<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER
PENTEGRA DENTAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-045043
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2999 NORTH 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 February 2, 1999, was 8,817,372.
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FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO. PAGE
PART I - FINANCIAL INFORMATION.........................................
Item 1 - Consolidated Financial Statements...........................
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1998 (unaudited)............................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended December 31, 1997, and December 31, 1998
(unaudited)................................................. 4
Consolidated Statement of Changes in Shareholders'
Equity for the period from April 1, 1998 to December 31, 1998
(unaudited)................................................. 5
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1997 and December 31, 1998
(unaudited)................................................. 6
Notes to Consolidated Financial Statements.................. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................... 14
Item 5 - Other Information........................................... 14
Item 6 - Exhibits and Reports on Form 8-K............................ 14
Signature............................................................ 14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTEGRA DENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
-------- --------
Assets
- ----------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,708 $ 4,717
Receivables from affiliated practices 4,632
Deferred tax asset 342
Prepaid and other current assets 101 1,033
-------- --------
Total current assets 6,809 10,724
Property and equipment, net 3,577 4,698
Intangible assets, net 183 21,028
Notes receivables from affiliated practices 1,168
Deferred tax asset 475
Other assets, net 64 264
-------- --------
Total assets $ 10,633 $ 38,357
======== ========
Liabilities and Shareholders' Equity
- ----------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 1,313 $ 2,118
Accrued employment agreement 1,250 1,050
Notes payable 2,337
-------- --------
Total current liabilities 2,563 5,505
Line of credit 8,000
Subordinated Notes - Series A 4,211
Other Long-term debt 1,074 568
-------- --------
Total liabilities 3,637 18,284
-------- --------
Shareholders' equity
Common stock 6 9
Additional paid-in capital 10,304 21,638
Retained earnings (deficit) (3,314) (1,574)
-------- --------
Total shareholders' equity 6,996 20,073
-------- --------
Total liabilities and shareholders' equity $ 10,633 $ 38,357
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PENTEGRA DENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $ -- $ 9,851 $ -- $ 26,039
Operating expenses:
Clinical salaries, wages and benefits -- 3,583 -- 9,952
Dental supplies and lab fees -- 2,030 -- 4,836
Rent -- 788 -- 2,042
Advertising and marketing -- 188 -- 468
General and administrative 298 1,411 698 3,248
Compensation expense in connection with
issuance of common stock 306 -- 645 --
Other operating expenses -- 1,595 -- 3,577
Depreciation and amortization -- 293 -- 689
----------- ----------- ----------- -----------
Total operating expenses 604 9,888 1,343 24,812
Earnings (loss) from operations (604) (37) (1,343) 1,227
Interest income (expense), net -- (78) -- 2
----------- ----------- ----------- -----------
Income (loss) before income taxes (604) (115) (1,343) 1,229
Income taxes expense (benefit) -- (885) -- (511)
----------- ----------- ----------- -----------
Net income (loss) $ (604) $ 770 $ (1,343) $ 1,740
=========== =========== =========== ===========
Basic and diluted earnings per share $ 0.10 $ 0.23
=========== ===========
Weighted average number of shares outstanding:
Basic 7,961,000 7,457,000
=========== ===========
Diluted 7,961,000 7,457,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PENTEGRA DENTAL GROUP, INC
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Additional Retained Total
Common Stock Paid-In Earnings Shareholders'
Shares Amount Capital (Deficit) Equity
--------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1998 6,441,898 $ 6 $ 10,304 $ (3,314) $ 6,996
Issuance of common stock 375,000 2,929 2,929
Issuance of common stock to affiliated practices 2,000,474 3 8,405 8,408
Net income 1,740 1,740
--------- --- -------- -------- --------
Balance at December 31, 1998 8,817,372 $ 9 $ 21,638 $ (1,574) $ 20,073
========= === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PENTEGRA DENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
December 31, December 31,
1997 1998
------- -------
<S> <C> <C>
Net cash used by operating activities $ (600) $(2,880)
------- -------
Cash used by investing activities:
Capital expenditures (164) (1,063)
Acquisition of intangible assets (6,314)
Issuance of notes receivable to affiliated practices (1,168)
------- -------
Net cash used by investing activities (164) (8,545)
------- -------
Cash flows provided by financing activities:
Proceeds from issuance of common and preferred stock 1,466 2,964
Proceeds from line of credit 8,000
Proceeds from issuance of notes payable 350
Payment of indebtedness (392)
Payment of offering costs (948) (1,088)
Payment of organization costs (5)
Payment of financing costs (50)
------- -------
Net cash provided by financing activities 863 9,434
------- -------
Net increase (decrease) in cash and cash equivalents 99 (1,991)
Balance at beginning of period 1 6,708
------- -------
Balance at end of period $ 100 $ 4,717
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PENTEGRA DENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Pentegra Dental Group, Inc. (the "Company") together with its wholly owned
subsidiary, Pentegra Investments, Inc. ("PII"), provides practice management
services to dental practices throughout the United States. In July 1997,
Pentegra Dental Group, Inc., changed its name to Pentegra Investments, Inc. and
formed a new wholly owned subsidiary named Pentegra Dental Group, Inc.
