<PAGE>
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1998 or
[X] Transaction report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from December 31, 1997 to March 31, 1998.
Commission file number
Pentegra Dental Group, Inc.
(exact name of Registrant as specified in its charter)
Delaware 76-045043
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2999 N. 44th Street, Suite 650, Phoenix, Arizona 85018
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (602) 952-1200
Indicate by check mark whether the Registrant (2) 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 [ ] No [X]
The Registrant became subject to the reporting requirements of Section
13 of the Securities Exchange Act of 1934 on March 30, 1998.
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at May 1, 1998 was 6,816,898.
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3
FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO.
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PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 4
Balance Sheets as of December 31, 1997 and March 31, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statement of Operations for the period from inception
February 21, 1997 through March 31, 1997 and for the
Three Months Ended March 31, 1998 (unaudited). . . . . . . . . . 5
Statement of Changes in Stockholders' Equity (Deficit) as of
March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Statement of Cash Flows for the period from inception
February 21, 1997 through March 31, 1997 and for the
Three Months Ended March 31, 1998 (unaudited) . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 12
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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4
PART I
ITEM 1. FINANCIAL STATEMENTS
PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
PENTEGRA DENTAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000s)
<TABLE>
Assets
------
December 31, March 31,
1997 1998
-----------------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 100 $ 6,708
Prepaids and Other Current Assets - 101
-----------------------
Total Current Assets 100 6,809
Property and Equipment, Net 409 3,577
Goodwill, Net - 183
Other Assets, Net 2,748 64
-----------------------
Total Assets $ 3,257 $ 10,633
-----------------------
-----------------------
Liabilities and Shareholders' Equity (Deficit)
- ----------------------------------------------
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 2,095 $ 1,313
Accrued Employment Agreement - 1,250
-----------------------
Total Current Liabilities 2,095 2,563
Long Term Debt 215 1,074
Preferred Stock - Class A 675 -
Preferred Stock - Class B 414 -
Shareholders' Equity (Deficit)
Common Stock 18 6
Additional Paid in Capital 1,194 10,304
Accumulated Deficit (1,354) (3,314)
-----------------------
Total Shareholders' Equity (Deficit) (142) 6,996
-----------------------
Total Liabilities and Shareholders' Equity $ 3,257 $ 10,633
-----------------------
-----------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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5
PENTEGRA DENTAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000s)
<TABLE>
For the period
from inception,
February 21, 1997 For the quarter
through March 31, ended March 31,
1997 1998
-----------------------------------
<S> <C> <C>
Revenue $ - $ -
Expenses:
General and administrative expenses 11 550
Employment agreement - 1,250
Interest expense - 160
------ -------
Net loss $ (11) $(1,960)
------ -------
Preferred stock dividend - (1.070)
------ -------
Loss attributable to common stock $ (11) $(3.030)
------ -------
------ -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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6
PENTEGRA DENTAL GROUP, INC
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
Class A Additional Accumulated
Common Stock Paid In Equity
Shares Amount Capital (Deficit)
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at February 21, 1997 - - - -
Issuance of common stock
($0.015 per share cash on February 21, 1997) 666,667 $ 7 $ 3 -
Issuance of common stock
($0.015 per share cash and $0.14 per share
Compensation on May 22, 1997) 766,667 8 107 -
Issuance of common stock
($1.27 per share on June 13, 1997) 290,000 3 365 -
Issuance of common stock
($0.015 per share cash and $1.26 per share
Compensation on June 13, 1997) 33,333 - 42 -
Purchases of common stock (86,667) (1) - -
Issuance of common stock ($0.015 per share cash
and $7.46 per share compensation on
September 1, 1997) 66,667 1 497 -
Issuance of common stock with promissory notes
($9.00 per share discount on promissory notes
on October 8, 1997) 20,000 - 180 -
Net Loss from inception through December 31, 1997 - - - (1,354)
-----------------------------------------
Balance at December 31, 1997 1,756,667 $ 18 $ 1,194 $(1,354)
-----------------------------------------
Issuance of common stock 2,500,000 3 16,357 -
Transfers of certain assets and liabilities
From Founding Affiliated Practices 3,094,468 3 (6,180) -
Dividend to Preferred Shareholders - - (1,070) -
Repurchase of Common Stock and
Share exchange (909,237) (18) 3 -
Net loss - - - (1,960)
-----------------------------------------
Balance at March 31, 1998 6,441,898 $ 6 $10,304 $(3,314)
-----------------------------------------
-----------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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7
Pentegra Dental Group, Inc.
