As of their respective dates, the Acquiror Reports (i) were prepared in accordance with the requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations thereunder and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each of the consolidated balance sheets of Acquiror included in or incorporated by reference into the Acquiror Reports (including any related notes and schedules) fairly presents the consolidated financial position of Acquiror and the Acquiror Subsidiaries as of its date and each of the consolidated statements of income, retained earnings and cash flows of Acquiror included in or incorporated by reference into the Acquiror Reports (including any related notes and schedules) fairly presents the consolidated results of operations, retained earnings and cash flows, as the case may be, of Acquiror and the Acquiror Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein and subject to normal year-end adjustments in the case of interim financial statements. Except as and to the extent set forth on the unaudited consolidated balance sheet of Acquiror and the Acquiror Subsidiaries at June 30, 1998, including all notes thereto, neither Acquiror nor any Acquiror Subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a consolidated balance sheet of Acquiror or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except liabilities arising in the ordinary course of business since such date. 6.7. LITIGATION. There are no actions, suits or proceedings pending against Acquiror or Acquiror's Subsidiaries or, to the knowledge of the executive officers of Acquiror, threatened against Acquiror or Acquiror's Subsidiaries, at law or in equity, or before or by any federal, state or local -21- commission, board, bureau, agency or instrumentality that are reasonably likely to have an Acquiror Adverse Effect. 6.8. ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Acquiror Reports filed with the SEC prior to the date hereof or has otherwise been publicly announced, since June 30 1998, Acquiror has conducted its business only in the ordinary course of such business and there has not been (i) any material adverse change in such business of which its executive officers have knowledge; (ii) any declaration, setting aside or payment of any dividend or other distribution with respect to its capital stock; or (iii) any material change in its accounting principles, practices or methods. 6.9. TAXES AND TAX RETURNS. Acquiror (i) has timely filed all federal, state, local and foreign tax returns required to be filed by it for the years ended prior to the date of this Agreement or requests for extensions have been timely filed and any such request shall have been granted and not expired and all such filed returns are complete in all material respects, (ii) has paid or accrued all taxes shown to be due and payable on such returns and (iii) has properly accrued all such taxes for periods subsequent to the periods covered by such returns. 6.10. LABOR MATTERS. Acquiror is not a party to or bound by any collective bargaining agreement. There is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of the executive officers of Acquiror, threatened relating to its business. To the knowledge of the executive officers of Acquiror, there are not any organizational efforts presently being made or threatened involving employees of Acquiror. 6.11. NO BROKERS. Acquiror has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Acquiror to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby, Acquiror is not aware of any claim for payment of any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. 6.12. CAPITAL STOCK. The outstanding shares of common stock of Merger Sub are validly issued, fully paid and nonassessable and are owned directly by Acquiror. The issuance and delivery by Acquiror of the Merger Consideration in connection with the Merger have been duly and validly authorized by all necessary corporate action on the part of Acquiror. The shares of Acquiror Common Stock to be issued in connection with the exercise of the options comprising a portion of the Merger Consideration, when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable and listed on the American Stock Exchange (the "AMEX"). 6.13. COMPLIANCE WITH APPLICABLE LAWS. Acquiror and the Acquiror Subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities required -22- or necessary for the conduct of their respective businesses, except for such permits, licenses, variances, exemptions, orders and approvals the failure of which to hold would not have an Acquiror Adverse Effect (the "Acquiror Permits"). Acquiror and the Acquiror Subsidiaries are in compliance with the terms of the Acquiror Permits, except for such failures to comply, which singly or in the aggregate, would not have an Acquiror Adverse Effect. Except as disclosed in the Acquiror Reports filed prior to the date of this Merger Agreement, the businesses of Acquiror and the Acquiror Subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity, except for possible violations which individually or in the aggregate do not and would not have an Acquiror Adverse Effect. No investigation or review by any Governmental Entity with respect to Acquiror or any of the Acquiror Subsidiaries is pending, or, to the knowledge of Acquiror, threatened, nor has any Governmental Entity indicated an intention to conduct the same, other than those the outcome of which would not have an Acquiror Adverse Effect. 6.14. CERTAIN AGREEMENTS. Except as disclosed in the Acquiror Reports filed prior to the date of this Agreement or as set forth on EXHIBIT 6.14 neither Acquiror nor any of the Acquiror Subsidiaries is a party to any oral or written (i) agreement, contract, indenture or other instrument relating to Indebtedness in an amount exceeding $1,000,000 or (ii) other contract, agreement or commitment (except those entered into in the ordinary course of business) having an Acquiror Adverse Effect. Neither Acquiror nor any of the Acquiror Subsidiaries is in default (with or without notice or lapse of time, or both) under any indenture, note, credit agreement, loan document, lease, license or other agreement including, but not limited to, any benefit plan, whether or not such default has been waived, which default, alone or in the aggregate with other such defaults, would have an Acquiror Adverse Effect. 6.15. NO MATERIAL ADVERSE EFFECT. Except as disclosed in the Acquiror Reports, Acquiror is not aware of any fact which, alone or together with another fact, is likely to result in an Acquiror Adverse Effect. 6.16. INFORMATION. No representation or warranty made by Acquiror contained in this Agreement and no statement contained in any certificate, list, exhibit or other instrument specified in this Agreement, including without limitation the exhibits hereto, contains any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. 6.17. ENVIRONMENT. There are not, with respect to Acquiror or any of the Acquiror Subsidiaries, no past or present violations of Environmental Laws, releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law liability or any liability under CERCLA or similar state or local laws, which liabilities, either individually or in the aggregate, would have an Acquiror Adverse Effect. -23- 6.18. TITLE TO ASSETS; LIENS. Except as disclosed on EXHIBIT 6.18, to the extent material to the business or operations of Acquiror and the Acquiror Subsidiaries, Acquiror has good and marketable title to all of its inventory, accounts receivable, property, equipment and other assets, and such assets are free and clear of any material mortgages, liens, charges, encumbrances, or title defects of any nature whatsoever, except for such mortgages, liens, charges, encumbrances or title defects which would not materially and adversely affect the value of such property as carried on Acquiror's financial statements contained in the Acquiror Reports or would not have an Acquiror Adverse Effect. Acquiror and the Acquiror Subsidiaries have valid and enforceable leases for the premises and the equipment, furniture and fixtures purported to be leased by them, except for leases, the failure of which to have or be enforceable, would not have an Acquiror Adverse Effect. ARTICLE 7 COVENANTS 7.1. ACQUISITION PROPOSALS. The Corporation shall not, directly or indirectly, take (nor shall the Corporation authorize or permit its officers, directors, employees, representatives, investment bankers, attorneys, accountants or other agents or affiliates, to take) any action to (i) encourage, solicit or initiate the submission of any Acquisition Proposal (hereinafter defined), (ii) enter