Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year
ended March 31, 2000.
[ ] Transaction report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from _________ to _________.
Commission file number 1-13725
Pentegra Dental Group, Inc.
(exact name of Registrant as specified in its charter)
Delaware 76-0545043
(State or other jurisdiction (I.R.S. Employer
Of incorporation or organization) Identification No.)
2999 N. 44th Street, Suite 650, Phoenix, Arizona 85018
(Address of principal executive offices) (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 June 15, 2000 was 10,798,130.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
The aggregate market value of the shares of the Registrant's Common Stock
held by non-affiliates of the Registrant June 15, 2000 was approximately
$5,136,000 based upon the closing price per share of the Registrant's Common
Stock as reported on the American Stock Exchange of $.88. As of June 15, 2000,
there were 10,798,130 outstanding shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
Annual Meeting of Stockholders of the Registrant to be held on July 28, 2000 are
incorporated by reference into Part III of this Report.
1
2
FORM 10-K REPORT INDEX
PART I
Items 1 and 2. Business and Properties 3
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 46
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Party Transactions 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 47,48,49
FORWARD-LOOKING STATEMENTS
Statements contained in this Report, which are not historical in
nature, are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include statements in Item 1. "Business", Item 5. "Market for Registrant's
Common Stock and Related Shareholder Matters" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as statements regarding the development of an e-business strategy, the
proposed modifications of management service agreements with affiliated
practices, projections of the Company's future earnings, funding of the
Company's operations and capital expenditures, payment or nonpayment of
dividends and liquidity needed for the future.
Such forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from
anticipated results. These risks and uncertainties include regulatory
constraints, changes in laws regulating the practice of dentistry or the
interpretation of such laws, competition from other dentists or practice
management companies, changes in the Company's operating strategy, the ability
of the Company to effectively manage the number of markets in which the dental
practices are located and other factors as may be identified from time to time
in the Company's filings with the Securities and Exchange Commission or in the
Company's press releases.
2
3
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
Overview
Pentegra Dental Group, Inc. (the "Company" or "Pentegra") provides
management, administrative, development and other services to dental practices
throughout the United States. Pentegra's approach to dental practice management
has historically been designed to increase revenues and lower costs at an
affiliated dental practice ("Affiliated Practices") while freeing the practicing
dentists to focus on the delivery of high-quality care. Pentegra earns
management service fees under long-term service agreements with Affiliated
Practices. In most cases, service fees payable to Pentegra under the service
agreements it has with its Affiliated Practices represent a share of the
Affiliated Practices' operating profits, thereby providing incentives for
Pentegra and the Affiliated Practices to work together to maximize practice
profitability. In other cases, service fees are a percentage of dental practice
collections. As indicated below and in Item 7, Management's Discussion and
Analysis, the focus of the Company's strategic direction has changed toward
providing Business to Business dental management services through the Internet.
As of March 31, 2000, Pentegra has entered into service agreements with 96
Affiliated Practices, which include approximately 135 dentists and 106 dental
offices located in 29 states (the "Affiliates"). In addition, Pentegra acquired
the assets of a consulting firm, Pentegra, Ltd., which was founded in 1988, and
a seminar company, Napili International ("Napili"), which was founded in 1963.
The clinical, administrative and marketing training developed and provided by
these companies to practicing dentists and their teams were the foundation for
the Company's approach to dental practice management ("the Pentegra Dental
Program".) The Pentegra Dental Program is available exclusively to Affiliated
Practices.
Pentegra believes it has several advantages that would lead dental practices
to seek to affiliate with Pentegra: (i) Pentegra and the Affiliated Practices
focus on providing traditional fee-for-service dental care, which Pentegra
believes is highly profitable and professionally rewarding for dentists; (ii)
the Pentegra Dental Program offers proven techniques to increase practice
profitability substantially; and (iii) affiliation with Pentegra enables
Affiliated Practices to benefit from professional management techniques,
economies of scale in administrative and other functions, and enable affiliated
dentists to dedicate more time and effort towards the growth of their practices.
In the third and fourth quarter of fiscal 2000, the Company announced that
it would be implementing a new business strategy to change the current practice
management business focus to an e-business strategy. A name change of the
Company to "e-dentist.com" was approved by the Board in April, 2000. The name
change will be submitted to a shareholder vote at the August 25, 2000 Annual
Meeting.
Management has begun the development of a Business-to-Business Web site
focussing on the following on-line services:
1. e-LEARNING - Live and on-line interactive learning
2. DENTAL CAREERS - Employment opportunities for both employers and
employees
3. PRACTICE SERVICES - Payroll, human resources, practice
enhancement, patient financing, etc.
4. COMMUNITY - Dental and professional idea communication in chat
rooms and message boards
5. PURCHASING - Dental supplies and equipment purchasing from major
suppliers to all dentist
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services
described above and disclosed these in various press releases. In early May
2000, the Company launched the first generation Web site, and expects to
increase its functionality. The current focus of functionality is concentrated
toward revenue generation for the Company. The Company anticipates a substantial
portion of the Web site will be completed and operational by December 2000.
The Company is proposing to modify, some of which were modified in July
2000, its current management service agreement structure (from 25-40 year terms)
to five years, and decrease and fix the future monthly management fees. The
proposed terms must be acceptable to both the Company and the Affiliated
Practices. The new service agreement will modify the type of services the
Company will provide each Affiliated Practice. The modification of the terms
will include the following:
1. The payroll and payables process will cease. All practice expenses
will be paid by the dentist and not reimbursed. All employees will
become employees of the dentists and payroll will be processed at
the practice level.
3
4
2. Management fees will be 90% of fiscal year 2000 fees and fixed for
three years, drawn weekly at the agreed upon fixed amount.
3. All accounts receivable currently outstanding will be paid, either
in cash or by signing a three-year, interest-bearing note at 10%.
4. Assets and other equipment will be transferred back to the doctors
at the end of the amended management service agreement term, at a
nominal value.
In July 2000, approximately half of the Company's service agreements were
modified on the foregoing basis.
Based on the proposed modifications of the management services agreements
that must be accepted by both the Company and Affiliated Practice, the Company
has prepared an analysis to determine the recoverability of the management
service agreement intangible asset grouped at the practice level for which there
are identifiable cash flows. The Company has prepared the analysis by
calculating the expected undiscounted future cash flows under the proposed
amendments to the management service agreements less the carrying amount of the
intangible asset and has determined that the majority of the intangible asset
will be impaired. The Company will recognize an impairment charge when and if
its proposed modifications are accepted by the Affiliated Practice. There is no
assurance which Affiliated Practices will accept the proposed modifications;
however, if accepted the amount of the impairment is estimated to be
approximately $18 million if substantially all of the Affiliated Practices
accept the proposed modifications, and will be recorded in the period in which
the management service agreements are amended. The periods effected are
anticipated to be the quarters ending June 30 and September 30, 2000. The fair
value of the management service agreement will be amortized over the remaining
term of the modified management service agreement.
Industry Overview
According to the U.S. Health Care Financing Administration ("HCFA"), dental
expenditures in the United States increased from $31.6 billion in 1990 to $50.6
billion in 1997. HCFA also projects that dental expenditures will reach
approximately $95.2 billion by 2007, representing an increase of approximately
88% over 1997 dental expenditures. The Company believes there are several
factors that will drive growth in dental expenditures in the United States,
including (i) the aging of the population, which increases the demand for
restorative and maintenance procedures (e.g. crowns, bridges and implants) that
tend to be more profitable than routine procedures (e.g. cleanings and
fillings); (ii) the increasing attention to dental health and wellness, with
greater emphasis on personal appearance, which increases the demand for general
dentistry services and, in particular, cosmetic dental procedures (e.g.,
porcelain bonding and bleaching), which also tend to be more profitable than
routine procedures; and (iii) the increasing percentage of the population
covered by some form of dental insurance, which, according to the National
Center for Health Statistics, makes patients more likely to seek treatment from
their dentist. Payments for dental services are made either directly by patients
or by third-party payors. Third-party payors primarily consist of private
insurance indemnity plans, preferred provider organizations ("PPOs") and dental
health maintenance organizations and other managed care programs ("DHMOs").
Private indemnity insurance companies typically pay for a patient's dental care
on a fee-for-service basis, while PPO plans pay on a discounted fee-for-service
basis. DHMO plans typically pay on a per-person, per month basis regardless of
the level of service provided to the patient. In the case of both PPOs and
DHMOs, patients typically must pay on a fee-for-service basis for any services
outside the limited range of dental procedures covered. According to the 1997
Mercer Consulting Group survey of Employer-Sponsored Health Plans, approximately
86% of the respondents in that survey reported that they offer their employees
dental plans that pay for dental services on a fee-for-service basis, while
approximately 22% of the plans surveyed are PPO and DHMO plans (i.e., discounted
fee-for-service payments or capitated payments). According to HCFA, only
approximately four percent of all payments for dental care are made under the
Medicaid program (which provides limited coverage for indigent children), with
no coverage being provided by the Medicare program. In a 1995 survey, the
American Dental Association ("ADA") reported that there were approximately
153,000 active dentists in the United States, approximately 88% of whom were
practicing either alone or with only one other dentist. In recent years,
dentists have begun to consolidate into affiliated groups and with practice
management organizations. Dentists who affiliate with practice management
companies gain several benefits, such as opportunities to achieve economies of
scale, to implement cost management techniques and to gain access to capital for
new equipment and other working capital needs.
Executive management of Pentegra Dental Group, Inc. (the "Company") has
committed to entering Internet commerce via Web sites that will provide
services, both free and chargeable, in Business-to-Business ("B2B") as well as
consumer market sectors. The Company's core competencies currently include
dental practice management and consulting, education of dental professionals,
and financial management. The services are currently only offered to the
practices owned by or affiliated with the Company. Additionally, the Company has
negotiated volume purchase agreements with suppliers of dental supplies and
passes those discounts along to owned practices. The Company maintains a public
Web site for marketing, public relations, and investor information and a private
Web site for administrative support, financial information, accounts payable and
payroll, and communication. Most of the Company's on-line services are available
only through dial-up links that are not browser-based.
4
5
The Company intends to deploy a B2B dental Web site that will provide a
broad range of services to dental practices across the United States and the
world using the Internet. The Company intends to form strategic marketing
alliances with dental supply distributors, industry consultants and service
vendors to market services on-line. In exchange for discounts on supplies or
services, the Company will provide the vendors with an on-line interface to
their products. In addition to individual dentist membership fees and a la carte
purchases, the Company will charge a small commission/fee per transaction to the
vendor. In this manner, the vendors can expand their market share while reducing
the cost for each transaction. Because of the large volume projected, most of
the discount will be passed on to the participating dental practice, thus
reducing their practice expenses while increasing their productivity with the
reduction in office management overhead. Additionally, vendor logos and ties
will be displayed prominently on the Web site, and vendors will pay the Company
a fee for their presence there.
The Company believes that there is a market for providing a dedicated web
site that supplies products and services directly to practices. By providing a
convenient, easy-to-use interface and broadband system access, the Company
believes that it will capture significant market share within the first three
years of the web site's initiation. The Company believes that the key to rapid
expansion is both convenient service and low cost. The Company also believes
that a significant market share will enable the Company to negotiate
preferential alliances with suppliers of dental products and content.
The Company's goal is to become the primary distributor for products and
services supplied to dental practices. In order to meet this goal, the Company
plans to form alliances with key vendors and content providers. The Company
intends to work closely with alliance partners within its distribution network
to market products/services and to provide industry news on technology and
practice management.
The Company intends to use the sales and distribution networks of its
strategically allied partners. The sales networks will be national in scope and
focus specifically on dental practices. The Company believes its product will be
positioned effectively as a "value added" distribution network to many national
and international suppliers.
In addition to its alliance program, the Company intends to market its
services through more traditional means. The Company intends to attend most
major national and state dental association meetings to demonstrate and market
its product. The Company believes that the majority of initial enrollments will
occur at these meetings. Concentration on dental association meetings will
enable the Company to introduce its product to the largest number of dentists
without having to develop a national sales organization. The Company also plans
to market its products through advertisement in dental industry journals and
publications.
The creation of a large, on-line dental community is expected to create
substantial stimulation of on-line e-commerce within the dental industry. The
Company's strategy is to create a network of market and strategic alliance
partners with enough size to mitigate adverse competitive actions of its
competitors. The Company is anticipating additional "co-op" advertising and
joint marketing programs with its allied partners.
The Pentegra Dental Program
Pentegra is continually implementing the Pentegra Dental Program at its
Affiliated Practices. The Pentegra Dental Program was originally developed by
Dr. Reed through Pentegra, Ltd. and Napili. Napili was founded in 1963 and has
conducted technical and management seminars for over 15,000 practicing dentists,
including many who have attended these seminars more than once. As a result of
demand by attendees of Napili seminars, Dr. Reed established Pentegra, Ltd. in
1988 to provide hands-on, on-site training and services to small groups of
dentists. Pentegra, Ltd. and Napili are wholly owned by Pentegra and their
services are available exclusively to Affiliated Practices.
Pentegra focuses on traditional fee-for-service practices, which generate
revenue by providing care to their established patient bases and typically grow
through patient referrals. Pentegra believes that the average dentist has the
skills necessary to diagnose and provide appropriate care to patients, but many
of them have not developed the skills needed to obtain patient acceptances of,
and commitments to, the treatment plans. As a result, a significant amount of
recommended care may not be completed, with correspondingly lower revenues to
the dentists.
The Pentegra Dental Program is a cooperative approach that emphasizes
patient wellness and involves the dentist and his or her patient mutually
agreeing on a program to achieve and maintain optimal oral health. In addition
to technical seminars on the current clinical thinking in dentistry, Pentegra
provides seminars both live and interactive using Internet technology and
on-site training and support to assist affiliated dentists (who will control the
practice of dentistry at Affiliated Practices) and their teams to communicate
effectively with each patient regarding the type and value of care needed,
obtain the patient's commitment to a treatment plan and then implement the
agreed-upon treatment plan. An initial on-site consulting and training session
is provided to Affiliated Practices lasting from
5
6
one to three days, with subsequent sessions as necessary. At each initial
session, Pentegra performs an analysis that includes on-site observation of the
dental practice, monitoring of the clinical staff and patient flow, as well as a
review of the charting and record documentation of the care provided. This
process identifies areas where improvements might be made in the day-to-day
operations of the dental practice, including changes in personnel and facility
utilization, patient scheduling and communication (both between the dentist and
his or her staff and between all dental practice personnel and its patients). In
addition, the dental practice's personnel, including its dentists, are
introduced to techniques designed to (i) improve communication among them and
(ii) sensitize them to becoming more confident and consistent in their
communications with patients to ensure that each patient is fully informed and
agrees with the dentist on a mutually acceptable treatment plan. Pentegra and
the Affiliated Practices monitor the patients' treatment plans by using active
recall systems to ensure that scheduled treatments are actually performed. The
Pentegra Dental Program stresses quality of care and personal attention, both of
which Pentegra believes are highly valued by patients and help achieve treatment
plan acceptance. Pentegra is developing a statistical database for each
Affiliated Practice to define and measure the standard of care and assure that
the desired standards are being achieved.
The Pentegra Dental Program also analyzes and rationalizes fee structures
to increase profitability. Pentegra believes that typical fee structures do not
accurately reflect all direct and indirect costs of various procedures. In order
to address this, Pentegra assists the Affiliated Practices by utilizing
time-related cost allocation models to compare cost and fee relationships for
Affiliated Practices that are designed to reflect the true cost of procedures
and, hence, increase profitability.
In addition, the Pentegra Dental Program focuses on increasing the
productivity of the dentist and his or her team. Pentegra consults with
Affiliated Practices with efforts to increase the use of hygienists and
production. A number of dental services can be provided by hygiene teams with
only limited involvement by the dentist, thereby enabling dentists to use their
extra time on higher margin procedures requiring greater expertise and skill.
Pentegra monitors the Affiliated Practices' patient scheduling and time spent
with patients.
SERVICES AND OPERATIONS
Service Agreements
Pentegra has entered into a service agreement with each Affiliated Practice
under which Pentegra is the exclusive manager and administrator of non-dental
services relating to the operation of the Affiliated Practices. The following is
intended to be a brief summary of the typical form of service agreement Pentegra
entered into with each Affiliated Practice. The actual terms of the various
service agreements vary from the description below on a case-by-case basis,
depending on negotiations with the individual Affiliated Practices and the
requirements of applicable law and governmental regulations.