Statements of Cash Flow
For the Three Months Ended
(000s)
<TABLE>
March 31, 1997 March 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (11) $ (1,960)
Increase in accounts payable and accrued
expenses 4 1,476
Changes in operating assets and liabilities (49)
Amortization of loan discount - 135
------------- --------------
Net cash used in operating activities (7) (398)
------------- --------------
Cash used in investing activities
Capital expenditures (2) (310)
Acquisition - (100)
Dividend to Founding Affiliated Practices - (6,492)
------------- --------------
Net cash used in investing activities (2) (6,902)
------------- --------------
Cash flows provided by financing activities:
Issuance of common stock 10 19,762
Redemption of preferred stock - (1,691)
Repurchase of common stock - (14)
Proceeds from issuance of debt - 486
Repayment of long-term debt - (3,129)
Offering costs - (1,447)
Organization costs - (59)
------------- --------------
Net cash provided by financing activities 10 13,908
------------- --------------
Net increase in cash and cash equivalents 1 6,608
------------- --------------
------------- --------------
Balance at inception, February 21, 1997
and January 1, 1998, respectively - 100
Balance at end of period 1 6,708
------------- --------------
------------- --------------
Non-Cash Activities
Offering cost accrued $ 1,008
--------------
--------------
Share exchange $ 17
--------------
--------------
Issuance of notes payable for prepaid assets
and acquisitions $ 373
--------------
--------------
Issuance of notes payable for redemption of
preferred stock $ 468
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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8
PENTEGRA DENTAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Pentegra Dental Group, Inc. together with its wholly owned subsidiary,
Pentegra Investments, Inc. ("Pentegra" or the "Company"), provides practice
management services to dental practices in the United States. In July 1997,
the Company changed its name to Pentegra Investments, Inc. ("PII") and formed
a new wholly owned subsidiary named Pentegra Dental Group, Inc. ("Pentegra
Dental"). On March 30, 1998, simultaneously with the initial public
offering, PII repurchased (the "Share Repurchase") from the stockholders of
PII, on a pro rata basis, at a purchase price of $0.015 per share, that
number of shares as was necessary so that the aggregate number of shares of
Pentegra Dental common stock issued in connection with the Affiliations (as
defined below) and the Share Exchange (as defined below) would not exceed
3,941,898 shares. Pursuant to that agreement, PII repurchased 909,237 shares
for approximately $14,000. The shareholders exchanged on a share-for-share
basis, shares of PII common stock, par value $0.015 per share, for 1,756,667
shares of common stock of Pentegra Dental (the "Share Exchange"). On March
30, 1998, Pentegra Dental acquired (the "Affiliations") simultaneously with
the closing of its initial public offering (the "Offering" or "IPO") of its
common stock, par value $.001 per share (the "Common Stock"), substantially
all of the tangible and intangible assets, and assumed the liabilities, of 50
dental practices (collectively, the "Founding Affiliated Practices") in
exchange for 3.1 million shares of Common Stock, $6.5 million in cash and net
assets assumed of approximately $300,000. The net proceeds of the 2.5
million shares of Common Stock issued in the IPO (after deducting the
underwriting discounts and commissions) were $19.8 million. Total related
offering costs were $3.4 million. The acquisitions of the Founding
Affiliated Practices have been accounted for in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 48.
In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders", published by the SEC, the
acquisition of the assets and assumption of certain liabilities for all of
the Founding Affiliated Practices pursuant to the Acquisitions has been
accounted for by the Company at the transferors' historical cost basis, with
the shares of common stock issued in those transactions being valued at the
historical cost of the nonmonetary assets acquired net of liabilities
assumed. The cash consideration of $6.5 million, paid at closing on March
30, 1998, less net assets acquired of approximately $300,000, is reflected as
a dividend by Pentegra to the owners of the Founding Affiliated Practices in
the quarter ended March 31, 1998. SAB No. 48 is not applicable to any
acquisitions made by the Company subsequent to the IPO. It is currently
anticipated that the Company's future acquisitions of certain of the assets
and liabilities of Affiliated Practices may result in substantial annual
noncash amortization charges for intangible assets in the Company's
statements of operations.
In May 1998, the Board of Directors approved the change of Pentegra's fiscal
year from December 31 to March 31, effective for the year beginning April 1,
1998.