into any agreement with respect to any Acquisition Proposal or (iii) participate in any way in discussions or negotiations with, or furnish any information to, any person in connection with, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal. The Corporation will promptly communicate to Acquiror any solicitation by the Corporation and the terms of any proposal or inquiry, including the identity of the person and its affiliates making the same, that it may receive in respect of any such transaction, or of any such information requested from it or of any such negotiations or discussions being sought to be initiated with it. "Acquisition Proposal" shall mean any proposed (A) merger, consolidation or similar transaction involving the Corporation, (B) sale, lease or other disposition, directly or indirectly, by merger, consolidation, share exchange or otherwise of assets of the Corporation (including, but not limited to, letters of intent to which the Corporation is a party) representing 30% or more of the assets of the Corporation, (C) issue, sale, or other disposition of (including by way of merger, consolidation, share exchange or any similar transaction) securities (or options, rights or warrants to purchase, or securities convertible into, such securities) representing 20% or more of the voting power of the Corporation or (D) transaction in which any person shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire beneficial ownership or any "group" (as such term is defined under the Exchange Act) shall have been formed which beneficially owns or has the right to acquire beneficial ownership of 20% or more of the outstanding Shares. -24- 7.2. INTERIM OPERATIONS OF THE CORPORATION. The Corporation covenants and agrees that, from and after the date hereof until the Effective Time (except as Acquiror shall otherwise agree or except as otherwise contemplated by this Agreement): (i) The business of the Corporation shall be conducted only in the ordinary course and, to the extent consistent therewith, the Corporation shall use its commercially reasonable efforts to preserve its business organization intact. (ii) The Corporation shall not (a) amend its Articles of Incorporation or Bylaws; (b) split, combine or reclassify any outstanding capital stock; (c) declare, set aside or pay any dividend payable in cash, stock or property with respect to any of its capital stock or (d) repurchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock. (iii) The Corporation shall not (a) issue, sell, pledge, dispose of or encumber, or authorize or propose the issuance, sale, pledge, disposition or encumbrance of, any shares of, or securities convertible or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock of any class or Voting Debt; (b) transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of any other property or assets or encumber any property or assets or incur or modify any indebtedness or other liability; (c) authorize capital expenditures; (d) make any acquisitions of, or investment in, substantially all the assets of or stock of any other person or entity; or (e) make any payment to third parties for goods or services which are not commercially reasonable or on an arm's length basis. (iv) The Corporation shall not grant any bonus or pay increase or any severance or termination pay to, or enter into any employment agreement with, any director, officers or other employee of the Corporation, except as (y) may be required to satisfy existing contractual obligations of the Corporation as of the date hereof, or (z) required by applicable law. (v) The Corporation shall not establish, adopt, enter into, make or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, employee stock ownership, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any class of directors, officers or employees or make, or accelerate the vesting of, any grants, awards, benefits or options under any such plans. (vi) The Corporation shall not, except in the ordinary and usual course of business and on commercially reasonable terms, modify, amend or terminate any of its Contracts or waive, release or assign any rights or claims. (vii) The Corporation shall not change its method of accounting as in effect at September 30, 1998, except as required by changes in generally accepted accounting principles as -25- concurred in by the Corporation's independent auditors. The Corporation will not change its fiscal year. (viii) The Corporation will not authorize or enter into an agreement to do any of the actions referred to in paragraphs (i) through (vii) above unless such agreement is conditioned upon the consent of Acquiror. 7.3. FILINGS; OTHER ACTION. Subject to the terms and conditions herein provided, the Corporation and Acquiror shall: (a) use all reasonable efforts to cooperate with one another in (i) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from, governmental or regulatory authorities of the United States, the several States and foreign jurisdictions in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and thereby and (ii) timely making all such filings and timely seeking all such consents, approvals, permits or authorizations; and (b) use all reasonable efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things, necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purpose of this Agreement, the proper officers and/or directors of Acquiror, Merger Sub and the Corporation shall take all such necessary action. 7.4. ACCESS. Each of Acquiror and the Corporation shall afford to the other party and to the officers, employees, accountants, counsel, financial advisors and other representatives of such other party, reasonable access during normal business hours during the period prior to the Effective Time to all their respective properties, books, contracts, commitments, personnel and records and, during such period, each of Acquiror and the Corporation shall, and shall cause each of its respective subsidiaries to, furnish promptly to the other party (a) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of Federal of state securities laws and (b) all other information concerning its business, properties and personnel as such other party may reasonably request. 7.5. MERGER INDEMNIFICATION AND INSURANCE. (i) Acquiror and Merger Sub agree that all rights to indemnification for acts or omissions occurring at or prior to the Effective Time now existing in favor of the current or former directors or officers of the Corporation as provided in their respective articles or certificates of incorporation or bylaws shall survive the Merger and shall continue in full force and effect in accordance with their terms. (ii) In the event Acquiror, the Surviving Corporation or any of their successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in each such case, proper provisions shall be -26- made so that the successors and assigns of Acquiror or the Surviving Corporation, as the case may be, shall assume the obligations set forth in this SECTION 7.5. (iii) This SECTION 7.5 shall survive the consummation of the Merger at the Effective Time, is intended to benefit the Corporation, Acquiror, the Surviving Corporation and the persons indemnified pursuant to SECTION 7.5(i), and shall be binding on all successors and assigns of Acquiror and the Surviving Corporation. 7.6. FEES AND EXPENSES. Except as provided below in this SECTION 7.6, all fees and expenses incurred in connection with the Merger, this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such fees or expenses, whether or not the Merger is consummated. 7.7. PUBLICITY. Acquiror shall consult with the Corporation in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any federal or state governmental or regulatory agency or with any national securities exchange with respect thereto. The Corporation shall not issue any press releases or otherwise make public announcements with respect to the transaction contemplated hereby without the prior written consent of Acquiror. 7.8. LISTING APPLICATION. Prior to the time of issuance, Acquiror shall prepare and submit to the AMEX a listing application covering Acquiror Common Stock to be issued upon exercise of options comprising a portion of the Merger Consideration and upon conversion of the Class B Shares in accordance with the terms of this Agreement and shall use its best efforts to obtain approval for the listing of such Acquiror Common Stock upon official notice of issuance. 7.9. FURTHER ACTION. Each party hereto shall, subject to the fulfillment at or before the Effective Time of each of the conditions of performance set forth herein or the waiver thereof, perform such further acts and execute such documents as may be reasonably required to effectuate the Merger. 