The service fees payable under the service agreements to Pentegra by the
professional corporations or associations formed by the dentist-owners of the
Affiliated Practices were determined initially and some have been subsequently
amended in arm's-length negotiations among the parties. Those Affiliated
Practices that have revenues greater than the average amount of revenues
generated by the Affiliated Practices will typically require more administrative
and other services from Pentegra than those Affiliated Practices with lower than
average revenues. Such fees, together with reimbursement for operating and
non-operating expenses of each Affiliated Practice paid by Pentegra pursuant to
the service agreements, are payable monthly and consist of various combinations
of the following: (i) a percentage (ranging from 30% to 40%) of the Affiliated
Practice's revenues related to dental services less operating expenses
associated with the operation of the Affiliated Practice; (ii) a percentage
(16%) of the Affiliated Practice's dental service revenues, not to exceed a
percentage (35%) of the difference between those revenues and operating expenses
associated with the operation of the Affiliated Practice; (iii) the greater of
(a) a percentage (not to exceed 35%) of the Affiliated Practice's revenues
related to dental services less operating expenses associated with the operation
of the Affiliated Practice or (b) a specified fixed fee or (iv) a percentage
(15%) of the Affiliated Practice's net collected revenues. In addition, with
respect to four of the Affiliated Practices, the Service Fees are based on fixed
fees that are subject to renegotiations on an annual basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Pursuant to each service agreement, Pentegra, among other things, (i) acts
as the exclusive manager and administrator of non-dental services relating to
the operation of the Affiliated Practice, subject to certain matters reserved to
the Affiliated Practice, (ii) administers the billing of patients, insurance
companies and other third-party payors and collects on behalf of the Affiliated
Practice the fees for professional dental and other services and products
rendered or sold by the Affiliated Practice, (iii) provides, as necessary,
clerical and postage, accounting, payroll, legal, bookkeeping and computer
services and personnel, information management, printing, (iv) supervises and
maintains custody of substantially all files and records (other than patient
records if prohibited by applicable law), (v) provides facilities, equipment and
furnishings for the Affiliated Practice, (vi) orders and purchases inventory and
supplies as reasonably requested by the Affiliated Practice and (vii)
implements, in consultation with the Affiliated Practice, public relations or
advertising programs.
6
7
Pursuant to each service agreement, the respective Affiliated Practice
retains the decision-making power and responsibility for, among other things,
(i) hiring, compensating and supervising dentist-employees and other licensed
dental professionals, (ii) ensuring that dentists have the required licenses,
credentials, approvals and other certifications appropriate for the performance
of their duties and (iii) complying with federal and state laws, regulations and
ethical standards applicable to the practice of dentistry. In addition, the
Affiliated Practice will be exclusively in control of all aspects of the
practice of dentistry and the provision of dental services.
Each service agreement as originally executed is for an initial term of 30
to 40 years, with automatic extensions (unless specified notice is given) of
five years. The service agreement may be terminated by either party if the other
party (i) files a petition in bankruptcy or other similar events occur or (ii)
defaults on the performance of a material duty or obligation, which default
continues for a specified term after notice. In addition, the service agreement
may be terminated by Pentegra (i) if the Affiliated Practice or a dental
employee engages in conduct for which the dental employee's license to practice
dentistry is revoked or suspended or is the subject of any restrictions or
limitations by any governmental authority to such an extent that he, she or it
cannot engage in the practice of dentistry or (ii) upon a breach by the dentist
of the employment agreement between the Affiliated Practice and the dentist
Subsequent to the end of fiscal 2000, the Company has indicated a comprehensive
plan which includes reducing the terms of all service agreements to a total of
five years provided the practices make and continue with certain commitments.
See Management's Discussion and Analysis for more detail (Section 7).
The service agreement requires the Affiliated Practice to enforce the
employment agreements between the Affiliated Practice and the dentists
associated with the Affiliated Practice (the "Dentist Employment Agreements").
If the Affiliated Practice does not enforce such employment agreement, Pentegra
may, at its option, require the Affiliated Practice to either assign (i) such
employment agreement or (ii) the rights to enforce the covenant not to compete
set forth therein to Pentegra or its designee. The Affiliated Practice is
responsible for obtaining professional liability insurance for the employees of
the Affiliated Practice and Pentegra has obtained general liability and property
insurance for the Affiliated Practice.
Upon termination of a service agreement, the Affiliated Practice has the
option to purchase and assume, and Pentegra has the option to require the
Affiliated Practice to purchase and assume, the assets and liabilities related
to the Affiliated Practice at the fair market value thereof, except in certain
circumstances where the Affiliated Practice or Pentegra, as applicable, was in
breach of the service agreement.
The Company is proposing to modify, some of which were modified in July
2000, its current Management Service Agreement structure (from 25-40 year terms)
to five years, and decrease and fix the future monthly management fees. The
proposed terms must be acceptable to both the Company and the Affiliated
Practices. The new service agreement will modify the type of services the
Company will provide each Affiliated Practice. The modification of the terms
will include the following:
1. The payroll and payables process will cease. All practice expenses
will be paid by the dentist and not reimbursed. All employees will
become employees of the dentists and payroll will be processed at
the practice level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed for
three years, drawn weekly at the agreed upon fixed amount.
3. All accounts receivable currently outstanding will be paid, either
in cash or by signing a three-year, interest-bearing note at 10%.
4. Assets and other equipment will be transferred back to the doctors
at the end of the amended management service agreement term, at a
nominal value.
In July 2000, approximately half of the Company's service agreements were
modified on the foregoing basis.
Dentist Agreement
Substantially all of the dentist-owners of the Affiliated Practices entered
into a dentist agreement, which provides Pentegra such dentist's guarantee (for
the initial five years and for so long thereafter as he or she owns any interest
in the Affiliated Practice) of the Affiliated Practice's obligations under the
applicable service agreement. In addition, such agreement provides that the
dentist may not sell his or her ownership interest during the dentist's
five-year employment term without Pentegra's prior written consent. In the event
of a default under the Service agreement by the Affiliated Practice, the dentist
agreement provides that Pentegra may, at its option, require the Affiliated
Practice to convey its patient records and the capital stock of the Affiliated
Practice to Pentegra's authorized designee, who, in any such case, Pentegra
anticipates will be a dentist affiliated with an Affiliated Practice.
Management Information Systems
The Company utilizes an integrated server-based information system to track
important operational and financial data related to each Affiliated Practice's
performance. The Company's management information system utilizes direct phone
lines, data lines or the Internet to collect from each Affiliated Practice, on a
daily basis, data on patients seen, number and type of procedures
7
8
performed, billing and collections, and other data needed for financial
reporting and analysis. The Company compiles and analyzes this data in order to
promote efficiency and assure high quality care at Affiliated Practices, as well
as maintain necessary financial controls. The Company's management information
system also enables the Company to centralize certain functions, such as
elements of purchasing, accounts payable and payroll processing, and achieve
economies of scale. Financial reporting to the Affiliated Practices is performed
automatically, through nationally known financial software that interfaces with
and delivers electronic reports via the internet.
Current Technology Infrastructure
Management believes the current hardware configuration utilized by the
Company is sufficient to host the current and new Web site. Further, it has
sufficient capacity to perform the anticipated growth in transaction volume. The
Company currently intends to host its own Web site, and such hosting will not
bring any significant incremental costs.
The Company has already invested considerable time on system development.
To date, development has focused on database functions and development database
objects that link disparate databases into one common interface. The development
of database objects is crucial to the quick development of user interfaces. It
is the database objects that are the "intermediary" between the user interface
and the back office systems. In effect, it is a three-tier system design that is
quickly scalable as new technologies develop.
Important back office elements have been designed and/or developed, which
include:
- Interface to accounts payable systems
- Interface to payroll/HR systems of national payroll provider (ADP)
- On-line financial reporting
- Interface to on-line ordering database to major dental suppliers
- System security and 40-bit data encryption
- System-wide member e-mail access
- Data warehouse integration with large practice management systems
These systems are currently in place and process over $75 million in annual
transactions. Management believes they can be quickly deployed for system
development, truncating the timeline for product launch to two to three months.
8
9
Locations
As of March 31, 2000, Pentegra provided management services to Affiliated
Practices with offices in the following states:
NUMBER OF
---------
STATE PRACTICES OFFICES DENTISTS
-------------- --------- ------- --------
Alaska 1 1 1
Arizona 6 9 6
Arkansas 1 1 2
California 7 8 8
Colorado 4 6 5
Florida 4 4 5
Georgia 2 2 2
Illinois 2 2 2
Kansas 1 1 2
Louisiana 4 4 4
Maine 1 1 1
Massachusetts 1 1 1
Michigan 1 1 1
Missouri 1 1 2
Nebraska 1 2 4
New Mexico 1 1 2
Nevada 2 2 2
New York 3 3 3
North Dakota 2 2 2
Ohio 2 2 2
Oklahoma 6 6 7
Oregon 1 1 1
South Carolina 1 1 2
South Dakota 1 1 1
Tennessee 4 4 6
Texas 32 34 56
Virginia 2 2 2
Washington 1 1 1
Wisconsin 1 1 1
-- --- ---
Totals 96 106 135
== === ===
OTHER PRACTICE MANAGEMENT SERVICES
The Company provides other practice management services to the Affiliated
Practices, including staffing, general business and professional dental
education and training to affiliated dentists, dental hygienists and office
staff, employee benefits administration, advertising and other marketing support
and, where permitted by applicable law, dentist recruiting. This management and
administrative support is designed to reduce the amount of time affiliated
dentists are required to spend on administrative matters and enable them to
dedicate more time and effort toward the growth of their professional practices.
In addition, the Company has negotiated, on behalf of Affiliated Practices,
discounts on, among other things, dental and office supplies, health and
malpractice insurance and equipment. The Company does not enter into any
agreements with third-party payors.
In the third and fourth quarter of fiscal 2000, the Company announced that
it would be implementing a new business strategy to change the current practice
management business focus to an e-business strategy. A name change of the
Company to "e-dentist.com" was approved by the Board in April, 2000. The name
change will be submitted to a shareholder vote at the August 25, 2000 Annual
Meeting.
Management has begun the development of a Business-to-Business Web site
focusing on the following on-line services:
1. e-LEARNING - Live and on-line interactive learning
2. DENTAL CAREERS - Employment opportunities for both employers and
employees
3. PRACTICE SERVICES - Payroll, human resources, practice
enhancement, patient financing, etc.
4. COMMUNITY - Dental and professional idea communication in chat
rooms and message boards
5. PURCHASING - Dental supplies and equipment purchasing from major
suppliers to all dentists
9
10
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services
described above and disclosed these in various press releases. In early May
2000, the Company launched the first generation Web site, and the functionality
increases continually. The current focus of functionality is concentrated toward
revenue generation. The Company anticipates a substantial portion of the Web
site completed and operational by December 2000.
The Company is proposing to modify, some of which were modified in July
2000, its current Management Service Agreement structure (from 25-40 year terms)
to five years, and decrease and fix the future monthly management fees. The
proposed terms must be acceptable to both the Company and the Affiliated
Practices. The new service agreement will modify the type of services the
Company will provide each Affiliated Practice. The modification of the terms
will include the following:
1. The payroll and payables process will cease. All practice expenses
will be paid by the dentist and not reimbursed. All employees will
become employees of the dentists and payroll will be processed at
the practice level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed for
three years, drawn weekly at the agreed upon fixed amount.
3. All accounts receivable currently outstanding will be paid, either
in cash or by signing a three-year, interest-bearing note at 10%.
4. Assets and other equipment will be transferred back to the doctors
at the end of the amended management service agreement term, at a
nominal value.
In July 2000, approximately half of the Company's service agreements were
modified on the foregoing basis.
SUMMARY OF TERMS OF AFFILIATIONS
Since Pentegra's beginning, the Company acquired all the assets necessary
to operate the business of each of the Affiliated Practices, except as limited
by applicable restrictions on the corporate practice of dentistry. The assets
acquired include furniture, fixtures, computer equipment, dental chairs, lights,
autoclaves, mixers, vacuum and suction systems, cabinets, hand instruments and
hand pieces of each Affiliated Practice. Pentegra also acquires the intangible
assets of each Affiliated Practice and employs the non-professional staff of
each Affiliated Practice and, on occasion, assumes certain indebtedness of an
Affiliated Practice. The Company owns no interest in the professional
corporations or associations. In the event of a breach of the service agreement
by an Affiliated Practice, the Company has the right to designate a dentist to
purchase the ownership interests of the applicable professional corporation or
association owned by the dentists that are a party to a service agreement with
the Company. The consideration paid by Pentegra for each Affiliated Practice is
determined by negotiations between executive officers of Pentegra using
valuation methods based on the Affiliated Practice's gross revenue net of
certain operating expenses, and the Company's assessment of growth potential.
The closing of each affiliation is subject to customary conditions. These
conditions include, among others, the accuracy, on the closing date of the
representations and warranties made by the Affiliated Practices and their
stockholders and by the Company; the performance of each of their respective
covenants included in the agreements relating to the affiliations; and the
absence of any material adverse change in the results of operations, financial
condition or business of each Affiliated Practice.
Dentist Employment Agreements
Each Affiliated Practice is a party to a dentist employment agreement with
each dentist owner of the professional entity that is party to a service
agreement with Pentegra. The dentist employment agreements are generally for an
initial term of five years and continue thereafter on a year-to-year basis until
terminated under the terms of the agreements. The dentist employment agreements
provide that the employee dentist will not compete with the Affiliated Practice
during the term of the agreement and following the termination of the agreement
for a term of two years in a specified geographical area (usually a 25 mile
radius) around the location of the relevant dental office. If employment of a
dentist is terminated during the initial five-year term without the consent of
Pentegra for any reason other than the dentist's death or disability or the
occurrence of certain events outside the dentist's control, an event of default
will occur under the related service agreement. In certain jurisdictions a
covenant not to compete may not be enforceable under certain circumstances.
Competition
Pentegra is aware of several publicly traded dental practice management
companies that have operations in jurisdictions where one or more Affiliated
Practices conduct business and several companies pursuing similar strategies in
other segments of the health care industry. Certain of these competitors have
greater financial and other resources than Pentegra and have operations in areas
where Pentegra may seek to expand in the future. Additional companies with
similar objectives are expected to enter Pentegra's markets and compete with
Pentegra. In addition, the business of providing dental services is highly
competitive in each market in which Pentegra operates. Each of the Affiliated
Practices faces local competition from other dentists, some of whom have more
established practices. There can be no
10
11
assurance that Pentegra or the Affiliated Practices will be able to compete
effectively with their respective competitors, that additional competitors will
not enter their markets or that additional competition will not have a material
adverse effect on Pentegra or the Affiliated Practices.
The market for technical products and services is highly competitive.
On-line service providers are free to enter the market with limited capital
resources. Products and services are priced on ever decreasing margins, focusing
on volume from a rapidly expanding market. The largest players in the market
have been able to establish an on-line "branding" that has enabled them to
retain and expand market share. As the market expands, the "branded" systems
will be in position to capture the greater portion of the market.
The primary competitors to the Company's web based business are the
approximately 30 to 40 existing or planned dental Web sites on the Internet.
Although most are limited in scope, there are 8 to 10 main dental Web sites that
have significant capital and scope to compete successfully with the Company.
Although these companies have a head start in the development of on-line
systems, the Company believes that none have marketable products at this time.
The Company has developed systems that are currently in place as a practice
management company and believes it's time to market is equivalent or better than
its competitors.
Employees
As of March 31, 2000, Pentegra employed 28 persons at its corporate office
and 460 persons at the offices of its Affiliated Practices. None of Pentegra's
employees is represented by collective bargaining agreements. Pentegra considers
its employee relations to be good.
In conjunction with the implementation of the revised business
strategy, the practice employees currently employed by Pentegra Dental Group,
Inc., will be employed by the individual practices. Management believes that by
the end of September 2000, virtually no practice level employees will be paid
through the Company.
Insurance
The Affiliated Practices provide dental services to the public and are
exposed to the risk of professional liability and other claims. In recent years,
dentists have become subject to an increasing number of lawsuits alleging
malpractice and related legal theories. Some of these lawsuits involve large
claims and significant defense costs. Any suits or claims involving Pentegra or
dentists at the Affiliated Practices, if successful, could result in substantial
damage awards to the claimants that may exceed the limits of any applicable
insurance coverage. Although Pentegra does not control the practice of dentistry
by the Affiliated Practices, it could be asserted that Pentegra should be held
liable for malpractice of a dentist employed by an Affiliated Practice. Each
Affiliated Practice has undertaken to comply with all applicable regulations and
legal requirements, and Pentegra maintains liability insurance for itself. There
can be no assurance, however, that a future claim or claims will not be
successful or, if successful, will not exceed the limits of available insurance
coverage or that such coverage will continue to be available at acceptable
costs.
The Affiliated Practices have maintained professional liability insurance
coverage, generally on a claims-made basis. Such insurance provides coverage for
claims asserted when the policy is in effect regardless of when the events that
caused the claim occurred. Pentegra has acquired similar coverage in the event
Pentegra succeeds to the liabilities of the Affiliated Practices.
Government Regulation
The dental services industry is regulated extensively at both the state and
federal levels. Regulatory oversight includes, but is not limited to,
prohibition of fee-splitting, corporate practice of dentistry, prohibitions on
fraud and abuse, restrictions on referrals and self-referrals, advertising
restrictions, restrictions on delegation and state insurance regulation.