("Pentegra Dental" or "the Company"). On March 30, 1998, simultaneously with the
Company's initial public offering, PII repurchased (the "Share Repurchase") from
the stockholders of PII, on a pro rata basis, at a purchase price of $0.015 per
share, that number of shares as was necessary so that the aggregate number of
shares of Pentegra Dental common stock, par value $.001 per share (the "Common
Stock"), issued in connection with the Affiliations (as defined below) and the
Share Exchange (as defined below) would not exceed 3,941,898 shares. Pursuant to
that agreement, PII repurchased 909,237 shares for approximately $14,000. The
PII shareholders exchanged on a share-for-share basis, shares of PII common
stock, par value $0.015 per share, for 1,756,667 shares of Common Stock (the
"Share Exchange"). On March 30, 1998, Pentegra Dental acquired (the
"Affiliations") simultaneously with the closing of its initial public offering
(the "Offering" or "IPO"), substantially all of the tangible and intangible
assets, and assumed the liabilities, of 50 dental practices (collectively, the
"Founding Affiliated Practices") in exchange for 3.1 million shares of Common
Stock, $6.5 million in cash and net assets assumed of approximately $300,000.
The net proceeds of the 2.5 million shares of Common Stock issued in the IPO
(after deducting the underwriting discounts and commissions) were $19.8 million.
Total related offering costs were $3.4 million.
The acquisitions of the Founding Affiliated Practices have been accounted for in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 48, "Transfers of Nonmonetary Assets by Promoters or
Shareholders". In accordance with SAB No. 48, the acquisition of the assets and
assumption of certain liabilities for all of the Founding Affiliated Practices
pursuant to the Affiliations has been accounted for by the Company at the
transferors' historical cost basis, with the shares of Common Stock issued in
those transactions being valued at the historical cost of the nonmonetary assets
acquired net of liabilities assumed. The cash consideration of approximately
$6.5 million, paid at closing on March 30, 1998, less net assets acquired of
approximately $300,000, is reflected as a dividend by the Company to the owners
of the Founding Affiliated Practices in the quarter ended March 31, 1998. SAB
No. 48 is not applicable to any acquisitions made by the Company subsequent to
the IPO. Acquisitions of certain of the assets and liabilities of practices that
affiliate with the Company after the IPO will generally be accounted for as
purchases, and may result in substantial annual noncash amortization charges for
intangible assets in the Company's statements of operations.
In April, 1998, the over allotment option to sell 375,000 shares of Common Stock
was exercised at a price of $8.50 per share, yielding additional net proceeds to
the Company of approximately $2.9 million.
On April 17, 1998, the Company filed a registration statement on Form S-4 for
1,500,000 shares of Common Stock, which the Company may issue from time to time
in connection with the direct and indirect acquisitions of other businesses,
properties or securities in business combination transactions. On September 29,
1998, the Company filed a registration statement on Form S-4 for 1,500,000
shares of Common Stock, and $50,000,000 in Convertible Subordinated Debt
Securities, which the Company may issue from time to time in connection with the
direct and indirect acquisitions of other businesses, properties or securities
in business combination transactions. The terms upon which it issues the shares
and convertible subordinated debt securities are determined through negotiations
with the security holders or principal owners of the businesses whose securities
or assets are to be acquired. The shares of Common Stock that are issued are
valued at prices reasonably related to prevailing market prices for the Common
Stock. 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. As of December 31, 1998, 2,000,474 shares and
$4,211,000 aggregate principal amount of Series A Convertible Subordinated Notes
registered under these filings had been issued
In May 1998, the Company changed its fiscal year from December 31 to March 31,
effective for the year beginning April 1, 1998.
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The unaudited consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosures herein are adequate to make the information not misleading, but
do not purport to be a complete presentation inasmuch as all note disclosures
required by generally accepted accounting principles are not included. In the
opinion of management, the consolidated financial statements reflect all
elimination entries and normal adjustments that are necessary for a fair
presentation of the results for the interim period ended December 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
Dental Group, Inc., and related notes thereto, and management's discussion and
analysis related thereto, all of which are included in the Company's
Registration Statement on Form S-1 (No. 333-37633), as amended (the
"Registration Statement"), filed with the SEC in connection with the Offering.