7.10. NOTIFICATION OF CERTAIN MATTERS. (i) The Corporation shall give prompt notice to Acquiror of: (a) any notice of, or other communication which becomes known to an executive officer of the Corporation relating to, a default or event that, with notice or lapse of time or both, would become a default, received by the Corporation, subsequent to the date of this Agreement and prior to the Effective Time, under any Contract material to the business of the Corporation and to which the Corporation is a party or is subject; and (b) any change that results in a Corporation Adverse Effect. The Corporation shall give prompt notice to Acquiror when any notice or other communication from any third party becomes known to an executive officer of the Corporation alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement. -27- (ii) The Corporation shall give prompt notice to Acquiror, and Acquiror or Merger Sub shall give prompt notice to the Corporation, of (a) any representation or warranty made by it contained in this Agreement that is qualified as to materiality becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect or (b) the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; PROVIDED HOWEVER, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. 7.11. LEGAL CONDITIONS TO MERGER. Each party shall use its best efforts to take, or cause to be taken, all actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the Merger and, subject to the terms and conditions set forth in this Agreement, to consummate the transactions contemplated by this Agreement; provided that nothing in this Agreement shall limit the ability of Acquiror or the Corporation to exercise any of its rights or perform any of its obligations under ARTICLE 9 of this Agreement. Each party will promptly cooperate with and furnish information to each other party in connection with any such restriction suffered by, or requirement imposed upon, it or any of its subsidiaries in connection with the foregoing. 7.12. ACQUIROR BOARD. Acquiror shall use its best efforts to cause Powers to be elected to the Board of Directors (as Chairman of the Board) of Acquiror following the consummation by members of the Acquiror Group of Liberty Practice Acquisitions representing $10,000,000 in Practice Gross Revenues. 7.13. LIBERTY ACQUISITIONS. From the date of this Agreement through June 30, 1999, Acquiror shall use its reasonable efforts to consummate Liberty Practice Acquisitions. 7.14. BANK ONE CONSENT. Acquiror shall use its best efforts to obtain the consent of Bank One, Texas, N.A. ("Bank One") to the consummation of the Merger or to obtain a new credit facility (replacing its existing credit facility with Bank One) at or prior to January 31, 1999. However, failure to succeed in obtaining the consent of Bank One to consummation of the Merger or a replacement credit facility shall not, in and of itself, constitute a breach of the terms of this Agreement. -28- ARTICLE 8 CONDITIONS 8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger shall be subject to the fulfillment in all material respects at or prior to the Effective Time of the following conditions: (i) None of the parties hereto shall be subject to any order or injunction against the consummation of the transaction contemplated by this Agreement. In the event any such order or injunction shall have been issued, each party agrees to use its reasonable efforts to have any such injunction lifted. (ii) No more than 5% of the outstanding Shares immediately prior to the Merger shall constitute Dissenting Shares in accordance with SECTION 4.1(vi). (iii) Powers shall have executed and delivered to the Corporation an employment agreement in the form of EXHIBIT 8.1(iii) and such employment agreement shall be in full force and effect. (iv) McAlister shall have executed and delivered to the Corporation an employment agreement in the form of EXHIBIT 8.1(iv). (v) Bank One shall have consented to the consummation of the Merger or in the absence of such consent, Acquiror shall have obtained a new credit facility replacing its existing credit facility with Bank One. 8.2. CONDITIONS TO OBLIGATION OF THE CORPORATION TO EFFECT THE MERGER. The obligation of the Corporation to effect the Merger shall be subject to the fulfillment in all material respects at or prior to the Effective Time of the following conditions: (i) Acquiror and Merger Sub shall have performed each agreement contained in this Agreement required to be performed on or prior to the Effective Time and the representations and warranties of Acquiror contained in this Agreement shall be true in all material respects on and as of the Effective Time (other than any failure to so perform or any misrepresentation or omission which would not materially influence the investment decision of a reasonable purchaser of securities); and the Corporation shall have received a certificate of the President of Acquiror certifying to such effect. (ii) The Corporation shall have received an opinion of Jackson Walker L.L.P., counsel to Acquiror, substantially in the form of EXHIBIT 8.2(ii). -29- 8.3. CONDITIONS TO OBLIGATION OF ACQUIROR AND MERGER SUB TO EFFECT THE MERGER. The obligation of Acquiror and Merger Sub to effect the Merger shall be subject to the fulfillment in all material respects at or prior to the Effective Time of the following conditions: (i) The Corporation shall have performed its agreements contained in this Agreement required to be performed on or prior to the Effective Time and the representations and warranties of the Corporation contained in this Agreement shall be true in all respects on and as of the Effective Time (other than any failure to so perform or any misrepresentation or omission which would not materially influence the investment decision of a reasonable purchaser of securities); and Acquiror shall have received a certificate of the President of the Corporation certifying to such effect. (ii) The Acquiror shall have received an opinion of Baker, Donelson, Bearman & Caldwell, counsel to the Corporation, substantially in the form of EXHIBIT 8.3(ii). (iii) The holders of the options to purchase the corporation's securities listed on EXHIBIT 5.3 (the "Corporation Options") shall have agreed in writing to exchange their Corporation Options for options to purchase a like number (145,000) shares of Acquiror Common Stock, which options shall be in the form of EXHIBIT 8.3(iii). (iv) SunTrust Equitable Securities Corporation shall have executed an agreement with the Corporation substantially in the form of EXHIBIT 8.3(iv). (v) Acquiror shall have received evidence reasonably satisfactory to Acquiror that at the Closing Date accrued but unpaid liabilities of the Corporation, including fees (the "Closing Date Liabilities") do not exceed $250,000. Acquiror and Merger Sub acknowledge and agree that the Closing Date Liabilities shall not include (a) legal and accounting fees and expenses specifically authorized in writing by Acquiror incurred to effect Liberty Practice Acquisitions or (b) expenses incurred by the Corporation to promote Liberty Practice Acquisitions that are approved in writing by Acquiror. At Closing, the Corporation will present to Acquiror (a) final statements of Arthur Andersen L.L.P. and Baker, Donelson, Bearman & Caldwell L.L.P. and (b) a statement of all other liabilities for which the Corporation is responsible for payment in connection with the transactions contemplated by this Agreement. (vi) Acquiror and the Corporation shall have received from each person listed on EXHIBIT 5.19 as a party to an Employment Agreement or Consulting Agreement with the Corporation an executed termination and release agreement in the form of EXHIBIT 8.3(vi). (vii) Acquiror and the Corporation shall have received a written resignation of each director and officer of the Corporation effective the Effective Time. (viii) Acquiror shall have received letter agreements from each of Powers, McAlister and Kelly in the form requested by Acquiror providing for the restriction of the sale of -30- one-half (1/2) of the shares of Pentegra Common Stock received by them hereunder for a period of one year from the date of issuance and one-half of the shares of Pentegra Common Stock received by them hereunder for a period of two years from the date of issuance. 