Corporate Practice of Dentistry and Fee-splitting Restrictions
The laws of many states permit a dentist to conduct a dental practice only
as an individual, a member of a partnership or an employee of a professional
corporation, professional association, limited liability company or limited
liability partnership. These laws prohibit business corporations such as
Pentegra from engaging in the practice of dentistry or employing dentists to
practice dentistry. The specific restrictions against the corporate practice of
dentistry, as well as the interpretation of those restrictions by state
regulatory authorities, vary from state to state. The restrictions are generally
designed to prohibit a non-dental entity (such as Pentegra) from controlling the
professional assets of a dental practice (such as patient records and payor
contracts), employing dentists to practice dentistry (or, in certain
11
12
states, employing dental hygienists or dental assistants) or controlling the
content of a dentist's advertising or professional practice. The laws of many
states also prohibit dentists from sharing professional fees with non-dental
entities. State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist for a
fee, provided certain conditions are met. Pentegra believes that its operations
will not contravene any restriction on the corporate practice of dentistry.
There can be no assurance, however, that a review of Pentegra's business
relationships by courts or regulatory authorities will not result in
determinations that could prohibit or otherwise adversely affect the operations
of Pentegra or that the regulatory environment will not change, requiring
Pentegra to reorganize or restrict its existing or future operations. The laws
regarding fee-splitting and the corporate practice of dentistry and their
interpretation are enforced by regulatory authorities with broad discretion.
There can be no assurance that the legality of Pentegra's business or its
relationship with the Affiliated Practices will not be successfully challenged
or that the enforceability of the provisions of any Service agreement will not
be limited.
In many states in which the Affiliated Practices are located, there is no
case law or other authority interpreting the foregoing provisions. There are,
however, interpretations in some states of analogous medical provisions. One
recent example is in the State of Florida, where the Florida Board of Medicine
recently considered the issue of whether a physician practice is permitted to
enter into a management agreement pursuant to which the managing entity earns a
management fee which includes a percentage of the practice's net income as
consideration for providing certain management and operational services. The
Florida Board of Medicine issued an opinion indicating that such a management
agreement is prohibited by applicable fee-splitting statutes. However, that
order has been stayed pending its appeal to the Florida courts. Although the
Florida Board of Medicine's decision did not apply to dental practices, the
court considering the appeal of the Board of Medicine's order could reach
conclusions or make statements that affect the application of fee-splitting
provisions applicable to dental management agreements. Pursuant to the terms of
the Service agreements, in the event such a Service agreement were determined to
be in violation of applicable law, the agreement would have to be amended in a
manner that complies with applicable law and preserves, to the greatest extent
possible, the economic interests of the parties thereto.
Fraud and Abuse Laws and Restrictions on Referrals and Self-Referrals
Many states in which the Affiliated Practices are located have fraud and
abuse laws that, in many cases, apply to referrals for items or services
reimbursable by any insurer, not just by Medicare and Medicaid. A number of
states, including many of the states in which the Affiliated Practices are
located, also impose significant penalties for submitting false claims for
dental services. In addition, most states in which the Affiliated Practices are
located have laws prohibiting paying or receiving any remuneration, direct or
indirect, that is intended to induce referrals for health care items or
services, including dental items and services. Many states in which the
Affiliated Practices are located either prohibit or require disclosure of
self-referral arrangements and impose penalties for the violation of these laws.
Many states limit the ability of a person other than a licensed dentist to own
or control equipment or offices used in a dental practice. Some of these states
allow leasing of equipment and office space to a dental practice under a bona
fide lease, if the equipment and office remain under the control of the dentist.
The service agreements that will be entered into by Pentegra with respect to
Affiliated Practices in these states will provide that equipment and offices
owned or leased by Pentegra and used at an Affiliated Practice will remain under
the exclusive control of the dentists employed by that Affiliated Practice.
Federal laws regulating the provision of dental care apply only to dental
services, which are reimbursed under certain federally funded programs. Because
none of the Affiliated Practices receive any revenue under these programs, the
impact of these laws on Pentegra is anticipated to be negligible.
There can be no assurance, however, that Affiliated Practices will not have
patients in the future covered by these laws, or that the scope of these laws
will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on Pentegra.
The federal fraud and abuse statute prohibits, subject to certain safe
harbors, the payment, offer, solicitation or receipt of any form of remuneration
in return for, or in order to induce: (i) the referral of a person for service,
(ii) the furnishing or arranging to furnish items or services or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable under
Medicare or Medicaid. The statute reflects the federal government's policy of
increased scrutiny of joint ventures and other transactions among healthcare
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Because dental services are covered under various government
programs, including Medicare and Medicaid, this federal law applies to dentists
and the provision of dental services under those programs.
Significant prohibitions against dentist self-referrals for services
covered by Medicare and Medicaid programs were enacted, subject to certain
exceptions, by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician and dentist
self-referral legislation known as Stark I (which applied only to clinical
laboratory referrals) by
12
13
dramatically enlarging the list of services and investment interests to which
the self-referral prohibitions apply. Stark II prohibits a physician or dentist,
or a member of his or her immediate family, from making referrals for certain
"designated health services" to entities in which the physician or dentist has
an ownership or investment interest, or with which the physician or dentist has
a compensation arrangement. "Designated health services" include, among other
things, clinical laboratory services, radiology and other diagnostic services,
radiation therapy services, durable medical equipment, prosthetics, outpatient
prescription drugs, home health services and inpatient and outpatient hospital
services. Stark II prohibitions include referrals within the physician's or
dentist's own group practice (unless such practice satisfies the "group
practice" exception) and referrals in connection with the physician's or
dentist's employment arrangements with the practice (unless the arrangement
satisfies the employment exception). Stark II also prohibits billing the
Medicare or Medicaid programs for services rendered following prohibited
referrals. Noncompliance with, or violation of, Stark II can result in exclusion
from the Medicare and Medicaid programs and civil and criminal penalties.
Pentegra believes that its operations as presently conducted do not pose a
material risk under Stark II, primarily because Pentegra does not provide
"designated health services." Nevertheless, there can be no assurance that Stark
II will not be interpreted or hereafter amended in a manner that has a material
adverse effect on Pentegra's operations.
Other Federal Regulations
Federal regulations also allow state licensing boards to revoke or restrict
a dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. Pentegra cannot assure compliance by dentists with the
payment terms of their student loans, if any.
The operations of the Affiliated Practices are also subject to compliance
with regulations promulgated by the Occupational Safety and Health
Administration ("OSHA"), relating to such matters as heat sterilization of
dental instruments and the use of barrier techniques such as masks, goggles and
gloves.
Licensure, Advertising Restrictions and Limitations on Delegation
The dentists associated with the Affiliated Practices must possess a
license from the applicable state Board of Dental Examiners and a permit from
the U.S. Drug Enforcement Agency. Additionally, to the extent required by
applicable state laws, dentists associated with the Affiliated Practices must
also possess a state controlled substance permit or certificate from their
respective states.
Some states prohibit the advertising of dental services under a trade or
corporate name. Some states require all advertisements to be in the name of the
dentist. A number of states also regulate the content of advertisements of
dental services and the use of promotional gift items. In addition, many states
impose limits on the tasks that may be delegated by dentists to hygienists and
dental assistants. These laws and their interpretations vary from state to state
and are enforced by the courts and by regulatory authorities with broad
discretion.
Insurance Regulation
There are certain state insurance regulatory risks associated with
Pentegra's anticipated role in negotiating and administering managed care
contracts on behalf of the Affiliated Practices. The application of state
insurance laws to third-party payor arrangements, other than fee-for-service
arrangements, is an unsettled area of law with little guidance available. State
insurance laws are subject to broad interpretation by regulators and, in some
states, state insurance regulators may determine that Pentegra or the Affiliated
Practices are engaged in the business of insurance because of the capitation
features (or similar features under which an Affiliated Practice assumes
financial risk) that may be contained in managed care contracts. In the event
that Pentegra or an Affiliated Practice is determined to be engaged in the
business of insurance, Pentegra or the Affiliated Practice could be required to
either seek licensure as an insurance company or change the form of its
relationships with the third-party payors. There can be no assurance that
Pentegra's operations would not be adversely affected if Pentegra or any of the
Affiliated Practices were to become subject to state insurance regulations.
Health Care Reform
The United States Congress has considered various types of health care
reform, including comprehensive revisions to the current health care system. It
is uncertain what legislative proposals, if any, will be adopted in the future
or what actions federal or state legislatures or third-party payors may take in
anticipation of or in response to any health care reform proposals or
legislation. There can be no assurance that applicable federal or state laws and
regulations will not change or be interpreted in the future either to restrict
or adversely affect Pentegra's relationships with dentists or the operation of
Affiliated Practices.
13
14
ITEM 3. LEGAL PROCEEDINGS
In December 1999, twelve former owners of certain dental practices acquired
by the Company in March 1998 filed a lawsuit against the Company in 190th
District Court of Harris County, Texas. The lawsuit alleges that the Company
committed a breach of contract relating to services rendered in connection with
the management services agreements. Subsequent to March 31, 2000 ten of the
twelve litigants have settled their claims. Discussions are continuing with the
remaining two. The settlement requires the practices to pay $727,000 and return
approximately 453,000 shares of Company stock from their original consideration
for the settlement of their accounts receivable and purchase of their practice
assets, and the payment of a reduced management fee until the expiration of
their original five year employment term. The Company recorded a loss of
approximately $310,000 related to the settlement during fiscal year ended March
31, 2000. In the opinion of management, resolution of these claims will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
In May 1999, two former employees of Omega Orthodontics, Inc. ("Omega") a
wholly owned subsidiary acquired in June 1999, filed a lawsuit against Omega in
Superior Court of California for the County of Los Angeles. One lawsuit alleges
that certain members of Omega's management engaged in conduct with could
constitute sexual harassment. The second employee claim alleges breach of an
oral employment contract and certain claims of ownership rights in Omega L.L.C.,
a shareholder of Pentegra. The Company believes that the asserted claims are
without merit. In the opinion of management, resolution of these claims will not
have a material adverse effect on the Company's financial position results of
operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of fiscal 2000.
Item S-K 401(b). Executive Officers of the Registrant
Pursuant to Instruction 3 to Item 401(6) of Regulation S-K and General
Instruction G(3) to Form 10K, the following information is included in Part I
of this Form 10K. The following table sets forth certain information concerning
the executive officers of Pentegra (ages are as of March 31, 2000):
NAME AGE POSITION
---- --- --------
James M. Powers, Jr., 44 Chairman, President and
D.D.S. Chief Executive Officer
Omer K. Reed, D.D.S. 68 Clinical Officer and
Director
Sam H. Carr 43 Senior Vice President,
Chief Financial Officer,
Secretary and Director
James L. Dunn, Jr. 38 Senior Vice President and
Chief Development Officer
Charles M. Sanders 43 Senior Vice President and
Chief Operating Officer
JAMES M. POWERS, JR., D.D.S. has served as Pentegra's Chairman of the Board
and Chief Executive Officer since November 1998. Dr. Powers served as Chairman
of the Board and President of Liberty Dental Alliance, Inc. from September 1997,
until November 1998, when Pentegra agreed to acquire Liberty Dental Alliance,
Inc. Liberty Dental Alliance, Inc. was a Nashville, Tennessee based dental
practice management company in its formative stages which had letters of intent
to purchase the assets of 75 independent dental practices. Dr. Powers also has
served as the Chairman of the Board of Directors of Clearridge, Inc., a
Nashville based bottled water company since May 1993. He served as President of
Clearridge, Inc., from May 1993 to January 1997. Dr. Powers was a co-founder and
member of the Board of Directors of Barnhill's Country Buffet, Inc., a Memphis,
Tennessee based 23 unit restaurant chain. Since his graduation from the
University of Tennessee College of Dentistry in 1979 until November 1998, Dr.
Powers practiced dentistry in a private practice in Waverly, Tennessee. He also
received a MBA from Vanderbilt University.
OMER K. REED, D.D.S. has served as Clinical Officer since May 1997 and
served as Pentegra's Chairman of the Board from May 1997 to November 1998. He
founded Pentegra, Ltd. in 1988 and Napili International in 1963, and is a
practicing dentist with one of the Pentegra's Affiliated Practices. Since
inception, Pentegra, Ltd. and Napili have provided comprehensive management and
consulting services to dental practices around the nation. In 1965, Dr. Reed
founded the CeramDent Laboratory and he has maintained a private dental practice
in Phoenix since 1959. He has held associate professorships in the Departments
of Ecological Dentistry at the University of North Carolina, Chapel Hill
(1978-1988) and the University of Minnesota (1982-1991), and has lectured
extensively around the world on
14
15
various subjects related to the practice of dentistry. Dr. Reed also serves on
the Board of Directors of Century Companies of America, CUNA Mutual Insurance
Group and the American Volunteer Medical Team.
SAM H. CARR has served as Pentegra's Senior Vice President and Chief
Financial Officer since September 1997. From September 1996 until August of
1997, Mr. Carr served as Vice President - Finance and Corporate Development of
Ankle & Foot Centers of America, LLP, a podiatry practice management company.
From February 1995 until July 1996, Mr. Carr was a Senior Manager with Arthur
Andersen LLP. Prior thereto, Mr. Carr was Chief Financial Officer of
Columbia/HCA's Bellaire Hospital in Houston, Texas from January 1994 until
January 1995, and Vice President of Finance of St. Vincent Hospital in Santa Fe,
New Mexico from 1990 until 1994. From 1978 to 1990, Mr. Carr was an accountant
with Arthur Andersen L.L.P. Mr. Carr is a certified public accountant. Mr. Carr
received his BBA in accounting from the University of Texas in 1977 and received
an Executive MBA from the University of New Mexico in 1994.
JAMES L. DUNN, JR. has served as Pentegra's Senior Vice President and Chief
Development Officer since July 1997, General Counsel since January 2000 and
served as a Director from March 1997 to March 1998. From 1987 through March
1998, Mr. Dunn was an attorney practicing as a sole practitioner in Houston,
Texas. His legal practice focused on providing services to members of the dental
community. He has been actively involved in the valuation and sale of dental
practices over the past five years. In 1995, Mr. Dunn was appointed to the Texas
Medical Disclosure Panel, the body that determines which dental procedures
require informed consent. Mr. Dunn is a member of the American Society of
Pension Actuaries and is a certified public accountant.
CHARLES M. SANDERS joined Pentegra as Senior Vice President and Chief
Operating Officer in October 1999. Mr. Sanders is an experienced veteran of over
20 years in the healthcare industry. Prior to joining Pentegra, and since 1994,
Mr. Sanders worked for FPA Medical Management, Inc., where he served as
president of a $250 million division. He was responsible for marketing,
operations, finance, human resources and information systems serving over 875
employed and affiliated physicians located in five states. Mr. Sanders'
extensive background in operations, finance and information technology includes
experience as the CFO of a $75 million multisite medical facility and the
regional IT director of a national HMO.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION, HOLDERS AND DIVIDEND
The Company's Common Stock has been traded on the American Stock Exchange
system under the symbol "PEN" since March 30, 1998. The following table sets
forth the range of the reported high and low sales prices of the Company's
Common Stock for the year, ended March 31, 2000 and 1999:
2000 High Low
First Quarter ............ $2.81 $1.38
Second Quarter ........... $2.13 $1.56
Third Quarter ............ $1.88 $1.00
Fourth Quarter ........... $1.88 $0.88
1999 High Low
First Quarter ............ $9.00 $6.25
Second Quarter ........... $8.69 $3.87
Third Quarter ............ $3.81 $1.75
Fourth Quarter ........... $2.81 $1.38
As of June 15, 2000, there were approximately 207 holders of record of
Common Stock, as shown on the records of the transfer agent and registrar of
Common Stock. The number of record holders does not bear any relationship to the
number of beneficial owners of the Common Stock. The last reported sale price of
the Common Stock on the American Stock Exchange as of June 15, 2000 was $.88 per
share.
The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividend on its Common Stock in the
foreseeable future. In addition, the terms of the Company's revolving credit
facility prohibit it from paying
15
16
dividends or making other payments with respect to its Common Stock without the
lenders' consent. The Company's Board of Directors intends, for the foreseeable
future, to retain earnings to finance the continued operation and expansion of
the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth-selected financial data of the Company. The
selected financial data in the table are derived from the Company's consolidated
financial statements. The data should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Report.
16
17
STATEMENT OF OPERATIONS DATA
For the period
from inception,
Year ended Year ended Three months ended February 21, 1997
March 31, March 31, March 31, through December 31,
2000 1999 1998 1997
---- ---- ---- ----
Net revenue $ 56,988 $ 38,824 $ -- $ --
Operating expenses 59,476 36,940 1,800 1,354
-------- -------- -------- --------
Earnings (loss) from operations (2,488) 1,884 (1,800) (1,354)
-------- -------- -------- --------
Income (loss) before income
Taxes and extraordinary item (3,497) 1,717 (1,960) (1,354)
Income tax expense (benefit) 2,213 (525) -- --
-------- -------- -------- --------
Net income (loss) before
extraordinary item (5,710) 2,242 (1,960) (1,354)
Extraordinary item, net 350
-------- -------- -------- --------
Net income (loss) (5,360) 2,242 (1,960) (1,354)
Preferred stock dividend -- -- (1,070) --
-------- -------- -------- --------
Income (loss) attributable to
common stock (5,360) 2,242 (3,030) (1,354)
======== ======== ======== ========
Basic and diluted earnings
per share
Earnings (loss) before
extraordinary item $ (0.55) $ 0.29
Extraordinary item 0.03 --
-------- --------
Net earnings (loss) $ (0.52) $ 0.29
======== ========
BALANCE SHEET DATA
Cash and cash equivalents $ 553 $ 1,047 $ 6,708 $ --
Working capital 1,330 4,224 3,640 --
Total assets 37,906 37,127 10,633 --
Long-term debt, less current
maturities 14,829 13,134 368 --
Total shareholder's equity 19,007 20,760 6,996 --
OPERATING DATA
Number of dental practices 96 85 51 --
Number of dentists 135 120 77 --
Total net revenue per dental
Office $ 594 $ 457 $ -- $ --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF PENTEGRA
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
PENTEGRA'S SEC FILINGS.