2. SIGNIFICANT ACCOUNTING POLICIES
INTANGIBLE ASSETS
Intangible assets consist primarily of management service fee intangibles that
are amortized over a 25-year period. The Company's management periodically
evaluates the realizability of the intangible assets on a practice by practice
basis considering such factors as profitability and net cash flow. Should this
evaluation result in an assessment that the value of the intangible asset is
impaired, a loss will be recorded in the period that the impairment is
identified. If it is determined that the estimated amortization period requires
revision, that revision will be made on a prospective basis.
NOTES RECEIVABLE FROM AFFILIATED PRACTICES
Notes receivable are with Affiliated Practices and are generally due over a
five-year period. The notes earn interest at 9% with principal and interest
payment due monthly.
NOTES PAYABLE
Notes payable relate to amounts due in connection with the acquisition of
certain Affiliated Practices that occurred in November and December 1998. The
notes are non-interest bearing. All notes payable were paid in early January
1999.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred taxes are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted marginal tax rates currently in effect when the differences
reverse.
The Company recognized a deferred tax asset of $817,000 during the three months
ended December 31, 1998. The Company concluded that it was more likely than not
it would utilize certain tax assets in future years. The Company expects the
effective tax rate for income generated in fiscal 1999 will be 25%.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of shares
of Common Stock and Common Stock equivalents outstanding during each period.
Diluted earnings per share are not separately presented because such amounts
would be the same as amounts computed for basic earnings per share.
Outstanding options to purchase approximately 546,000 shares of Common Stock at
exercise prices above the market value of Common Stock were excluded from the
calculation of earnings per share for the three and nine months ended December
31, 1998 because their effect would have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at
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the date of the financial statements and the reported amounts of expenses during
the reporting period. Actual results could differ from those estimates.
3. LINE OF CREDIT
On June 1, 1998, the Company closed a revolving bank credit facility with Bank
One, Texas, N.A., which provides the Company with a revolving line of credit of
up to $15.0 million, to be used for general corporate purposes including
financing of acquisitions, capital expenditures and working capital. The credit
facility is collateralized by liens on certain of the Company's assets,
including its rights under the management service agreements and accounts
receivable. The credit facility contains restrictions on the incurrence of
additional indebtedness and payment of dividends on the Common Stock. At
December 31, 1998, $8,000,000 was outstanding under the revolving line of
credit.
4. RETAINED EARNINGS (DEFICIT)
The Company's retained earnings (deficit) at December 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 charged to operations, and
therefore contributed to the Company's retained earnings (deficit). Payments of
the bonus have been and will continue to be made in increments of $10,000 on the
closing of each future dental practice affiliation until the bonus has been paid
in full. Pursuant to the terms of the Company's employment agreement with the
Chairman, the employment bonus must be paid in full within three years of the
IPO. At December 31, 1998, a bonus payable of $1,050,000 remained outstanding.
5. NEW DENTIST AFFILIATIONS
For the nine-month period ended December 31, 1998, the Company completed new
dentist affiliations with 31 practices representing 43 dentists and 32 office
locations. Total consideration paid by the Company for the new affiliations
consisted of 2,000,474 shares of Common Stock valued at $8,889,000, $4,211,000
aggregate principal amount of Convertible Subordinated Debt Securities and
$9,136,000 of cash.
The cost of each of the above new dental practice affiliations has been
allocated on the basis of the estimated fair market value of the assets acquired
and liabilities assumed, resulting in intangible assets of $21,028,000.
6. LIBERTY DENTAL ALLIANCE MERGER
On November 13, 1998 the Company and Liberty Dental Alliance, Inc. entered into
an Agreement and Plan of, pursuant to which Liberty will become a wholly owned
subsidiary of the Company. The Company expects this transaction to close before
March 31, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF THE
COMPANY AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS
OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND
RISKS DETAILED IN THE COMPANY'S SEC FILINGS.
OVERVIEW
The Company provides practice management services to fee-for-service dental
practices in the United States. On March 30, 1998, the Company acquired
simultaneously with the closing of its IPO, substantially all of the tangible
and intangible assets, and assumed the liabilities, of the 50 Founding
Affiliated Practices. The Company also began to provide practice management
services to professional corporations or associations owned by the
dentist-owners of the Founding Affiliated Practices (one of which split into two
separate dental practices immediately after the IPO) pursuant to long-term
management service agreements entered into at the time of the Affiliations.
