<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PENTEGRA DENTAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 8021 76-0545043
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization Classification Code Number) Identification No.)
</TABLE>
2999 NORTH 44TH STREET, SUITE 650
PHOENIX, ARIZONA 85018
(602) 952-1200
(Address, Including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
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JAMES M. POWERS, JR., D.D.S.
PENTEGRA DENTAL GROUP, INC.
2999 NORTH 44TH STREET, SUITE 650
PHOENIX, ARIZONA 85018
(602) 952-1200
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
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copies to:
<TABLE>
<S> <C>
JAMES S. RYAN, III RICHARD S. ROTH
JACKSON WALKER L.L.P. JACKSON WALKER L.L.P.
901 MAIN STREET, SUITE 6000 1100 LOUISIANA, SUITE 4200
DALLAS, TEXAS 75202 HOUSTON, TEXAS 77002
(214) 953-6000 (713) 752-4200
</TABLE>
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Approximate Date of Commencement of Proposed Sale to Public: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time (the "Effective Time") of the merger (the "Merger") of a
wholly-owned subsidiary of the Registrant with and into Omega Orthodontics, Inc.
as described in the Agreement and Plan of Merger dated as of March 15, 1999.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(2) FEE(3)
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Common Stock, par value $0.001 per share...... 1,800,000 N/A $2,925,000 $585
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</TABLE>
(1) Represents the maximum number of shares of Common Stock, par value $0.001
per share, of the Registrant ("Pentegra Common Stock") to be issued in
connection with the Merger in exchange for shares of Common Stock, par value
$.01 per share, of Omega Orthodontics, Inc. ("Omega Common Stock"),
determined on the basis of the common stock consideration applicable in the
Merger.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) of the Securities Act of 1933, as
amended (the "Securities Act"), based on the average of the high and low
sales prices of Pentegra Common Stock on May 11, 1999 on the American Stock
Exchange, which was $1.625.
(3) This fee has been calculated pursuant to Rule 457(f) under the Securities
Act as $585. Pursuant to Rule 457(b), the calculated fee of $585 is exceeded
by the fee of $597 paid in connection with the Joint Proxy Statement and
Prospectus of the Registrant and Omega Orthodontics, Inc. filed with the
Securities and Exchange Commission on April 26, 1999. Therefore no fee is
submitted herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
JOINT PROXY STATEMENT/ PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
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<PAGE> 2
PENTEGRA DENTAL GROUP, INC. OMEGA ORTHODONTICS, INC.
DEAR FELLOW STOCKHOLDERS: MAY , 1999
The Boards of Directors of Pentegra Dental Group, Inc. and Omega
Orthodontics, Inc. have unanimously approved a merger designed to create a
leading dental practice management company. The combined company will be named
Pentegra Dental Group, Inc. and will have approximately 158 affiliated dentists
providing services to patients in 30 states.
In the merger, Omega stockholders will receive 0.356 shares of Pentegra
common stock for each share of Omega common stock they own. Pentegra
stockholders will continue to hold their existing shares of common and
convertible preferred stock. We estimate that the shares of Pentegra to be
issued to Omega stockholders will represent approximately 16.5% of the
outstanding stock of Pentegra after the merger. Likewise the shares of Pentegra
held by Pentegra stockholders prior to the merger will represent approximately
83.5% of the outstanding stock of Pentegra after the merger.
The Boards of Directors of Omega and Pentegra have determined that the
merger is in the best interests of their stockholders, and each board
unanimously recommends voting FOR approval of the merger agreement.
The merger cannot be completed unless the stockholders of both companies
approve the merger agreement. We have each scheduled special meetings for our
stockholders to vote on the merger agreement. YOUR VOTE IS VERY IMPORTANT.
You are cordially invited to attend. Whether or not you plan to attend your
company's special meeting, it is important that your shares be voted. Please
take the time to vote by completing and mailing the enclosed proxy card to us.
Alternatively, you may vote your shares by telephone. If you sign, date and mail
your proxy card or use telephonic voting without indicating how you want to
vote, your proxy will be counted as a vote in favor of the merger agreement. If
your shares are held in "street name," you must instruct your broker in order to
vote. If you fail to vote or to instruct your broker to vote your shares, the
effect will be the same as a vote against the merger agreement.
The date, times and places of the special meetings are as follows:
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For Pentegra stockholders: For Omega stockholders:
Wednesday, June 30, 1999, Wednesday, June 30, 1999,
10:00 a.m. (Phoenix time) 1:00 p.m. (Boston time)
2999 North 44th Street 374 Congress St.
Suite 650 Suite 407
Phoenix, Arizona 85018 Boston, Massachusetts 02210
</TABLE>
This Joint Proxy Statement/Prospectus provides you with detailed
information about the proposed merger. We encourage you to read this document
carefully. In addition, you may obtain information about our companies from
documents that we have filed with the Securities and Exchange Commission.
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/s/ JAMES M. POWERS, JR., D.D.S. /s/ ROBERT J. SCHULHOF
James M. Powers, Jr., D.D.S. Robert J. Schulhof
Chairman of the Board, President and President and Chief Executive Officer
Chief Executive Officer Omega Orthodontics, Inc.
Pentegra Dental Group, Inc.
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the merger described in this Joint Proxy
Statement/Prospectus or the Pentegra common stock to be issued in the merger,
nor have they determined if this Joint Proxy Statement/Prospectus is accurate or
adequate. Furthermore, the Securities and Exchange Commission has not determined
the fairness or merits of the merger. Any representation to the contrary is a
criminal offense.
This Joint Proxy Statement/Prospectus is dated May , 1999, and is first
being mailed to stockholders on or about May , 1999.
<PAGE> 3
PENTEGRA DENTAL GROUP, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Date: Wednesday, June 30, 1999
Time: 10:00 a.m. (Phoenix time)
Place: 2999 North 44th Street
Suite 650
Phoenix, Arizona 85018
At the Special Meeting, the stockholders of Pentegra Dental Group, Inc.
will vote upon a proposal to approve and adopt the Agreement and Plan of Merger,
dated as of March 15, 1999, among Pentegra Dental Group, Inc., Omega
Orthodontics, Inc. and a wholly owned subsidiary of Pentegra (the "Merger
Agreement"), and the transactions contemplated thereby (the "Merger").
It is important that your shares be voted. Please vote as soon as possible
by telephone or by completing the proxy card and returning it in the enclosed
envelope. If you decide to attend the meeting in person, you can withdraw your
proxy and vote at that time. Stockholders of record at the close of business
(5:00 p.m., Phoenix time) on May 14, 1999 are entitled to one vote for each
share held. A list of these stockholders will be available for inspection for
ten days preceding the meeting at the office of the Secretary of Pentegra at
2999 North 44th Street, Suite 650, Phoenix, Arizona 85018, and will also be
available for inspection at the meeting itself.
THE BOARD OF DIRECTORS OF PENTEGRA HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF THE STOCKHOLDERS OF PENTEGRA, HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE MERGER, AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE TO ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER AT THE SPECIAL
MEETING.
By order of the Board of Directors,
/s/ SAM H. CARR
Sam H. Carr
Senior Vice President, Chief Financial
Officer and Secretary
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE SIGNED, DATED AND PROMPTLY
RETURNED IN THE ENCLOSED ENVELOPE OR THAT YOU REGISTER YOUR VOTE BY TELEPHONE BY
FOLLOWING THE INSTRUCTIONS ON YOUR PROXY CARD, SO THAT YOUR SHARES WILL BE
REPRESENTED WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
YOU SHOULD NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE> 4
CONFIDENTIAL -- FOR USE OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
OMEGA ORTHODONTICS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Date: Wednesday, June 30, 1999
Time: 1:00 p.m. (Boston time)
Place: 374 Congress St.
Suite 407
Boston, MA. 02210
At the Special Meeting, the stockholders of Omega Orthodontics, Inc. will
vote upon a proposal to approve and adopt the Agreement and Plan of Merger,
dated as of March 15, 1999, among Pentegra Dental Group, Inc., Omega
Orthodontics, Inc. and a wholly owned subsidiary of Pentegra (the "Merger
Agreement"), and the transactions contemplated thereby (the "Merger").
It is important that your shares be voted. Please vote as soon as possible
by telephone or by completing the proxy card and returning it in the enclosed
envelope. If you decide to attend the meeting in person, you can withdraw your
proxy and vote at that time. Stockholders of record at the close of business
(5:00 p.m., Boston time) on May 14, 1999 are entitled to one vote for each share
held. A list of these stockholders will be available for inspection for ten days
preceding the meeting at the office of the Secretary of Omega at 374 Congress
St., Suite 407, Boston, Massachusetts 02210, and will also be available for
inspection at the meeting itself.
THE BOARD OF DIRECTORS OF OMEGA HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF THE STOCKHOLDERS OF OMEGA, HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE MERGER, AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO
ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER AT THE SPECIAL MEETING.
By order of the Board of Directors,
/s/ EDWARD M. MULHERIN
Edward M. Mulherin
Senior Vice President, Chief Financial
Officer and Secretary
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE SIGNED, DATED AND PROMPTLY
RETURNED IN THE ENCLOSED ENVELOPE OR THAT YOU REGISTER YOUR VOTE BY TELEPHONE BY
FOLLOWING THE INSTRUCTIONS ON YOUR PROXY CARD, SO THAT YOUR SHARES WILL BE
REPRESENTED WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
YOU SHOULD NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE> 5
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What do I need to do now?
A: Just indicate on your proxy card how you want to vote, sign it and mail it
in the enclosed return envelope as soon as possible, so that your shares may
be represented at the special meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: No. You should instruct your broker to vote your shares in accordance with
your proxy card. You should follow the directions provided by your broker.
Your failure to instruct your broker will be the equivalent of voting
against the merger.
Q: If I am an Omega stockholder, should I send in my stock certificates now?
A: No. Pentegra will send instructions to you on how to exchange your stock
certificates for Pentegra stock certificates after the merger is completed.
Q: Can I change my vote after submitting my proxy card?
A: Yes. Any person who submits a proxy in connection with this solicitation may
revoke the proxy at any time before it is voted. The proxy may be revoked in
writing, or by appearing at the special meeting and voting in person. If you
have instructed a broker to vote your shares, you must follow directions
received from your broker to change those instructions. You may find further
details on how to revoke your proxy on pages 103 and 105.
Q: When do you expect the merger to be completed?
A: We are working to complete the merger as soon as possible. We hope to
complete the merger by July 31, 1999.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger or if you would like additional
copies of this document, you should contact:
Pentegra Dental Group, Inc.
2999 North 44th Street, Suite 650
Phoenix, Arizona 85018
Attention: James L. Dunn, Jr.
Phone Number: (602) 952-1200
or
Omega Orthodontics, Inc.
374 Congress St., Suite 407
Boston, Massachusetts 02210
Attention: Peter Wexler
Phone Number: (617) 523-5717
<PAGE> 6
TABLE OF CONTENTS
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PAGE
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SUMMARY............................... 1
Selected Financial Data............... 6
Unaudited Summary Selected Pro Forma
Combined Financial Data............. 8
Comparative Market Price
Information......................... 9
RISK FACTORS.......................... 10
Potential Fluctuation in Value of
Pentegra Common Shares to be
Issued in the Merger............. 10
Risks Relating to Interpretation of
Pentegra and Omega Operations and
Regulation of Anticipated Cost
Savings.......................... 10
Forward-Looking Statements May Prove
Inaccurate....................... 10
Reliance on Affiliated Practices and
Dentists......................... 11
Dependence in Management Information
Systems.......................... 11
Risks Associated with Expansion
Strategy......................... 12
Need for Additional Financing....... 12
Government Regulation............... 12
Corporate Practice of Dentistry and
Fee Splitting Restrictions....... 13
Fraud and Abuse Laws and
Restrictions on Referrals and
Self-Referrals................... 13
Advertising Restrictions and
Limitations on Delegation........ 14
Insurance Regulation................ 14
Health Care Reform.................. 14
Risks Associated with Cost
Containment Initiatives.......... 14
Risks Associated with Managed Care
Contracts; Capitated Fee
Revenue.......................... 14
Board Composition................... 15
Dependence on Key Personnel......... 15
Competition......................... 15
Malpractice Risks of Providing
Dental Services.................. 16
</TABLE>
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PAGE
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Potential Effect of Shares Eligible
for Future Sale on Price of
Common Stock..................... 16
Possible Volatility of Stock
Price............................ 17
Certain Anti-Takeover Provisions.... 17
THE MERGER............................ 18
General............................. 18
Background of the Merger............ 18
Pentegra's Reasons for the Merger;
Recommendation of the Pentegra
Board............................ 20
Omega's Reasons for the Merger;
Recommendations of the Omega
Board............................ 20
Material Federal Income Tax
Circumstances.................... 21
Accounting Treatment................ 22
No Appraisal Rights................. 22
Stock Transfer Restrictions......... 23
Opinions of Financial Advisors...... 23
Interests of Certain Persons in the
Merger........................... 27
CERTAIN PROVISIONS OF THE MERGER
AGREEMENT........................... 29
General............................. 29
Consideration to be Received in the
Merger........................... 30
Exchange of Shares.................. 30
Certain Representation and
Warranties....................... 30
Certain Covenants................... 31
No Solicitation of Transactions..... 33
Indemnification..................... 34
Omega Stock Options................. 35
Omega Warrants...................... 35
Other Covenants..................... 35
Conditions to the Consummation of
the Merger....................... 36
Termination......................... 37
Termination Fees Payable by Omega... 38
Expenses............................ 38
</TABLE>
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COMPARATIVE PER SHARE
MARKET PRICE AND
DIVIDEND INFORMATION................ 39
INFORMATION ABOUT PENTEGRA............ 39
Recent Developments................. 39
Dividend Policy..................... 40
Management's Discussion and Analysis
of Financial Condition and
Results of Operations............ 41
Business............................ 46
Management.......................... 58
Description of Capital Stock........ 69
INFORMATION ABOUT OMEGA............... 72
Description of Business............. 72
Management's Discussion and
Analysis......................... 82
Management.......................... 89
THE SPECIAL MEETINGS.................. 100
The Omega Special Meeting........... 100
The Pentegra Special Meeting........ 102
</TABLE>
<TABLE>
<CAPTION>
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COMPARISON OF STOCKHOLDER RIGHTS...... 104
LEGAL MATTERS......................... 109
EXPERTS............................... 109
FUTURE STOCKHOLDER PROPOSALS.......... 109
WHERE YOU CAN FIND MORE INFORMATION... 109
INDEX TO FINANCIAL STATEMENTS......... F-1
ANNEX A -- AGREEMENT AND PLAN OF
MERGER..................... A-1
ANNEX B -- OPINION OF EVEREN
SECURITIES, INC. .......... B-1
ANNEX C -- OPINION OF SPENCER TRASK
SECURITIES INCORPORATED.... C-1
ANNEX D -- SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW.... D-1
</TABLE>
ii
<PAGE> 8
SUMMARY
This summary contains selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read this entire document carefully, including the Annexes,
and the documents to which we refer. A list of documents incorporated by
reference appears below under the heading "Where You Can Find More Information"
on page 113.
THE COMPANIES
Pentegra Dental Group, Inc.
2999 North 44th Street, Suite 650
Phoenix, Arizona 85018
Telephone: (602) 952-1200
Pentegra Dental Group, Inc. provides management, administrative,
development and other services to affiliated dental practices throughout the
United States. Pentegra's approach to dental practice enhancement was developed
by Dr. Omer K. Reed, the Clinical Officer and a director of Pentegra, and is
designed to increase revenues and lower costs at affiliated dental 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 dental practices. In most cases, service fees payable to
Pentegra under its service agreements represent a share of the operating profits
of the affiliated dental practices, thereby providing incentives for Pentegra
and the affiliated dental practices to work together to maximize practice
profitability.
Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, California 93510
Telephone: (800) 266-5608
Omega Orthodontics, Inc. provides management and marketing services
primarily to orthodontic and endodontic practices in the United States. Omega
offers its services primarily under an affiliate relationship whereby it
purchases the equity interests in a management services organization that holds
certain assets of and is associated with an orthodontic or other dental
specialty practice that contractually affiliates with Omega and enters into a
long-term management services agreement with the affiliated practice.
Special Omega Acquisition Corporation
2999 North 44th Street, Suite 650
Phoenix, Arizona 85018
Telephone: (602) 952-1200
Special Omega Acquisition Corporation is a Delaware corporation recently
formed by Pentegra for use in the merger. This is the only business of Special
Omega Acquisition Corporation.
THE MERGER (SEE PAGE 18)
In the merger, Special Omega Acquisition Corporation will be merged with
and into Omega. Omega will be the surviving corporation and will become a wholly
owned subsidiary of Pentegra. As a result of the merger, Omega stockholders will
receive 0.356 Pentegra shares for each Omega share held, subject to reduction in
the event that the amount of cash and cash equivalents of Omega on hand at the
time of the consummation of the merger and the amount of Omega's liabilities to
be assumed by Pentegra in the merger are not consistent with the amounts
specified in the merger agreement. Instead of receiving fractional Pentegra
shares, Omega stockholders will be paid cash.