17
18
Overview
Pentegra provides practice management services to fee-for-service dental
practices in the United States. On March 30, 1998, Pentegra acquired
simultaneously with the closing of its initial public offering ("IPO"),
substantially all of the tangible and intangible assets, and assumed the
liabilities, of 50 Affiliated Practices. Pentegra also began to provide practice
management services to professional corporations or associations owned by the
dentist-owners of those Affiliated Practices (one of which split into two
separate dental practices immediately after the IPO) pursuant to long-term
management service agreements entered into at the time of the IPO. Throughout
fiscal 1999, Pentegra added 34 Affiliate Practices. During fiscal 2000, Pentegra
affiliated with an additional 20 practices. Due primarily to dentist
disabilities, 4 practices have discontinued their affiliation with Pentegra.
The expenses incurred by Pentegra in fulfilling its obligations under the
management service agreements are generally of the same nature as the operating
costs and expenses that are otherwise 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, Pentegra incurs personnel and administrative
expenses in connection with maintaining a corporate office, which provides
management, practice enhancements, administrative and business development
services.
Recent Events, Liquidity and Management Plans
In the third and fourth quarter of fiscal 2000, the Company announced that
it would be implementing a new business strategy to change the current practice
management business focus to an e-business strategy. A name change of the
Company to "e-dentist.com" was approved by the Board in April, 2000. The name
change will be submitted to a shareholder vote at the August 25, 2000 Annual
Shareholders' Meeting.
Management has begun the development of a Business-to-Business Web site
focussing on the following on-line services:
1. e-LEARNING - Live and on-line interactive learning
2. DENTAL CAREERS - Employment opportunities for both employers and
employees
3. PRACTICE SERVICES - Payroll, human resources, practice enhancement,
patient financing, etc.
4. COMMUNITY - Dental and professional idea communication in chat rooms
and message boards
5. PURCHASING - Dental supplies and equipment purchasing from major
suppliers to all dentists
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services.
In early May 2000, the Company launched the first generation Web site.
In July 2000, the Company modified approximately half of its Management
Service Agreements and intends to modify a substantial portion of the remaining
Management Services Agreements, to a shorter term (from 25-40 year terms) of
five years, and decrease and fix the future monthly management fees. The new
service agreement will modify the type of services the Company will provide each
Affiliated Practice. The modification of the terms include the following:
1. The payroll and payables process will cease. All practice expenses will
be paid by the dentist and not reimbursed. All employees will become
employees of the dentists and payroll will be processed at the practice
level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed for
three years, drawn weekly at the agreed upon fixed amount.
3. All accounts receivable currently outstanding will be paid, either in
cash or by signing a three-year, interest-bearing note at 10%.
4. Assets and other equipment will be transferred back to the doctors at
the end of the amended management service agreement terms, at a nominal
value.
Based on the proposed modifications of the management services agreements
that must be accepted by both the Company and Affiliated Practice, the Company
has prepared an analysis to determine the recoverability of the management
service agreement intangible asset grouped at the practice level for which there
are identifiable cash flows. The Company has prepared the analysis by
calculating the expected undiscounted future cash flows under the proposed
amendments to the management service agreements less the carrying amount of the
intangible asset and has determined that the majority of the intangible asset
will be impaired. The Company will recognize an impairment charge when and if
its proposed modifications are accepted by the Affiliated Practice. There is no
assurance which Affiliated Practices will accept the proposed modification;
however, if accepted the amount of the impairment is estimated to be
approximately $18 million if substantially all of the Affiliated Practices
accept the proposed modifications, and will be recorded in the period in which
the management service agreements are amended. The periods effected are
anticipated to be the quarters ending June 30 and September 30, 2000.
18
19
During the fiscal 2000, the Company incurred a net loss of approximately
$5.3 million and has an accumulated deficit of $6.4 million at March 31, 2000.
In addition, the Company used cash flow from operations of $628,000 during the
period ended March 31, 2000.
As discussed in Note 9 of the financial statements, at March 31, 2000, the
Company was not in compliance with certain of the financial covenants of the
line of credit. At March 31, 2000, $10.1 million was outstanding under line of
credit. In conjunction with the extension discussed below, the bank has waived
non-compliance of certain financial ratios at March 31, 2000.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for any amount it collects from its notes receivables during each quarter.
In addition, at the end of each quarter, the bank may receive an additional
$50,000 principal payment if the Company's cash balance exceeds $750,000 and if
the bank has not received at least $350,000 in principal payment from note
receivable collections. The Company has prepared financial projections for the
periods through fiscal year ended March 31, 2001, and believes it will be in
compliance with its financial covenants. No additional borrowings are permitted
under the amendment.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Based upon its current strategy to enhance cash collections and
reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the credit agreement
obligation due July 31, 2001. Management believes it will be able to replace the
credit facility with other financing alternatives or refinance its current line
of credit. There is no assurance that other financing or refinancing of its
current line of credit will be available in sufficient amounts, if at all, and
there can be no assurance that the related terms and conditions will be
acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company 's financial position.
In order to increase its liquidity, the Company has developed the following
strategies; (i) suspension of its new practice affiliation program, (ii)
implement its revised eCommerce based strategic alternative described above,
(iii) implement more rigid credit policies with its Affiliated Practices, (iv)
consider terminating the services agreements of selected underperforming
Affiliated Practices, (v) reducing costs in the Company's corporate office, and
(vi) raising additional capital. However, there can be no assurance that the
Company's strategies will be achieved.
Results of Operations
Following completion of the IPO, Pentegra began operations effective April
1, 1998. Prior to April 1, 1998, the Company was not an operating entity and
therefore had no net revenue and incurred only minor pre-operating expenses.
Comparisons to this period for comparative purposes are not meaningful. In May
1998, Pentegra changed its fiscal year end from December 31 to March 31,
effective for the year beginning April 1, 1998. Management service fee
recognition and related expenses began April 1, 1998, and Pentegra began
managing 50 dental practices in 18 states. At March 31, 2000, Pentegra managed
96 practices in 106 offices in 29 states.
Components of Revenues and Expenses
Under the terms of the typical management services agreement with an
Affiliated Practice, Pentegra serves as the exclusive manager and administrator
of all non-dental services relating to the operation of an Affiliated Practice.
The obligations of Pentegra 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, Pentegra 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, Pentegra is paid a management
fee comprised of two components: (1) a management fee that is fixed in amount,
an amount usually approximating 35% of the Affiliated Practice's operating
profit, before dentist compensation, or 5% to 22% of the Affiliated Practice's
collected gross revenue ("Service Fee") and, (2) the costs incurred by Pentegra
on behalf of the Affiliated Practice. Therefore, net revenues represent amounts
earned by Pentegra 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 Pentegra under
the service agreements.
19
20
The Company is embarking upon a new strategy focusing on eCommerce in
dentistry. Prior to the transition toward eCommerce, Pentegra processed all
payments to vendors and employed the team members of Affiliated Practices. The
proposed modified Management Service Agreements will cause the team members to
cease working as employees for Pentegra Dental Group, Inc., and they will become
employees of the individual Affiliated Practices. In addition, processing of
payments to practice vendors will be performed at the practice level, by
practice employees. Pentegra will no longer be reimbursed for expenses paid on
the practices' behalf. As a result, the components of Net Revenues will change
with the shift in employers.
Beginning April 1, 2000, for practices operating under the revised
Management Services Agreements employing their team members, Net Revenues as
reported by Pentegra Dental Group, Inc. will consist solely of the amended
management fees as agreed in the modified Management Service Agreements.
Reimbursed expenses will no longer be reported as revenues or expenses of the
Company.
Net Revenue
For the year ended March 31, 2000, net revenue generated was $57 million,
an $18.2 million increase over approximately $38.8 million generated for the
year ended March 31, 1999. For the years ended March 31, 2000 and 1999, dental
center revenues aggregated to $73.2 million and $51.6 million, respectively.
During the year ended March 31, 2000, the dental center revenue and net revenue
increases resulted from additional practice affiliations with 12 additional
dental practices in conjunction with the acquisition of Omega Orthodontics, Inc.
In addition, fiscal 2000 contains the benefits of a full twelve month's revenue
generated from the acquisitions of practices acquired during fiscal 1999.
Operating Expenses
The Company incurred operating expenses of approximately $59.5 million for
the year ended March 31, 2000; an increase of approximately $22.6 million over
approximately $36.9 million in operating expenses incurred for the year ended
March 31, 1999. Operating expenses consisted primarily of salaries, wages and
benefits, dental supplies and laboratory fees, rent, advertising and marketing,
and general and administrative expenses. These operating expense increases were
due to the affiliation with 12 additional practices in conjunction with the
acquisition of Omega Orthodontics, Inc. and the full year's costs of fiscal 1999
practice affiliations.
General and administrative expenses consist of the corporate expenses of
the Company. These corporate expenses include salaries, wages and benefits, bad
debt expenses, rent, consulting fees, travel (primarily related to practice
development and practice enhancement), office costs and other general corporate
expenses. For the year ended March 31, 2000, general and administrative expenses
were approximately $10.6 million, an increase of approximately $6.1 million over
approximately $4.5 million in general and administrative expenses incurred for
the year ended March 31, 1999. General and administrative expenses represented
18.6% and 11.6% of net revenue for the years ended March 31, 2000 and 1999,
respectively. The increase in general and administrative costs was primarily due
to the provision for uncollectible accounts and notes receivable of $4.5
million. In addition, the Company incurred higher general and administrative
expenses because it provided services to the increased number of practices in
fiscal 2000 over fiscal 1999.
Accounts receivable are amounts due from Affiliated Practices related to
expenses paid on their behalf by the Company, or management fees not yet paid.
Notes receivable represent advances made to practices for a practice acquisition
by the Affiliated Practice, or advances made for working capital. At March 31,
2000 and 1999, the Company provided $4.5 million and approximately $125,000
respectively for accounts receivable and notes receivable deemed uncollectible.
The increase in the provision for uncollectible receivables during 2000 resulted
from experiencing adequate operating history to determine required reserves for
accounts and notes deemed uncollectible. As a result of mediation with ten (10)
practices in Texas, a portion of the amounts due from these practices was deemed
uncollectible. The provision for uncollectible accounts includes the amounts
deemed uncollectible as a result of the settlements with these practices.
Depreciation and amortization expenses were $2.5 million for the year ended
March 31, 2000 and approximately $1.2 million recorded in the year ended March
31, 1999, an increase of $1.3 million. Depreciation and amortization represented
4.4% and 3.1% of net revenues for the year ended March 31, 2000 and 1999,
respectively. The increase is due primarily to the acquisition of fixed assets
and management service agreements in conjunction with practice affiliations.
Income Tax Expense
Income tax expense for the year ended March 31, 2000 totaled approximately
$2.2 million. The expense arose primarily due to the Company recorded a
valuation allowance for its entire deferred tax asset. The Company recorded the
valuation allowance because it
20
21
concluded it is not likely it would be able to recognize the tax assets because
of no operating history of its new implementation of e-business plan,
modification of its management service agreements and maturity of its line of
credit on July 30, 2001. In addition, the Company has $6.1 million of potential
deductions related to the increase in tax basis of the assets acquired in the
Affiliations. Any tax benefits will be recognized over a period of seven to
fifteen years.
Income tax benefit for the year ended March 31, 1999 was $525,000.
Liquidity and Capital Resources
At March 31, 2000, Pentegra had a working capital of approximately $1.3
million. Current assets included approximately $550,000 in cash and $2.9 million
in accounts receivable, due from Affiliated Practices. Current liabilities
consisted of $250,000 current maturities of bank debt and approximately $2.6
million in accounts payable and accrued liabilities, mostly related to expenses
of the Affiliated Practices.
On June 1, 1998, Pentegra closed a revolving bank credit facility with Bank
One, Texas, N.A., which provides Pentegra 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 Pentegra'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 Pentegra's common stock. Additionally, compliance with
certain financial covenants is required and the lender has approval rights with
respect to acquisitions exceeding certain limits. At March 31, 2000, $10.1
million was outstanding under the revolving line of credit.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for any amount it collects from its notes receivables during each quarter.
In addition, at each quarter, the bank may receive an additional $50,000
principal payment if the Company's cash balance exceeds $750,000 and if the bank
has not received at least $350,000 in principal payments from note receivable
collections. The Company has prepared financial projections for the periods
through fiscal year ended March 31, 2001, and believes they will be in
compliance with the financial covenants. No additional borrowings are permitted
under the amendment.
As discussed above, the bank credit facility due date has been extended to
July 31, 2001. Currently, management projects the Company does not have
financial cash flow from operations to meet this payment. Management believes it
will be able to replace the credit facility with other financing alternatives or
refinance its current line of credit. There is no assurance that other financing
will be available in sufficient amounts, if at all, and there can be no
assurance that the related terms and conditions will be acceptable to the
Company. Failure of the Company to obtain such alternative financing would have
a material and adverse effect on the Company 's financial position.
Cash used in investing activities for the year ended March 31, 2000 and
1999 included approximately $1.4 million and $350,000 for purchases of capital
equipment respectively, mostly for assets acquired in new practice affiliations.
The Company also invested $472,000 and $10.3 million in fiscal 2000 and 1999
respectively for the purchase of intangibles associated with new practice
affiliations.
Cash generated from financing activities for the year ended March 31, 2000
and 1999, included draws on the revolving line of credit of approximately $2.1
million and $8.0 million respectively. Uses of cash include the issuance of
notes receivable to Affiliated Practices of $279,000 in fiscal 2000 and
approximately $1.3 million in 1999.
During fiscal 2000, $984,000 was used to repay long term debt. No repayment
of long-term debt occurred in fiscal 1999.
In the year ended March 31, 2000, the Company entered into capital lease
agreements for the purchase of dental equipment of $1.5 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. 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 of the businesses
21
22
whose securities or assets are to be acquired. The shares of Common Stock that
are issued are valued at market prices. 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. The convertible
subordinated 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 maturity, unless previously redeemed at their conversion price.
The convertible subordinated 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 subordinated debt securities issued
will be valued at prices reasonably related to their principal amount.
Through March 31, 2000, 2,286,000 shares of Common Stock and $4,566,000
aggregate principal amount of convertible subordinated notes registered under
these filings had been issued. At March 31, 2000, $3,834,000 of the convertible
subordinated notes remained outstanding.
As described earlier, the Company is in the process of implementing a new
strategy focussing on a Business-to-Business Web site, providing services to the
dental industry. The application of the Internet functionality to the Company
and its affiliates is not new. Rather, the Internet has been utilized since the
Company's inception in March 1998 to connect the Affiliated Practices with the
corporate office. Throughout the following period, in excess of two years,
practice invoices, payroll and other key financial information has been
transmitted with appropriate data encryption, via the Internet for consolidated
reporting, bill paying, payroll processing, etc. Financial results reported back
to the practices have also utilized the Internet. The required investment in
hardware infrastructure has already been made to accommodate the utilization of
the Internet by its corporate office and Affiliated Practices.
Implementing the new strategy will take additional investment. However, the
investments in hardware at both the affiliate practice and corporate levels are
complete. The investments to successfully implement the Business-to-Business Web
site will entail product development costs, marketing costs, and other related
costs to implement the complete menu of products. Management believes that the
current level of cash flow, combined with the growth provided by the initiation
of the Web site, will be sufficient to complete the development of the Web site
and deploy anticipated services.
Acquisition of Liberty Dental Alliance
On November 13, 1998 Pentegra and Liberty Dental Alliance, Inc. ("Liberty")
entered into an Agreement and Plan of Merger (the "Liberty Merger Agreement"),
pursuant to which Liberty became a wholly owned subsidiary of Pentegra, and
James M. Powers, Jr., D.D.S. was named President of Pentegra. The Liberty Merger
Agreement provided Pentegra pay Liberty common stockholders, consideration for
completed Liberty affiliations.
In connection with the Liberty Merger Agreement, Pentegra has agreed to pay
investment-banking fees of up to $194,000 to SunTrust Equitable Securities
Corporation. This amount is expected to be paid in fiscal 2001. Pentegra issued
an aggregate of 145,000 options to acquire Pentegra common stock to certain
consultants of Pentegra with an exercise price of $6.125 per share, in the same
proportions and upon completion of Liberty Affiliations as the Additional Common
Merger Consideration.