8.4. FRUSTRATION OF CLOSING CONDITIONS. None of the Corporation, Acquiror and Merger Sub may rely on the failure of any condition set forth in SECTION 8.1, 8.2 OR 8.3, as the case may be, to be satisfied if such failure was caused by such party's failure to act in good faith or to use its best efforts to consummate the Merger and the other transactions contemplated by this Agreement, as required by SECTION 7.3. ARTICLE 9 TERMINATION 9.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and may be abandoned at any time prior to the Effective Time by the mutual consent of Acquiror, Merger Sub and the Corporation. 9.2. TERMINATION BY EITHER ACQUIROR OR THE CORPORATION. This Agreement may be terminated and the Merger may be abandoned by action of the Board of Directors of either Acquiror or the Corporation if the Merger shall not have been consummated by January 31, 1999, provided that the terminating party shall not have breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure referred to in such clause. 9.3. TERMINATION BY THE CORPORATION. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by action of the Board of Directors of the Corporation, if (i) the Board of Directors of Acquiror shall have withdrawn or modified in a manner adverse to the Corporation its approval or recommendation of this Agreement or the Merger, or (ii) there has been a breach by Acquiror or Merger Sub of any representation, warranty, covenant or agreement contained in this Agreement which would have an Acquiror Adverse Effect which is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by the Corporation to the Acquiror. 9.4. TERMINATION BY ACQUIROR. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by action of the Board of Directors of Acquiror, if (a) the Board of Directors of the Corporation shall have withdrawn or modified in a manner adverse to Acquiror its approval or recommendation of this Agreement, or the Merger, or shall have recommended to stockholders of the Corporation an Acquisition Proposal, or (b) there has been a breach by the Corporation of any representation, warranty, covenant or agreement contained in this Agreement, or the Stock Option Agreement which would have a Corporation Adverse Effect -31- which is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by Acquiror to the party committing such breach. 9.5. EFFECT OF TERMINATION AND ABANDONMENT. (i) In the event of termination of this Agreement and the abandonment of the Merger pursuant to this ARTICLE 9, no party hereto (or any of its directors or officers) shall have any liability or further obligation to any other party to this Agreement except as provided in SECTION 9.5(ii), SECTION 7.7 (subject to SECTION 9.5(ii)) and SECTION 11.6 below, and except that nothing herein will relieve any party from liability for any breach of this Agreement. (ii) In the event that any person shall have made an Acquisition Proposal for the Corporation and thereafter this Agreement is terminated by either party (other than pursuant to the breach of this Agreement by Acquiror) then the Corporation, if requested by Acquiror, shall, subject to the provisions set forth below, promptly, but in no event later than two days after the date of such request, pay Acquiror $300,000, which amount shall be payable by wire transfer of same day funds; provided that no fee shall be payable to Acquiror pursuant to this SECTION 9.5(ii) unless and until (i) any person (other than Acquiror) (an "Acquiring Party") has entered into a letter of intent, agreement in principle or definitive agreement to acquire, by purchase, merger, consolidation, sale, assignment, lease, transfer or otherwise, in a transaction or a series of transactions, a majority of the voting power of the outstanding securities of the Corporation or 50% or more of the assets of the Corporation (including, but not limited to, letters of intent to which the Corporation is a party), (ii) there has been executed a letter of intent, agreement in principle or definitive agreement with respect to a consolidation, merger or similar transaction between the Corporation and an Acquiring Party in which the stockholders of the Corporation immediately prior to such proposed consolidation, merger or similar transaction do not own securities representing at least 50% of the outstanding voting power of the surviving entity (or, if applicable, any entity in control of such Acquiring Party) of such proposed consolidation, merger or similar transaction immediately following the consummation thereof, or (iii) an Acquiring Party, or any "group" (as such term is defined under Section 13(d) of the Exchange Act) acquires beneficial ownership or the right to acquire beneficial ownership of 50% of the common stock of the Corporation, whether by tender offer, exchange offer or otherwise. The Corporation acknowledges that the agreements contained in this SECTION 9.5(ii) are an integral part of the transactions contemplated in this Agreement, and that, without these agreements, Acquiror and Merger Sub would not enter into this Agreement; accordingly, if the Corporation fails to promptly pay the amount due pursuant to this SECTION 9.5(ii), and, in order to obtain such payment, Acquiror or Merger Sub commences a suit which results in a judgment against the Corporation for the fee set forth in this paragraph (b), the non-prevailing party shall pay to the prevailing party its costs and expenses (including attorneys' fees) in connection with such suit, together with interest on the amount of the fee at the prime rate of Bank One, N.A. in effect on the date such payment was required to be made. 9.6. EXTENSION; WAIVER. At any time prior to the Effective Time of the Merger, any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the -32- obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (ii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE 10 INDEMNITY 10.1. INDEMNIFICATION BY CLASS B HOLDERS. The Class B Holders, jointly and severally, will indemnify and hold harmless Acquiror, and its officers, directors, stockholders and subsidiaries (collectively, the "Indemnified Persons"), and will reimburse the Indemnified Persons, for any loss, liability, claim, damage, expense (including costs of investigation and defense and reasonable attorneys' fees and expenses) or diminution of value, whether or not involving a third-party claim (collectively, "Damages"), arising from or in connection with: (i) any breach of any representation or warranty, covenant or agreement made by the Corporation or the Class B Holders in this Agreement, or any other certificate or document delivered by the Corporation or any Class B Holder pursuant to this Agreement; (ii) any reimbursement made by the Corporation of advances by dental practices to the Corporation pursuant to the letters of intent listed on EXHIBIT 5.4; or (iii) any amounts by which the Closing Date Liabilities of the Corporation exceed $250,000. 10.2. PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS. (i) Promptly after receipt by an Indemnified Party under SECTION 10.1 of notice of the commencement of any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or informal, public or private) commenced, brought, conducted or heard by or before or otherwise involving any governmental body or arbitrator (a "Proceeding") against it, such Indemnified Party will, if a claim is to be made against an indemnifying party under this ARTICLE 10, give notice to the indemnifying party of the commencement of such Proceeding, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any Indemnified Party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party's failure to give such notice. (ii) If any Proceeding referred to in SECTION 10.2 is brought against an Indemnified Party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the Indemnified Party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the Indemnified Party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume -33- the defense of such Proceeding with counsel satisfactory to the Indemnified Party and, after notice from the indemnifying party to the Indemnified Party of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the Indemnified Party under this ARTICLE 10 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the Indemnified Party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification; (ii) no compromise or settlement of such claims may be effected by the indemnifying party without the Indemnified Party's consent unless (A) there is no finding or admission of any violation of law or any violation of the rights of any person and no effect on any other claims that may be made against the Indemnified Party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (iii) the indemnifying party will have no liability with respect to any compromise or settlement of such