1
<PAGE> 9
Except for stock options held by certain of Omega's executive officers which
will be terminated, each outstanding option to purchase Omega common stock will
be assumed by Pentegra and amended to provide for, among other things, an
exercise price of $6.125 per share of Pentegra common stock. Each outstanding
option (other than the options held by certain of Omega's executive officers
which will be terminated) and warrant to purchase Omega common stock will be
converted into an option or warrant to purchase a number of shares of Pentegra
common stock equal to the product of (i) the number of shares of Omega common
stock issuable upon exercise of such option or warrant immediately prior to the
consummation of the merger multiplied by (ii) the number of shares of Pentegra
common stock issuable for a share of Omega common stock in the merger. The
exercise price of each warrant to purchase Omega common stock will be equal to
the result of (i) the exercise price per share of Omega common stock under the
warrant immediately prior to the merger divided by (ii) the number of shares of
Pentegra common stock issuable for a share of Omega common stock in the merger.
OUR REASONS FOR THE MERGER (SEE PAGE 20)
We believe that the merger represents a unique strategic opportunity for
Pentegra and Omega, two companies with similar philosophies and complementary
geographic presence. We believe that the combined company will have greater
financial strength, operational efficiencies, earnings power and growth
potential than either Pentegra or Omega would have on its own.
RECOMMENDATIONS TO STOCKHOLDERS
PENTEGRA. Pentegra's Board of Directors believes that the merger is in the
best interests of Pentegra stockholders and unanimously recommends that Pentegra
stockholders vote FOR the proposal to approve and adopt the merger agreement.
See "Pentegra's Reasons for the Merger" on page 20 for the reasons
Pentegra's board of directors approved the merger.
OMEGA. Omega's Board of Directors believes that the merger is in the best
interests of Omega stockholders and unanimously recommends that Omega
stockholders vote FOR the proposal to approve and adopt the merger agreement.
See "Omega's Reasons for the Merger" on page 20 for the reasons Omega's
board of directors approved the merger.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGE 23)
PENTEGRA. In connection with the merger, Pentegra's board of directors
received an opinion from its financial advisors, EVEREN Securities, Inc. The
opinion discusses the fairness from a financial point of view of the merger to
Pentegra's stockholders. We have attached the full text of this opinion as Annex
B to this document. This opinion describes the procedures followed, assumptions
made, matters considered and limitations on the review undertaken in connection
with the opinion. We encourage you to read and consider the opinion in its
entirety. The opinion is directed to Pentegra's board of directors and does not
constitute a recommendation to any stockholder as to how that stockholder should
vote in connection with the proposed merger.
OMEGA. In connection with the merger, Omega's board of directors received
an opinion from its financial advisors, Spencer Trask Securities Incorporated.
This opinion discusses the fairness from a financial point of view of the merger
to Omega's stockholders and of the consideration to be received by Omega's
stockholders. We have attached the full text of this opinion as Annex C to this
document. This opinion describes the procedures followed, assumptions made,
matters considered and limitations on the review undertaken in connection with
the opinion. We encourage you to read and
2
<PAGE> 10
consider the opinion in its entirety. The opinion is directed to Omega's board
of directors and does not constitute a recommendation to any stockholder as to
how that stockholder should vote in connection with the proposed merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 21)
The receipt of Pentegra common shares in the merger generally will be tax
free to Omega stockholders for United States federal income tax purposes, except
with respect to cash received in lieu of fractional common shares of Pentegra.
To review tax consequences of the merger in greater detail, see "Material
Federal Income Tax Consequences" on page 21.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR PARTICULAR SITUATION. YOU ARE URGED TO
CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION (SEE PAGE 39)
Pentegra common stock is listed on AMEX under the symbol "PEN".
Applications for listing the Pentegra common stock to be issued in connection
with the merger have been made with the AMEX. Omega common stock was listed on
the Nasdaq Small Cap Market, under the symbol "ORTH" until April 21, 1999, and
has been traded on the OTC Bulletin Board since that date. On March 12, 1999,
the last full trading day prior to the public announcement of the proposed
merger, the last sale price per Pentegra common share was $1.75 and the last
sale price per Omega common share was $1.38. On May , 1999, the most recent
date prior to the printing of this document, the last sale price per Pentegra
common share was $ and the last sale price per Omega common share was
$ . Neither Pentegra nor Omega has ever paid dividends nor does either
company expect to pay dividends in the foreseeable future.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE 27)
A number of directors and executive officers of Pentegra and Omega have
interests in the merger as employees and/or directors that are different from,
or in addition to, yours as a stockholder. In exchange for their execution of a
release of Omega from liabilities that Omega may otherwise have to them, certain
of Omega's officers will receive one or more of the following upon the
consummation of the merger: (i) an employment agreement with Pentegra; (ii)
options to purchase shares of Pentegra common stock at $6.125 per share and
(iii) a cash payment. Also, directors' and officers' liability insurance for
existing directors and officers of Omega will be continued by Pentegra. The
boards of directors of Omega and Pentegra recognized these interests and
determined that they did not affect the benefits of the merger to the Omega
stockholders and the Pentegra stockholders, respectively. Please refer to page
27 for more information concerning these interests.
CONDITIONS TO THE MERGER (SEE PAGE 36)
The consummation of the merger is subject to a number of conditions,
including:
- approval of the merger agreement by the Omega and Pentegra stockholders;
and
- receipt of certain third party consents.
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<PAGE> 11
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 37)
Omega and Pentegra can jointly agree to terminate the merger agreement at
any time before completing the merger. In addition, either company can terminate
the merger agreement if:
- the merger is not completed by September 30, 1999;
- a law or court order prohibits the merger; or
- Omega's or Pentegra's stockholders fail to approve the merger.
Omega can also terminate the merger agreement if Omega's board of directors
has determined that an alternative transaction with a third party is superior to
the merger and that Omega should enter into an agreement relating to that
transaction. Pentegra can terminate the merger agreement if Omega recommends an
alternative transaction to its stockholders.
TERMINATION FEES AND EXPENSES (SEE PAGE 38)
Omega could be obligated to pay Pentegra a termination fee of $300,000 if
the merger agreement is terminated under specified circumstances. See
"Termination Fees Payable by Omega" on page 38 for a discussion of the
circumstances in which the fees and expenses are payable.
THE STOCKHOLDERS' MEETINGS (SEE PAGE 100)
The Pentegra Special Meeting will be held at 2999 North 44th Street, Suite
650, Phoenix, Arizona 85018, at 10:00 a.m. on Wednesday, June 30, 1999. At the
special meeting, Pentegra stockholders will be asked to approve the merger
agreement and the transactions contemplated thereby, including the issuance of
Pentegra common stock pursuant to the merger of Omega with a subsidiary of
Pentegra in accordance with the terms of the merger agreement.
The Omega Special Meeting will be held at 374 Congress Street, Suite 407,
Boston, Massachusetts 02210, at 1:00 p.m. on Wednesday, June 30, 1999. At the
special meeting, Omega stockholders will be asked to approve the merger
agreement and the transactions contemplated thereby.
RECORD DATE; VOTING POWER (SEE PAGES 100 AND 102)
You are entitled to vote at your stockholders' meeting if you owned shares
as of the close of business (5:00 p.m. Eastern Standard time) on May 14, 1999,
the Record Date.
On the Record Date, there were shares of Pentegra common stock.
Pentegra stockholders will be entitled to one vote at the special meeting for
each share of Pentegra common stock held of record on the Record Date for the
adoption of the merger agreement.
On the Record Date, there were shares of Omega common stock
entitled to vote at the special meeting. Omega stockholders will be entitled to
one vote at the special meeting for each share of Omega common stock held of
record on the Record Date for the adoption of the merger agreement.
VOTES REQUIRED (SEE PAGES 100 AND 102)
Approval by Pentegra stockholders of the proposal to approve the merger
agreement and the transactions contemplated thereby, including the issuance of
Pentegra common stock pursuant to the merger of Omega with a subsidiary of
Pentegra in accordance with the terms of the merger agreement, requires the
approval of more than 50% of the shares of Pentegra common stock outstanding on
the Record Date.
4
<PAGE> 12
Approval by Omega stockholders of the merger agreement and the transaction
contemplated thereby will require the approval of more than 50% of the shares of
Omega common stock outstanding on the Record Date.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS (SEE PAGES 68 AND 95)
On the Record Date, directors and executive officers of Pentegra may be
deemed to be the beneficial owners of 1,038,273 shares of Pentegra common stock
or approximately 11.3% of the shares of Pentegra common stock outstanding on the
Record Date and directors and executive officers of Omega and their affiliates
may be deemed to be the beneficial owners of 1,714,571 shares of Omega common
stock or approximately 32.2% of the shares of Omega common stock outstanding on
the Record Date.
The directors and executive officers of Omega and Pentegra have indicated
that they intend to vote the Omega common stock owned by them FOR the proposal
to approve the merger agreement. The directors and executive officers of
Pentegra and Omega have indicated that they intend to vote the Pentegra stock
owned by them FOR the proposal to approve the merger agreement and the
transactions contemplated thereby, including the issuance of Pentegra common
stock pursuant to the merger.
DIRECTORS AND EXECUTIVE OFFICERS OF PENTEGRA FOLLOWING THE MERGER (SEE PAGE 29)
Following the merger, the directors and executive officers of Pentegra will
continue to be the directors and executive officers of the combined company.
Robert J. Schulhof will be appointed as Senior Vice President -- Orthodontic
Division of the combined company following the merger.
APPRAISAL RIGHTS (SEE PAGE 22)
Both of our companies are organized under Delaware law. Under Delaware law,
stockholders have no right to an appraisal of the value of their shares in
connection with the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (SEE PAGES 10 AND 86)
Both of our companies have each made forward-looking statements in this
document (and in documents that are incorporated by reference) that are subject
to risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of Pentegra or
Omega. Also, when we use words such as "believes," "expects," "anticipates" or
similar expressions, we are making forward-looking statements. Stockholders
should note that many factors, some of which are discussed elsewhere in this
document and in the documents that we incorporate by reference, could affect the
future financial results of Pentegra and Omega and could cause those results to
differ materially from those expressed in our forward-looking statements
contained or incorporated by reference in this documents. These factors include
the following:
- operating, legal and regulatory risks; and
- the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful.
5
<PAGE> 13
SELECTED FINANCIAL DATA (IN THOUSANDS)
The following tables show financial results actually achieved by each of
Pentegra and Omega (the "historical" figures) and also show results as if the
companies had been combined for the periods shown (the "pro forma combined"
figures). Pro forma combined figures are simply arithmetical combinations of
Pentegra's and Omega's separate historical results; you should not assume that
Pentegra and Omega would have achieved the combined pro forma results if they
had actually been combined during the periods shown.
Figures for Pentegra for the three-months ended March 31, 1998 and nine
months ended December 31, 1998 are unaudited, however Pentegra believes that its
three-months and nine-month figures reflect all normal recurring adjustments
necessary for a fair presentation of the financial position and results of
operations for those periods. You should not assume that the three-months ended
March 31, 1998 and nine months ended December 31, 1998 results are indicative of
results for any future period.
Pentegra's historical figures from inception, February 21, 1997 through
December 31, 1997 and Omega's historical figures for the years ended December
31, 1997 and 1998 are derived from audited financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(FEBRUARY 21, NINE
1997 THROUGH THREE MONTHS MONTHS ENDED
DECEMBER 31, ENDED DECEMBER 31,
1997) MARCH 31, 1998 1998
-------------- -------------- ------------
<S> <C> <C> <C>
PENTEGRA -- HISTORICAL
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $ -- $ -- $26,039
Expenses
Clinical salaries, wages and benefits......... -- -- 9,952
Dental supplies and lab fees.................. -- -- 4,836
Rent.......................................... -- -- 2,042
Advertising and marketing..................... -- -- 468
General and administrative.................... 709 550 3,248
Depreciation and amortization................. -- -- 689
Other operating expenses...................... 645 1,250 3,577
------- ------- -------
Total operating expenses................... 1,354 1,800 24,812
------- ------- -------
Earnings (loss) from operations................. (1,354) (1,800) 1,227
Interest income (expense)..................... -- (160) 2
------- ------- -------
Income (loss) before income taxes............... (1,354) (1,960) 1,229
Income taxes benefit.......................... -- -- (511)
------- ------- -------
Net income (loss)............................. (1,354) (1,960) 1,740
Preferred stock dividend...................... -- (1,070) --
------- ------- -------
Earnings (loss) attributable to common
stock...................................... $(1,354) $(3,030) $ 1,740
======= ======= =======
Earnings per share.............................. $ 0.23
=======
Weighted average number of shares
outstanding................................ 7,457
=======
</TABLE>
6
<PAGE> 14
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,717
Working capital............................................. 5,219
Total assets................................................ 38,357
Long-term obligations, net of current....................... 12,779
Stockholders' equity........................................ 20,073
Book value per common share................................. 2.28
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
OMEGA -- HISTORICAL
Net revenues.............................................. $ 918 $7,366
Expenses
Clinical salaries, wages and benefits................... 351 2,722
Dental supplies and lab fees............................ 173 1,136
Rent.................................................... 91 763
Advertising and marketing............................... 16 167
General and administrative.............................. 3,703 1,951
Depreciation and amortization........................... 116 456
Other operating expenses................................ 148 771
------- ------
Total operating expenses............................. 4,598 7,966
------- ------
Earnings (loss) from operations........................... (3,680) (600)
Interest income (expense)............................... (12) 43
Other income............................................ 58 39
------- ------
Income (loss) before income taxes......................... (3,643) (518)
Income taxes............................................ -- 7
------- ------
Net income (loss)....................................... $(3,643) $ (525)
======= ======
Loss per share............................................ $ (1.59) $(0.11)
======= ======
Weighted average number of shares
outstanding.......................................... 2,290 4,895
======= ======
</TABLE>
<TABLE>
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 982
Working capital............................................. 1,064
Total assets................................................ 14,454
Stockholders' equity........................................ 10,681
Book value per common share................................. 2.11
</TABLE>
7
<PAGE> 15
UNAUDITED SUMMARY SELECTED PRO FORMA
COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
PRO FORMA COMBINED
Net revenues................................................ $31,886
Net income.................................................. 1,975
Earnings per share.......................................... 0.21
Dividend per common share................................... --
Total assets................................................ 45,986
Long-term obligations, net of current....................... 13,834
Stockholders' equity........................................ 23,929
Book value per common share................................. 2.25
OMEGA EQUIVALENTS(1):
Earnings per share.......................................... 0.08
Dividends per common share.................................. --
Book value per common share................................. 0.80
</TABLE>
- ---------------
(1) Equivalent pro forma amounts have been calculated by multiplying the
combined pro forma results by 0.356.
8
<PAGE> 16
COMPARATIVE MARKET PRICE INFORMATION
The following table presents trading information for Pentegra and Omega
common stock on the AMEX and Nasdaq, respectively, on March 12, 1999 and
, 1999. March 12, 1999 was the last full trading day prior to our
announcement of the signing of the merger agreement. , 1999 was the
last practicable trading day for which information was available prior to the
date of this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
PENTEGRA
PENTEGRA OMEGA COMMON STOCK
COMMON STOCK COMMON STOCK PRICE X 0.356
(DOLLARS PER SHARE) (DOLLARS PER SHARE) (DOLLARS PER SHARE)
------------------- ------------------- -------------------
HIGH LOW CLOSE HIGH LOW CLOSE HIGH LOW CLOSE
---- ---- ----- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 12, 1999...................... 1.75 1.69 1.75 1.50 0.50 1.38 0.623 0.602 0.623
, 1999.................
</TABLE>
On the Record Date, there were approximately holders of
record of Pentegra common stock and holders of record of Omega
common stock.
HISTORICAL MARKET PRICES AND DIVIDENDS
The principal trading market for Pentegra and Omega common stock is the
AMEX and OTC Bulletin Board respectively. Omega commenced trading on the Nasdaq
Small Cap Market on October 1, 1997 and its shares were delisted from trading on
that market on April 21, 1999. Since that date shares of Omega common stock have
traded on the OTC Bulletin Board. Pentegra commenced trading on the AMEX on
March 24, 1998. No cash dividends have been paid on the shares of Pentegra or
Omega common stock. The following tables set forth, for the periods indicated,
the high and low closing price per share on the AMEX and Nasdaq Small Cap
Market, based on published financial sources.
<TABLE>
<CAPTION>
PENTEGRA OMEGA
COMMON COMMON
STOCK STOCK
MARKET PRICE MARKET PRICE
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
1997
4th Quarter (ended 12/31/97)................................ -- -- $6.25 $2.87
1998
1st Quarter (ended 3/31/98)................................. $8.50 $8.00 $3.25 $2.88
2nd Quarter (ended 6/30/98)................................. $9.00 $6.25 $2.38 $1.69
3rd Quarter (ended 9/30/98)................................. $8.69 $3.87 $1.44 $0.50
4th Quarter (ended 12/31/98)................................ $3.81 $1.75 $0.94 $0.44
1999
First Quarter (ended 3/31/99)............................... $2.81 $1.38 $1.88 $0.44
Second Quarter (through April 19, 1999)..................... $1.88 $1.31 $0.56 $0.41
</TABLE>
Additional market price information is contained on page 39 under the
caption "Comparative Per Share Market Price and Dividend Information."