As of March 31, 2000, Pentegra had completed all Liberty affiliations with
17 dental practices of which all were completed during fiscal 1999. These dental
practices generated aggregate annual patient revenue of approximately $13
million during their most recently completed fiscal year, and include dentists
treating patients in 17 dental offices. The aggregate consideration paid by
Pentegra for these practices consisted of approximately $5.6 million in cash,
1,295,268 shares of Pentegra common stock and approximately $3.6 million
aggregate principal amount of 6% Series A convertible subordinated notes,
one-half payable November 2002 and one-half payable November 2003, and $160,000
aggregate principal amount of 6% of Series B convertible subordinated notes,
one-half payable April 2003 and one-half payable April 2004.
The Liberty merger was finalized in the third quarter of fiscal 2000. The
consideration paid pursuant to the Liberty merger for Liberty Affiliations
through December 31, 1999 consisted of approximately $421,000 in cash, 150,194
shares of Pentegra common stock, the assumption of approximately $350,000 in
liabilities of Liberty and 82,681 options to purchase Pentegra common stock.
Dr. Powers entered into an employment agreement with Pentegra, effective
November 13, 1998, pursuant to which he became Pentegra's Chairman, President
and Chief Executive Officer. Dr. Powers' 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 Pentegra common stock with an
exercise price of $6.125 per share and an additional 150,000 shares with an
exercise price of $2.625 per share (the closing sale price on November 13,
1998).
22
23
Acquisition of Omega Orthodontics
On July 1, 1999, the Company executed a merger agreement with Omega
Orthodontics, Inc. ("Omega"). In exchange for the approximately 5.0 million
shares outstanding of Omega, the Company issued approximately 1.8 million shares
of Pentegra stock, and assumed approximately $1.1 million in debt. The merger
was accounted for under the purchase method of accounting. The twelve Omega
practices represent approximately $11.0 million in annualized practice revenues
in fiscal 2000.
Recent Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company will adopt SAB No. 101, as amended by SAB No. 101B, in the fourth
quarter of fiscal 2001. Management is currently evaluating the effects of the
adoption of SAB No. 101 on the Company's financial statements.
In March 2000, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 00-2, "Accounting for the Costs of Developing a Web Site." EITF 00-2
states that for specific web site development costs, the accounting for such
costs should be based generally on a model consistent with the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." All costs incurred in the planning stage should be expensed as
incurred. For the web site application and development stage, all costs relating
to software used to operate a web site should be accounted for pursuant to SOP
98-1, unless a plan exists to market the software externally, in which case the
costs should be accounted for pursuant to SFAS No. 86. Web site hosting fees
should be expensed over the period of benefit and web site graphics should be
capitalized in June 30, 2000, even for costs relating to projects that are in
progress as of that date. Management is currently evaluating the effects the
adoption of EITF 00-2 on the Company's financial statements.
In March 2000, the FASB issued Financial Standards Board Interpretation
(FIN) No. 44, "Accounting for Certain Transactions involving Stock Compensation
- -- an Interpretation of APB Opinion No. 25. FIN No. 44 addresses the application
of APB No. 25 to clarify, among other issues, (a) the definition of employee for
purposes of applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent FIN No. 44 covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying the interpretation will be recognized on a
prospective basis from July 1, 2000. Management believes that the adoption of
FIN No. 44 will not have a material effect on the Company's financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
borrowed funds, which could affect its results of operations and financial
condition. At March 31, 2000, the Company has $10.1 million in variable rate
debt outstanding and, as such, the risk is immaterial based upon a 10% increase
or decrease in interest rates from their March 31, 2000 levels.
23
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Independent Auditors' Reports 25
Consolidated Balance Sheets at March 30, 1999 and 2000 26
Consolidated Statements of Operations for the years ended March 30, 2000, 1999,
1998, February 21, 1997 through December 31, 1997 27
Consolidated Statements of Shareholders' Equity for the years ended March 30,
2000 28
Consolidated Statements of Cash Flows for the years ended March 30, 2000, 1999,
1998, February 21, 1997 through December 31, 1997 29
Notes to Consolidated Financial Statements 30-46
24
25
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Pentegra Dental Group, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Pentegra Dental Group, Inc. and its Subsidiaries at March 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the two years
in the period ended March 31, 2000, the three months ended March 31, 1998 and
the period from inception, February 21, 1997 through December 31, 1997, in
conformity with accounting principals generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Notes 1 and 2, the Company is implementing a new business
strategy which changes the current practice management business focus to an
e-business strategy. In connection with this change, management is proposing to
modify its current management service agreements, some of which were modified in
July 2000, by decreasing the original terms to five years. There is no assurance
which Affiliated Practices will accept the proposed modifications; however, if
the modifications are accepted by substantially all the Affiliated Practices,
the Company estimates it will recognize an impairment charge of approximately
$18 million over the first and second quarters of fiscal 2001.
As described in Notes 1 and 9, the terms of the Company's Credit Agreement
call for a principal maturity date of July 31, 2001. Management's current
projections indicate that the Company will have sufficient funds to meet its
operating capital requirements through fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the credit agreement
obligations due at July 31, 2001. Management is currently seeking other
financing arrangements that would enable the Company to repay amounts
outstanding under the Credit Agreement before July 31, 2001. Absent the
Company's ability to obtain additional sources of funding or refinance its line
of credit, it is unlikely that the Company will be able to pay the principal
payment due on the Credit Agreement on July 31, 2001 which could have a material
and adverse effect on the Company.
PricewaterhouseCoopers LLP
July 14, 2000
Phoenix, Arizona
25
26
PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, March 31,
2000 1999
---- ----
Assets
Current assets:
Cash and cash equivalents $ 553 $ 1,047
Receivables from Affiliated Practices, net of
allowance for doubtful accounts of $3,269 and $125,
respectively 2,966 5,659
Prepaid expenses and other current assets 499 465
Notes receivable from Affiliated Practices - current, net 421 286
-------- --------
Total current assets 4,439 7,457
Property and equipment, net 6,886 6,171
Intangible assets, net 25,786 21,848
Notes receivable from Affiliated Practices, net 709 971
Deferred tax asset - 680
Other assets 86 -
-------- --------
Total assets $ 37,906 $ 37,127
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long term debt $ 492 $ 537
Accounts payable and accrued liabilities 1,908 1,756
Accrued employment agreement 400 940
Current portion of capital leases 309 -
--------- --------
Total current liabilities 3,109 3,233
Long term debt, less current maturities 14,829 13,134
Capital lease liabilities 961 -
Commitments and contingencies
Shareholders' equity
Common stock, $.001 par value 40,000,000 shares authorized,
10,820,783 and 9,102,503 issued respectively 11 9
Additional paid-in capital 25,604 21,823
Accumulated deficit (6,432) (1,072)
Less: Treasury shares at cost: 154,748 at March 31, 2000 (176) -
---------- --------
Total shareholders' equity 19,007 20,760
---------- --------
Total liabilities and shareholders' equity $ 37,906 $ 37,127
========= =========
The accompanying notes are an integral part of the consolidated financial
statements
26
27
PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the period
from inception,
Three months February 21, 1997
Year ended Year ended ended through
March 31, March 31, March 31, December 31,
2000 1999 1998 1997
Net Revenue $56,988 $38,824 $ -- $ --
Operating expenses: -- --
Clinical salaries, wages and benefits 22,957 14,735 -- --
Dental supplies and lab fees 10,134 7,133 -- --
Rent 3,922 2,963 -- --
Advertising and marketing 1,380 785 -- --
General and administrative 10,586 4,497 550 709
Other operating expenses 7,993 5,627 -- --
Depreciation and amortization 2,504 1,200 -- --
Employment agreement -- -- 1,250 --
Compensation expense in connection with issuance
of stock -- -- -- 645
-------- -------- -------- --------
Total operating expenses 59,476 36,940 1,800 1,354
-------- -------- -------- --------
Earnings (loss) from operations (2,488) 1,884 (1,800) (1,354)
Interest expense 1,310 399 160 --
Interest income (208) (188) -- --
Other income (93) (44) -- --
-------- -------- -------- --------
1,009 167 160 --
Income (loss) before income taxes and extraordinary
Item (3,497) 1,717 (1,960) (1354)
Income tax expense (benefit) 2,213 (525) -- --
-------- -------- -------- --------
Income (loss) before extraordinary item (5,710) 2,242 (1,960) (1,354)
Extraordinary item - gain on debt forgiveness (net of
of tax effect of $0) 350 -- -- --
-------- -------- -------- --------
Net income (loss) (5,360) 2,242 (1,960) (1,354)
Preferred stock dividend -- -- (1,070) --
-------- -------- -------- --------
Income (loss) attributable to common stock $(5,360) $2,242 $(3,030) $(1,354)
======== ======== ======== ========
Basic and diluted earnings per share
Earnings (loss) before extraordinary item $(0.55) $0.29
Extraordinary item .03 --
--------- -------
Net earnings (loss) $(0.52) $0.29
======== ========
Weighted average number of shares outstanding-
basic and diluted 10,356 7,803
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
27
28
PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Additional Total
Paid in Accumulated Treasury Shareholders
Shares Amount Capital Deficit Stock Equity (Deficit)
Balances at February 21, 1997 -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock 1,844 19 $1,194 -- -- $1,213
Purchase of common stock (87) (1) -- -- -- (1)
Net loss from inception
through December 31, 1997 -- -- -- (1,354) -- (1,354)
-------- -------- -------- -------- -------- --------
Balances, December 31, 1997 1,757 18 1,194 (1,354) -- (142)
Issuance of common stock 2,500 3 16,357 -- -- 16,360
Transfers of certain assets
and liabilities to founders 3,094 3 (6,180) -- -- (6,177)
Dividend to shareholders
of Affiliated Practices -- -- (1,070) -- -- (1,070)
Share exchange (909) (18) 3 -- -- (15)
Net loss -- -- -- (1,960) -- (1,960)
-------- -------- -------- -------- -------- --------
Balances, March 31, 1998 6,442 6 10,304 (3,314) 6,996
Issuance of common
stock 375 1 2,870 -- -- 2,871
Issuance of common stock
to Affiliated Practices 2,286 2 8,494 -- -- 8,496
Tax benefit related to
assets acquired in
affiliations -- -- 155 -- -- 155
Net income -- -- -- 2,242 -- 2,242
-------- -------- -------- -------- -------- --------
Balances, March 31, 1999 9,103 9 21,823 (1,072) 20,760
Issuance of common stock 1,893 2 3,836 -- 3,838
Shares repurchased (175) -- (297) -- (176) (473)
Issuance of options for
compensation -- -- 54 -- -- 54
Net loss -- -- -- (5,360) -- (5,360)
Tax benefit related to
assets acquired in
affiliations -- -- 188 -- -- 188
-------- -------- -------- -------- -------- --------
Balances, March 31, 2000 10,821 $11 $25,604 $(6,432) $(176) $19,007
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements
28
29
PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the period
from inception,
For the year For the year Three months February 21, 1997
Ended ended ended through
March 31, 2000 March 31, 1999 March 31, 1998 December 31, 1997
-------------- -------------- -------------- -----------------
Cash flows from operating activities
Net income (loss) $(5,360) $2,242 $(1,960) $(1,354)
Adjustment to net income (loss)
Provision for bad debts 4,505 125 -- --
Depreciation and amortization 2,504 1,200 -- --
Stock options compensation 54 -- -- --
Debt forgiveness (350) -- 135 --
Amortization of loan discount -- -- -- 45
Compensation associated with issuance of stock -- -- -- 645
Deferred income taxes (benefit) 2,161 (525) -- --
Changes in operating assets and liabilities
Receivables from affiliated practices (2,383) (5,784) -- --
Prepaid expenses and other current assets (168) (364) (49) --
Accounts payable and accrued liabilities (1,401) (63) 1,476 57
Accrued employment agreement (190) (310) -- --
-------- -------- -------- --------
Net cash used in operating activities (628) (3,479) (398) (607)
-------- -------- -------- --------
Cash flows from investing activities
Repayment of notes receivable 116 -- -- --
Capital expenditures (347) (1,424) (310) (166)
Acquisitions of affiliated dental practices net of
cash acquired (472) (10,326) (100) --
Dividend to founding affiliated practices -- -- (6,492) --
Issuance of notes receivable (279) (1,257) -- --
Organizational costs -- -- (59) (5)
-------- -------- -------- --------
Net cash used in investing activities (982) (13,007) (6,961) (171)
-------- -------- -------- --------
Cash flows from financing activities
Proceeds from issuance of common and redeemable
preferred stock -- 2,930 19,762 1,476
Proceeds from issuance of notes payable -- -- 486 350
Proceeds from line of credit 2,100 8,000 -- --
Redemption of common stock -- -- (1,691) --
Repurchase of common stock -- -- (14) --
Repayment of long-term debt (984) -- (3,129) (948)
Offering and financing costs -- (105) (1,447) --
-------- -------- -------- --------
Net cash provided by financing activities 1,116 10,825 13,967 878
-------- -------- -------- --------
Net change in cash and cash equivalents (494) (5,661) 6,608 100
Cash and cash equivalents, beginning of period 1,047 6,708 100 --
-------- -------- -------- --------
Cash and cash equivalents, end of period $553 $1,047 $6,708 $100
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements
29
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Recent Events, Liquidity and Management Plans
In the third and fourth quarter of fiscal 2000, the Company announced
that it would be implementing a new business strategy to change the current
practice management business focus to an e-business strategy. A name change of
the Company to "e-dentist.com" was approved by the Board in April, 2000. The
name change will be submitted to a shareholder vote at the August 25, 2000
Annual Shareholders' Meeting.
Management has begun the development of a Business-to-Business Web site
focussing on the following on-line services:
1. E-LEARNING - Live and on-line interactive learning
2. DENTAL CAREERS - Employment opportunities for both employers and
employees
3. PRACTICE SERVICES - Payroll, human resources, practice
enhancement, patient financing, etc.
4. COMMUNITY - Dental and professional idea communication in chat
rooms and message boards
5. PURCHASING - Dental supplies and equipment purchasing from major
suppliers to all dentist
The Company has developed a Web site and executed various channel
partnership agreements with other entities to help provide the on-line services.
In early May 2000, the Company launched the first generation Web site.
In July 2000, the Company modified approximately half of its Management
Service Agreements and intends to modify a substantial portion of the remaining
Management Services Agreements, to a shorter term (from 25-40 year terms) of
five years, and decrease and fix the future monthly management fees. The new
service agreement will modify the type of services the Company will provide each
Affiliated Practice. The modification of the terms include the following:
1. The payroll and payables process will cease. All practice
expenses will be paid by the dentist and not reimbursed. All
employees will become employees of the dentists and payroll
will be processed at the practice level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed
for three years, drawn weekly at the agreed upon fixed amount.
3. All accounts receivable currently outstanding will be paid,
either in cash or by signing a three-year, interest-bearing
note at 10%.
4. Assets and other equipment will be transferred back to the
doctors at the end of the amended management service agreement
term, at a nominal value.
Based on the proposed modifications of the management services
agreements that must be accepted by both the Company and Affiliated Practice,
the Company has prepared an analysis to determine the recoverability of the
management service agreement intangible asset grouped at the practice level for
which there are identifiable cash flows. The Company has prepared the analysis
by calculating the expected undiscounted future cash flows under the proposed
amendments to the management service agreements less the carrying amount of the
intangible asset and has determined that the majority of the intangible asset
will be impaired. The Company will recognize an impairment charge when and if
its proposed modifications are accepted by the Affiliated Practice. The amount
of the impairment is estimated to be approximately $18 million if substantially
all of the Affiliated Practices accept the proposed modifications, and will be
recorded in the period in which the management service agreements are amended.
The periods effected are anticipated to be the quarters ending June 30 and
September 30, 2000.
During fiscal 2000, the Company incurred a net loss of approximately
$5.4 million and has an accumulated deficit of $6.4 million at March 31, 2000.
In addition, the Company used cash flow from operations of $628,000 during the
period ending March 31, 2000.
As discussed in Note 9, at March 31, 2000, the Company was not in
compliance with certain of the financial covenants of the line of credit. At
March 31, 2000, $10.1 million was outstanding under line of credit. In
conjunction with the extension discussed below, the bank has waived
non-compliance of certain financial ratios at March 31, 2000.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for any amount it collects from its notes receivable during each quarter.
In addition, at the end of each quarter, the bank may receive an additional
$50,000 principal payment if the Company's cash balance exceeds $750,000 and if
the bank has not received at least $350,000 in principal payments from note
receivable collections. The Company has prepared financial projections for the
periods through fiscal year ending March 31, 2001,
30
31
and believes it will be in compliance with its financial covenants. No
additional borrowings are permitted under the amendment.
As discussed above, the bank credit facility due date has been extended
to July 31, 2001. Based upon its current strategy to enhance cash collections
and reduce costs, the Company projects to have sufficient funds to meet its
operating capital requirements through the fiscal year ending March 31, 2001;
however, there would not be sufficient cash flow to fund the credit agreement
obligations due July 31, 2001. Management believes it will be able to replace
the credit facility with other financing alternatives or refinance its current
line of credit. There is no assurance that other financing or refinancing of its
current line of credit will be available in sufficient amounts, if at all, and
there can be no assurance that the related terms and conditions will be
acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company's financial position.