claims effected without its prior written consent. If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within ten days after the Indemnified Party's notice is given, give notice to the Indemnified Party of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the Indemnified Party. (iii) Notwithstanding the foregoing, if an Indemnified Party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates or advisors other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the Indemnified Party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its prior written consent (which may not be unreasonably withheld). (iv) With respect to any Proceeding subject to indemnification under this ARTICLE 10: (i) both the Indemnified Party and the indemnifying party, as the case may be, shall keep the other party fully informed of the Proceeding at all stages thereof where such party is not represented by its own counsel, and (ii) the parties agree (each at its own expense) to render to each other such assistance as they may reasonably require of each other and to cooperate in good faith with each other in order to ensure the proper and adequate defense of any Proceeding brought by any third party. (v) With respect to any Proceeding subject to indemnification under this ARTICLE 10, the parties agree to cooperate in such a manner as to preserve in full (to the extent possible) the confidentiality of all confidential business records and the attorney-client and work-product privileges. In connection therewith, each party agrees that: (i) it will use its best efforts, in any Proceeding in which it has assumed or participated in the defense, to avoid production of confidential business records (consistent with applicable law and rules of procedure), and (ii) all -34- communications between any party hereto and counsel responsible for or participating in the defense of any Proceeding shall, to the extent possible, be made so as to preserve any applicable attorney-client work-product privilege. 10.3. PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS. A claim for indemnification for any matter not involving a third party claim may be asserted by notice to the party from whom indemnification is sought. 10.4. LIMITATION ON AMOUNT. The liability of McAlister under this ARTICLE 10 shall be limited to an amount equal to the value of the Class B Merger Consideration received by her pursuant to the terms of this Agreement. The liability of Kelly under this ARTICLE 10 shall be limited to an amount equal to the value of the Class B Merger Consideration received by him pursuant to the terms of this Agreement. For purposes of this SECTION 10.4 only, the shares of Acquiror Common Stock issued as Class B Merger Consideration shall be valued at $2.00 per share. ARTICLE 11 GENERAL PROVISIONS 11.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall be deemed to survive the Merger until June 30, 2000, provided, however, that the agreements contained in ARTICLE 4 and in SECTIONS 7.6, 7.8, 7.12, 11.6 and 11.4 and the agreements delivered pursuant to this Agreement shall survive the Merger indefinitely. 11.2. NOTICES. Any notice required to be given hereunder shall be sufficient if in writing, and sent by facsimile transmission and by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows: If to the Corporation: Liberty Dental Alliance, Inc. 3100 West End Avenue Suite 1230 Nashville, Tennessee 37203-1385 Attention: James M. Powers, Jr. FAX: (615) 783-0790 -35- Copy to: Baker, Donelson, Bearman & Caldwell 1700 Nashville City Center 511 Union Street Nashville, Tennessee 37219 Attention: James L. McElroy FAX: 615-726-0464 If to Acquiror or Merger Sub: Pentegra Dental Group, Inc. 2999 N. 44th Street, Suite 650 Phoenix, Arizona 85018 Attention: Chief Executive Officer FAX: (602) 952-0544 Copy to: Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas 75202 Attention: James S. Ryan, III FAX: (214) 953-5822 or to such other address as any party shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so telecommunicated, personally delivered or mailed. 11.3. BINDING EFFECT; BENEFIT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, except for the provisions of ARTICLE 4 and SECTIONS 7.8, 7.9, 7.11, 7.12 and 11.6 nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 11.4. ENTIRE AGREEMENT. This Agreement, the exhibits and other documents and agreements among the parties hereto, constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, among the parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto. -36- 11.5. AMENDMENT. This Agreement may be amended by the parties hereto, by action taken by their respective Board of Directors or a committee thereof, at any time before or after approval of matters presented in connection with the Merger by the stockholders of the Corporation, but after any such stockholder approval no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 11.6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its rules of conflict of laws. 11.7. COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. 11.8. HEADINGS. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and shall be given no substantive or interpretive effect whatsoever. 11.9. INTERPRETATION. In this Agreement, unless the context otherwise requires, words describing the singular number shall include the plural and VICE VERSA, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and VICE VERSA. 11.10. WAIVERS. Except as provided in this Agreement, no action taken pursuant to this Agreement, including without limitation any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by any party hereto of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder. 11.11. INCORPORATION OF EXHIBITS AND DISCLOSURE LETTERS. All exhibits attached hereto and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein. 11.12. SEVERABILITY. If for any reason whatsoever, any one or more of the provisions of this Agreement shall be held or deemed to be inoperative, unenforceable or invalid as applied to any particular case or in all cases, such circumstances shall not have the effect of rendering such provision invalid in any other case or of rendering any of the other provisions of this Agreement inoperative, unenforceable or invalid. 11.13. OBLIGATION OF ACQUIROR. Acquiror shall cause Merger Sub to perform each of its duties and obligations under this Agreement. -37- 11.14 MEDIATION AND ARBITRATION. Upon the request of any party (hereinafter referred to as a "Party"), whether made before or after the institution on any legal proceeding, any dispute among the Parties hereto in any way arising out of, related to or in connection with this Agreement (hereinafter a "Dispute"), shall be resolved in accordance with the terms of this Section (hereinafter the "Arbitration Program"). If a Dispute between the Parties cannot be resolved through negotiation, the Parties agree first to try in good faith to settle the Dispute by mediation administered by the American Arbitration Association ("AAA") under its Commercial Mediation Rules before resorting to arbitration. The mediator's fees, as well as other fees and expenses related to mediation (excluding attorneys' fees), shall be paid by the Party requesting mediation. Mediation proceedings hereunder shall be conducted where agreed to in writing by the Parties or, in the absence of such agreement in Phoenix, Arizona or the corporate headquarters of Acquiror if other than Phoenix, Arizona as set forth in the most recent securities filing of Acquiror. In the event the Parties are unable to resolve a Dispute through mediation, it shall then be submitted to and resolved by binding arbitration administered by the AAA in accordance with the terms of this Arbitration Program and the Commercial Arbitration Rules of the AAA. In the event of any inconsistency between this Arbitration Program and those rules or statutes, then the terms of this Arbitration Program shall control. A Party may release or settle with one or more liable persons as the Party deems fit without releasing or impairing rights to proceed against any persons not so released. All statutes of limitation that would otherwise be applicable shall apply to any arbitration proceeding. All Disputes shall be decided in accordance with applicable law. Any Dispute wherein the claim or amount in controversy does not exceed $100,000, shall be decided by a single arbitrator (who shall have authority to render a maximum award of $100,000 including all damages of any kind, costs, and fees, including attorney's fees). Any Dispute in which the amount in controversy exceeds $100,000 shall be decided by a majority vote of