9
<PAGE> 17
RISK FACTORS
Omega's and Pentegra's stockholders should consider the following matters
in deciding whether to vote in favor of the merger agreement. Stockholders
should consider these matters in conjunction with the other information included
or incorporated by reference in this document.
RISKS RELATING TO THE MERGER
POTENTIAL FLUCTUATION IN VALUE OF PENTEGRA COMMON SHARES TO BE ISSUED IN
THE MERGER. The number of Pentegra common shares to be received in the
aggregate by Omega's stockholders in the merger is fixed at 1,800,000, subject
to reduction in accordance with the terms of the merger agreement. Therefore,
because the market price of Pentegra shares fluctuates, the value at the time of
the merger of the consideration to be received by Omega stockholders will depend
on the market price of Pentegra shares at that time. There can be no assurance
as to the market value at the time of the merger of the consideration to be
received by Omega stockholders. For historical and current market prices of
Pentegra shares, see "Comparative Per Share Market Price and Dividend
Information" on page 39.
RISKS RELATING TO INTEGRATION OF PENTEGRA AND OMEGA OPERATIONS AND
REALIZATION OF ANTICIPATED COST SAVINGS. The merger involves the integration of
two companies that have previously operated independently. The combined company
(the "Combined Company") expects to realize increased revenues, together with
cost savings and other financial and operating benefits from the merger, but
there can be no assurance regarding when or the extent to which the Combined
Company will be able to realize these benefits. There are numerous systems that
the companies must integrate, including those involving management information,
accounting and finance, employee benefits, payroll and regulatory compliance.
The companies will have to integrate, or, in some cases, replace, these systems.
Difficulties associated with integrating Pentegra and Omega could have an
adverse effect on the ability of the Combined Company to realize the expected
benefits of the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE. Certain statements in
this document may be considered to be "forward looking statements" as that term
is defined in the Private Securities Litigation Reform Act of 1995, such as
statements that include the words or phrases "will result," "are expected to,"
"will continue," "is anticipated," "estimate," or similar expressions. Such
statements are subject to certain risks and uncertainties. The factors which
could cause actual results to differ materially from those suggested by any such
statements include, but are not limited to, those discussed or identified from
time to time in Pentegra's or Omega's public filings with the Securities and
Exchange Commission (the "SEC") and specifically include: risks or uncertainties
associated with Pentegra's or Omega's expectations with respect to timing,
completion or tax status of the merger or with respect to the value of the
merger consideration, growth prospects, market positions, earnings per share,
cost savings, revenue enhancements and profitability resulting from the merger
transaction; and, more generally, include general economic conditions including
changes in domestic laws, regulations and taxes, the development of major Year
2000 liabilities, as well as general market conditions and competition.
10
<PAGE> 18
RISKS INHERENT IN THE INDUSTRY OR PARTICULAR TO PENTEGRA AND OMEGA
RELIANCE ON AFFILIATED PRACTICES AND DENTISTS. Following the merger, the
Combined Company will continue to receive fees for management services provided
to its affiliated practices under the management service agreements. It will not
employ dentists or control the practice of dentistry by the dentists employed by
the affiliated practices, and its management services revenue generally will
depend on revenue generated by the affiliated practices. In some cases, the
management fees will be based on the costs and expenses the Combined Company
incurs in connection with providing management services. While the laws of some
states permit Pentegra and Omega to participate in the affiliated practices
negotiations of managed care contracts, preferred provider arrangements and
other negotiated price agreements, the affiliated practices will be the
contracting parties for those relationships, and the Combined Company will be
dependent on its affiliated practices for the success of any such relationships.
Accordingly, the profitability of those payor relationships, as well as the
performance of the individual dentists employed by the affiliated practices,
will affect the Combined Company's profitability.
The revenue of the affiliated practices (and, therefore, the success of the
Combined Company) is dependent on fees generated by the dentists employed by the
affiliated practices. In connection with the service agreements, substantially
all of the owners of the affiliated practices entered into five-year employment
agreements with the professional corporation or other entity with which that
owner is affiliated (and which is a party to a service agreement). The
employment agreements provide that the employee will not compete with the
affiliated practice during the term of the agreement and following the
termination of the agreement for a term of two years in a specified geographical
area. In most states, however, a covenant not to compete will be enforced only
to the extent it is necessary to protect a legitimate business interest of the
party seeking enforcement, does not unreasonably restrain the party against whom
enforcement is sought and is not contrary to the public interest. This
determination is made based on all the facts and circumstances of the specific
case at the time enforcement is sought. Thus, there can be no assurance that a
court will enforce such a covenant in a given situation. In addition, no
judicial precedents have addressed whether a dental practice management
company's interest under a management or service agreement will be viewed as the
type of protectable business interest that would permit it to enforce such a
covenant or to require an affiliated practice to enforce such covenants against
an employee dentist.
A substantial reduction in the number of dentists employed by or associated
with the affiliated practices could have a material adverse effect on the
financial performance of the Combined Company. Failure by the affiliated
practices to employ a sufficient number of dentists (whether by renewals of
existing employment agreements or otherwise) would have a material adverse
effect on the Combined Company.
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS. The success of the Combined
Company's business strategy is dependent on, among other things, the successful
implementation of management information systems and other operating systems to
permit the effective integration of the administrative operations of newly
acquired affiliated practices into the Combined Company's operations. For
example, the Combined Company will be required to integrate its financial
information system with existing practice management systems at the affiliated
practices, which may be different from those used by the Combined Company. Any
significant delay or increase in expense associated with the conversion and
integration of management information systems used by affiliated practices could
have a material adverse effect on the successful implementation of the Combined
11
<PAGE> 19
Company's expansion strategy. In addition, the Combined Company will have some
systems that are decentralized, including cash collections. Accordingly, the
Combined Company will rely on local staff for certain functions, including
transferring cash from the affiliated practices to the Combined Company.
RISKS ASSOCIATED WITH EXPANSION STRATEGY. The success of the Combined
Company's expansion strategy is dependent on a number of factors, including the
Combined Company's ability to
- identify attractive and willing candidates to become affiliated practices
in suitable markets and in suitable locations within those markets,
- affiliate with acceptable affiliated practices on favorable terms,
- adapt the Combined Company's structure to comply with present or future
legal requirements affecting the Combined Company's arrangements with
affiliated practices and comply with regulatory and licensing
requirements applicable to dentists and facilities operated and services
offered by dentists,
- obtain suitable financing to facilitate its expansion program and
- expand the Combined Company's infrastructure and management to
accommodate expansion.
A shortage of available dentists with the skills and experience sought by
the Combined Company would have a material adverse effect on the Combined
Company's expansion opportunities, and the Combined Company anticipates facing
substantial competition from other companies to establish affiliations with
additional practices. In addition, there can be no assurance that the Combined
Company's expansion strategy will be successful, that modifications to the
Combined Company's strategy will not be required or that the Combined Company
will be able to manage effectively and enhance the profitability of additional
affiliated practices. There can be no assurance that the Combined Company will
be able to achieve planned growth, that the assets of dental practices will
continue to be available for acquisition by the Combined Company, that the
Combined Company will be able to realize expected operating and economic
efficiencies from pending or future affiliations or that future affiliations
with additional affiliated practices will be profitable.
NEED FOR ADDITIONAL FINANCING. The Combined Company's expansion program
will require substantial capital resources. Capital is needed not only for the
acquisition of the assets of additional affiliated practices, but also for the
effective integration, operation and expansion of the affiliated practices. The
affiliated practices may from time to time require capital for renovation and
expansion and for the addition of equipment and technology, and there can be no
assurance that an affiliated practice to which the Combined Company advances
working capital loans for these purposes will be able to repay those loans in
full. The Combined Company will require additional capital from outside
financing sources in order to continue its expansion program. There can be no
assurance that the Combined Company will be able to obtain additional funds when
needed on satisfactory terms or at all. Any significant limitation on the
Combined Company's ability to obtain additional financing could have a material
adverse effect on the Combined Company.
GOVERNMENT REGULATION. Various federal and state laws regulate the dental
services industry. Regulatory oversight includes, but is not limited to,
considerations of fee splitting, corporate practice of dentistry, prohibitions
on fraud and abuse, restrictions on referrals and
12
<PAGE> 20
self-referrals, advertising restrictions, restrictions on delegation and state
insurance regulation.
CORPORATE PRACTICE OF DENTISTRY AND FEE SPLITTING RESTRICTIONS. The laws
of many states, prohibit business corporations such as the Combined Company from
engaging in the practice of dentistry or employing dentists to practice
dentistry. The specific restrictions against the corporate practice of
dentistry, as well as the interpretation of those restrictions by state
regulatory authorities, vary from state to state. The restrictions are generally
designed to prohibit a non-dental entity (such as the Combined Company) from
controlling the professional aspects of a practice (such as patient records and
payor contracts), employing dentists to practice dentistry (or, in certain
states, employing dental hygienists or dental assistants), or controlling the
content of a dentist's advertising or professional practice. The laws of many
states also prohibit dentists from sharing professional fees with non-dental
entities. State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist for a
fee, provided certain conditions are met. The Combined Company believes that its
operations will not contravene any applicable restriction on the corporate
practice of dentistry. There can be no assurance, however, that a review of the
Combined Company's business relationships by courts or regulatory authorities
will not result in determinations that could prohibit or otherwise adversely
affect the operations of the Combined Company or that the regulatory environment
will not change, requiring the Combined Company to reorganize or restrict its
existing or future operations. The laws regarding fee-splitting and the
corporate practice of dentistry and their interpretation are enforced by
regulatory authorities with broad discretion. There can be no assurance that the
legality of the Combined Company's business or its relationship with the
affiliated practices will not be successfully challenged or that the
enforceability of the provisions of any service agreement will not be limited.
In particular, recently proposed amendments to the laws restricting the practice
of dentistry by non-dentists in the State of Texas and recently proposed
amendments to the rules of the Board of Dental Examiners of the State of Texas
interpreting whether a person or entity is engaging in the illegal practice of
dentistry may make certain terms (including the provisions relating to the
computation of the management fee) of the Combined Company's management services
agreements with its affiliated practices in Texas unenforceable. A substantial
portion of the Combined Company's revenues are expected to be derived from
management fees earned from the provision of management services to affiliated
practices in Texas and there can be no assurance that these proposed amendments,
if adopted, will not have a material adverse effect on the Combined Company.
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 of the 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
13
<PAGE> 21
equipment and office space to a dental practice under a bona fide lease, if the
equipment and office remain under the control of the dentist.
ADVERTISING RESTRICTIONS AND LIMITATIONS ON DELEGATION. Some states
prohibit the advertising of dental services under a trade or corporate name.
Some states require all advertisements to be in the name of the dentist. A
number of states also regulate the content of advertisements of dental services
and the use of promotional gift items. In addition, many states impose limits on
the tasks that may be delegated by dentists to hygienists and dental assistants.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
INSURANCE REGULATION. There are certain state insurance regulatory risks
associated with the Combined Company's anticipated role in negotiating and
administering managed care contracts on behalf of the affiliated practices. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. State insurance laws are subject to broad interpretation by
regulators and, in some states, state insurance regulators may determine that
the Combined Company or the affiliated practices are engaged in the business of
insurance because of the capitation features (or similar features under which an
affiliated practice assumes financial risk) that may be contained in managed
care contracts. In the event the Combined Company or an affiliated practice is
determined to be engaged in the business of insurance, the Combined Company or
the affiliated practice could be required to either seek licensure as an
insurance company or change the form of its relationships with the third-party
payors. There can be no assurance that the Combined Company's operations would
not be adversely affected if the Combined Company or any of the affiliated
practices were to become subject to state insurance regulations.
HEALTH CARE REFORM. The United States Congress has considered various
types of health care reform, including comprehensive revisions to the current
health care system. It is uncertain what legislative proposals, if any, will be
adopted in the future or what actions federal or state legislatures or
third-party payors may take in anticipation of or in response to any health care
reform proposals or legislation. There can be no assurance that applicable
federal or state laws and regulations will not change or be interpreted in the
future either to restrict or adversely affect the Combined Company's
relationships with dentists or the operation of affiliated practices.
RISKS ASSOCIATED WITH COST CONTAINMENT INITIATIVES. The health care
industry, including the dental services market, is experiencing a trend toward
cost containment, as third-party and government payors seek to impose lower
reimbursement rates on providers. The Combined Company believes this trend will
continue and will increasingly affect dental services. This may result in a
reduction in per-patient and per-procedure revenue from historical levels. There
can be no assurance that any reductions in revenues and operating margins could
be offset through cost reductions, increased volume, introduction of new
procedures or otherwise. Accordingly, significant reductions in payments to
affiliated practices or other changes in reimbursement by third-party payors for
dental services performed by affiliated practices may have a material adverse
effect on the Combined Company.
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS; CAPITATED FEE
REVENUE. Pentegra and Omega believe that managed care arrangements are becoming
more prevalent in certain sectors of the dental services industry. As an
increasing percentage of the population is covered by managed care organizations
that provide dental coverage, the Combined Company's future success may be
dependent, in part, on its ability to assist the
14
<PAGE> 22
affiliated practices in negotiating contracts with dental health maintenance
organizations, insurance companies, self insurance plans and other private
third-party payors pursuant to which services will be provided on some type of
fee-for-service or capitated basis by some of its affiliated practices. Under
certain capitated contracts, the health care provider accepts a predetermined
amount per patient per month as its sole payment in exchange for providing a
specific schedule of services to enrollees. These contracts shift much of the
risk of providing health care from the payor to the provider. To the extent that
an affiliated practice enters into capitated managed care arrangements, it will
be exposed to the risk that the cost of providing dental care required by these
contracts exceeds the amount the affiliated practice receives for providing such
care. If those costs exceed the revenues received for the service provided, the
affiliated practice will remain responsible under its service agreement for
reimbursing the Combined Company for all of the costs associated with providing
those services, even if no service fee is due thereunder. To the extent an
affiliated practice enters into additional managed care contracts, it may
achieve greater predictability of revenues but greater unpredictability of
expenses due to the fluctuating costs of the services provided. There can be no
assurance that the Combined Company will be able to negotiate on behalf of the
affiliated practices satisfactory arrangements on a capitated basis, regardless
of the amount of risk sharing. In addition, to the extent that patients or
enrollees covered by certain of these contracts require, in the aggregate, more
frequent or extensive care than anticipated, operating margins may be reduced,
or the revenues derived from these agreements may be insufficient to cover the
costs of the services provided. As a result, affiliated practices would be at
risk for additional costs which would reduce or eliminate any earnings for the
affiliated practices under these contracts, with a corresponding reduction in or
elimination of the service fee payable to the Combined Company in those cases
where the service agreements provide for percentage-based service fees.
BOARD COMPOSITION. The Combined Company's Bylaws provide that a majority
of the members of the Board of Directors must be licensed dentists who are
affiliated with affiliated practices. As a result, there is a limited group of
persons from which candidates to fill these board positions may be selected, and
it is not anticipated that many of these persons will have had prior experience
as board members of publicly held companies. This provision could also
discourage potential acquisition proposals, delay or prevent a change in control
of the Combined Company or limit the price that certain investors might be
willing to pay in the future for shares of Common Stock. In addition, each of
Drs. Powers and Reed and the other board members who own an affiliated practice
is a party to a service agreement with the Combined Company. In connection with
the provision of management services by the Combined Company to the affiliated
practices owned by those dentists, conflicts of interest may arise.
DEPENDENCE ON KEY PERSONNEL. The Combined Company's future performance
depends in significant part on the continued service of its senior management.
There can be no assurance that these individuals will continue to work for the
Combined Company. Loss of services of those persons could have a material
adverse effect on the Combined Company. The success of the Combined Company's
growth strategy will also depend on the Combined Company's ability to attract
and retain additional high quality personnel.
COMPETITION. The Combined Company anticipates facing substantial
competition from other companies to establish affiliations with additional
dental practices. Pentegra and Omega are aware of several publicly traded dental
practice management companies that have operations in jurisdictions where one or
more of the affiliated practices conduct business and several companies pursuing
similar strategies in other segments of the health
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care industry. Certain of these competitors have greater financial and other
resources than the Combined Company will have and have operations in areas where
the Combined Company may seek to expand in the future. Additional companies with
similar objectives are expected to enter the Combined Company's markets and
compete with the Combined Company. In addition, the business of providing dental
services is highly competitive in each market in which the Combined Company will
operate. Each of the affiliated practices faces local competition from other
dentists some of whom have more established practices. There can be no assurance
that the Combined Company or the affiliated practices will be able to compete
effectively with their respective competitors, that additional competitors will
not enter their markets or that additional competition will not have a material
adverse effect on the Combined Company or the affiliated practices.