In order to increase its liquidity, the Company has developed the
following strategies; (i) suspension of its new practice affiliation program,
(ii) implement its revised eCommerce based strategic alternative described
above, (iii) implement more rigid credit policies with its Affiliated Practices,
(iv) consider terminating the services agreements of selected underperforming
Affiliated Practices, (v) reducing costs in the Company's corporate office, and
(vi) raising additional capital. However, there can be no assurance that the
Company's strategies will be achieved.
Organization and Basis of Presentation
Pentegra Dental Group, Inc. (the "Company") together with its wholly
owned subsidiary, Pentegra Investments, Inc. ("PII"), provides practice
management services to dental practices throughout the United States. In July
1997, Pentegra Dental Group, Inc., changed its name to Pentegra Investments,
Inc. and formed a new wholly owned subsidiary named Pentegra Dental Group, Inc.
("Pentegra Dental" or "the Company"). On March 30, 1998, simultaneously with the
Company's initial public offering, PII repurchased (the "Share Repurchase") from
the stockholders of PII, on a pro rata basis, at a purchase price of $0.015 per
share, that number of shares as was necessary so that the aggregate number of
shares of Pentegra Dental common stock, par value $.001 per share (the "Common
Stock"), issued in connection with the Affiliations (as defined below) and the
Share Exchange (as defined below) would not exceed 3,941,898 shares. Pursuant to
that agreement, PII repurchased 909,237 shares for $14,000 and exchanged on a
share-for-share basis, shares of PII common stock, par value $0.015 per share,
for 1,756,667 shares of Common Stock (the "Share Exchange"). On March 30, 1998,
Pentegra Dental acquired (the "Affiliations") simultaneously with the closing of
its initial public offering (the "Offering" or "IPO"), substantially all of the
tangible and intangible assets, and assumed the liabilities, of 50 dental
practices (collectively, the "Founding Affiliated Practices") in exchange for
3.1 million shares of Common Stock, $6.5 million in cash and net assets assumed
of approximately $300,000. The net proceeds of the 2.5 million shares of Common
Stock issued in the IPO (after deducting the underwriting discounts and
commissions) were $19.8 million. Total related offering costs were $3.4 million.
The acquisitions of the Founding Affiliated Practices have been
accounted for in accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin ("SAB") No. 48, "Transfers of Non-monetary Assets by
Promoters or Shareholders". In accordance with SAB No. 48, the acquisition of
the assets and assumption of certain liabilities for all of the Founding
Affiliated Practices pursuant to the Affiliations has been accounted for by the
Company at the transferors' historical cost basis, with the shares of Common
Stock issued in those transactions being valued at the historical cost of the
non-monetary assets acquired net of liabilities assumed. The cash consideration
of approximately $6.5 million, paid at closing on March 30, 1998, less net
assets acquired of approximately $300,000, is reflected as a dividend by the
Company to the owners of the Founding Affiliated Practices in the quarter ended
March 31, 1998. SAB No. 48 is not applicable to any acquisitions made by the
Company subsequent to the IPO. Acquisitions of certain of the assets and
liabilities of practices that affiliate with the Company after the IPO have been
accounted for as purchases, and resulted in substantial annual non-cash
amortization charges for intangible assets in the Company's statements of
operations.
In April 1998, the over allotment option to sell 375,000 shares of
Common Stock was exercised at a price of $8.50 per share, yielding additional
net proceeds to the Company of approximately $2.9 million.
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. 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
31
32
terms upon which it issues the shares and convertible subordinated debt
securities are determined through negotiations with the businesses whose
securities or assets are to be acquired. The shares of Common Stock that are
issued are valued at 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. The
convertible subordinated 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 maturity, unless previously redeemed at
their conversion price. The convertible subordinated 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 subordinated debt
securities issued are valued at prices reasonably related to their principal
amount. As of March 31, 2000, 2,286,000 shares and $4,566,000 aggregate
principal amount of Convertible Subordinated Notes registered under these
filings had been issued.
Fiscal Year Change
In May 1998, the Company changed its fiscal year from December 31 to
March 31, effective for the year beginning April 1, 1998. The three-month
transition period from January 1, 1998 through March 31, 1998 (the "Transition
Period") preceded the start of the new fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions are eliminated upon consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the various
classes of depreciable assets, ranging from three to seven years. Maintenance
and repairs are charged to expense whereas renewals and major replacements are
capitalized. Gains and losses from dispositions are included in operations.
Intangible Assets
The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated individually by either party without
cause. The cost of the management services agreement is amortized on a
straight-line basis over the lessor of its term or 25 years.
In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of the group with which a
management services agreement is entered into, including the number of dentists
in each group, number of dental centers and ability to recruit additional
dentists, the affiliated dental practice's relative market position, the length
of time each affiliated dental practice has been in existence, and the term and
enforceability of the management services agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and non-compete agreements with the dentist, or directly
contract with payors, the intangible asset created in the purchase allocation
process is associated primarily with the management services agreement with the
affiliated dental practice.
The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If this review indicates that the carrying amount of the asset
may not be recoverable, as determined based on the undiscounted cash flows of
the related operations over the remaining amortization period, the carrying
value of the asset is reduced to estimated fair value. Among the factors that
the Company will continually evaluate are unfavorable changes in each affiliated
dental practice's relative market share and local market competitive
environment, current period and forecasted operating results
32
33
and cash flows of the affiliated dental practice and its impact on the
management fee earned by the Company, and legal factors governing the practice
of dentistry.
The Company has prepared an analysis to determine the recoverability of
the management service agreement intangible asset grouped at the practice level
for which there are identifiable cash flows. The Company has prepared the
analysis by calculating the expected undiscounted future cash flows under the
existing management service agreements less the carrying amount of the
intangible asset and has determined that the intangible asset is not impaired
based on the management service agreements in effect as of March 31, 2000.
However, the Company is proposing to modify, some of which were modified in July
2000, its current Management Service Agreement structure (from 25-40 year terms)
to five years, and decrease and fix the future monthly management fees. The
following proposed terms must be mutually accepted by the Company and Affiliated
Practice. The new service agreement will modify the type of services the Company
will provide each Affiliated Practice. The proposed modification of the terms
will include the following:
1. The payroll and payables process will cease. All practice
expenses will be paid by the dentist and not reimbursed. All
employees will become employees of the dentists and payroll
will be processed at the practice level.
2. Management fees will be 90% of fiscal year 2000 fees and fixed
for three years, drawn weekly at the agreed upon fixed amount.
3. All accounts receivable currently outstanding will be paid,
either in cash or by signing a three-year, interest-bearing
note at 10%.
4. Assets and other equipment will be transferred back to the
doctors at the end of the amended management service agreement
term, at a nominal value.
Based on the proposed modifications of the management services agreements
that must be accepted by both the Company and Affiliated Practice, the Company
has prepared an analysis to determine the recoverability of the management
service agreement intangible asset grouped at the practice level for which there
are identifiable cash flows. The Company has prepared the analysis by
calculating the expected undiscounted future cash flows under the proposed
amendments to the management service agreements less the carrying amount of the
intangible asset and has determined that the majority of the intangible asset
will be impaired. The Company will recognize an impairment charge when and if
its proposed modifications are accepted by the Affiliated Practice. There is no
assurance which Affiliated Practices will accept the proposed modifications;
however, the amount of the impairment is estimated to be approximately $18
million if substantially all of the Affiliated Practices accept the proposed
modifications, and will be recorded in the period in which the management
service agreements are amended. The periods effected are anticipated to be the
quarters ending June 30 and September 30, 2000. The fair value of the management
service agreement will be amortized over the remaining term of the modified
management service agreement.
As of July 14, 2000, approximately fifty Affiliated Practices have
accepted the new terms of the Management Service Agreements.
Revenue Recognition
Under the terms of the typical management services agreement with an
Affiliated Practice, Pentegra serves as the exclusive manager and administrator
of all non-dental services relating to the operation of an Affiliated Practice.
The obligations of Pentegra 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, Pentegra 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, Pentegra is paid a management
fee comprised of two components: (1) a management fee that is fixed in amount,
an amount usually approximating 35% of the Affiliated Practice's operating
profit, before dentist compensation, or 15% of the Affiliated Practice's
collected gross revenue ("Service Fee") and, (2) the costs incurred by Pentegra
on behalf of the Affiliated Practice. Therefore, net revenues represent amounts
earned by Pentegra 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 are obligated to pay to
Pentegra under the service agreements.
The Company is embarking upon a new strategy focusing on eCommerce in
dentistry. Prior to the transition toward eCommerce, Pentegra processed all
payments to vendors and employed the team members of Affiliated Practices. The
expected modified Management Service Agreements will cause the team members to
cease working as employees for Pentegra Dental Group, Inc., and they will become
employees of the individual Affiliated Practices. In addition, processing of
payments to practice vendors will be performed at the practice level, by
practice employees. Pentegra will no longer be reimbursed for expenses paid on
the practices' behalf. As a result, the
33
34
components of Net Revenues will change and Net Revenues will decrease
significantly with the new proposed management service agreements.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under this method, deferred taxes are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect when the
differences reverse.
Earnings Per Share
Basic earnings per share are computed based upon the weighted average
number of shares of common stock and common stock equivalents outstanding during
each period. Diluted earnings per share are not separately presented because
such amounts would be the same as amounts computed for basic earnings per share.
As of March 31, 2000 and 1999, options to purchase 1,219,273 and
596,666 shares of Common Stock at exercise prices above the market value of
Common Stock were excluded from the calculation of earnings per share because
their effect would have been antidilutive. As of March 31, 2000 and 1999, shares
of 559,656 and 665,206 convertible from the Company's convertible subordinated
notes were excluded from the calculation because their effects would have been
antidilutive. Earnings per share for the periods prior to the year ended March
31, 1999 are not reported because the Company had no significant operations.
Segment Reporting
The Company presently operates in one business segment, which is to
manage dental practices. The Company currently manages offices across the United
States. All aspects of the Company's business are structured on a
practice-by-practice basis. Financial analysis and operational decisions are
made at the office level. The Company does not evaluate performance criteria
based upon geographic location, type of service offered or sources of revenue.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
New Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company will adopt SAB No. 101, as amended by SAB No. 101B, in the fourth
quarter of fiscal 2001. Management is currently evaluating the effects of the
adoption of SAB No. 101 on the Company's financial statements.
In March 2000, the Emerging Issues Task Force (EITF) reached a
consensus on Issue 00-2, "Accounting for the Costs of Developing a Web Site."
EITF 00-2 states that for specific web site development costs, the accounting
for such costs should be based generally on a model consistent with the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." All costs incurred in the planning stage should be expensed as
incurred. For the web site application and development stage, all costs relating
to software used to operate a web site should be accounted for pursuant to SOP
98-1, unless a plan exists to market the software externally, in which case the
costs should be accounted for pursuant to SFAS No. 86. Web site hosting fees
should be expensed over the period of benefit and web site graphics should be
capitalized in accordance with SOP 98-1. This consensus will be applicable to
all web site development costs incurred for quarters beginning after June 30,
2000, even for costs relating to projects that are in progress as of that date.
Management is currently evaluating the effects of the adoption of EITF 00-2 on
the Company's financial statements.
In March 2000, the FASB issued Financial Standards Board Interpretation
(FIN) No. 44, "Accounting for Certain Transactions involving Stock Compensation
- -- an Interpretation of APB Opinion No. 25. FIN No. 44 addresses the application
of APB No. 25 to clarify, among other issues, (a) the definition of employee for
purposes of applying APB No. 25, (b) the criteria for determining whether a plan
34
35
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent FIN No. 44 covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying the interpretation will be recognized on a
prospective basis from July 1, 2000. Management believes that the adoption of
FIN No. 44 will not have a material effect on the Company's financial
statements.
Reclassifications
Certain prior year balances in the consolidated financial statements
have been reclassified to confirm with the 2000 presentation.
3. NOTES RECEIVABLE
Notes receivable consisted of the following:
March 31,
--------------------
2000 1999
--------------------
(in thousands)
Notes receivable $2,844 $1,257
Less: allowance for doubtful accounts (1,714) --
------- -------
1,130 1,257
Notes receivable, current 421 286
------- -------
$709 $971
======= =======
Notes receivables are with Affiliated Practices and are
uncollateralized, ranging in length from one to thirteen years. The notes bear
interest at March 31, 2000 at rates ranging from 5% to 10% with interest and
principal payments due monthly.
The payout schedule of notes receivable for each of the next five years
subsequent to March 31, 2000 were as follows (in thousands):
2001........................................................................ $ 848
2002........................................................................ 422
2003........................................................................ 414
2004........................................................................ 440
2005........................................................................ 261
Thereafter.................................................................. 459
--------
$2,844
========
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31,
-----------------------
2000 1999
-----------------------
(in thousands)
Furniture & Fixtures $2,732 $2,959
Equipment 3,662 2,381
Computer Equipment 2,103 1,330
Leasehold Improvements 371 287
------ ------
Total property and equipment 8,868 6,957
Less: accumulated depreciation 1,982 786
------ ------
Property and equipment, net $6,886 $6,171
====== ======
Depreciation expense for the years ended March 31, 2000 and 1999 was
$1,284,000 and $786,000, respectfully.
35
36
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
March 31,
----------------------------
2000 1999
----------------------------
(in thousands)
Management service agreements $ 26,905 $ 21,970
Other 504 292
------------ -----------
27,409 22,262
Less: accumulated amortization 1,623 414
------------ -----------
Intangible assets, net $ 25,786 $ 21,848
============ ===========
Amortization expense for the years ended March 31, 2000 and 1999 was
$1,220,000 and $414,000, respectfully.
As discussed in Note 2, the Company is proposing to modify the terms of
its existing management service agreement. The Company expects to recognize an
impairment charge of approximately $18 million over the second and third
quarters of fiscal 2001 if the proposed modifications are accepted by the
Affiliated Practices.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
March 31,
-----------------------
2000 1999
-----------------------
(in thousands)
Accounts payable trade $1,111 $1,066
Amounts payable to Affiliated Practices 332 --
Accrued interest 73 334
Other 392 356
------ ------
Total accounts payable and
accrued liabilities $1,908 $1,756
====== ======
7. EXTRAORDINARY ITEM
In December 1999, a member of the Board of Directors forgave $350,000
previously due from the Company (See Note 14).
8. AFFILIATIONS
On July 1, 1999, the Company executed a merger agreement with Omega
Orthodontics, Inc. ("Omega"). In exchange for the approximately 5.0 million
shares outstanding of Omega, the Company issued approximately 1.8 million shares
of Pentegra stock, and assumed approximately $1.1 million in debt. The merger
was accounted for under the purchase method of accounting.
The following unaudited pro forma summary of financial information
presents the Company's combined results of operations as if the acquisition of
Omega Orthodontics, Inc. had occurred at the beginning of the periods presented,
after including the impact of certain adjustments including: (i) the elimination
of nonrecurring merger related costs, and (ii) reduced amortization expense
reflecting in value assigned to intangible assets.
36
37
Fiscal years ended March 31,
2000 1999
---------------- ------------------
Pro forma Pro forma
Unaudited Unaudited
(in thousands, except per share amounts)
----------------------------------------
Revenues $59,063 $46,645
Expenses 61,752 44,216
-------- --------
Net income (5,683) 2,429
Net income (loss) per basic and
diluted share before extraordinary item $ (.55) $ 0.25
======== ========
Weighted average number of
basic and diluted share
Outstanding 10,356 9,546
======== ========
The pro forma financial information presented does not purport to
indicate what the combined results of operations would have been had the merger
occurred at the beginning of the periods presented or the results of operations
that may be obtained in the future. Additionally, the pro forma financial
information presented does not reflect the anticipated cost savings resulted
from the integration of the Company's and Omega's operations.
Acquisition of Liberty Dental Alliance
On November 13, 1998 Pentegra and Liberty Dental Alliance, Inc.
("Liberty") entered into an Agreement and Plan of Merger (the "Liberty Merger
Agreement"), pursuant to which Liberty became a wholly owned subsidiary of
Pentegra, and James M. Powers, Jr., D.D.S. was named President of Pentegra. The
Liberty Merger Agreement provided Pentegra pay Liberty common stockholders,
consideration for completed Liberty affiliations.
In connection with the Liberty Merger Agreement, Pentegra has agreed to
pay investment-banking fees of up to $194,000 to SunTrust Equitable Securities
Corporation. This amount is expected to be paid in fiscal 2001. Pentegra issued
an aggregate of 145,000 options to acquire Pentegra common stock to certain
consultants of Pentegra with an exercise price of $6.125 per share, in the same
proportions and upon completion of Liberty Affiliations as the Additional Common
Merger Consideration.
As of March 31, 2000, Pentegra had completed all Liberty Affiliations
with 17 dental practices of which all were completed during fiscal 1999. These
dental practices generated aggregate annual patient revenue of approximately $13
million during their most recently completed fiscal year, and include dentists
treating patients in 17 dental offices. The aggregate consideration paid by
Pentegra for these practices consisted of approximately $5.6 million in cash,
1,295,268 shares of Pentegra common stock and approximately $3.6 million
aggregate principal amount of 6% Series A convertible subordinated notes,
one-half payable November 2002 and one-half payable November 2003, and $160,000
aggregate principal amount of 6% of Series B convertible subordinated notes,
one-half payable April 2003 and one-half payable April 2004.