three arbitrators. The arbitrators may grant any remedy or relief within the scope of this Arbitration Program and this Agreement. The arbitrators may also grant such ancillary relief as is necessary to make effective the award. In all arbitration proceedings, the arbitrators shall make specific and written findings of fact and conclusions of law. In arbitration proceedings in which the amount in controversy exceeds $100,000, in the aggregate, the Parties shall have in addition to the statutory right to seek vacation or modification of any award pursuant to applicable law, the right to seek vacation or modification of any award that is based in whole, or in part, on a incorrect or erroneous ruling of law by appeal to an appropriate court having jurisdiction; provided, however, that any such application for vacation and modification of any award based on an incorrect ruling of law must be filed in a court having jurisdiction over the Dispute within 15 days from the date the award is rendered. The arbitrators' findings of fact shall be binding on all Parties and shall not be subject to further review except as otherwise allowed by a court of law. -38- To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with AAA. Arbitration proceedings hereunder shall be conducted where agreed to in writing by the Parties or, in the absence of such agreement in Phoenix, Arizona or the corporate headquarters of Acquiror if other than Phoenix, Arizona as set forth in the most recent securities filing of Acquiror. The provisions of this Arbitration Program shall survive any termination, amendment, or expiration of the Documents, unless the Parties otherwise expressly agree in writing making specific reference to this Arbitration Program. To the extent permitted by applicable law, the arbitrator(s) shall have the power to award recovery of all costs and fees (including attorney's fees, administrative fees, and arbitrator's fees) to the prevailing Party. This Arbitration Program may be amended, changed, or modified only by a writing which specifically refers to this Arbitration Program and which is signed by all the Parties. If any term, covenant, condition or provision of the Arbitration Program is found to be unlawful or invalid or unenforceable, such illegality or invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Arbitration Program, and all such remaining parts hereof shall be valid and enforceable and have full force and effect as if the illegal, invalid or unenforceable part had not been included. Each Party agrees to keep all Disputes and arbitration proceedings, including any awards or decisions, strictly confidential, except for disclosures of information required in the ordinary course of business of the Parties or by applicable law or regulation. [Intentionally Left Blank] -39- IN WITNESS WHEREOF, the parties have executed this Agreement and caused the same to be duly delivered on their behalf on the day and year first hereinabove written. THE CORPORATION: LIBERTY DENTAL ALLIANCE, INC. By: /s/ James M. Powers, Jr. ------------------------------ Title: President --------------------------- ACQUIROR: PENTEGRA DENTAL GROUP, INC. By: /s/ Kimberlee K. Rozman ------------------------------ Title: Senior Vice President --------------------------- MERGER SUB: LIBERTY ACQUISITION CORPORATION By: /s/ Kimberlee K. Rozman ------------------------------ Title: Senior Vice President --------------------------- -40- /s/ James M. Powers, Jr. ----------------------------------- James M. Powers, Jr. /s/ Sylvia H. McAlister ----------------------------------- Sylvia H. McAlister /s/ William Kelly ----------------------------------- William Kelly -41- EX-10.6 6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT Employment Agreement (the "Agreement"), dated November 13, 1998, by and between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"), and James M. Powers, Jr.("Employee"). In consideration of the mutual premises and conditions contained herein, the parties hereto agree as follows: Section 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and Employee hereby accepts employment by the Company, upon the terms and subject to the conditions hereinafter set forth. Section 2. DUTIES. Initially, employee shall serve as the President of the Company. Employee's duties and powers shall be limited to taking actions necessary to effect dental practice acquisitions contemplated by that certain Agreement and Plan of Merger dated November 13, 1998 between the Company, Liberty Acquisition Corporation, Liberty Dental Alliance, Inc. and certain other parties thereto (the "Merger Agreement") until such time that members of the Acquiror Group have consummated Liberty Practice Acquisitions representing $10,000,000 in Practice Gross Revenues. Upon consummation by members of the Acquiror Group of Liberty Practice Acquisitions representing $10,000,000 in Practice Gross Revenues, the duties and powers of the Employee will be expanded to include the duties and authority of the President, Chief Executive Officer and Chairman of the Board of the Company as delineated in the Company's Bylaws and as may otherwise be specified by the Company's Board of Directors. Capitalized terms used but not otherwise defined in this Agreement shall have the meaning assigned to such terms in the Merger Agreement. Employee agrees to devote his full time and best efforts to the performance of his duties to the Company. All of the Employee's powers and authorities shall be subject to the reasonable direction and control of the Company's Board of Directors ("Board"). Employee acknowledges that the executive offices of the Company will be located in Phoenix, Arizona and that he shall perform his duties under this Agreement from such executive offices. Employee and the Company further agree as follows: (a) Upon the consummation by members of the Acquiror Group of Liberty Practice Acquisitions representing a cumulative total of $10,000,000 in Practice Gross Revenues until the acquisition by members of the Acquiror Group of Liberty Practice Acquisitions representing a cumulative total of $25,000,000 in Practice Gross Revenues, Employee shall establish and maintain a residence in the Phoenix, Arizona area and the Company shall provide Employee a living allowance of $1,500 per month. 1 (b) Employee agrees that upon consummation by members of the Acquiror Group of Liberty Practice Acquisitions representing a cumulative total of $25,000,000 in Practice Gross Revenues, Employee shall establish and maintain his principal residence in the Phoenix, Arizona area. Company shall reimburse Employee for relocation costs as set forth on Exhibit B and the Company will have no further obligation to pay to Employee the living allowance provided for in subparagraph (a). Section 3. TERM. Except as otherwise provided in Section 6 hereof, the term of this Agreement shall be for two (2) years ("Term"), commencing on the date hereof (the "Commencement Date"). Section 4. COMPENSATION AND BENEFITS. In consideration for the services of the Employee hereunder, the Company will compensate Employee as follows: (a) BASE SALARY. Commencing on the date at which members of the Acquiror Group have consummated Liberty Practice Acquisitions representing $10,000,000 in Practice Gross Revenues, Employee shall be entitled to receive a base salary of $200,000.00 per annum or as increased from time to time by the Board of Directors of the Company or the Compensation Committee of the Board of Directors ("Compensation Committee"). (b) BONUS. Commencing with the fiscal year beginning April 1, 1999 and ending March 31, 2000, Employee shall be eligible to receive a bonus each year during the term of this Agreement in accordance with the bonus plan set forth on Exhibit A. Such bonus shall be payable by the Company to Employee on or before 90 days from the end of each fiscal year. (c) BENEFITS. The Company shall grant Employee options to purchase 150,000 shares of the Company's Common Stock at the closing sales price of the Common Stock as quoted by the American Stock Exchange on the date that the merger contemplated by the Merger Agreement is consummated; and 150,000 shares of the Company's Common Stock at the price of $6.125 per share of Company Common Stock, with such options vesting 20% on March 24, 1999 and 20% per year thereafter. In addition, during the term of this Agreement, Employee shall be entitled to participate in and receive benefits under any and all employee benefit plans and programs which are from time to time generally made available to the executive employees of the Company, subject to approval and grant by the appropriate committee of the Board of Directors of the Company with respect to programs calling for such approvals or grants. Additionally, Employee shall be entitled to medical, dental, disability, life insurance and other benefits as are generally made available to the executive employees of the Company. Employee shall be entitled to three (3) weeks vacation and such other days for personal use as reasonably determined by the Company. 