MALPRACTICE RISKS OF PROVIDING DENTAL SERVICES. The affiliated practices
provide dental services to the public and are exposed to the risk of
professional liability and other claims. In recent years, dentists have become
subject to an increasing number of lawsuits alleging malpractice and related
legal theories. Some of these lawsuits may involve large claims and significant
defense costs. Any suits involving the Combined Company or dentists at the
affiliated practices, if successful, could result in substantial damage awards
to the claimants that may exceed the limits of any applicable insurance
coverage. Although the Combined Company will not control the practice of
dentistry by the affiliated practices, it could be asserted that the Combined
Company should be held liable for malpractice of a dentist employed by an
affiliated practice. Each affiliated practice has undertaken to comply with all
applicable regulations and legal requirements, and the Combined Company will
maintain liability insurance for itself. There can be no assurance, however,
that a future claim or claims will not be successful or, if successful, will not
exceed the limits of available insurance coverage or that such coverage will
continue to be available at acceptable costs. Malpractice insurance, moreover,
can be expensive and varies from state to state. Successful malpractice claims
asserted against the affiliated practices (or their dentists) or the Combined
Company may have a material adverse effect on the Combined Company.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. The market price of the common stock of the Combined Company could be
adversely affected by the sale of substantial amounts of the common stock in the
public market. Concurrently with the closing of Pentegra's initial public
offering the owners of the affiliated practices received, in the aggregate,
3,094,468 shares of common stock as a portion of the consideration for the
assets of their practices. Certain other stockholders of Pentegra hold, in the
aggregate, an additional 673,763 shares of Common Stock. Those shares are not
being offered and sold pursuant to this Joint Proxy Statement/Prospectus. All of
those 3,768,231 shares were issued in transactions that have not been registered
under the Securities Act and, accordingly, such shares may not be sold except in
transactions registered under the Securities Act or pursuant to an exemption
from registration.
Except as noted below, the 1,800,000 shares of common stock issuable
pursuant to this Joint Proxy Statement/Prospectus will generally be freely
tradable by nonaffiliates after their issuance. The resale of shares issuable to
affiliates of Omega will be subject to volume limitations and other requirements
pursuant to the provisions of Rule 145 of the Securities Act. The resale of
943,132 of these shares, which will be issued to the owners of Omega's
affiliated practices and Omega's officers and directors, will be contractually
restricted for a one-year period following consummation of the merger.
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In April and October 1998, Pentegra registered an aggregate of 3,000,000
shares of its common stock for use by Pentegra as all or a portion of the
consideration to be paid in future affiliation transactions. As of April 1,
1999, approximately 2,285,605 of these shares had been issued to the dentist
owners of Pentegra's affiliated practices. These shares are, and the remaining
approximately 714,395 of these shares will be, generally freely tradeable upon
issuance; however, each party that has received these shares of common stock has
contractually agreed with the Combined Company not to sell any of such shares
for a period of one year from receipt. In addition, approximately $4.6 million
aggregate principal amount of convertible promissory notes of Pentegra are
outstanding, which are convertible into approximately 665,206 shares of Pentegra
common stock. The shares of common stock issuable upon conversion of these notes
will generally be freely tradeable, subject to contractual provisions
restricting the transfer of the shares of common stock for a period of one year
beginning on the date of issuance of the convertible promissory note. Pentegra
anticipates that the agreements entered into in connection with future
acquisitions will contractually restrict the resale of all or a portion of the
shares issued in those transactions for varying periods of time.
Pentegra has outstanding under its 1997 Stock Compensation Plan options to
purchase approximately 673,333 shares of common stock. Pentegra has registered
the shares issuable upon exercise of options granted under its 1997 Stock
Compensation Plan.
POSSIBLE VOLATILITY OF STOCK PRICE. The securities markets have, from time
to time, experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. These
fluctuations often substantially affect the market price of a company's common
stock. The market prices for securities of medical and dental practice
management companies have in the past been, and can be expected to be,
particularly volatile. The market price of Pentegra's common stock could be
subject to significant fluctuations in response to numerous factors, including
variations in financial results or announcements of material events by the
Combined Company or its competitors. Regulatory changes, developments in the
health care industry or changes in general conditions in the economy or the
financial markets could also adversely affect the market price of the Combined
Company's common stock.
CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of Pentegra's
Restated Certificate of Incorporation and Bylaws and of the Delaware General
Corporation Law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Combined Company or limit
the price that certain investors might be willing to pay in the future for
shares of the Combined Company's common stock. The certificate of incorporation
provides for "blank check" preferred stock, which may be issued without
stockholder approval and provides for a "staggered" Board of Directors. In
addition, certain provisions of Pentegra's Bylaws restrict the right of the
stockholders to call a special meeting of stockholders, to nominate directors,
to submit proposals to be considered at stockholders' meetings and to adopt
amendments to the Bylaws, and the Bylaws require that at least a majority of the
members of the Board of Directors be licensed dentists who are affiliated with
affiliated practices. The Combined Company also is subject to Section 203 of the
Delaware General Corporation Law, which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business acquisitions with an "interested stockholder" for a period of three
years following the date such stockholder became an interested stockholder. In
addition, a "Change of Control" (as defined in Pentegra's credit facility)
constitutes an event of default under the credit facility, which could impede or
prevent a change of control or depress the price of the Combined Company's
common stock.
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THE MERGER
GENERAL
Omega and Pentegra are furnishing this document to holders of Omega common
stock and Pentegra common stock in connection with the solicitation of proxies
(i) by Omega's board of directors in connection with a special meeting of its
stockholders and (ii) by Pentegra's board of directors in connection with a
special meeting of its stockholders, and at any adjournments or postponements of
the meetings.
At the special meetings, the Omega and Pentegra stockholders will be asked
to vote upon a proposal to approve and adopt the Agreement and Plan of Merger,
dated as of March 15, 1999, among Pentegra, Omega and Special Omega Acquisition
Corporation, a wholly owned subsidiary of Pentegra (the "Merger Agreement"), and
the transactions contemplated thereby.
The Merger Agreement provides for the merger of the Pentegra subsidiary,
Special Omega Acquisition Corporation, with and into Omega, with Omega surviving
the merger as a wholly owned subsidiary of Pentegra. The merger will become
effective in accordance with the certificate of merger to be filed with the
Secretary of State of the State of Delaware. We anticipate that the parties will
make this filing as soon as practicable after the last of the conditions
precedent to the merger contained in the Merger Agreement has been satisfied or
waived. We have attached a copy of the Merger Agreement as Annex A to this Joint
Proxy Statement/Prospectus.
BACKGROUND OF THE MERGER
In July 1998, James L. Dunn, Pentegra's Chief Development Officer, and
Robert J. Schulhof, Omega's President and Chief Executive Officer met in Austin,
Texas to discuss their respective companys' philosophies and management
structure. They executed a confidentiality agreement and discussed the possible
synergies and cost savings that might be possible if the two companies were to
combine. Since Omega's affiliated orthodontists seek referrals from traditional
general dentists, they discussed the resulting cross specialty referral
opportunities presented by their respective geographic markets. They also
discussed the roles of their respective management teams and the compatability
of their management information and practice enhancement systems.
In September 1998, a second meeting was held in Phoenix, Arizona between
Mr. Dunn and Mr. Schulhof, who were joined by Dr. Omer Reed, Clinical Officer
and a director of Pentegra, and Mr. Floyd V. Elliot, Omega's Director of
Professional Relations and Staff Development. The benefits available to the
affiliated dentists of the combined companies were discussed as well as the
philosophical perspective of the companies' affiliated dentists.
A third meeting was held in Boston in September 1998 at Omega's operational
offices. Mr. Dunn and Mr. Schulhof were joined by Mr. Peter Wexler, Mr. Ed
Mulherin, and Dr. Joel Glovsky, Omega's General Counsel, Chief Financial Officer
and Chairman, respectively. They discussed the financial impact of the possible
combination upon revenues and earnings per share. They discussed the structure
of the resulting management team and the possibility of corporate overhead
savings as a result of the merger. Omega's existing management fee structure was
discussed as well as the necessity to modify the existing Omega management
services agreements to conform to Pentegra's management services agreement.
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In November 1998 a fourth meeting was held in Phoenix, between Pentegra's
and Omega's entire senior management teams. Joining in this meeting was Dr.
James Powers, Pentegra's Chairman, President and Chief Executive Officer. In
addition to a continuation of the discussion of the benefits of the merger, the
parties discussed the consideration Pentegra was willing to pay as well as the
form of consideration available to Omega. A presentation was made by both
companies and each continued to gather documents and information as a part of
the preliminary due diligence process. Financial models were exchanged and a
discussion was held concerning the desired financial targets which were
necessary for a successful merger.
Several telephone conference calls were held in December 1998 and January
1999. Dr. Powers and Mr. Dunn described the financial models utilized and
discussed the number of shares that would be offered to the Omega stockholders.
Each discussed the management positions that would exist in the Combined
Company. Severance amounts to be paid to departing Omega management were
negotiated and incorporated into the financial model. Pentegra tendered a letter
of understanding to Omega that described the financial terms to be offered to
Omega's stockholders, with the letter of understanding being executed on January
14, 1999.
In January 1999 at the regular meeting of the board of directors of
Pentegra, a full discussion of the benefits and costs of the Omega acquisition
was held, but no formal action was requested.
A meeting of the dentists who were affiliated with Omega was held in
Phoenix. Omega's management discussed with its dentists the possibility of a
merger with Pentegra, followed by a presentation by Pentegra's management. The
dentists informally voted unanimously for the merger with Pentegra.
Beginning on January 14, 1999 and continuing thereafter through the
execution of the merger agreement, the respective management and their
respective legal and financial advisors negotiated the terms of the merger
agreement.
A telephone meeting of Omega's board of directors was held on March 11,
1999. Discussion of the financial terms and the consideration to be received by
the Omega stockholders was discussed. Omega's board of directors then
unanimously approved the transaction.
A telephone meeting of Pentegra's board of directors was held on March 12,
1999. Pentegra's financial advisor, EVEREN Securities, Inc. presented its
fairness opinion and discussed with the board members the basis for the
favorable opinion. Mr. Dunn and Mr. Carr discussed the financial models used to
arrive at the consideration proposed. Pentegra's board of directors then
unanimously approved the transaction and Dr. Powers executed the merger
agreement. Pentegra and Omega issued a press release the following day
describing the nature of the transaction and the benefits to both companies.
A telephone meeting of Omega's board of directors was held on April 23,
1999. Omega's board reviewed and discussed the written fairness opinion of
Spencer Trask Securities, Inc. dated April 19, 1999. Copies of that fairness
opinion had been submitted to Omega's board prior to the meeting. Following its
review of the fairness opinion and its discussion of the fairness opinion and
the terms of the Merger Agreement, Omega's board ratified its approval of the
Merger Agreement and its recommendation that Omega stockholders vote to approve
the Merger Agreement.
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PENTEGRA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE PENTEGRA BOARD
In reaching its conclusion to approve the Merger Agreement, the Pentegra
board considered a number of factors, including the following:
Pentegra's affiliated practices are the traditional fee-for-service dental
practices in which a dentist practices either alone or with one other dentist.
Omega has affiliated with orthodontists who are also focused on providing the
fee-for-service treatments to patients, and who are either sole practitioners,
or practice in small groups of orthodontists. Therefore, one opportunity
presented by the merger is the integration of Omega's orthodontic practices with
Pentegra's dental practices, all with a fee-for-service focus. Pentegra believes
this integration can be accomplished with little disruption at the practice
level and with little investment of additional capital or resources by Pentegra.
Although Pentegra is employing certain of Omega's key personnel, it is
anticipated that a material amount of the corporate overhead historically
incurred by Omega will be eliminated by the combination. It is anticipated the
combination will permit the addition of revenues to Pentegra without a
proportionate increase in associated corporate overhead.
It is also anticipated that the merger will enhance the capturing of cross
specialty referrals. Pentegra has affiliated with both general dentists as well
as specialists in order to capture the referrals among the general dentists and
the specialists. In certain existing markets, Pentegra's affiliated dentists
will be able to augment the referral base of the Omega orthodontic practices,
providing opportunity for market expansion and increase the rate of new patient
treatments.
Another opportunity presented by the merger is the overlap of practice
enhancement systems. The Pentegra Dental Program has application with all dental
specialists, including orthodontists. See "Information about
Pentegra -- Business" for a description of the Pentegra Dental Program. Many of
the systems utilized by Pentegra's affiliated dentists have direct application
to Omega's affiliated orthodontic and endodontic practices. Additionally, the
practice enhancement techniques utilized by Omega also have application in both
the specialists and the general dentists affiliated with Pentegra.
In view of the variety of factors considered in connection with its
evaluation of the proposed merger and the terms of the Merger Agreement, the
Pentegra board of directors did not deem it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching its conclusion. Individual directors may have given different
weights to different factors.
The Pentegra board unanimously recommends that its stockholders vote "FOR"
approval and adoption of the Merger Agreement.
OMEGA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE OMEGA BOARD
In reaching its conclusion to approve the Merger Agreement and to recommend
that stockholders vote for the merger agreement, the Omega board considered a
number of factors, including the following:
Although Omega completed its initial public offering in October 1997 and
has consummated affiliations with 15 affiliated practices, Omega has not yet
achieved a profitable level of operations. As of December 31, 1998, Omega had an
accumulated deficit of approximately $4.5 million and had incurred an operating
loss of $525,000 for the year ended on that date. It is anticipated that Omega
will incur similar operating losses for the foreseeable future and there can be
no assurances as to whether Omega will achieve
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profitability. This lack of profitability has adversely effected Omega's ability
to raise the external financing necessary to continue its operations. Omega's
management and board of directors believes that without the merger, Omega may
not be able to meet its contractual commitments, including the services
agreements with its affiliated practices.
In light of the above, Omega, after exploring numerous alternatives,
determined that a merger with Pentegra was in the best interests of the
corporation and its stockholders. In Pentegra, Omega found a corporation with a
similar corporate philosophy and strategic vision. Both Omega's and Pentegra's
affiliated practices are traditional fee-for-service dental practices, with
affiliated dentists who are either sole practitioners or who practice in small
groups of dentists. These similarities will allow for a smooth transition and
integration of the companies and will allow the companies to capitalize on their
individual strengths while reducing associated costs.
In order to support the Omega practices, Pentegra is retaining several of
Omega's key personnel who have the ability to also provide services to both
existing Pentegra practices. However, it is anticipated a material amount of the
corporate overhead incurred by Omega will be eliminated by the combination. It
is anticipated the combination will permit the addition of revenues to Pentegra
without an associated proportionate increase in corporate overhead. Omega
believes that the foregoing cost savings measures will result in increased value
for its stockholders and that the shares of the Combined Company will be trading
in a more liquid market because of higher public float and trading volume.
In view of the variety of factors considered in connection with its
evaluation of the proposed merger and the terms of the Merger Agreement, the
Omega board did not deem it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered in reaching its
conclusion. Individual directors may have given different weights to different
factors.
The Omega board unanimously recommends that stockholders vote "FOR"
approval and adoption of the Merger Agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
It is anticipated that the material federal income tax consequences of the
merger and the exchange of Omega common stock for Pentegra common shares will be
as follows:
- Pentegra, its subsidiaries and Omega will not recognize any gain or loss
as a result of the merger.
- Omega stockholders will not recognize any gain or loss upon the exchange
of their Omega common stock solely for Pentegra common shares pursuant to
the merger, except with respect to any cash they receive instead of
fractional Pentegra common shares.
- The aggregate tax basis of the shares of Pentegra common stock received
solely in exchange for shares of Omega common stock pursuant to the
merger, including fractional Pentegra common shares for which cash is
received, will be the same as the aggregate tax basis of the Omega common
stock exchanged for them.
- Omega stockholders who receive cash instead of fractional Pentegra common
shares should be treated as having received the fractional shares in the
merger and then as having such fractional shares redeemed by Pentegra in
a distribution under Section 302 of the Code. Accordingly, such
stockholders will generally recognize gain or loss equal to the
difference, if any, between the tax basis of the fractional
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shares and the amount of cash received. The gain or loss generally will
be capital gain or loss and, in the case of individuals, long-term
capital gain or loss eligible for reduced rates of taxation if the Omega
stock exchanged have been held for more than one year.
The foregoing discussion is a summary of the material United States federal
income tax consequences of the merger to a United States stockholder who holds
Omega common stock as a capital asset but does not purport to be a complete
analysis or description of all potential tax effects of the merger. In addition,
the discussion does not address all of the tax consequences that may be relevant
to particular taxpayers in light of their personal circumstances or to taxpayers
subject to special treatment under the tax code (for example, insurance
companies, financial institutions, dealers in securities, traders that mark to
market, tax-exempt organizations, stockholders who hold their shares as part of
a hedge, appreciated financial position, straddle or conversion transaction
stockholders who acquired the Omega common stock through the exercise of options
or otherwise as compensation or through a tax-qualified retirement plan, foreign
corporations, foreign partnerships or other foreign entities and individuals who
are not citizens or residents of the United States).