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Pursuant
to such regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting and disclosures, but do not purport to be a complete
presentation inasmuch as all note disclosures required are not included. In
the opinion of management, the financial statements reflect all elimination
entries and normal adjustments that are necessary for a fair presentation of
the results for the interim period ended March 31, 1998.
Operating results for interim periods are not necessarily indicative of the
results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the Financial Statements of Pentegra
and related notes thereto, and management's discussion and analysis related
thereto, all of which are included in the Company's Registration Statement on
Form S-1 (No. 333-37633), as amended (the "Registration Statement"), filed
with the SEC in connection with the Offering.
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9
2. SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred taxes are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect when the
differences reverse.
As reflected in the accompanying balance sheets, the Company incurred a
deficit of $3,314,000 during the period from inception, February 21, 1997,
through March 31, 1998. The Company has recognized no tax benefit from this
net loss. Due to the limited operations of the Company since its inception,
a valuation allowance has been established to offset the deferred tax asset
related to these net losses that have been capitalized for tax purposes.
There is no other significant difference in the tax and book bases of the
Company's assets or liabilities that would give rise to deferred tax balances.
EARNINGS PER SHARE
Earnings per share has been excluded from the financial statements because
the Company has limited historical operations and does not have a significant
operating history.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
3. REDEEMABLE PREFERRED STOCK
Prior to the IPO, certain officers and directors agreed to permit PII to
repurchase their shares of Class B Preferred Stock at the subscription price.
Accordingly, the Company used a portion of the net proceeds of the IPO to
repurchase 245,835 shares of PII Class B Preferred Stock held by those
officers and directors at repurchase prices equal to the subscription prices,
which ranged from $0.01 to $1.00 per share. The remaining 1,337,500 shares of
Class A and B preferred stock outstanding were redeemed at a price of $1.50
per share, of which $1.15 per share was paid in cash and $0.35 per share was
paid in the form of 6.0% promissory note that becomes due and payable by the
Company on the earlier of the fifth anniversary of the date of the closing of
the IPO or the date on which the Company offers and sells an amount of equity
securities with gross proceeds equal to or greater than the gross proceeds of
the IPO. The Company recognized a dividend on the preferred stock for the
difference between the redemption amount and the recorded value at the date
of the IPO of approximately $1,070,000.
4. NOTES PAYABLE
In October 1997, the Company repurchased an additional 20,000 shares of its
common stock from a director at a purchase price per share of $0.015, and
issued (i) 20,000 shares of common stock and (ii) $300,000 of 9.5% promissory
notes due on the earlier of 30 days after the closing of the IPO or October
1998. The Company allocated the $300,000 proceeds between the promissory
notes and the common stock based on their relative fair values, with the
value of the shares based on $8.50 per share. The amount of the proceeds
allocated to those shares of common stock was recorded as a discount on the
promissory notes of approximately $180,000. The notes and interest were
repaid in March 1998. The Company recognized the remaining unamortized
discount of $135,000 in interest expense during the three-month period ending
March 31, 1998.
In November 1997, the Company issued an additional $50,000 of 9.5% promissory
notes due on the earlier of 30 days after the closing of the IPO or July
1998. The notes and interest were repaid in March 1998.
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10
In February 1998, the Company issued $486,000 of 15% promissory notes due on
the earlier of three days after the closing of the IPO or eight months from
the date the notes were issued. The notes and interest were repaid on March
30, 1998.
In connection with the IPO, the Company issued approximately $468,000 notes
payable to certain shareholders formerly owning preferred stock. The notes
bear 6% interest and are payable on the earlier of the fifth anniversary of
the IPO, or the date upon which the Company offers and sells an amount of
equity securities equal or greater to the gross proceeds of the IPO.
5. ACCUMULATED DEFICIT
The Company's accumulated deficit at March 31, 1998 is primarily attributable
to compensation costs and other costs of managing the Company prior to its
IPO. On March 30, 1998, an employment bonus of $1,250,000 to the Chairman of
the Board of Directors (the "Chairman") was recorded, and therefore is
included in the Company's accumulated deficit. Payment of the bonus will be
made in increments of $10,000 on the closing of each future dental practice
affiliation until the bonus has been paid in full. Pursuant to the terms of
the Company's employment agreement with the Chairman, the employment bonus
must be paid in full within three years of the Offering.
6. YEAR 2000
The year 2000 issue is the result of computer programs using two digits to
define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. A computer system that is not year 2000 compliant would
not be able to correctly process certain data, or, in extreme situations,
system failure could result.