2 Section 5. EXPENSES; AUTOMOBILE. It is acknowledged by the parties that Employee, in connection with the services to be performed by him pursuant to the terms of this Agreement, will be required to make payments for travel, entertainment of business associates, mobile telephone and similar expenses. The Company will reimburse Employee for all reasonable expenses of types authorized by the Company and incurred by Employee in the performance of his duties hereunder, including, without limitation, reasonable expenses incurred by him for the purpose of effecting Liberty Practice Acquisitions. Employee will comply with such budget limitations and approval and reporting requirements with respect to expenses as the Company may establish from time to time. The Company shall provide Employee with a suitable automobile for business use, or at the Company's option, Company shall provide Employee with an automobile allowance and Company shall pay all costs and expenses reasonably incurred by Employee in connection with the business use thereof; provided that the cost to Company for such automobile costs and expenses shall not exceed $750 per month. Section 6. TERMINATION. Employee's employment hereunder will commence on the Commencement Date and continue until the end of the Term, except that the employment of Employee hereunder will terminate earlier upon the occurrence of the following events: (a) DEATH OR DISABILITY. Employee's employment will terminate immediately upon the death of Employee during the term of his employment hereunder or, at the option of the Company, in the event of Employee's disability, upon 30 days notice to Employee. Employee will be deemed disabled if, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been absent from his duties with the Company on a full-time basis for 120 consecutive business days and Employee shall not reasonably be expected to be able to resume his duties within 60 days of the end of such 120 day period. In the event of the termination of this Agreement pursuant to this subsection, Employee will not be entitled to any severance pay or other compensation except for any portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. (b) FOR CAUSE. The Company may terminate the Employee's employment for "Cause" immediately upon written notice by the Company to Employee. For purposes of this Agreement, a termination will be for Cause if: (i) Employee willfully and continuously fails to perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), (ii) Employee willfully engages in gross misconduct materially and demonstrably injurious to the Company, (iii) Employee has been convicted of a felony, or (iv) Employee fails to use his best efforts to take actions necessary to effect Liberty Practice Acquisitions representing $10,000,000 in Gross Practice Revenues. In the event of the termination of this Agreement pursuant to this subsection, Employee will not be entitled to any severance pay or other compensation except for any portion of his base 3 salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. (c) BY COMPANY WITHOUT CAUSE. The Company may terminate this Agreement during the Term at any time for any reason without cause. In the event of the termination of this Agreement pursuant to this subsection, the Company will pay Employee, as Employee's sole remedy in connection with such termination, severance pay in the amount determined by multiplying Employee's monthly base salary at the rate in effect immediately preceding the termination of Employee's employment by twelve (12) months. The Company will also pay Employee the portion of his base salary accrued but unpaid from the last monthly payment date to the date of termination and expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. The Company will pay the severance payments provided for in this subsection (other than in the foregoing sentence) in a lump sum amount concurrent with Employee's termination of employment. The Company will not be entitled to offset or mitigate the amount due under this subsection by any other amounts payable to Employee, including amounts payable or paid to Employee by third parties for Employee's services after the date of termination. This subsection (c) shall not apply in the event of a termination by the Company pursuant to subsection (d) below. (d) BY COMPANY AS THE RESULT OF FAILURE TO CLOSE LIBERTY ACQUISITIONS. The Company may terminate this Agreement at any time after January 31, 1999 by action of the Board of Directors of the Company, if on or prior to January 31, 1999 members of the Acquiror Group have not consummated Liberty Practice Acquisitions representing $10,000,000 in Practice Gross Revenues. In the event of the termination of this Agreement pursuant to this subsection, Employee will not be entitled to any severance pay or other compensation except for expense reimbursements under Section 5 hereof for expenses incurred in the performance of his duties hereunder prior to termination. Section 7. EFFECT OF TERMINATION ON OPTIONS. The Employee has been granted options to purchase shares of the Company's Common Stock pursuant to the terms of an Incentive Stock Option Agreement in the form of Exhibit C attached hereto and may continue to be granted such options from time to time. The effect of the termination of the Employee's employment on such options shall be determined by the terms of the option plan under which the options are issued and the option agreement related to such options. Section 8. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges that certain assets of the Company and its affiliates, including without limitation information regarding customers, pricing policies, methods of operation, proprietary computer programs, sales, products, profits, costs, markets, key personnel, formulae, product applications, technical processes, and trade secrets (hereinafter called "Confidential Information") are valuable, special and unique assets of the 4 Company and its affiliates. Employee will not, during or after his term of employment, disclose any of the Confidential Information to any person, firm, corporation, association, or any other entity for any reason or purpose whatsoever, directly or indirectly, except as may be required pursuant to his employment hereunder, unless and until such Confidential Information becomes publicly available other than as a consequence of the breach by Employee of his confidentiality obligations hereunder. In the event of the termination of his employment, whether voluntary or involuntary and whether by the Company or Employee, Employee will deliver to the Company all documents and data pertaining to the Confidential Information and will not take with him any documents or data of any kind or any reproductions (in whole or in part) of any items relating to the Confidential Information. Section 9. NONCOMPETITION. Until one year after termination of Employee's employment with the Company for any reason, whether voluntary or involuntary, Employee will not (i) engage directly or indirectly, alone or as a shareholder, partner, officer, director, employee or consultant of any other business organization, in any business activities which relate to the acquisition and consolidation of dental practices which were either conducted by the Company at the time of Employee's termination or "Proposed to be Conducted" (as defined herein) by the Company at the time of such termination (the "Designated Industry"), (ii) divert to any competitor of the Company in the Designated Industry any customer of Employee, or (iii) solicit or encourage any officer, employee, or consultant of the Company to leave its employ for employment by or with any competitor of the Company in the Designated Industry. The parties hereto acknowledge that Employee's noncompetition obligations hereunder will not preclude Employee from (i) owning less than 5% of the common stock of any publicly traded corporation conducting business activities in the Designated Industry or (ii) serving as an officer, director, stockholder or employee of an entity engaged in the healthcare industry whose business operations are not competitive with those of the Company. "Proposed