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
The foregoing discussion is based upon the provisions of the U.S. federal tax
code, applicable Treasury regulations thereunder, and IRS rulings and judicial
decisions, as in effect as of the date of this document. There can be no
assurance that future legislative, administrative or judicial changes or
interpretations will not affect the accuracy of the statements or conclusions
set forth herein. Any such change could apply retroactively and could affect the
accuracy of such discussion. No rulings have been or will be sought from the IRS
concerning the tax consequences of the merger and the opinion of counsel as to
the federal income tax consequences set forth above will not be binding on the
IRS.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, OMEGA
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS,
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
Pentegra will account for the merger using the "purchase" method of
accounting. Pentegra will include Omega's revenues and expenses in its financial
statements from the date of consummation of the merger.
NO APPRAISAL RIGHTS
Omega stockholders are not entitled to appraisal or dissenters' rights
under Delaware law in connection with the merger because Omega's common stock is
listed on Nasdaq on the record date for Omega's special meeting of stockholders,
and the Pentegra common shares that the Omega stockholders will be entitled to
receive in the merger will be listed on AMEX at the effective time of the
merger.
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STOCK TRANSFER RESTRICTIONS
This document does not cover any resales of the Pentegra common shares to
be received by Omega's stockholders upon consummation of the merger, and no
person is authorized to make any use of this document in connection with any
such resale.
All Pentegra common shares received by Omega stockholders in the merger
will be freely transferable, with the exception of the Pentegra common shares
received by persons who are deemed to be "affiliates" of Omega under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder, at the time of the Omega special meeting. Such "affiliates" may only
re-sell their Pentegra common shares in transactions permitted by Rule 145 under
the Securities Act of 1933 or as otherwise permitted under that Act. Persons who
may be deemed to be affiliates of Omega for such purposes generally include
individuals or entities that control, are controlled by, or are under common
control with, Omega and may include certain officers, directors and principal
stockholders of Omega. Additionally, the resale of 943,132 of the shares of
Pentegra common stock to be issued in the merger, which will be issued to the
owners of Omega's affiliated practices and Omega's officers and directors, will
be contractually restricted for a one-year period following consummation of the
merger.
OPINIONS OF FINANCIAL ADVISORS
Opinion of Pentegra's Financial Advisor
Pentegra retained EVEREN Securities, Inc. as its exclusive financial
advisor and agent in connection with its merger with Omega to render an opinion
as to whether the consideration to be paid by Pentegra in the merger was fair,
from a financial point of view. EVEREN delivered its opinion to Pentegra on
March 15, 1999; EVEREN based its opinion on a number of factors with the
principal factor being the value of consideration to be paid by Pentegra in the
Merger. For purposes of its opinion, EVEREN used Pentegra's and Omega's closing
stock prices of $1.69 and $0.53 per share on March 8, 1999 respectively.
EVEREN did not determine the consideration to be received in the merger.
Pentegra and Omega made the determination through arms length negotiation.
Pentegra engaged EVEREN to provide its recommendation regarding the
consideration to be paid in the merger. Pentegra selected EVEREN as an advisor
because of its expertise and reputation as a nationally recognized investment
banking firm. EVEREN, as part of its investment banking business, regularly
engages in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwriting, competitive bidding, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
On March 15, 1999, during a telephone meeting of the board of directors of
Pentegra, EVEREN rendered its opinion that, as of the date of such opinion, the
consideration to be paid to Omega stockholders in the merger was fair from a
financial point of view to Pentegra and its stockholders.
In formulating the Opinion, EVEREN:
(i) reviewed the Letter of Understanding by and between Pentegra and
Omega dated January 12, 1999;
(ii) reviewed the draft Merger Agreement between Pentegra and Omega;
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(iii) reviewed Pentegra's Form 10-Q for the three-month period ended
December 31, 1998;
(iv) reviewed certain non-public operating and financial information,
including projections relating to Pentegra's business prepared by the
management of Pentegra;
(v) interviewed certain members of Pentegra's management to discuss its
operations, financial statements and future prospects;
(vi) reviewed Omega's Form 10-K for the year ended December 31, 1997,
Omega's Form 10-Q for the three month period ended September 30, 1998
and unaudited draft financial statements for the year ended December
31, 1998;
(vii) reviewed certain non-public operating and financial information,
including internal management reports and projections, relating to
Omega's business prepared by the management of Omega and Pentegra;
(viii) interviewed certain members of Omega's management to discuss its
operations, financial statements and future prospects;
(ix) reviewed publicly available financial data and stock market
performance data of other dental practice management companies which
EVEREN deemed comparable to Pentegra and Omega;
(x) reviewed the terms of selected recent acquisitions of companies which
EVEREN deemed generally comparable to Omega;
(xi) reviewed the historical stock prices and reported traded volumes of
Pentegra's and Omega's common shares; and
(xii) conducted such other studies, analyses, inquiries and investigations
as EVEREN deemed appropriate.
In arriving at its opinion, EVEREN considered such factors as it deemed
relevant including, but not limited to the following: (i) the historical stock
price performance of Omega relative to the purchase price per share to be paid
by Pentegra; (ii) the relative financial contributions of Pentegra and Omega, as
well as the relative contribution of number of offices and dentists, as compared
to the post-merger ownership interests of Pentegra and Omega stockholders; (iii)
the purchase price of Omega as compared to the valuations and multiples of
publicly traded dental practice management companies; (iv) the purchase price
multiples and premiums of the merger as compared to the purchase price multiples
and premiums of comparable healthcare services and business services merger
transactions; and (v) the projected earnings per share of Pentegra on a
stand-alone and pro forma combined basis.
EVEREN did not conduct a physical inspection of any of the assets,
properties or facilities of either Pentegra or Omega, and did not make or
obtain, and was not furnished with, any independent evaluation or appraisal of
any of such assets, properties, facilities, liabilities or contingencies of
Pentegra or Omega. EVEREN assumed and relied upon, without independent
investigation, the accuracy and completeness of the financial and other
information that was publicly available or provided to it by Pentegra and Omega
senior management, and did not independently attempt to verify any of such
information. EVEREN also assumed that all of the conditions to the merger would
be satisfied and that the merger would be consummated on a timely basis. No
limitations were imposed by
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Pentegra upon EVEREN with respect to the scope of its investigation, nor were
any specific instructions given to EVEREN in connection with its fairness
opinion.
In connection with its analyses, EVEREN assumed that the financial
projections which it reviewed were reasonably prepared using assumptions
reflecting the best currently available estimates and judgments of the future
financial performance of Pentegra and Omega. EVEREN's opinion was based upon
market, economic, financial and other conditions as they existed on the date of
the opinion. Any subsequent material change in conditions would require a
reevaluation of the opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF EVEREN DATED MARCH 15, 1999 WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX B AND IS INCORPORATED HEREIN BY
REFERENCE. PENTEGRA STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS
ENTIRETY. EVEREN'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE CONSIDERATION
PAID BY PENTEGRA IN THE MERGER FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS
ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
PENTEGRA SPECIAL MEETING. THE SUMMARY OF THE OPINION OF EVEREN SET FORTH IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses, without considering the analyses as a whole, could
create an incomplete view of the processes underlying EVEREN's opinion. In
arriving at its fairness determination, EVEREN considered the results of all
such analyses. No company or transaction used in the analyses as a comparison is
directly comparable to Pentegra, Omega or to the contemplated merger. The
analyses were prepared solely for purposes of EVEREN providing its opinion to
Pentegra's board of directors as to the fairness, from a financial point of
view, of the consideration to be paid by Pentegra in the Merger and do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be purchased. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of EVEREN.
Previously, EVEREN acted as Pentegra's co-manager in connection with
Pentegra's initial public offering in March 1998 for which it received customary
compensation. EVEREN is serving as financial advisor to Pentegra in connection
with the merger and will receive a success fee upon its completion. In the
ordinary course of business, EVEREN provided research coverage on Pentegra.
EVEREN also acts as a market maker and broker in Pentegra common stock for which
it receives customary compensation for these activities. EVEREN provides a full
range of financial advisory and securities services and, in the course of its
normal trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of Pentegra or Omega for its own
account and for the account of customers.
Opinion of Omega's Financial Advisor
Spencer Trask Securities, Inc. was retained by Omega to evaluate the
fairness, from a financial point of view, to Omega of the consideration to be
paid by Pentegra in the merger. On April 19, 1999, Spencer Trask rendered a
written opinion to the Omega board of directors to the effect that, as of such
date and based upon and subject to certain
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<PAGE> 33
matters stated in such opinion, the consideration to be paid by Pentegra in the
merger was fair, from a financial point of view, to Omega.
In arriving at its opinion, Spencer Trask reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of Omega and certain senior officers and other
representatives and advisors of Pentegra concerning the businesses, operations
and prospects of Omega and Pentegra. Spencer Trask examined certain publicly
available business and financial information relating to Omega and Pentegra as
well as certain financial forecasts and other data for Omega and Pentegra which
were provided to Spencer Trask by or otherwise discussed with the respective
managements of Omega and Pentegra, including information relating to certain
strategic implications and operational benefits anticipated from the Merger.
Spencer Trask reviewed the financial terms of the merger as set forth in the
Merger Agreement in relation to, among other things, current and historical
market prices and trading volumes of Omega and Pentegra common stock; the
historical and projected earnings and operating data of Omega and Pentegra; and
the capitalization and financial condition of Omega and Pentegra. Spencer Trask
considered, to the extent publicly available, the financial terms of similar
transactions recently effected which Spencer Trask considered relevant in
evaluating the merger and analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose businesses Spencer Trask considered relevant in evaluating those of Omega
and Pentegra. In addition to the foregoing, Spencer Trask conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Spencer Trask deemed appropriate to arrive at its opinion.
Spencer Trask noted that its opinion was necessarily based upon information
available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Spencer Trask as of the date of its opinion.
In rendering its opinion, Spencer Trask assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Spencer Trask. With respect to financial forecasts and
other financial information and data provided to or otherwise reviewed by or
discussed with Spencer Trask, the managements of Omega and Pentegra advised
Spencer Trask that such forecasts and other information and data were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the respective managements of Omega and Pentegra as to the future
financial performance of Omega and Pentegra and the strategic implications and
operational benefits anticipated from the merger. Spencer Trask's opinion
relates to the relative values of Omega and Pentegra. Spencer Trask did not
express any opinion as to what the value of the Pentegra common stock actually
will be when issued to Omega stockholders pursuant to the merger or the price at
which the Pentegra Common Stock will trade subsequent to the merger. In
addition, Spencer Trask did not make or obtain an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Omega or
Pentegra. Spencer Trask was not asked to consider, and in its opinion does not
address, the relative merits of the merger as compared to any alternative
business strategies that might exist for Omega or the effect of any other
transaction in which Omega might engage. In addition, although Spencer Trask
evaluated the consideration to be paid by Pentegra in the merger from a
financial point of view, Spencer Trask was not asked to and did not recommend
the specific consideration payable in the merger, which was determined by Omega
and Pentegra through negotiation. No limitations were imposed by Omega on
Spencer Trask with respect to the investigations made or procedures followed by
Spencer Trask in rendering its opinion.
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<PAGE> 34
THE FULL TEXT OF THE WRITTEN OPINION OF SPENCER TRASK DATED APRIL 19, 1999,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX C AND IS INCORPORATED HEREIN BY
REFERENCE. OMEGA STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS
ENTIRETY. SPENCER TRASK'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO BE PAID BY PENTEGRA IN THE MERGER FROM A FINANCIAL POINT OF
VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE OMEGA SPECIAL MEETING. THE SUMMARY OF THE OPINION
OF SPENCER TRASK SET FORTH IN THIS JOINT PROXY STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the Board of Directors of Omega, Spencer Trask
performed a variety of financial and comparative analyses, including those
described above. The summary of such analyses does not purport to be a complete
description of the analyses underlying Spencer Trask's opinion. The preparation
of a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, Spencer Trask believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinion. In
its analyses, Spencer Trask made numerous assumptions with respect to Pentegra,
Omega, industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Pentegra
and Omega. The estimates and other matters, many of which are beyond the control
of Pentegra and Omega. The estimates contained in such analyses and the
valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Omega's board of directors with
respect to the Merger proposal, Omega stockholders should be aware that certain
directors and members of management of Omega may be deemed to have interests in
the Merger that are in addition to their interests as Omega stockholders
generally. Omega's board of directors was aware of such interests and considered
them, among other matters, in approving the Merger.
Pursuant to the Merger Agreement, the Omega options held by Dean Bellavia,
Floyd V. Elliott, Peter Wexler, Ed Mulherin, Steve DeAngelis, Steve Crisilieo,
John Clarke, David Grove, Robert Daskal and George Bodiroga will be terminated.
Each of Robert J. Schulhof, Dean Bellavia, Floyd V. Elliott, Joel Glovsky,
Peter Wexler, Ed Mulherin, Steve DeAngelis, Steve Crisilieo and George Bodiroga
will also resign their respective positions with Omega effective upon the
consummation of the merger and release Omega from any and all claims based upon
any Omega employee benefit plan, compensation plan, employment agreement or
other contract, arrangement or understanding between such individual and Omega
or any subsidiary of Omega. In
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<PAGE> 35
connection with such release, the foregoing individuals will enter into the
agreement or receive the amount of cash set forth opposite his name below:
<TABLE>
<S> <C> <C>
Robert J. Schulhof -- Employment Agreement with Pentegra providing for
an annual salary of $120,000 and an initial term
of one year.
Dean C. Bellavia, Ph.D. -- Employment Agreement with Pentegra providing for
an annual salary of $120,000 and an initial term
of one year.
-- Option Agreement providing for the purchase of
35,625 shares of Pentegra common stock at an
exercise price of $6.125 per share, vesting
ratably over a five-year period beginning on the
first anniversary of the consummation date of
the merger.
Floyd V. Elliot -- Employment Agreement with Pentegra providing for
an annual salary of $120,000 and an initial term
of one year.
-- Option Agreement providing for the purchase of
35,625 shares of Pentegra common stock at an
exercise price of $6.125 per share, vesting
ratably over a five-year period beginning on the
first anniversary of the consummation date of
the merger.
C. Joel Glovsky, D.D.S. -- Cash payment of $60,000, one-half of which shall
be paid upon consummation of the merger and
one-half of which shall be payable six months
following consummation of the merger.
Peter I. Wexler -- Option Agreement providing for the purchase of
8,903 shares of Pentegra common stock at an
exercise price of $6.125 per share, vesting
ratably over a five-year period beginning on the
first anniversary of the consummation date of
the merger; and
-- Cash payment of $90,000, one-half of which shall
be paid upon consummation of the merger and
one-half of which shall be payable six months
following consummation of the merger.
Edward M. Mulherin -- Option Agreement providing for the purchase of
53,417 shares of Pentegra common stock at an
exercise price of $6.125 per share, vesting
ratably over a five-year period beginning on the
first anniversary of the consummation date of
the merger.
-- Cash payment of $120,000, one-half of which
shall be paid upon consummation of the merger
and one-half of which shall be payable six
months following consummation of the merger.
</TABLE>
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<PAGE> 36
<TABLE>
<S> <C> <C>
Steven DeAngelis -- Option Agreement providing for the purchase of
8,903 shares of Pentegra common stock at an
exercise price of $6.125 per share, vesting
ratably over a five-year period beginning on the
first anniversary of the consummation date of
the merger.
-- Cash payment of $80,000, one-half of which shall
be paid upon consummation of the merger and
one-half of which shall be payable six months
following consummation of the merger.
Steve Crisilieo -- Option Agreement providing for the purchase of
1,781 shares of Pentegra common stock at an
exercise price of $6.125 per share, vesting
ratably over a five-year period beginning on the
first anniversary of the consummation date of
the merger.
-- Cash payment of $60,000, one-half of which shall
be paid upon consummation of the merger and
one-half of which shall be payable six months
following consummation of the merger.
George Bodiroga -- Option Agreement providing for the purchase of
3,462 shares of Pentegra common stock at an
exercise price of $6.125 per share, vesting
ratably over a five-year period beginning on the
first anniversary of the consummation of the
merger.
-- Cash payment of $60,000, half of which shall be
paid upon consummation of the merger and half of
which shall be payable six months following
consummation of the merger.
</TABLE>
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
GENERAL
The Merger Agreement contemplates the merger of Special Omega Acquisition
Corporation, a subsidiary of Pentegra ("Merger Sub"), with and into Omega, with
Omega surviving the merger as a wholly-owned subsidiary of Pentegra. The merger
will become effective in accordance with the certificate of merger to be filed
with the Secretary of State of the State of Delaware. It is anticipated that
such filing will be made as soon as practicable after the last of the conditions
precedent to the merger, as set forth in the Merger Agreement, has been
satisfied or waived. Following the merger, the directors and executive officers
of Pentegra will continue to be the directors and executive officers of the
combined company. Robert J. Schulhof will be appointed as Senior Vice
President -- Orthodontic Division of the combined company following the merger.