The Liberty merger was finalized in the third quarter of fiscal 2000.
The consideration paid pursuant to the Liberty merger on the Liberty
affiliations through December 31, 1999 consisted of approximately $421,000 in
cash, 150,194 shares of Pentegra common stock, the assumption of approximately
$350,000 in liabilities of Liberty and 82,681 options to purchase Pentegra
common stock.
For the year ended March 31, 1999, the Company completed new dentist
affiliations with 34 practices. Total consideration paid by the Company for the
new affiliations consisted of 2,286,000 shares of Common Stock, $4.6 million
aggregate principal amount of Convertible Subordinated Debt Securities, $537,000
in notes and $10.3 million of cash.
The assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The aggregate purchase price and related
expenses that exceeded the fair market value of net assets, have been assigned
to management services agreements. Management fees and related costs are
included in the financial statements from their acquisition dates. The
allocations were as follows (in thousands):
37
38
2000 1999
-------- ----------
Property and equipment, net.................................................... $ 500 $ 1,955
Management services agreements................................................. 4,938 21,970
Deferred tax asset............................................................. 1,212 -
Net liabilities acquired....................................................... (2,340) -
------- ----------
4,310 23,946
Less: Common stock issued...................................................... 3,838 8,496
Less: Notes payable and convertible subordinated notes issued.................. - 5,103
------- ----------
Cash purchase price.................................................. $ 472 $ 10,326
======= ==========
9. LONG-TERM DEBT
Long-term debt consisted of the following:
March 31,
--------------------------------------------
2000 1999
---------------------------------------------
(in thousands)
Line of credit $ 10,100 $ 8,000
Convertible subordinated notes, Series A 3,546 4,211
Convertible subordinated notes, Series B 288 355
Shareholders' notes payable 559 1,105
Notes payable 828 -
--------------------- ----------------
15,321 13,671
Less: current portion of long-term debt 492 537
--------------------- ----------------
Long-term debt $ 14,829 $ 13,134
===================== ================
The line of credit provided the Company with a revolving line of credit
facility of up to $15.0 million, to be used for general corporate purposes
including financing of acquisitions, capital expenditures and working capital.
The credit facility bears interest at an adjustable rate based on LIBOR. At
March 31, 2000 and 1999 the interest rate on outstanding amounts was 10.68% and
7.58%, respectfully. 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.
At March 31, 2000, the Company was not in compliance with certain of
the financial covenants of the line of credit. At March 31, 2000, $10.1 million
was outstanding under line of credit. In conjunction with the extension
discussed below, the bank has waived non-compliance of certain financial ratios
at March 31, 2000.
At July 14, 2000, Bank One, Texas, NA extended the terms of the credit
facility through July 31, 2001, and the Company paid $250,000 in principal to
the bank. The Company is required to make additional principal payment to the
bank for any amount it collects from its notes receivables. In addition, at each
quarter, the bank may receive an additional $50,000 principal payment if the
Company's cash balance exceeds $750,000 and if the bank has not received at
least $350,000 in principal payment from note receivable collections. The
Company has prepared financial projections for the periods through fiscal year
ended March 31, 2001, and believes they will be in compliance with the financial
covenants. No additional borrowings are permitted under the amendment.
As discussed above, the bank credit facility due date has been extended
to July 31, 2001. Currently, the Company does not have financial resources to
meet this payment. Management believes it will be able to replace the credit
facility with other bank financing alternatives or refinancing of its current
line of credit. There is no assurance that other financing will be available or
refinancing of its current line of credit in sufficient amounts, if at all, and
there can be no assurance that the related terms and conditions will be
acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company 's financial position.
38
39
The Convertible Subordinated Notes, Series A Securities (Series A
Securities) were issued in connection with the acquisition of certain Affiliated
Practices. The Series A Securities bear interest at 6% and can be converted to
Common Stock of the Company at conversion prices ranging from $6.75 to $7.00 per
share. The conversion period begins on November 1, 1999 and ends on November 1,
2003. The principal amount of the Series A Securities, if not converted, is
payable one-half on November 1, 2002 and one-half on November 1, 2003.
The Convertible Subordinated Notes, Series B Securities (Series B
Securities) were issued in connection with the acquisition of certain Affiliated
Practices. The Series B Securities bear interest at 6% and can be converted to
Common Stock of the Company at a conversion price of $6.75 per share. The
conversion period begins on April 1, 2000 and ends on April 1, 2004. The
principal amount of the Series B Securities, if not converted, is payable
one-half on April 1, 2003 and one-half on April 1, 2004.
During fiscal 2000, $665,000 and $67,000 of previously issued Series A
Securities and Series B Securities, respectively, were returned by the holders
to offset amounts owed to the Company.
In connection with the merger with Omega Orthodontics, Inc., (see Note
8), Pentegra assumed certain notes payable to Affiliated Practices. The notes
were originally issued in connection with the affiliation agreements at the time
the assets of the practices were acquired. At March 31, 2000, the remaining
principal on these notes was $828,000. The notes are due in monthly installments
ranging from $630 to $4,860 through January 2003, and bear interest at 8.5%.
In connection with the IPO, the Company issued $468,000 of notes
payable to certain shareholders formerly owning preferred stock The notes bear
6% interest and are payable on the earlier of the fifth anniversary of the IPO,
or the date upon which the Company offers and sells an amount of equity
securities equal or greater to the gross proceeds of the IPO. During fiscal
2000, the Company made a payment of $9,000 to the shareholders.
In March 1999, the Company issued $537,000 of notes payable to owners
of affiliated dental practices. These notes were paid in April 1999.
The Company entered into an agreement with an officer to purchase
substantially all the assets and the operations of Pentegra, Ltd. and Napili,
International for total consideration of $200,000, consisting of an aggregate of
$100,000 in cash and a $100,000 principal amount 9.0% promissory note due July
2001.
The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to March 31, 2000 were as follows (in
thousands):
2001 ...................................... $ 492
2002 ...................................... 10,183
2003 ...................................... 2,350
2004 ...................................... 2,079
2005 ...................................... 147
Thereafter ................................ 70
----------
$ 15,321
==========
10. REDEEMABLE PREFERRED STOCK
Prior to the IPO, certain officers and directors agreed to permit PII
to repurchase their shares of Class B Preferred Stock at the subscription price.
Accordingly, the Company used a portion of the net proceeds of the IPO to
repurchase 245,835 shares of PII Class B Preferred Stock held by those officers
and directors at repurchase prices equal to the subscription prices, which
ranged from $0.01 to $1.00 per share. The remaining 1,337,500 shares of Class A
and B preferred stock outstanding were redeemed at a price of $1.50 per share,
of which $1.15 per share was paid in cash and $0.35 per share was paid in the
form of a 6.0% promissory note that becomes due and payable by the Company on
the earlier of the fifth anniversary of the date of the closing of the IPO or
the date on which the Company offers and sells an amount of equity securities
with gross proceeds equal to or greater than the gross proceeds of the IPO. The
Company recognized a dividend on the preferred stock for the difference between
the redemption amount and the recorded value at the date of the IPO of
approximately $1,070,000 during the transition period.
39
40
11. INCOME TAXES
Significant components of the Company's deferred tax assets
(liabilities) were as follows (in thousands):
March 31,
-------------------
2000 1999
Deferred tax assets:
Reserves for uncollectible accounts $1,931 $ --
Net operating loss carryforward 2,472 2,083
Organizational costs 352 477
Other 26 --
------- -------
Total deferred tax assets 4,781 2,560
Deferred tax liabilities:
Excess book basis over tax basis of
Accrued revenues and expenses (1,183) (1,311)
Property and equipment (204) (512)
Management services agreement (155) (57)
------- -------
Total deferred tax liabilities (1,542) (1,880)
Net deferred tax asset 3,239 680
Less valuation allowance (3,239) --
------- -------
Net deferred tax asset $ -- $ 680
------- -------
Less current portion -- --
======= =======
Noncurrent assets $ -- $ 680
======= =======
Significant components of the provision for income taxes were as
follows:
Year ended Year ended Three months
March 31, March 31, ended March 31,
2000 1999 1998
------------------ ---------------- -------------
Current tax expense (benefit)
Federal.................................... $ 52 $ - $ -
State...................................... - - -
------------------ ---------------- -------------
Total current..................... 52 - -
Deferred tax expense (benefit):
Federal.................................... 1984 (462) -
State...................................... 177 (63) -
------------------ ---------------- -------------
Total deferred.................... 2,161 (525) -
------------------ ---------------- -------------
Expense (benefit) for income taxes....................... $ 2,213 $ (525) $ -
================== ================ =============
40
41
The differences between the statutory federal tax rate and the
Company's effective tax rate on continuing operations were as follows (in
thousands):
Three months
Year ended Year ended ended
March 31, March 31, March 31,
2000 1999 1998
---------------------------------------------------------------------------
(in thousands)
Tax (benefit) at U.S. Statutory rate (34%).......... $ (1,070) $ 584 $ (666)
State income taxes, net of federal tax............... (106) 82 (93)
Nondeductible expenses and other..................... 150 118 (14)
Change in valuation allowance ....................... 3,239 (1,309) 773
=========================================================================
Total tax expense (benefit)................. $ 2,213 $ (525) $ -
=========================================================================
At March 31, 2000, the Company had net operating loss carry-forwards
available to reduce future taxable income of approximately $6.4 million,
expiring beginning in 2017. The Company recorded a valuation allowance for its
entire deferred tax asset because it concluded it is not likely it would be able
to recognize the tax assets due to the lack of operating history of its
implementation of the e-business plan, and modification of its management
service agreements and maturity of its line of credit on July 31, 2001. The
Company also has $6.1 million of available deductions related to the increase in
tax basis of the assets acquired in the Affiliations. The tax benefits will be
recognized over a period of seven to fifteen years.
12. STOCK OPTION PLANS
The Company grants stock options under the 1997 Stock Compensation
Plan, stock-based incentive compensation (the "Plan"). The Company recognizes
stock-based compensation issued to employees at the intrinsic value between the
exercise price of options granted and the fair value of stock for which the
options may be exercised. However, pro forma disclosures as if the Company
recognized stock-based compensation at the fair value of the options themselves
are presented below.
Under the Plan, the Company is authorized to issue 2,000,000 shares of
Common Stock pursuant to "Awards" granted to officers and key employees in the
form of stock options.
There were 1,219,273 and 596,666 options granted under the Plan, at
March 31, 2000 and 1999, respectively. The Compensation Committee administers
the Plans. These stock options have contractual terms of 10 years and have an
exercise price no less than the fair market value of the stock at grant date.
The options vest at varying rates over a one to five year period, beginning on
the first anniversary of the date of grant.
41
42
Following is a summary of the status of the Company's stock options as
of March 31, 2000 and the changes from inception:
Number of Shares of Weighted Average
Underlying Options Exercise Prices
------------------- ----------------
Outstanding at December 31, 1997.......................................... - $ -
------------------- ----------------
Exercisable at December 31, 1997.......................................... - -
------------------- ----------------
Granted................................................................... 671,666 8.50
Exercised................................................................. - -
Forfeited................................................................. - -
Expired................................................................... - -
------------------- ----------------
Outstanding at March 31, 1998............................................. 671,666 8.50
------------------- ----------------
Exercisable at March 31, 1998............................................. - -
------------------- ----------------
Granted................................................................... 358,000 4.94
Exercised................................................................. - -
Forfeited................................................................. (433,000) 8.46
Expired................................................................... - -
------------------- ----------------
Outstanding at March 31, 1999............................................. 596,666 4.94
------------------- ----------------
Exercisable at March 31, 1999............................................. 136,333 6.69
------------------- ----------------
Granted................................................................... 680,940 3.49
Exercised................................................................. - -
Forfeited................................................................. (58,333) 7.06
Expired................................................................... - -
------------------- ----------------
Outstanding at March 31, 2000............................................. 1,219,273
------------------- ----------------
Exercisable at March 31, 2000............................................. 267,263 6.41
------------------- ----------------
Weighted average fair value of options granted
during the period:
For the three months ended March 31, 1998 $5.63
Fiscal 1999............................................................... $2.77
Fiscal 2000............................................................... $1.00
The fair value of each stock option granted by the Company is estimated
on the date of grant using the Black-Scholes option pricing model for 1997, the
Transition Period, and the years ended March 31, 1999 and 2000 with the
following weighted-average assumptions: dividend yield of 0% for each year;
expected volatility of 0% for 1997, 61.4 % for the Transition Period and for the
year ended March 31, 1999; and 67% for the year ended March 31, 2000; risk-free
interest rates are 5.9% for 1997 and 4.7% for the Transition Period, 5.7% for
the year ended March 31, 1999 and 6.2% for the year ended March 31, 2000 and the
expected lives of the options average ten years.
The following table summarizes information about stock options
outstanding at March 31, 2000 and 1999:
Weighted Weighted
Weighted Average Exercise Average
Range of Number Average Price Number Exercise Price
Exercise Outstanding at Remaining of options Exercisable at of Exercisable
Fiscal year Prices 3/31/00 Contract Life Outstanding 3/31/00 Options
- ------------------------------------------------------------------------------------------------------------------------------------
2000 $1.94 - $8.50 1,219,273 8.74 years $4.74 267,263 $6.41
1999 $2.63 - $8.50 596,666 9.1 years $6.40 136,333 $6.69
Had the compensation cost for the company's stock based compensation
plans been determined using the fair value rather than the intrinsic value of
the options, the Company's net income (loss) and diluted net income (loss) per
share for 2000 and 1999 would approximate $(5.4) million or $(0.52) and $1.9
million, or $0.25 per share, respectively. The (loss) pro forma effect for the
periods prior to the year ended March 31, 1999 are excluded because the Company
had insignificant historical operating results. The effects of applying fair
value accounting in this pro forma disclosure are not indicative of future
amounts.
42
43
Warrants
Omega Orthodontics, Inc. (See Note 8) had warrants outstanding to
purchase 2,430,000 shares of Omega common stock. As a result of the merger with
Pentegra on July 1, 2000, these warrants now constitute a warrant to acquire, on
the same terms and conditions as were applicable under the original Omega
warrants, the same number of shares of Pentegra common stock exercisable at
prices ranging from $18.54 to $27.80 per share.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases a portion of its property and equipment under the
terms of capital and operating leases. The capital leases bear interest at
varying rates ranging from 8.9% to 12.6% and require monthly payments.
Assets recorded under capital leases, at March 31, 2000, consisted of
the following (in thousands):
Cost.......................................... $ 1,488
Less accumulated amortization................. 115
--------------
Total......................................... $ 1,373
==============
Future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of one or more years consisted
of the following at March 31, 2000 (in thousands):
Capital Operating
-------------- -------------
2001........................................................ $ 434 $ 399
2002........................................................ 434 368
2003........................................................ 324 262
2004........................................................ 275 158
2005........................................................ 108 2
Thereafter.................................................. - -
-------------- -------------
Total minimum obligations................................... 1,575 $ 1,189
=============
Less amount representing interest......................... 305
--------------
Present value of minimum obligations........................ 1,270
Less current portion...................................... 309
--------------
Long-term obligation at March 31, 2000...................... $ 961
==============
Litigation
In December 1999, twelve former owners of certain dental practices
acquired by the Company in March 1998 filed a lawsuit against the Company in
190th District Court of Harris County, Texas. The lawsuit alleges that the
Company committed a breach of contract relating to services rendered in
connection with the management services agreements. Subsequent to March 31, 2000
ten of the twelve litigants have settled their claims. Discussions are
continuing with the remaining two. The settlement requires the practices to pay
$727,000 and return approximately 453,000 shares of Company stock from their
original consideration for the settlement of their accounts receivable and
purchase of their practice assets, and will pay a reduced management fee until
the expiration of their original five year employment term. The Company recorded
a loss of approximately $310,000 related to the settlement during fiscal year
ended March 31, 2000. In the opinion of management, resolution of these claims
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
43
44
In May 1999, two former employees of Omega Orthodontics, Inc. ("Omega")
filed a lawsuit against Omega in Superior Court of California for the County of
Los Angeles. One lawsuit alleges that certain members of Omega's management
engaged in conduct that could constitute sexual harassment. The second employee
claim alleges breach of an oral employment contract and certain claims of
ownership rights in Omega L.L.C., a shareholder of Pentegra. The Company
believes that the asserted claims are without merit. In the opinion of
management, resolution of these claims will not have a material adverse effect
on the Company's financial position results of operations.
14. RELATED PARTY TRANSACTIONS
During the Transition Period, an employment bonus of $1,250,000 to a
member of the Board of Directors and Chief Dental Officer of the Company was
recorded. Payments of the bonus have been made in increments of $10,000 on the
closing of each dental practice affiliation. During fiscal 2000 and 1999,
$190,000 and $310,000 were paid respectively to this board member. In December
1999, the officer forgave $350,000 due him by the Company. The net extraordinary
gain to the Company after a tax effect was $350,000. Pursuant to the terms of
the Company's employment agreement with the Chief Dental Officer as amended, the
remaining employment bonus must be paid in full by July 31, 2001. At March 31,
2000, a bonus payable of $400,000 remained outstanding.