Since the IPO, the Company has affiliated with 31 additional practices.
The expenses incurred by the Company in fulfilling its obligations under the
management service agreements will be generally of the same nature as the
operating costs and expenses that would have otherwise been incurred by the
affiliated practices, including salaries, wages and benefits of practice
personnel (excluding dentists and certain other licensed dental care
professionals), dental supplies and office supplies used in administering their
practices and the office (general and administrative) expenses of their
practices. In addition to the operating costs and expenses discussed above, the
Company incurs personnel and administrative expenses in connection with
maintaining a corporate office, which provides management, practice
enhancements, administrative and business development services.
RESULTS OF OPERATIONS
Following completion of the IPO and the Affiliations on March 30, 1998, the
Company began operations effective April 1, 1998. Management service fee
recognition and related expenses began April 1, 1998, and the Company began
managing 51 dental practices in 18 states. At December 31, 1998, the Company
managed 82 practices in 96 offices in 26 states.
COMPONENTS OF REVENUES AND EXPENSES
Under the terms of the typical management services agreement with an Affiliated
Practice, the Company becomes the exclusive manager and administrator of all
non-dental services relating to the operation of an Affiliated Practice. The
obligations of the Company include assuming responsibility for the operating
expenses incurred in connection with managing the dental centers. These expenses
include salaries, wages and related costs of non-dental personnel, dental
supplies and laboratory fees, rental and lease expenses, promotion and marketing
costs, management information systems and other operating expenses incurred at
the Affiliated Practices. In addition, the Company incurs general and
administrative expenses related to the financial and administrative management
of dental operations, insurance, training and development and other typical
corporate expenditures. As compensation for its services under the typical
services agreement and subject to applicable law, the Company is paid a
management fee comprised of two components: (1) the costs incurred by it on
behalf of the Affiliated Practice, and (2) a management fee either fixed in
amount, 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"). Therefore, net revenues
represent amounts earned by the Company under the terms of its management
services agreements with the Affiliated Practices, which generally equate to the
sum of the Service Fees and the operating expenses that the affiliated practices
paid to the Company under the service agreements.
NET REVENUE
Net revenue generated for the three and nine months ended December 31, 1998 was
approximately $9.9 and $26.0 million respectively. During the three months ended
December 31, 1998, the Company affiliated with eighteen practices. For the three
and nine months ended December 31, 1998, dental center revenues aggregated to
approximately $12.7 and $35.3 million, respectively.
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OPERATING EXPENSES
The Company incurred operating expenses of approximately $9.9 million and $24.8
million for the three and nine months ended December 31, 1998, respectively.
Operating expenses consisted primarily of salaries, wages and benefits, dental
supplies and laboratory fees, rent, advertising and marketing, and general and
administrative expenses.
General and administrative expenses include primarily the corporate expenses of
the Company. These corporate expenses include salaries, wages and benefits,
rent, consulting fees, travel (primarily related to practice development),
office costs and other general corporate expenses. For the three months ended
December 31, 1998, general and administrative expenses were approximately $1.4
million which represented 14.3% of net revenue. Included in general and
administrative expenses for the three months ended December 31, 1998 is a one
time severance payment to the former Chief Executive Officer of the Company. For
the nine months ended December 31, 1998, general and administrative expenses
were approximately $3.2 million which represented 12.5% of net revenue.
INCOME TAX EXPENSE
The company recognized a tax asset of $817,000 during the three months ended
December 31, 1998. The Company concluded that it was more likely than not it
would utilize certain tax assets in future years. The Company expects the
effective tax rate for income generated in fiscal 1999 will be 25%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had a working capital balance of approximately
$5.2 million. Current assets included approximately $4.7 million in cash and $
4.6 million in accounts receivable, due entirely from Affiliated Practices.
Current liabilities consisted of approximately $3.2 million in accounts payable
and accrued liabilities, mostly related to expenses of the Affiliated Practices
and $2.3 million in short term notes payable used in the acquisition of certain
Affiliated Practices. The Company believes that cash on hand, together with the
availability under the revolving line of credit will be sufficient to continue
execution of its affiliation strategy.
On June 1, 1998 the Company closed a revolving bank credit facility with Bank
One, Texas, N.A., which provides the Company with a revolving line of credit of
up to $15.0 million, to be used for general corporate purposes including
financing of acquisitions, capital expenditures and working capital. The credit
facility is collateralized by liens on certain of the Company's assets,
including its rights under the management service agreements and accounts
receivable. The credit facility contains restrictions on the incurrence of
additional indebtedness and payment of dividends on the Common Stock.