The Merger Agreement obligates Pentegra to have the shares of Pentegra common
stock to be issued in connection with the merger approved for listing on the
AMEX, subject to official notice of issuance, prior to the consummation of the
merger. If the merger is consummated Omega common stock will cease to be traded
on the OTC Bulletin Board. The following description of the Merger Agreement
does not purport to be complete and is qualified by reference to the complete
text of the Merger Agreement, which is incorporated by reference herein and a
copy of which is attached hereto as Annex A.
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<PAGE> 37
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the consummation of the merger,
1. all of the issued and outstanding shares of Omega common stock, other
than shares to be canceled pursuant to clause 2 immediately below, will
be converted into the right to receive 1,800,000 shares of Pentegra
common stock in the aggregate (subject to adjustment upon certain
changes in the capital stock of Pentegra such as stock splits and
subject to reduction in the event that the amount of cash and marketable
securities held by Omega at the consummation of the merger or that the
dollar amount of certain liabilities of Omega at the consummation of the
merger are consistent with the amounts specified in the Merger
Agreement),
2. each share of Omega common stock held by Omega as treasury shares or
owned by Pentegra or any Pentegra subsidiaries will be canceled and
retired; and
3. each outstanding option (other than options held by certain of Omega's
officers) and warrant to acquire Omega common stock will be assumed by
Pentegra as described below.
Cash will be paid instead of any fractional shares of Pentegra common stock
that would otherwise be issuable. The type and amount of consideration payable
in the merger were determined through negotiations between Omega and Pentegra
and were approved by the Omega and Pentegra boards.
EXCHANGE OF SHARES
As promptly as practicable after the consummation of the merger, Pentegra
will send to each holder of record of shares of Omega common stock a letter of
transmittal and instructions. Thereafter, holders of Omega common stock may
surrender their certificates to Pentegra, together with a duly executed letter
of transmittal. In exchange for such share certificates, holders will receive
Pentegra common stock certificates representing such number of shares as
described under "Consideration to be Received in the Merger." Holders of shares
of unexchanged Omega common stock will not be entitled to receive any dividends
or other distributions payable by Pentegra until their certificates are
surrendered. Upon surrender, however, subject to applicable laws, such holders
will receive accumulated dividends and distributions, without interest, together
with cash in lieu of fractional shares.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain reciprocal representations and
warranties of Pentegra and Omega as to, among other things, due organization and
good standing, corporate authority to enter into the contemplated transactions,
governmental authorization, absence of conflicts with organizational documents
and material agreements, capitalization, recent reports filed with the SEC,
financial statements, any changes or events, tax matters and finders' fees. In
addition, Omega has made certain representations regarding, among other matters,
ownership of subsidiaries, compliance with laws, undisclosed liabilities,
litigation, labor matters, Year 2000 compliance, environmental matters, employee
benefits matters and insurance matters.
Many of these representations and warranties are qualified by the concept
of "material adverse effect," that is to say, such representations and
warranties are not intended to apply to facts or circumstances which would not
have an adverse effect on the financial
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<PAGE> 38
condition or results of operations of such party and its subsidiaries, taken as
a whole, other than effects caused by:
- changes in general economic conditions; or
- changes that affect the dental or orthodontic practice management
industry in general.
The representations and warranties contained in the Merger Agreement will
survive until August 1, 2000, except for Omega's representations and warranties
concerning tax matters which shall survive for the relevant statute of
limitations applicable to the taxable year in which the consummation of the
Merger occurs plus ninety days.
CERTAIN COVENANTS
Pursuant to the Merger Agreement, Omega and Pentegra have agreed that from
March 15, 1999 (the date of the Merger Agreement) until the consummation of the
merger, Omega and Pentegra and each of their respective subsidiaries will
conduct their business in the ordinary course and will use reasonable efforts to
preserve intact their present and existing business relationships with material
customers, suppliers and others and keep available their present offices and
employees.
Additionally, from the date of the Merger Agreement until the consummation
of the merger, without the written consent of Pentegra, Omega may not, nor may
it permit any Omega subsidiary to:
- sell, lease or otherwise dispose of any of its material assets, except in
the ordinary course of business;
- mortgage, pledge or otherwise encumber, or permit to exist any new
security interest, lien or encumbrance on, any of its assets, except in
the ordinary course of business;
- except in accordance with the ordinary course of its business, enter
into, amend, modify or cancel any material contract;
- incur any obligation or liability for borrowed money except in the
ordinary course of business;
- make any material investment in, purchase any material assets or
securities of, or merge with any person or entity;
- assume, guarantee, endorse or otherwise become responsible for the
obligations of any person or entity, or make loans or advances to any
person or entity, except in the ordinary course of business;
- increase in any manner the compensation of any of the directors, officers
or other employees of Omega or its subsidiaries other than increases in
compensation of employees who are not officers or directors in the
ordinary course of business;
- pay or agree to pay any pension or retirement allowance not required by
an existing plan or agreement to any director, officer or employee,
whether past or present, of Omega or its subsidiaries, or enter into or
amend any employment agreement or any benefit plan or arrangement with or
for the benefit of any of its directors, officers, employees or of any
other person or entity, or approve or grant any stock options, stock
appreciation rights or similar awards to any person or entity;
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<PAGE> 39
- declare, set aside or pay any dividend in cash or property, repurchase or
otherwise make any distribution, with respect to its capital stock other
than in accordance with prior practice;
- split, combine or otherwise similarly change its capital stock, or redeem
any of its capital stock;
- authorize the creation or issuance of, or issue or sell (other than upon
the exercise of previously outstanding options or warrants), any shares
of its capital stock or any securities or obligations convertible into or
exchangeable for, or giving any person or entity any right to acquire
from it, any shares of its capital stock;
- enter into any joint venture, partnership or other similar arrangement
except in the ordinary course of business;
- enter into any agreement or arrangement with an affiliate of Omega or any
of its subsidiaries except in the ordinary course of business;
- enter into any agreement which restricts in any way its ability to
compete with any other person or entity;
- amend its certificate of incorporation or bylaws;
- cancel or compromise any indebtedness owed to it except in the ordinary
course of business;
- alter in any way the manner in which it has regularly and customarily
maintained its books of account and records, or change any of its
accounting principles or the methods by which such principles are applied
for tax or reporting purposes;
- allow the stock options exercisable for Omega common stock held by
certain of Omega's executive officers to be exercised, transferred or
assigned; or
- agree or commit to do any of the foregoing.
Additionally, from the date of the merger agreement until the Consummation
of the Merger, without the written consent of Omega, Pentegra may not, nor may
it permit any Pentegra subsidiary to:
- sell, lease or otherwise dispose of any of its material assets, except in
the ordinary course of business;
- alter in any way the manner in which it has regularly and customarily
maintained its books of account and records, or change any of its
accounting principles or the methods by which such principles are applied
for tax or reporting purposes;
- make any material investment in, purchase any material assets or
securities of, or merge with any person or entity that is a competitor of
Omega;
- make any investment in, purchase any material assets or securities of, or
merge with any person or entity in a transaction in which Pentegra's
investment or purchase or merger consideration is valued in excess of
$10,000,000;
- enter into any joint venture, partnership, or other similar agreement
that would change materially the character of Pentegra's business; or
- agree or commit to do any of the foregoing.
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<PAGE> 40
NO SOLICITATION OF TRANSACTIONS.
Pursuant to the Merger Agreement, Omega has agreed that, subject to the
fiduciary duties of Omega's board and applicable law, it will not, until the
earlier to occur of (i) the consummation of the merger, (ii) the termination of
the merger agreement or (iii) September 30, 1999, neither it nor any of its
subsidiaries nor any of the officers and directors of it or its subsidiaries
shall, and that it shall direct and use its reasonable efforts to cause its and
its subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or
knowingly facilitate (including by way of furnishing information) any inquiries
or the making of any Acquisition Proposal (as defined below). Omega further
agreed that, subject to the fiduciary duties of Omega's board, neither it nor
any of its subsidiaries nor any of the officers and directors of it or its
subsidiaries shall, and that it shall direct and use its best efforts to cause
its and its subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
subsidiaries) not to, directly or indirectly, have any discussion with or
provide any confidential information or data to any person or entity relating to
an Acquisition Proposal, or engage in any negotiations concerning an Acquisition
Proposal or accept an Acquisition Proposal.
Notwithstanding the foregoing, Omega or its board is permitted to do any of
the following: (i) comply, to the extent applicable, with certain federal
securities laws requiring action by Omega with regard to certain Acquisition
Proposals, (ii) in response to an unsolicited bona fide written Acquisition
Proposal, recommend approval of such an unsolicited bona fide written
Acquisition Proposal to the stockholders of Omega or withdraw or modify in any
manner its recommendation of the merger if Omega's board concludes that such
Acquisition Proposal would, if consummated, constitute a Superior Proposal (as
defined below) or (iii) engage in any discussions or negotiations with, or
provide any information to, any person or entity in response to an unsolicited
bona fide written Acquisition Proposal by any such person or entity if Omega's
board concludes that such Acquisition Proposal could reasonably be expected to
constitute a Superior Proposal.
Omega also agreed that, except to the extent that the board of Omega
determines, based upon the advice of Robinson & Cole LLP, Omega's outside legal
counsel, that doing so would reasonably be expected to violate the fiduciary
duties of the board of Omega under applicable law, prior to providing any
information or data to any person or entity or entering into discussions or
negotiations with any person or entity, the board of Omega shall notify Pentegra
of any Acquisition Proposal. Finally, Omega also agreed that, as of the date it
executed the Merger Agreement, it would immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
with respect to any Acquisition Proposal.
"Acquisition Proposal" for purposes of the Merger Agreement means any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving, or any purchase (including, without
limitation, by way of tender offer) or sale of, all or any significant portion
of the assets or more than 19.9% of the outstanding shares of Omega common stock
or the common stock of any of its subsidiaries.
"Superior Proposal" for purposes of the Merger Agreement means a bona fide
Acquisition Proposal which Omega's board concludes in good faith (after
consultation with its financial advisors and legal counsel) would, if
consummated, result in a transaction that is more favorable to Omega's
stockholders (in their capacities as stockholders), from a
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<PAGE> 41
financial point of view, than the transactions contemplated by the Merger
Agreement; provided that for purposes of this definition, the term "Acquisition
Proposal" shall have the meaning assigned to such term set forth in the
preceding paragraph except that the references to "19.9%" shall each be deemed
to be a reference to "50%" and "Acquisition Proposal" shall only be deemed to
refer to a transaction involving Omega, or with respect to assets (including the
shares of any subsidiary of Omega) of Omega and its subsidiaries, taken as a
whole, and not any of its subsidiaries alone.
INDEMNIFICATION
Pursuant to the Merger Agreement, Omega and certain of its stockholders
(the "Indemnifying Omega Stockholders") agree to jointly and severally indemnify
and hold harmless Pentegra, its officers, directors, stockholders and
subsidiaries (collectively, the "Indemnified Persons"), and reimburse the
Indemnified Persons for any loss, liability, claim, damage, expense (including
costs of investigation and defense and reasonable attorneys' fees and expenses)
or diminution of value whether or not involving a third-party claim, arising
from, among other things:
- any breach of any representation or warranty, covenant or agreement made
by Omega or the Indemnifying Omega Stockholders in the Merger Agreement,
or any other certificate or document delivered by Omega or any
Indemnifying Omega Stockholder pursuant to the Merger Agreement;
- all prorated taxes of Omega and each of its subsidiaries with respect to
any taxable period ending on or before the date of the consummation of
the Merger to the extent such taxes exceed the amount of the current
liability accruals for taxes reflected in Omega's books and records as of
the date of the consummation of the merger;
- any liability of Omega, any Omega subsidiary, any stockholder of Omega,
any affiliated practice or any affiliated provider of Omega for costs and
expenses (including attorneys' fees) incurred in connection with the
negotiation, preparation or closing of the transactions contemplated by
the Merger Agreement or the other documents to be executed in connection
therewith;
- any untrue statement of a material fact or omission to state a material
fact made by Pentegra in reliance upon and in conformity with written
information concerning Omega or the Affiliated Practices furnished to
Pentegra by Omega for use in this Joint Proxy Statement/Prospectus; and
- any untrue statement of a material fact or omission to state a material
fact made by Omega in any proxy statement or other stockholder
communication related to the Omega Special Meeting.
The indemnity obligations of each Indemnifying Omega Stockholder is limited to
the product of the number of shares of Pentegra common stock actually received
by such individual Indemnifying Omega Stockholder pursuant to the merger
multiplied by the average closing price for Pentegra common stock for the five
(5) trading days immediately preceding the date of the consummation of the
merger. Any claim for indemnification pursuant to the Merger Agreement must be
asserted by written notice to the party from whom indemnification is sought on
or before August 1, 2000. If notice of a claim is not received by the above
date, the Indemnifying Omega Stockholders are released from all further
liability under the Merger Agreement. The Indemnifying Omega Stockholders have
no liability for the first $100,000, in the aggregate, of indemnification
payments under the
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<PAGE> 42
Merger Agreement; provided, however, that in the event that such $100,000
threshold of indemnification claims is exceeded in the aggregate, the
Indemnifying Omega Stockholders are liable for the entire amount of such claims
with no deduction for such $100,000 threshold.
OMEGA STOCK OPTIONS
The Merger Agreement provides that at the consummation of the merger, each
Omega option outstanding immediately prior to the consummation of the merger
(except for Omega options held by certain Omega executive officers, which are
discussed below), regardless of the extent vested and exercisable, will be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such Omega stock option, the same number of shares of
Pentegra common stock as the holder of such Omega option would have been
entitled to receive pursuant to the Merger Agreement had such holder exercised
such Omega option in full immediately prior to the consummation of the merger,
rounded up to the nearest whole number. The exercise price will equal $6.125 per
share of Pentegra common stock.
Pentegra has agreed, at or prior to the consummation of the merger, to take
all corporate action necessary to reserve for issuance a sufficient number of
shares of Pentegra common stock for delivery upon exercise of these substitute
options. Within thirty (30) days following the consummation of the merger,
Pentegra will file a registration statement with respect to the shares of
Pentegra common stock subject to such Pentegra options, and will use
commercially reasonable efforts to maintain the effectiveness of such
registration statement(s) for so long as such Pentegra options remain
outstanding.
Pursuant to the Merger Agreement, the Omega options held by Dean C.
Bellavia, Floyd V. Elliott, Peter I. Wexler, Edward M. Mulherin, Steve
DeAngelis, Steve Crisilieo, John Clarke, David Grove, Robert Daskal and George
Bodiroga will be terminated. These arrangements are discussed in more detail
under the "Interest of Certain Persons in the Merger."
OMEGA WARRANTS
Pursuant to the merger, at the consummation of the merger each warrant to
acquire shares of Omega common stock outstanding immediately prior to the
consummation of the merger, regardless of the extent vested and exercisable,
will be deemed to constitute a warrant to acquire, on the same terms and
conditions as were applicable under such Omega warrant, the same number of
shares of Pentegra common stock as the holder of such Omega warrant would have
been entitled to receive pursuant to the Merger Agreement had such holder
exercised such Omega warrant in full immediately prior to the consummation of
the merger, rounded up to the nearest whole number. The exercise price of each
warrant to purchase Omega common stock will be equal to the result of (i) the
exercise price per share of Omega common stock under the warrant immediately
prior to the merger divided by (ii) the number of shares of Pentegra common
stock issuable for a share of Omega common stock in the merger.
OTHER COVENANTS
The Merger Agreement contains other covenants relating to the preparation
and distribution of this document, expenses, access to information, public
announcements and the listing of the shares of Pentegra common stock issuable in
connection with the merger with AMEX and tax matters. In addition, the Merger
Agreement contains a general
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<PAGE> 43
covenant requiring the parties to use their reasonable best efforts to effect
the consummation of the merger.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligation to Effect the Merger. Each party's
obligations to effect the merger are subject to the satisfaction of several
conditions including:
- The approval of Omega's and Pentegra's stockholders of the merger and the
Merger Agreement;
- The absence of any temporary or permanent restraining order or injunction
or other order by any federal or state court or any law or regulation
preventing consummation of the merger;
- The receipt of all required statutory approvals; and
- The registration under the Securities Act of the issuance of the shares
of Pentegra common stock in connection with the merger.
Conditions to Pentegra's and Merger Sub's Obligations to Effect the
Merger. Pentegra and Merger Sub's obligations to effect the merger are subject
to the satisfaction of several conditions including:
- The absence of any uncured breach of any representation, warranty,
covenant or agreement on the part of Omega having a material adverse
effect on Omega or such that closing would put Pentegra or Merger Sub in
conflict with federal securities laws;
- The absence of any material adverse effect on Omega and its subsidiaries
taken as a whole;
- The receipt of all material third-party consents to Omega's participation
in and the consummation of the merger;
- The receipt of amendments to certain of Omega's management services
agreements;
- The receipt of a resignation of and release of liability by each director
and executive officer of Omega and each of its subsidiaries;
- The opinion from EVEREN to the effect that the merger is fair to the
stockholders of Pentegra from a financial point of view shall not have
been withdrawn prior to the consummation of the merger;
- None of the Omega options held by Omega's executive officers that are to
be terminated pursuant to the merger shall have been exercised,
transferred or assigned;
- The receipt of agreements by certain of Omega's stockholders restricting
the sale, transfer or disposition of the shares of the Pentegra common
stock for a period of one year after the consummation of the merger; and
- The receipt of stock pledge agreements from Robert Schulhof and Floyd V.