During the year ended March 31, 2000, the Company made a severance
payment of $30,000 to the former Chief Operating Officer. The Company also
agreed to pay the former Chief Operating Officer $72,000 under the terms of the
separation. During the year ended March 31, 1999, the Company made a severance
payment of $350,000 to the former Chief Executive Officer.
At March 31, 2000 and 1999, the Company had notes and accounts
receivable from Affiliated Practices who also serve as members of the Board of
Directors. At March 31, 2000 and 1999, the total notes receivable from board
members were approximately $361,000 and $109,000 respectively, net of an
allowance for doubtful accounts of $136,000 and $0, respectively. The accounts
receivable from board members at March 31, 2000 and 1999 were approximately
$430,000 and $386,000 respectively, net of allowance for doubtful accounts of
$198,000 and $0, respectively.
During fiscal 2000, Pentegra completed the acquisition of Liberty
Dental Alliance, Inc. ("Liberty"). The President and Chief Executive Officer was
an owner of Liberty, and as such, received 127,650 common shares and 417 options
to purchase common shares of Pentegra Dental Group, Inc., in exchange for his
ownership in Liberty.
15. CREDIT RISK
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables from
Affiliated Practices, and accounts payable approximate fair values due to the
short-term maturities of these instruments. The carrying amounts of the
Company's long-term borrowings, and revolving line of credit and notes
receivables from Affiliated Practices as of March 31, 2000 and 1999, approximate
their fair value based on the Company's current incremental borrowing rates for
similar type of borrowing arrangements.
Receivables and Notes Receivables from Affiliated Practices
Receivables from Affiliated Practices represents payments for services
rendered by the Company for the Affiliated Practices. The Company does not
perform periodic credit reports or provide collateral related to the receivables
from Affiliated Practices.
As of March 31, 2000 and 1999, the Company had on allowance for doubtful
accounts of $4.5 million and $125,000 respectively for its accounts and notes
receivables from Affiliated Practices. In the year ended March 31, 2000, the
Company recorded a $4.5 million charge in bad debt expense resulting from its
inability to collect receivables from Affiliated Practices after exhausting
various payment plans with the Affiliated Practices and settlement of litigation
with ten practices in Texas. (See Note 13). Although management believes the
remaining receivables are collectable at March 31, 2000, it is reasonably
possible that what the Company will collect may materially differ.
During the year ended March 31, 2000, the Company converted
approximately $971,000 in receivables from Affiliated Practices into interest
bearing notes receivables.
44
45
16. SUPPLEMENTAL CASH FLOW INFORMATION
For the period
from inception,
Three months February 21, 1997
Year ended Year ended ended through
March 31, March 31, March 31, December 31,
2000 1999 1998 1997
------------ ---------- --------- ---------------
(in thousands)
Cash paid during the period for:
Interest $1,571 $55 $24 $ --
Income taxes -- 85 -- --
Supplemental disclosure of non-cash
Investing and financing activities:
Issuance of common stock
in connection with practice
affiliations: 3,838 8,496 -- --
Issuance of convertible subordinated notes in connection with
practice affiliations:
-- 4,566 -- --
Issuance of notes payable in connection with practice affiliations:
-- 537 18 --
Issuance of notes payable for prepaid assets and acquisitions:
-- -- 373 --
Issuance of notes payable for redemption of preferred stock
-- -- 468 --
Offering costs accrued -- -- 1,008 1,795
Acquisition of property and
Equipment accrued -- -- -- 243
Discount on notes payable -- -- -- 180
Convertible subordinated notes
Offset against receivables from
Affiliated Practices 732 -- -- --
Conversion of receivables from
Affiliated Practices to notes
Receivables 971 -- -- --
Capital leases incurred for equipment 1,448 -- -- --
Treasury stock acquired for payment 176
of receivable from Affiliated
practices and purchase of property
and equipment
45
46
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth summary quarterly results of operations
for the Company for the years ended March 31, 2000 and 1999
2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------------------
Net revenue $12,449 $ 15,609 $14,967 $ 13,963
Operating expenses 11,544 14,920 14,761 18,251
(Loss) earnings from operations 905 689 206 (4,288)
(Loss) earnings before income taxes 698 525 8 (4,728)
Income taxes 279 250 49 1,635
Extraordinary items, net 217 133
Net (loss) earnings $ 419 $ 275 $ 176 $ (6,230)
Net earnings per share (1)
Basic and diluted earnings per share
Earnings (loss) before extraordinary item .05 .03 - (.60)
Extraordinary item - - .02 .01
Net earnings (loss) .05 .03 .02 (.58)
Weighted average common shares outstanding:
Basic and diluted 9,103 10,844 10,802 10,675
1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------------------
Net revenue $ 7,412 $ 8,761 $ 9,851 $ 12,800
Operating expenses 6,515 8,394 9,888 12,143
Earnings from operations 897 367 (37) 657
Earnings before income taxes 937 406 (115) 489
Income taxes 263 112 (885) (15)
Net earnings $ 674 $ 294 $ 770 $ 504
Net earnings per share (1)
Basic and diluted $ .10 $ .04 $ .10 $ .06
Weighted average common share outstanding:
Basic and diluted 6,886 7,526 7,961 8,841
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share dues
not equal the total computed for the year due in stock transactions
that occurred.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the captions
"Election of Directors' and "Section 16 Reports will be set forth in the
Company's definitive Proxy Statement (the "2000 Proxy Statement") for its 2000
annual meeting of stockholders, which sections are incorporated herein by
reference.
Pursuant to Item 401 (b) of Regulation S-K, the information required by
this item with respect to executive officers of the Company is set forth in Part
I of this Report.
46
47
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the section
entitled "Executive Compensation" in the 2000 Proxy Statement, which section is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be set forth in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
2000 Proxy Statement, which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED THIRD PARTY TRANSACTIONS
The information required by this item will be set forth in the section
entitled "Certain Transactions" in the 2000 Proxy Statement, which section is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8 - K
(A) (1) FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of March 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended March 31, 2000 and
1999, and the three months ended March 31, 1998.
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
Year Ended March 31, 2000 and 1999, and the three months ended March 31, 1998.
Consolidated Statements of Cash Flows for the Years Ended March 31, 2000 and
1999, and the three months ended March 31, 1998.
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All Schedules and other statements for which provision is made in the applicable
regulations of the Commission have been omitted because they are not required
under the relevant instructions or are inapplicable.
47
48
(a)(3)EXHIBITS
EXHIBITS
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1(1) Restated Certificate of Incorporation of Pentegra Dental Group, Inc.
3.2(1) Bylaws of Pentegra Dental Group, Inc.
4.1(1) Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc.
4.2(1) Form of Registration Rights Agreement for Owners of Founding Affiliated Practices
4.3(1) Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named
therein
4.4(2) Form of Stockholders' Agreement for Owners of Affiliated Practices
4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust Company of Texas, N.A., as Trustee relating to the
Convertible Debt Securities
+10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan
+10.2(1) Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S.
+10.3(1) Employment Agreement dated July 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter
+10.4(1) Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer
+10.5(1) Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr
+10.6(1) Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James Dunn, Jr.
+10.7(1) Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee K. Rozman
+10.8(1) Form of Service Agreement
+10.9(1) Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed, D.D.S.
+10.10(1) Second Amendment to Employment Agreement dated July 31, 1997 between Pentegra Dental Group, Inc. and Omer K. Reed,
D.D.S.
+10.11(1) Amendment to Employment Agreement dated May 1, 1997 between Pentegra Dental Group, Inc. and Gary S. Glatter
+10.12(1) Amendment to Employment Agreement dated September 1, 1997 between Pentegra Dental Group, Inc. and Sam H. Carr
+10.13(1) Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and James L. Dunn, Jr.
+10.14(1) Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and John Thayer.
+10.15(1) Amendment to Employment Agreement dated July 12, 1997 between Pentegra Dental Group, Inc. and Kimberlee Rozman
10.16(1) Second Amendment to Asset Contribution Agreement dated August 20, 1997 between Pentegra Dental Group, Inc., Pentegra,
Ltd., Napili International, Inc. and the shareholders of Pentegra, Ltd. and Napili International, Inc.
10.17(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A. and Pentegra Dental Group, Inc.
10.18(5) Modification to Credit Agreement between Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated September 9,
1998
10.19(5) Second Amendment to Employment Agreement between Pentegra Dental Group, Inc. and James L. Dunn, Jr. dated April 22,
1998
10.20(5) Separation and Mutual Release Agreement between Pentegra Dental Group, Inc. and Gary S. Glatter dated November 13,
1998
10.21(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
10.22(5) Employment Agreement between Pentegra Dental Group, Inc. and James M. Powers, Jr. dated November 13, 1998
10.23(2) First Amendment to Credit Agreement by and among Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated as of
February 9, 1999
10.24(2) First Amendment to the Agreement and Plan of Merger by and among Pentegra Dental Group, Inc., Liberty Dental
Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as
of January 29, 1999
10.25(2) Agreement and Plan of Merger dated as of March 15, 1999 among Pentegra, Omega, Merger Sub and the stockholders of
Omega named therein (included Annex A to the Proxy Statement/Prospectus)
10.26 Third Amendment to Credit Agreement
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
48
49
(1) Previously filed as an exhibit to Pentegra's Registration Statement on
Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to Pentegra's Registration Statement on
Form S-4 (No. 333-78535), and incorporated herein by reference.
(3) Previously filed as an exhibit to Pentegra's Registration Statement on
Form S-4 (No. 333-64665), and incorporated herein by reference.
(4) Previously filed as an exhibit to Pentegra's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(5) Previously filed as an exhibit to Pentegra's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 14(c) of Form
10-K.
(b) No current reports on Form 8-K were filed during the fourth quarter
1999.
49
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned; thereunto duly authorized, in the City of
Phoenix, State of Arizona, on July 14, 2000.
PENTEGRA DENTAL GROUP, INC.
By: /s/ James M. Powers, Jr., D.D.S.
--------------------------------------
James M. Powers, Jr., D.D.S.
Chairman of the Board, President and
Chief Executive Officer
50
51
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
Name Capacity Date
- ---- -------- ----
/s/ James M. Powers, Jr., D.D.S.
- ---------------------------------------
James M. Powers, Jr., D.D.S. Chairman of the Board, President and Chief July 14, 2000
Executive Officer (Principal Executive Officer)
/s/ Sam H. Carr
- ---------------------------------------
Sam H. Carr Senior Vice President, Chief Financial Officer July 14, 2000
and Director (Principal Financial and Accounting
Officer)
/s/ Omer K. Reed, D.D.S.
- ---------------------------------------
Omer K. Reed, D.D.S. Director July 14, 2000
/s/ Walter J. Anderson, D.D.S.
- ---------------------------------------
Walter J. Anderson, D.D.S. Director July 14, 2000
/s/ James H. Clarke, Jr., D.D.S.
- ---------------------------------------
James H. Clarke, Jr., D.D.S. Director July 14, 2000
/s/ Mack E. Greder, D.D.S.
- ---------------------------------------
Mack E. Greder, D.D.S. Director July 14, 2000
/s/David A. Little, D.D.S.
- ---------------------------------------
David A. Little, D.D.S. Director July 14, 2000
/s/ Anthony P. Maris
- ---------------------------------------
Anthony P. Maris Director July 14, 2000
/s/ George M. Siegel
- ---------------------------------------
George M. Siegel Director July 14, 2000
51
52
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
53
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 12B-25
NOTIFICATION OF LATE FILING
(CHECK ONE)
[X] FORM 10-K [ ] FORM 20-F [ ] FORM 11-K [ ] FORM 10-Q [ ] FORM N-SAR
FOR PERIOD ENDED: MARCH 31, 2000
[ ] TRANSITION REPORT ON FORM 10-K
[ ] TRANSITION REPORT ON FORM 20-F
[ ] TRANSITION REPORT ON FORM 11-K
[ ] TRANSITION REPORT ON FORM 10-Q
[ ] TRANSITION REPORT ON FORM N-SAR
FOR THE TRANSITION PERIOD ENDED: ______________
READ ATTACHED INSTRUCTION SHEET BEFORE PREPARING FORM. PLEASE PRINT OR TYPE.
NOTHING IN THIS FORM SHALL BE CONSTRUED TO IMPLY THAT
THE COMMISSION HAS VERIFIED ANY INFORMATION CONTAINED HEREIN.
IF THE NOTIFICATION RELATES TO A PORTION OF THE FILING CHECKED
ABOVE, IDENTIFY THE ITEM(S) TO WHICH THE NOTIFICATION RELATES:
PART 1 - REGISTRANT INFORMATION (OFFICIAL TEXT)
FULL NAME OF REGISTRANT:
PENTEGRA DENTAL GROUP, INC.
FORMER NAME IF APPLICABLE:
N/A
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE (STREET AND NUMBER):
2999 N. 44TH STREET, SUITE 650
CITY, STATE AND ZIP CODE
PHOENIX, ARIZONA 85018
54
PART II - RULES 12b-25 (b) AND (c)
IF THE SUBJECT REPORT COULD NOT BE FILED WITHOUT
UNREASONABLE EFFORT OR EXPENSE AND THE REGISTRANT
SEEKS RELIEF PURSUANT TO RULE 12b-25(b) THE
FOLLOWING SHOULD
BE COMPLETED. (CHECK BOX IF APPROPRIATE)
[X] (a) THE RESPONSE DESCRIBED IN REASONABLE DETAIL IN
PART III OF THIS FORM COULD NOT BE ELIMINATED WITHOUT
UNREASONABLE EFFORT OR EXPENSE;
[X] (b) THE SUBJECT ANNUAL REPORT, SEMI-ANNUAL REPORT,
TRANSITION REPORT ON FORM 10-K, FORM 20-F, 11-K OR
FORM N-SAR, OR PORTION THEREOF WILL BE FILED ON OR
BEFORE THE FIFTEENTH CALENDAR DAY FOLLOWING THE
PRESCRIBED DUE DATE; OR THE SUBJECT QUARTERLY REPORT
OR TRANSITION REPORT ON FORM 10-Q, OR PORTION THEREOF
WILL BE FILED ON OR BEFORE THE FIFTH CALENDAR DAY
FOLLOWING THE PRESCRIBED DUE DATE; AND
[ ] (c) THE ACCOUNTANT'S STATEMENT OR OTHER EXHIBIT
REQUIRED BY RULE 12b-25(c) HAS BEEN ATTACHED, IF
APPLICABLE.
PART III - NARRATIVE (OFFICIAL TEXT)
STATE BELOW IN REASONABLE DETAIL THE REASONS WHY THE
FORM 10-K, 11-K, 10-Q, N-SAR, OR THE TRANSITION REPORT OR PORTION
THEREOF, COULD NOT BE FILED WITHIN THE PRESCRIBED TIME PERIOD.
(ATTACH EXTRA SHEETS IF NEEDED)
The Registrant has been in discussions with respect to (i) the renegotiation of
existing service contracts that are ongoing with its affiliate dental practices
and (ii) certain compliance issues with its secured lender. The existing service
contracts would, if amended as currently contemplated by the parties, affect the
valuation of the Registrant's intangibles and would result in a charge against
earnings which, in turn, would affect compliance with certain of the financial
covenants in the Registrant's secured credit agreements. The Registrant is
currently not in compliance with certain of the covenants of its $15 million
bank credit facility with Bank One of Texas, N.A. (the "Bank One Facility"). The
Registrant is currently renegotiating certain of the covenants of the Bank One
Facility, which the Company anticipates will be completed prior to July 14,
2000. The resolution of these issues has delayed the completion of the Annual
Report on Form 10-K for the fiscal year ended March 31, 2000.
55
PART IV - OTHER INFORMATION (Official Text)
(1) Name and telephone number of person to contact in regard to this
notification
[NAME] [AREA CODE] [NUMBER]
Sam H. Carr (602) 952-1200
(2) Have all other periodic reports required under Section 13 or 15(d) of the
Securities Exchange Act of 1934 or Section 30 of the Investment Company
Act of 1940 during the preceding 12 months or for such shorter period that
the Registrant was required to file such report(s) been filed? If answer
is no, identify reports(s).
[X] Yes [ ] No
(3) Is it anticipated that any significant change in results of operations
from the corresponding period for the last fiscal year will be reflected
by the earnings statement to be included in the subject report or portion
thereof?
[X] Yes [ ] No
The Registrant continually evaluates the collectibility of its accounts
receivable and notes receivable from affiliated dental practices. In the year
ended March 31, 2000, the Registrant anticipates a charge against earnings
related to doubtful collections of accounts receivable and notes receivable from
affiliated dental practices of approximately $4.5 million on a pre-tax basis. In
addition, without giving effect to the charge for uncollectible accounts
discussed above, the Registrant also anticipates a fourth quarter 2000 loss and,
after giving effect to the charge for uncollectible accounts, report a loss for
the fiscal year ended March 31, 2000.
PENTEGRA DENTAL GROUP, INC.
(Name of Registrant as Specified in Charter)
has caused this notification to be signed on its behalf by the undersigned
hereunto duly authorized.
By /s/ SAM H. CARR Date: June 30, 2000
---------------------------