The Company has recently completed the purchase and installation of year 2000
compliant software for its operations. Accordingly the Company does not
expect the year 2000 issue to have a material effect on its financial
position, results of operations or cash flows.
7. SUBSEQUENT EVENTS
In April 1998, the underwriters of the IPO exercised their option to sell an
additional 375,000 shares of common stock for $8.50 per share. The net
proceeds after commissions provided an additional $3 million in cash to the
Company.
Also in April 1998, the Company filed a Form S-4, registering an additional
1.5 million shares of Common Stock in the Company. The shares will be issued
by the Company as consideration for the affiliation of practices.
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11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on current plans and expectations of the
Company and involve risks and uncertainties that could cause actual future
activities and results of operations to be materially different from those
set forth in the forward-looking statements. Important factors that could
cause actual results to differ include, among others, risks associated with
affiliations, fluctuations in operating results because of affiliations and
variations in stock price, changes in government regulations, competition,
risks of operations and growth of existing and new affiliated dental
practices, and risks detailed in the Company's SEC filings.
OVERVIEW
The Company provides practice management services to dental practices in the
United States. On March 30, 1998, the Company acquired simultaneously with
the closing of its IPO, substantially all of the tangible and intangible
assets, and assumed the liabilities, of 50 dental practices. The Company
also began to provide practice management services to professional
corporations or associations owned by the dentist-owners of the Founding
Affiliated Practices pursuant to long-term Service Agreements entered into at
the time of the Acquisitions. The Company expects that its future growth
will come from (i) implementing a comprehensive operating strategy designed
to drive internal growth of the Affiliated Practices and (ii) entering into
Service Agreements with new Affiliated Practices.
The expenses incurred by the Company in fulfilling its obligations under the
Service Agreements will be generally of the same nature as the operating
costs and expenses that would have otherwise been incurred by the Affiliated
Practices, including salaries, wages and benefits of practice personnel
(excluding dentists and certain other licensed dental care professionals),
dental supplies and office supplies used in administering their practices
and the office (general and administrative) expenses of their practices. In
addition to the operating costs and expenses discussed above, the Company
incurs personnel and administrative expenses in connection with establishing
and maintaining a corporate office, which provides management, practice
enhancements, administrative, and business development services.
RESULTS OF OPERATIONS (UNAUDITED)
The Company conducted no significant operations through the date of the IPO.
Following completion of the IPO and the Acquisitions of March 30, 1998, the
Company began operations effective April 1, 1998. General and administrative
expenses were incurred during the period from inception (February 21, 1997)
through March 31, 1998 in connection with the Offering. The unaudited
financial statements of the Company for the three-month period ended March
31, 1998 reflect a net loss of approximately $2.0 million. Management
service fee recognition and related expenses began April 1, 1998.
The Company's net loss for the quarter ended March 31, 1998 is primarily
attributable to the accrual of an employment bonus of $1,250,000 payable to
the Chairman. The bonus is to be paid in installments of $10,000 upon the
closing of each future dental practice affiliation. The bonus must be paid
in full within three years. The remaining net loss for the quarter, resulted
from pre-IPO expenses, mostly general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The net proceeds after paying most transaction costs and acquisition costs
are reflected in cash and cash equivalents of approximately $6.7 million at
March 31, 1998. Certain costs of assumed debt repayment and printing costs
have been accrued as liabilities and were paid subsequent to March 31, 1998.
The Company has a commitment from a lender and is in the process of
negotiating a revolving bank credit facility which will provide a revolving
line of credit of up to $15.0 million. Any borrowings under the credit
facility will be collateralized by liens on certain of the Company's assets.
The credit facility will also contain restrictions on the
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12
incurrence of additional indebtedness (except for purchase money loans for
property and equipment) and payment of dividends on the common stock of the
Company. Additionally, compliance with certain financial covenants will be
required.
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Pentegra Dental Group, Inc., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PENTEGRA DENTAL GROUP, INC.
Dated: May 15, 1998 /s/ Sam H. Carr
--------------------------------------------
By: Sam H. Carr
Sr. Vice President - Chief Financial Officer
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,708
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,809
<PP&E> 3,577
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,633
<CURRENT-LIABILITIES> (2,563)
<BONDS> 1,074
0
0
<COMMON> (6)
<OTHER-SE> (6,990)
<TOTAL-LIABILITY-AND-EQUITY> (10,633)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160
<INCOME-PRETAX> (1,960)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,960)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