Additionally, compliance with certain financial covenants is required and the
lender has approval rights with respect with acquisitions exceeding certain
limits. At December 31, 1998, $8.0 million was outstanding under the revolving
line of credit.
Cash used in investing activities for the nine months ended December 31, 1998
included $1.1 million for purchases of capital equipment, mostly for assets
acquired in new practice affiliations, and $6.3 million for the purchase of
intangibles associated with those new practice affiliations.
Cash generated from financing activities for the nine-month period ended
December 31, 1998 included advances on the revolving line of credit of
approximately $8.0 million and the issuance of 375,000 shares of stock with the
exercise of the over-allotment option that provided net proceeds to the Company
of approximately $3.0 million. Uses of cash during the nine-month period ended
December 31, 1998 by financing activities included the payment of costs related
to the IPO totaling approximately $1.1 million, and the repayment of debt
assumed in the IPO of $392,000. These payments related to liabilities recognized
at March 31, 1998.
YEAR 2000 ISSUE
A number of computer programs and other equipment with embedded chips or
processors ("Systems") use two digits rather than four digits to define the
applicable year. Any Systems that are date sensitive may recognize a date of
"00" as the year 1900 rather than the year 2000. This could result in
miscalculations or System failures causing disruptions of operations, as well as
potentially exposing the Company to third party liability. This issue is
commonly referred to as the year 2000 problem ("Y2K").
The Company has initiated a Y2K compliance program to ensure that all of the
critical Systems and processes that are under its direct control remain
functional. The Company completed the installation of year 2000 compliant
software for its operations prior to the
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IPO. Accordingly the Company does not expect the year 2000 issue to have a
material adverse effect on its financial position, results of operations or cash
flows.
Although the Company's Y2K compliance program will attempt to determine the Y2K
readiness of key third parties, there may be certain Systems or processes relied
on by the Company that are outside of its control, and there can be no assurance
that these Systems or processes will remain functional. Non-compliance by key
third parties could have a material adverse effect on the operations of the
Company. To date, the costs incurred by the Company that relate solely to the
Y2K compliance program have been minimal. In the opinion of management, the
costs to complete the Company's Y2K compliance program will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
The Company has received assurance that the systems implemented prior to the IPO
are Y2K compliant. In addition, the Company has inventoried all hardware and
software at the affiliated practices that process information related to
practice management. The Company has estimated it will incur approximately
$250,000 in computer upgrades for Y2K compliance. These upgrades are estimated
to be completed by June 1999.
The failure to correct a material year 2000 problem could possibly result in an
interruption in or failure of, certain normal business activities operations.
Such failure would materially and adversely affect the Company's financial
position, results of operations and cash flows. Due to the general uncertainty
inherent in the year 2000 problem, including uncertainty regarding the year 2000
readiness of third party suppliers and potential future acquisitions, the
Company is unable to determine at this time whether the consequences of any
possible year 2000 failures will have a material adverse impact on the Company's
financial position, results of operations or cash flows. The Company believes
that, with the scheduled completion of its computer system upgrades, the
possibility of any material interruption to normal operations should be
significantly reduced.
The Company's plans to comply with year 2000 requirements and completion dates
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources and other factors. There can be no assurances; however, that the
estimates will be achieved and actual results could differ from those estimates.
Specific factors that might cause such material difference include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to identify and correct potential problems and similar uncertainties.
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PART II
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS - none
ITEM 3. DEFAULTS OF SENIOR SECURITIES - none
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - none
ITEM 5. OTHER INFORMATION - none
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.1 Financial Data Schedule.
(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: February 16, 1999 /s/James M. Powers
------------------
By. James M. Powers
President - Chief Executive Officer
/s/ Sam H. Carr
------------------
By: Sam H. Carr
Sr. Vice President - Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FROM THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS THIS
FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,717
<SECURITIES> 0
<RECEIVABLES> 4,632
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,724
<PP&E> 5,194
<DEPRECIATION> (496)
<TOTAL-ASSETS> 38,357
<CURRENT-LIABILITIES> 5,505
<BONDS> 12,779
0
0
<COMMON> 9
<OTHER-SE> 20,064
<TOTAL-LIABILITY-AND-EQUITY> 38,357
<SALES> 26,039
<TOTAL-REVENUES> 26,039
<CGS> 24,812
<TOTAL-COSTS> 24,812
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2)
<INCOME-PRETAX> 1,229
<INCOME-TAX> (511)
<INCOME-CONTINUING> 1,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,740
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