Elliot pursuant to which each of them pledges shares of Pentegra common
stock received by him in connection with the merger as collateral for all
indebtedness owed by such individual to Omega.
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Conditions to Omega's Obligations to Effect the Merger. Pentegra and
Merger Sub's obligations to effect the merger are subject to the satisfaction of
several conditions including:
- The absence of any uncured breach of any representation, warranty,
covenant or agreement on the part of Pentegra having a material adverse
effect on Pentegra or such that closing would put Omega in conflict with
federal securities laws;
- The absence of any material adverse effect on Pentegra and its
subsidiaries taken as a whole;
- The receipt of all material third-party consents to Pentegra's
participation in and the consummation of the merger, including the
consent of Bank One, Texas, N.A., which consent had not been obtained by
Pentegra as of the date of this Proxy Statement/Prospectus;
- The opinion from Spencer Trask to the effect that each of the merger and
the consideration to be received by Omega stockholders is fair to the
stockholders of Omega from a financial point of view shall not have been
withdrawn prior to the consummation of the merger; and
- The listing of the shares of Pentegra common stock issuable to the
stockholders of Omega pursuant to the Merger Agreement shall have been
approved for listing on the AMEX, subject to official notice of issuance.
TERMINATION
The Merger Agreement may be terminated and the merger may be abandoned at
any time prior to the consummation of the merger, whether before or after
approval thereof by the stockholders of Omega and Pentegra:
- by mutual written consent of the boards of Omega, Merger Sub and
Pentegra;
- by Pentegra or Omega if the consummation of the merger shall not have
occurred or on before September 30, 1999; provided that the right to
terminate the Merger Agreement for this reason shall not be available to
any party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of or resulted in the failure of the
consummation of the merger to occur on or before such date;
- by Pentegra or Omega if any court of competent jurisdiction in the U.S.
or other governmental authority shall have issued an order, decree or
ruling, or taken any other action restraining, enjoining or otherwise
prohibiting the merger and such order, decree, ruling or other action
shall have become final and non-appealable;
- by Pentegra or Omega if the approval of the merger and the Merger
Agreement by Omega's stockholders is not obtained at the Omega Special
Meeting (or any adjournment thereof);
- by Pentegra or Omega if the approval of the merger and the Merger
Agreement by Pentegra's stockholders is not obtained at the Pentegra
Special Meeting (or any adjournment thereof);
- by Omega if Omega receives a bona fide written Acquisition Proposal from
any person or entity (other than Pentegra or its affiliates) which
constitutes a Superior Proposal and Omega recommends the Superior
Proposal to its stockholders; or
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- by Pentegra if the board of Omega, prior to Omega Special Meeting, (i)
shall recommend a Superior Proposal to its stockholders.
TERMINATION FEES PAYABLE BY OMEGA
If the Merger Agreement is terminated by either party after any person
makes an Acquisition Proposal and Omega enters into a letter of intent,
agreement in principle or definitive agreement regarding the Acquisition
Proposal or another similar transaction, Omega will pay to Pentegra a
termination fee of $300,000 in cash within two business days after Pentegra
requests that such payment be made.
EXPENSES
All fees and expenses incurred in connection with the Merger Agreement and
the transactions contemplated by the Merger Agreement other than termination
fees payable upon termination under "Termination Fees Payable by Omega," will be
paid by the party incurring such expenses, whether or not the merger is
consummated.
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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The price per share of Pentegra common stock is quoted on AMEX under the
symbol "PEN." The price per share of Omega common stock is quoted on the OTC
Bulletin Board under the symbol "ORTH." Omega commenced trading on the Nasdaq
Small Cap Market on October 1, 1997 and its shares were delisted from trading at
that market on April 21, 1999. Since that date shares of Omega common stock have
traded on the OTC Bulletin Board. Pentegra commenced trading on the AMEX on
March 24, 1998. No cash dividends have been paid on the shares of Pentegra or
Omega common stock.
For the calendar quarters indicated, the table below sets forth the high
and low sales prices per share of Pentegra common stock and Omega common stock,
in each case as reported on AMEX or Nasdaq Small Cap Market.
<TABLE>
<CAPTION>
PENTEGRA OMEGA
COMMON COMMON
STOCK STOCK
MARKET PRICE MARKET PRICE
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
1997
4th Quarter (ended 12/31/97)........................ -- -- $6.25 $2.87
1998
1st Quarter (ended 3/31/98)......................... $8.50 $8.00 $3.25 $2.88
2nd Quarter (ended 6/30/98)......................... $9.00 $6.25 $2.38 $1.69
3rd Quarter (ended 9/30/98)......................... $8.69 $3.87 $1.44 $0.50
4th Quarter (ended 12/31/98)........................ $3.81 $1.75 $0.94 $0.44
1999
First Quarter (ended 3/31/99)....................... $2.81 $1.38 $1.88 $0.44
Second Quarter (through April 19, 1999)............. $1.88 $1.31 $0.56 $0.41
</TABLE>
On March 12, 1999, the last full trading day prior to the public
announcement of the proposed merger, the closing price per share of Pentegra
common stock quoted on AMEX was $1.75 and the closing price per share of Omega
common stock reported on Nasdaq Small Cap Market was $1.38. On May , 1999, the
most recent date prior to the printing of this document, the closing price per
share of Pentegra common stock reported on AMEX was $ and the closing
price per share of Omega common stock reported on the OTC bulletin board was
$ . Stockholders are urged to obtain current market quotations prior to
making any decision with respect to the merger.
Pentegra and Omega do not expect to change their dividend policies before
the merger. Pentegra does not expect to declare dividends for the foreseeable
future.
INFORMATION ABOUT PENTEGRA
Pentegra's principal executive offices are located at 2999 N. 44th Street,
Suite 650, Phoenix, Arizona 85018, and its telephone number is (602) 952-1200.
RECENT DEVELOPMENTS
In connection with its initial public offering in March 1998 (the "IPO"),
Pentegra acquired substantially all the tangible and intangible assets and
assumed certain liabilities
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<PAGE> 47
of, and entered into agreements to provide long-term management services to, 77
dentists operating in 63 offices located in 18 states (the "Founding Affiliated
Practices"). From the date of the IPO through March 31, 1999, Pentegra has
affiliated with an additional 35 practices and 65 dentists operating in 33
offices, increasing the total number of existing practices affiliated with
Pentegra ("Affiliated Practices") to 85. During that period, Pentegra also
funded six dental practice acquisitions by dentists party to a long-term
management services agreement (a "Service Agreement") with Pentegra, which
practices were "tucked-in" to an existing Affiliated Practice. These additional
practices expand Pentegra's geographical base into nine additional states. In
addition to these affiliations, Pentegra is negotiating and will continue to
negotiate to affiliate with additional dental practices; however, although
Pentegra intends to aggressively pursue these and other affiliations, there can
be no assurance that any of such affiliations will be consummated.
DIVIDEND POLICY
It is Pentegra's current intention to retain earnings for the foreseeable
future to support operations and finance expansion. The payment of any future
dividends will be at the discretion of Pentegra's Board of Directors and will
depend on, among other things, Pentegra's earnings, financial condition, cash
flow from operations, capital requirements, expansion plans, the income tax laws
then in effect, the requirements of Delaware law and restrictions that may be
imposed by Pentegra's future financing arrangements.
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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.
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 IPO, substantially all of the tangible
and intangible assets, and assumed the liabilities, of the 50 Founding
Affiliated Practices. Pentegra 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 IPO.
The expenses incurred by Pentegra 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,
Pentegra incurs personnel and administrative expenses in connection with
maintaining a corporate office, which provides management, practice
enhancements, administrative and business development services.
Results of Operations (unaudited)
Following completion of the IPO on March 30, 1998, Pentegra began
operations effective April 1, 1998. In May 1998, Pentegra changed its fiscal
year 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 December
31, 1998, Pentegra 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, Pentegra becomes the exclusive manager and administrator of
all non-dental services relating to the operation of an Affiliated Practice. The
obligations of Pentegra
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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 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") 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.
Net Revenue
Net revenue generated for the nine months ended December 31, 1998 was
approximately $26.0 million. During the nine months ended December 31, 1998,
Pentegra affiliated with 32 additional dental practices. For the nine months
ended December 31, 1998, dental center revenues aggregated to approximately
$35.3 million.
Operating Expenses
Pentegra incurred operating expenses of approximately $24.8 million for the
nine months ended December 31, 1998. Operating expenses consisted primarily of
salaries, wages and benefits, dental supplies and laboratory fees, rent,
advertising and marketing, and general and administrative expenses.
General and administrative expenses include primarily the corporate
expenses of Pentegra. 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 nine
months ended December 31, 1998, general and administrative expenses were
approximately $3.2 million which represented 12.5% of net revenue. Included in
general and administrative expenses for the nine months ended December 31, 1998
is a one time severance payment of $350,000 to the former Chief Executive
Officer of Pentegra.
Income Tax Expense
Pentegra recognized a tax asset of $817,000. Pentegra concluded that it was
more likely than not it would utilize certain tax assets in future years.
Pentegra expects the effective tax rate for income generated in fiscal 1999 will
be approximately 25%.
Liquidity and Capital Resources
At December 31, 1998, Pentegra 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. Pentegra believes that cash on
hand, together
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with the availability under the revolving line of credit will be sufficient to
continue execution of its affiliation strategy through 1999.
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 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 draws 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 Pentegra 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 Pentegra to third party liability. This issue is commonly
referred to as the year 2000 problem ("Y2K").
Pentegra has initiated a Y2K compliance program to ensure that all of the
critical Systems and processes that are under its direct control remain
functional. Pentegra completed the installation of year 2000 compliant software
for its operations prior to the IPO. Accordingly Pentegra does not expect the
year 2000 issue to have a material adverse effect on its financial position,
results of operations or cash flows.
Although Pentegra'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 Pentegra 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
Pentegra. To date, the costs incurred by Pentegra that relate solely to the Y2K
compliance program have been minimal. In the opinion of management, the costs to
complete Pentegra's Y2K compliance program will not have a material adverse
effect on Pentegra's consolidated financial position, results of operations or
cash flows.
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Pentegra has received assurance that the systems implemented prior to the
IPO are Y2K compliant. In addition, Pentegra has inventoried all hardware and
software at the affiliated practices that process information related to
practice management. Pentegra 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 Pentegra'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, Pentegra is unable to determine at this time whether the
consequences of any possible year 2000 failures will have a material adverse
impact on Pentegra's financial position, results or operations and cash flows.
Pentegra believes that, with the scheduled completion of its computer system
upgrades, the possibility of any material interruption to normal operations
should be significantly reduced.
Pentegra'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.
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 will become a wholly owned subsidiary of Pentegra, and
James M. Powers, Jr., D.D.S. was named President of Pentegra, replacing Gary S.
Glatter. The Liberty Merger Agreement provides Pentegra will pay (a) $0.01 per
share for each outstanding share of Liberty common stock, par value $0.01 per
share at closing and (b) up to $3.99 per share and options to purchase up to
0.25 shares of common stock of Pentegra with an exercise price of $6.125 per
share for each share of Liberty common stock (collectively, the "Additional
Common Merger Consideration") in accordance with the following:
(i) One-third of the Additional Common Merger Consideration is payable
upon completion of affiliations with dental practices under a letter
of intent with Liberty ("Liberty Affiliations") that had collected
revenues for the year ended December 31, 1997 ("1997 Practice
Revenues") aggregating to at least $10,000,000;
(ii) One-third of the Additional Common Merger Consideration is payable
upon completion of additional Liberty Affiliations that had aggregate
1997 Practice Revenues of at least $15,000,000; and
(iii) One-third of the Additional Common Merger Consideration is payable
upon completion of additional Liberty Affiliations that had aggregate
1997 Practice Revenues of at least $15,000,000.
The holders of shares of Liberty common stock will forfeit any right to receive
Additional Common Merger Consideration related to Liberty Affiliations not
consummated by
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June 30, 1999. As of November 13, 1998, there are 315,750 shares of Liberty
common stock outstanding, which would result in Pentegra paying an aggregate of
up to $1,263,000 cash and issuing options to acquire up to 78,938 shares of
Pentegra common stock.
The Liberty Merger Agreement also provides that Pentegra pay (a) $0.01 per
share for each outstanding share of Liberty Class B common stock, par value
$0.01 per share at closing and (b) up to one share of common stock for each
outstanding share of Liberty class B common stock (the "Additional Class B
Merger Consideration") in accordance with the following:
(i) One-fifth of the Additional Class B Merger Consideration is payable
upon completion of Liberty Affiliations that had aggregate 1997
Practice Revenues of at least $10,000,000;
(ii) Three-tenths of the Additional Class B Merger Consideration is
payable upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $10,000,000;
(iii) Two-fifths of the Additional Class B Merger Consideration is payable
upon completion of additional Liberty Affiliations that had aggregate
1997 Practice Revenues of at least $20,000,000; and
(iv) One-tenth of the Additional Class B Merger Consideration is payable
upon completion of additional Liberty Affiliations that had aggregate
1997 Practice Revenues of at least $10,000,000.
The holders of shares of Liberty class B common stock will forfeit any right to
receive Additional Class B Merger Consideration related to Liberty Affiliations
not consummated by June 30, 1999. As of November 13, 1998, there are 545,000
shares of Liberty class B common stock outstanding, which would result in
Pentegra paying an aggregate of up to $5,450 cash and up to 545,000 shares of
Pentegra common stock. Consummation of the Liberty Merger Agreement, which is
anticipated to occur prior to June 30, 1999, is subject to, among other things,
Pentegra obtaining the consent of its lenders.
In connection with the Liberty Merger Agreement, Pentegra has agreed to pay
investment banking fees of up to $600,000 to SunTrust Equitable Securities
Corporation, $166,667 of which is payable upon completion of Liberty
Affiliations that had aggregate 1997 Practice Revenues of at least $10,000,000,
$166,667 of which is payable upon completion of additional Liberty Affiliations
that had aggregate 1997 Practice Revenues of at least $15,000,000 and $266,666
of which is payable upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $15,000,000. Pentegra also agreed
to issue 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 is payable.
As of March 31, 1999, Pentegra had completed Liberty Affiliations with 17
dental practices. 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, due November 2003, and $160,000 aggregate principal amount
of 6% of Series B convertible subordinated notes due April 1, 2004.
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BUSINESS
Overview
Pentegra was formed to provide management, administrative, development and
other services to dental practices throughout the United States. Pentegra's
approach to dental practice management, the Pentegra Dental Program, was
developed by Omer K. Reed, D.D.S. and is designed to increase revenues and lower
costs at Affiliated Practices while freeing the practicing dentists to focus on
the delivery of high-quality care. Pentegra will earn management service fees
under long-term service agreements with Affiliated Practices. In most cases,
service fees payable to Pentegra under the Service Agreements 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. Pentegra will also seek to grow by acquiring practice management
companies and affiliating with additional dental practices.
As of March 31, 1999, Pentegra has entered into Service Agreements with its
Affiliated Practices, which include approximately 121 dentists and 99 dental
offices located in 27 states (the "Affiliates"). In addition, Pentegra acquired
from Dr. Reed the assets of a consulting firm, Pentegra, Ltd., which was founded
in 1988, and a seminar company, Napili, which was founded in 1963. The clinical,
administrative and marketing training developed and provided by these companies
to practicing dentists and their teams are the foundation for the Pentegra
Dental Program. The Pentegra Dental Program is available exclusively to
Affiliated Practices.
Pentegra believes it has several advantages that would lead dental
practices to seek to affiliate with Pentegra: (i) Pentegra and the Founding
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; (iii) both Pentegra and the Affiliated
Practices will have incentives to work together to maximize practice
profitability; and (iv) affiliation with Pentegra will enable Affiliated
Practices to benefit from professional management techniques, economies of scale
in administrative and other functions, and enable affiliated dentists to
dedicate more time and effort towards the growth of their practices.
Industry
The Health Care Finance Administration ("HCFA") estimates that in 1995,
approximately $43 billion was spent in the United States on dental services.
HCFA projects annual dental expenditures to increase at an average annual rate
of six percent per year, reaching $79 billion in the year 2005. Pentegra
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.
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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 ADA reported that there were approximately 153,000
active dentists in the United States, approximately 88% of whom were practicing
either alone or with only one other dentist. In recent years, dentists have
begun to consolidate into affiliated groups and with practice management
organizations. Dentists who affiliate with practice management companies gain
several benefits, such as opportunities to achieve economies of scale, to
implement cost management techniques and to gain access to capital for new
equipment and other working capital needs.