to be Conducted", as used herein, shall mean those business activities which are the subject of a formal, written business plan approved by the Board of Directors prior to termination of Employee's employment and which the Company takes material action to implement within 12 months of the termination of Employee's employment. Employee will continue to be bound by the provisions of this Section 9 until their expiration and will not be entitled to any compensation from the Company with respect thereto. If at any time the provisions of this Section 9 are determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 9 will be considered divisible and will become and be immediately amended to only such area, duration and scope of activity as will be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Employee agrees that this Section 9 as so amended will be valid and binding as though any invalid or unenforceable provision had not been included herein. The parties hereto acknowledge and agree that the provisions of this Section 9 shall not apply if this Agreement is terminated pursuant to Section 6(d) hereof; provided, further, however, that this Section 9 shall apply if this Agreement is terminated pursuant to Section 6(b)(iv) hereof notwithstanding that such termination shall also constitute a termination of this Agreement pursuant to Section 6(d) hereof. 5 Section 10. GENERAL. (a) NOTICES. All notices and other communications hereunder will be in writing or by written telecommunication, and will be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested or by written telecommunication, to the relevant address set forth below, or to such other address as the recipient of such notice or communication will have specified to the other party hereto in accordance with this Section 10(a): If to the Company, to: with a copy to: Pentegra Dental Group, Inc. Jackson Walker L.L.P. 2999 N. 44th Street, Suite 650 901 Main Street, Suite 6000 Phoenix, Arizona 85018 Dallas, Texas 75202 Attn: CHIEF EXECUTIVE OFFICER Attn: James S. Ryan, III Fax No.: (602) 952-0544 Fax No.: (214) 953-5822 If to Employee, to: ------------------------ ------------------------ ------------------------ ------------------------ (b) WITHHOLDING; NO OFFSET. All payments required to be made by the Company under this Agreement to Employee will be subject to the withholding of such amounts, if any, relating to federal, state and local taxes as may be required by law. No payment under this Agreement will be subject to offset or reduction attributable to any amount Employee may owe to the Company or any other person. (c) EQUITABLE REMEDIES. Each of the parties hereto acknowledges and agrees that upon any breach by Employee of his obligations under any of Sections 8 and 9 hereof, the Company will have no adequate remedy at law, and accordingly will be entitled to specific performance and other appropriate injunctive and equitable relief. (d) SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable, such provision will be fully severable and this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as part of this Agreement a provision as similar in its terms to such 6 illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (e) WAIVERS. No delay or omission by either party hereto in exercising any right, power or privilege hereunder will impair such right, power or privilege, nor will any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. (f) COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument. (g) CAPTIONS. The captions in this Agreement are for convenience of reference only and will not limit or otherwise affect any of the terms or provisions hereof. (h) REFERENCE TO AGREEMENT. Use of the words "herein," "hereof," "hereto" and the like in this Agreement refer to this Agreement only as a whole and not to any particular subsection or provision of this Agreement, unless otherwise noted. (i) BINDING AGREEMENT. This Agreement will be binding upon and inure to the benefit of the parties and will be enforceable by the personal representatives and heirs of Employee and the successors of the Company. If Employee dies while any amounts would still be payable to him hereunder, such amounts will be paid to Employee's estate. This Agreement is not otherwise assignable by Employee. (j) ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and may not be amended except by a written instrument hereafter signed by each of the parties hereto. (k) GOVERNING LAW. This Agreement and the performance hereof will be construed and governed in accordance with the laws of the State of Arizona, without regard to its choice of law principles. Section 11. BINDING ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled exclusively by arbitration in Phoenix, Arizona, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrator(s) may be entered in, and enforced by, any court having jurisdiction thereof. 7 EXECUTED as of the date and year first above written. PENTEGRA DENTAL GROUP, INC. By: /s/ Kimberlee K. Rozman ------------------------------ Its: Senior Vice President ------------------------------ EMPLOYEE /s/ James M. Powers, Jr. ------------------------------ James M. Powers, Jr. 8 EXHIBIT A BONUS Commencing with the fiscal year of the Company beginning April 1, 1999 and ending March 31, 2000, Employee shall be eligible to receive an annual cash bonus in an amount equal to up to 25% of his base salary in the event that the Company experiences at least 20% or greater growth in earnings per share on a fiscal year to year basis. For purposes of determining the applicable year's earnings per share, the cash bonus payable hereunder and under all other similar agreements between the Company and its officers shall be included prior to such determination.
Percentage Increase in Bonus as a Percentage Earnings Per Share Of Annual Base Salary 20.0-22.5% 5% Over 22.5-25.0% 10% Over 25.0% to 27.5% 15% Over 27.5% to 30.0% 20% Over 30.0% 25%
9 EXHIBIT B Upon relocation of the Employee to Phoenix, Arizona and subsequent relocation by Employee should the headquarters of the Company be moved from Phoenix, Arizona, Employee shall be entitled to receive reimbursement of the moving/relocation expenses set forth below: The Company will reimburse the Employee for all reasonable, out-of-pocket and adequately documented moving expenses. The term "reasonable, out-of-pocket and adequately documented moving expenses" incurred by Employee shall include the following: 1. Expenses incurred by Employee in connection with the sale of Employee's present principal residence, such as real estate commissions and closing costs, payable in connection with such sale but not including an equity loss on the sale of such residence; 2. Expenses in the form of closing costs, but excluding prepayments and mortgage discount points, incurred by Employee in connection with the purchase by Employee of a new permanent principal residence in the area where the Employee is being asked to relocate; 3. Expenses incurred by Employee for the packing and moving of usual and customary personal property and automobiles of Employee located in the present principal residence to the Employee's new residence; 4. Expenses incurred by Employee for up to two (2) trips to the relocation area, of up to three (3) days and nights, for Employee and Employee's spouse in connection with Employee's efforts to locate a new permanent residence (such expenses to include airfare, hotel and automobile rental). 5. Cash reasonably calculated by the Company to negate adverse income tax consequences to Employee of the foregoing reimbursement. Total expenses reimbursed by Company to Employee as set forth in subparagraphs (1) - (5) above shall not exceed the sum of $50,000. Additionally, If Employee is terminated without cause pursuant to Section 6(c) hereof following the consummation by Acquiror Group of Liberty Practice Acquisitions with more than $10,000,000 in Practice Gross Revenues, the Company shall pay to Employee a lump sum amount (on the date of such termination) equal to the amounts paid by the Company to Employee as set forth above (i.e., if Employee receives the sum of $50,000 set forth above for relocation to Phoenix, Arizona and tax consequences of such reimbursement, upon termination of Employee pursuant to Section 6(c), Employee shall again receive the sum of $50,000). 10 EX-27 7 EXHIBIT 27
5 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-1999 APR-01-1998 SEP-30-1998 697 0 4,851 0 0 5,900 4,704 (317) 19,019 2,455 502 0 0 8 16,054 19,019 16,173 16,173 14,909 14,909 0 0 (79) 1,343 375 968 0 0 0 968 0.13 0.13
-----END PRIVACY-ENHANCED MESSAGE-----