Business Strategy
Pentegra's objective is to become a leader in providing dental practice
management services. In order to achieve this objective, Pentegra's strategy
includes the following elements:
- Focus on Traditional Fee-for-Service Dental Care. According to the 1997
Mercer Consulting Group Survey of Employer-Sponsored Health Plans,
approximately 86% of the respondents in that survey reported that they
offer their employees dental plans that pay for dental services on a
fee-for-service basis. Pentegra believes that fee-for-service care is
high-quality, highly profitable and professionally rewarding for
dentists.
- Increase Productivity and Profitability of Affiliated Practices by
Implementing the Pentegra Dental Program. The Pentegra Dental Program
involves implementing techniques designed to increase revenues and lower
costs, as well as methods to make the dentist and his or her practice
team more efficient in the delivery of dental care.
- Lower Operating Costs by Achieving Economies of Scale. Pentegra believes
that, as a result of its size and resources, it will be able to provide
Affiliated Practices with certain management functions at lower cost than
if the Affiliated Practices were to perform the services by themselves.
- Free the Dentist to Focus More Time on the Practice of
Dentistry. Pentegra will relieve practicing dentists of administrative
tasks. Pentegra believes its management and administrative support will
substantially reduce the amount of time affiliated
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dentists are required to spend on administrative matters and enable them
to dedicate more time and effort toward the growth of their professional
practices.
- Grow Through Acquisitions and Affiliations of Additional Dental
Practices. Pentegra will generally seek to affiliate with practices that
have high potential for future growth, particularly through
implementation of the Pentegra Dental Program, an established reputation
for high-quality care and a strategic fit either in an existing market or
as an entry into a new market.
Services and Operations
The Pentegra Dental Program
Pentegra intends to implement the Pentegra Dental Program at each
Affiliated Practice. The Pentegra Dental Program was developed by Dr. Reed
through Pentegra, Ltd. and Napili. Napili was founded in 1963 and has conducted
technical and management seminars for over 15,000 practicing dentists, including
many who have attended these seminars more than once. As a result of demand by
attendees of Napili seminars, Dr. Reed established Pentegra, Ltd. in 1988 to
provide hands-on, on-site 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 based on a cooperative approach that
emphasizes patient wellness and involves the dentist and his or her patient
mutually agreeing on a program to achieve and maintain optimal oral health.
Pentegra will provide seminars and on-site training and support to assist
affiliated dentists (who will control the practice of dentistry at Affiliated
Practices) and their teams to communicate effectively with each patient
regarding the type and value of care needed, obtain the patient's commitment to
a treatment plan and then implement the agreed-upon treatment plan. An initial
on-site consulting and training session will be provided to Affiliated Practices
lasting from one to three days, with subsequent sessions provided as necessary.
At each initial session, Pentegra will perform an analysis that includes on-site
observation of the dental practice, monitoring of the clinical staff and patient
flow, as well as a review of the charting and record documentation of the care
provided. The purpose of this analysis is to identify areas where improvements
might be made in the day-to-day operations of the dental practice, including
changes in personnel and facility utilization, patient scheduling and
communication (both between the dentist and his or her staff and between all
dental practice personnel and its patients). In addition, the dental practice's
personnel, including its dentists, are introduced to techniques designed to (i)
improve communication among them and (ii) sensitize them to becoming more
confident and consistent in their communications with patients in order to
ensure that each patient is fully informed and agrees with the dentist on a
mutually acceptable treatment plan. Pentegra and the Affiliated Practices will
monitor the patients' treatment plans by using active recall systems to ensure
that scheduled treatments are actually performed. The Pentegra Dental Program
stresses quality of care and personal attention, both of which Pentegra believes
are highly valued by
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patients and help achieve treatment plan acceptance. Pentegra intends to develop
and maintain a statistical database for each Affiliated Practice to define and
measure the standard of care and assure that the desired standards are being
achieved.
The Pentegra Dental Program also analyzes and rationalizes fee structures
to increase profitability. Pentegra believes that typical fee structures do not
accurately reflect all direct and indirect costs of various procedures. In order
to address this, Pentegra will use time-related cost allocation models to
recommend fee structures for Affiliated Practices that are designed to reflect
the true cost of procedures and, hence, increase profitability.
In addition, the Pentegra Dental Program focuses on increasing the
productivity of the dentist and his or her team. Pentegra will seek to increase
the use of hygienists and production at the Affiliated Practices. A number of
dental services can be provided by hygiene teams with only limited involvement
by the dentist, thereby enabling dentists to use their extra time on higher
margin procedures requiring greater expertise and skill. Pentegra will also
monitor the Affiliated Practices' patient scheduling and time spent with
patients, and will provide office design services, in order to increase
utilization of existing dental equipment and personnel.
Management Information Systems
Pentegra utilizes an integrated server-based information system to track
important operational and financial data related to each Affiliated Practice's
performance. Pentegra's management information system allows Pentegra to collect
from each Affiliated Practice, on a daily basis, data on patients seen, number
and type of procedures performed, billing and collections, and other data needed
for financial reporting and analysis. Pentegra then 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. Pentegra's
management information system will also enable Pentegra to centralize certain
functions, such as accounts payable and payroll processing, and achieve
economies of scale.
The centralized data repository of Pentegra's management information system
has been completed. Pentegra's financial reporting system is operational at all
of the Founding Affiliated Practices, and will be installed promptly at all
future Affiliated Practices as they affiliate with Pentegra. Any significant
delay or increase in expense associated with the conversion and integration of
management information systems used by Affiliated Practices could have a
material adverse effect on the successful implementation of Pentegra's expansion
strategy. In addition, Pentegra will have some systems that will remain
decentralized for at least some time, such as cash collections. Accordingly,
Pentegra will rely on local staff for certain functions.
Other Practice Management Services
Pentegra 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 substantially reduce the amount of time
affiliated dentists are required to spend on administrative matters and enable
them to dedicate more time and effort toward the growth of their professional
practices. In addition, Pentegra has negotiated, on behalf of Affiliated
Practices, discounts on, among other things, dental and office supplies, health
and malpractice insurance and equipment. Pentegra does not currently intend to
enter into any agreements with third-
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party payors. In certain markets, Pentegra may assist Affiliated Practices in
securing reimbursement contracts from third-party payors. In those limited
situations, Pentegra's role will be to negotiate and administer the contracts on
behalf of the Affiliated Practices.
Locations
As of April 22, 1999, Pentegra provides management services to Affiliated
Practices with offices in the following states:
<TABLE>
<CAPTION>
NUMBER OF
--------------------------------
STATE PRACTICES OFFICES DENTISTS
- ----- --------- ------- --------
<S> <C> <C> <C>
Alaska............................................. 1 1 1
Arizona............................................ 6 6 7
Arkansas........................................... 1 2 1
California......................................... 2 2 3
Colorado........................................... 5 6 6
Florida............................................ 4 4 5
Illinois........................................... 1 1 1
Kansas............................................. 1 1 2
Louisiana.......................................... 4 4 5
Maine.............................................. 1 1 1
Maryland........................................... 1 1 1
Massachusetts...................................... 1 1 2
Michigan........................................... 1 1 1
Missouri........................................... 1 1 1
Nebraska........................................... 1 2 4
New Mexico......................................... 1 1 2
New York........................................... 5 5 5
North Dakota....................................... 2 2 2
Ohio............................................... 2 3 3
Oklahoma........................................... 6 7 8
Oregon............................................. 1 1 1
South Carolina..................................... 1 1 1
Tennessee.......................................... 4 7 7
Texas.............................................. 29 33 45
Virginia........................................... 1 2 2
Washington......................................... 2 2 2
Wisconsin.......................................... 1 1 1
--- --- ---
Totals............................................. 86 99 120
=== === ===
</TABLE>
Most office facilities are leased by Pentegra, in some cases from the owner
of the Affiliated Practice using the facility. Pursuant to its Service
Agreements, Pentegra will provide all the office facilities (which it intends to
lease), dental equipment and furnishings to the Affiliated Practices.
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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. Pentegra expects to enter into
similar agreements with Affiliated Practices in the future. The actual terms of
the various Service Agreements vary from the description below on a case-by-case
basis, depending on negotiations with the individual Affiliated Practices and
the requirements of applicable law and governmental regulations.
The Service Fees payable under the Service Agreements to Pentegra by the
professional corporations or associations formed by the dentist-owners of the
Affiliated Practices were determined in arm's-length negotiations among the
parties. Those Affiliated Practices that have revenues greater than the average
amount of revenues generated by the Affiliated Practices will typically require
more administrative and other services from 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 to be 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
revenues. In addition, with respect to four of the Affiliated Practices, the
Service Fees are based on fixed fees that are subject to renegotiation on an
annual basis. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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 collect on behalf of the Founding
Affiliated Practice the fees for professional dental and other services and
products rendered or sold by the Affiliated Practice, (iii) provides, as
necessary, clerical, accounting, payroll, legal, bookkeeping and computer
services and personnel, information management, printing, postage and
duplication services and transcribing services, (iv) supervises and maintain
custody of substantially all files and records (other than patient records if
prohibited by applicable law), (v) provides facilities, equipment and
furnishings for the Affiliated Practice, (vi) orders and purchase inventory and
supplies as reasonably requested by the Affiliated Practice and (vii)
implements, in consultation with the Affiliated Practice, public relations or
advertising programs.
Pursuant to each Service Agreement, the respective Affiliated Practice
retains the decision-making power and responsibility for, among other things,
(i) hiring, compensating and supervising dentist-employees and other licensed
dental professionals, (ii) ensuring that dentists have the required licenses,
credentials, approvals and other certifications appropriate for the performance
of their duties and (iii) complying with federal and state laws, regulations and
ethical standards applicable to the practice of dentistry. In addition,
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the Affiliated Practice will be exclusively in control of all aspects of the
practice of dentistry and the provision of dental services.
Each Service Agreement is for an initial term of 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.
The Service Agreement requires the Affiliated Practice to enforce the
employment agreements between the Founding Affiliated Practice and the dentists
associated with the Affiliated Practice (the "Dentist Employment Agreements").
If the Affiliated Practice does not enforce such employment agreement, 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 is
responsible for obtaining general liability and property insurance for the
Affiliated Practice.
Upon termination of a Service Agreement, the Affiliated Practice has the
option to purchase and assume, and 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.
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.
Dentist Employment Agreements
Each Affiliated Practice will be a party to a Dentist Employment Agreement
with each dentist owner. The Dentist Employment Agreements with substantially
all of the dentists who received cash or Pentegra common stock in the
Affiliations are for an initial term of five years and continue thereafter on a
year-to-year basis until terminated under the terms of the agreements. The
Dentist Employment Agreements provide that the employee dentist will not compete
with the Affiliated Practice during the term of the
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agreement and following the termination of the agreement for a term of two years
in a specified geographical area (usually a 25 mile radius). If employment of a
dentist is terminated during the initial five-year term without the consent of
Pentegra for any reason other than the dentist's death or disability or the
occurrence of certain events outside the dentist's control, an event of default
will occur under the Service Agreement. In certain jurisdictions a covenant not
to compete may not be enforceable under certain circumstances. See "Risk
Factors -- Reliance on Affiliated Practices and Dentists."
Competition
Pentegra anticipates facing substantial competition from other companies to
establish affiliations with additional dental practices. Pentegra is aware of
several publicly traded dental practice management companies that have
operations in jurisdictions where one or more Founding 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 will operate. Each of the Affiliated Practices
faces local competition from other dentists, some of whom have more established
practices. There can be no 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.
Employees
As of March 31, 1999, Pentegra employed 34 persons at its corporate office
and 602 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.
Litigation and Insurance
The Affiliated Practices provide dental services to the public and are
exposed to the risk of professional liability and other claims. In recent years,
dentists have become subject to an increasing number of lawsuits alleging
malpractice and related legal theories. Some of these lawsuits involve large
claims and significant defense costs. Any suits or claims involving 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.
Pentegra is currently not a party to any claims, suits or complaints.
Pentegra may become subject to certain pending claims (each of which is an
ordinary routine proceeding incidental to the business of the applicable
Affiliated Practice) as the result of successor liability in connection with the
Affiliations; however, it is management's opinion that the
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ultimate resolution of those claims will not have a material adverse effect on
the financial position, operating results or cash flows of Pentegra.
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 intends to acquire similar coverage after
the closing of the Affiliations, since Pentegra, as a result of the
Affiliations, will in some cases succeed to the liabilities of the Affiliated
Practices. Therefore, claims may be asserted against Pentegra after the closing
of Affiliations for events that occurred prior to such closing.
Government Regulation
The dental services industry is regulated extensively at both the state and
federal levels. Regulatory oversight includes, but is not limited to,
considerations of fee-splitting, corporate practice of dentistry, prohibitions
on fraud and abuse, restrictions on referrals and self-referrals, advertising
restrictions, restrictions on delegation and state insurance regulation.
Corporate Practice of Dentistry and Fee-splitting Restrictions
The laws of many states 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 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 particular, recently
proposed amendments to the laws restricting the practice of dentistry by
non-dentists in the State of Texas and recently proposed amendments to the rules
of the Board of Dental Examiners of the State of Texas interpreting whether a
person or entity is engaging in the illegal practice of dentistry may make
certain terms (including the provisions relating to the computation of the
management fee) of the Combined Company's management services agreements with
its affiliated practices in Texas unenforceable. A substantial portion of the
Combined
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Company's revenues are expected to be derived from management fees earned from
the provision of management services to affiliated practices in Texas and there
can be no assurance that these proposed amendments, if adopted, will not have a
material adverse effect on the Combined Company.
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, including Alaska, Florida and Maine, limit the ability of a person
other than a licensed dentist to own or control equipment or offices used in a
dental practice. Some of these states allow leasing of equipment and office
space to a dental practice under a bona fide lease, if the equipment and office
remain under the control of the dentist. The Service Agreements that will be
entered into by Pentegra with respect to Affiliated Practices in Florida and
Maine 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 the Medicare and Medicaid programs. Because
none of the Affiliated Practices receive any revenue under Medicare or Medicaid,
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.
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The federal fraud and abuse statute prohibits, subject to certain safe
harbors, the payment, offer, solicitation or receipt of any form of remuneration
in return for, or in order to induce: (i) the referral of a person for service,
(ii) the furnishing or arranging to furnish items or services or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable under
Medicare or Medicaid. The statute reflects the federal government's policy of
increased scrutiny of joint ventures and other transactions among healthcare
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Because dental services are covered under various government
programs, including Medicare and Medicaid, this federal law applies to dentists
and the provision of dental services under those programs.
Significant prohibitions against dentist self-referrals for services
covered by Medicare and Medicaid programs were enacted, subject to certain
exceptions, by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician and dentist
self-referral legislation known as Stark I (which applied only to clinical
laboratory referrals) by dramatically enlarging the list of services and
investment interests to which the self-referral prohibitions apply. Stark II
prohibits a physician or dentist, or a member of his or her immediate family,
from making referrals for certain "designated health services" to entities in
which the physician or dentist has an ownership or investment interest, or with
which the physician or dentist has a compensation arrangement. "Designated
health services" include, among other things, clinical laboratory services,
radiology and other diagnostic services, radiation therapy services, durable
medical equipment, prosthetics, outpatient prescription drugs, home health
services and inpatient and outpatient hospital services. Stark II prohibitions
include referrals within the physician's or dentist's own group practice (unless
such practice satisfies the "group practice" exception) and referrals in
connection with the physician's or dentist's employment arrangements with the
practice (unless the arrangement satisfies the employment exception). Stark II
also prohibits billing the Medicare or Medicaid programs for services rendered
following prohibited referrals. Noncompliance with, or violation of, Stark II
can result in exclusion from the Medicare and Medicaid programs and civil and
criminal penalties. 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.
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<PAGE> 64
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.
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<PAGE> 65
MANAGEMENT
Directors and Executive Officers
As required by Pentegra's Bylaws, a majority of Pentegra's Board of
Directors are dentists who are affiliated with Affiliated Practices. The
following table sets forth certain information concerning Pentegra's directors
and the executive officers of Pentegra (ages are as of March 31, 1999):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James M. Powers, Jr., D.D.S. ....... 41 Chairman, President and Chief
Executive Officer
Omer K. Reed, D.D.S. ............... 67 Clinical Officer and Director
Sam H. Carr......................... 42 Senior Vice President, Chief
Financial Officer, Secretary and
Director
James L. Dunn, Jr. ................. 37 Senior Vice President and Chief
Development Officer
John G. Thayer...................... 46 Senior Vice President and Chief
Operating Officer
Ronnie L. Andress, D.D.S. .......... 44 Director
James H. Clarke, Jr., D.D.S. ....... 51 Director
Ronald E. Geistfeld, D.D.S. ........ 65 Director
Mack E. Greder, D.D.S. ............. 55 Director
Roger Allen Kay, D.D.S. ............ 55 Director
Gerald F. Mahoney................... 56 Director
Anthony P. Maris.................... 65 Director
George M. Siegel.................... 61 Director
Ronald M. Yaros, D.D.S. ............ 53 Director
</TABLE>
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 MBA from Vanderbuilt 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 in 1963, and is a practicing dentist
with one of the Founding Affiliated Practices. Since inception, Pentegra, Ltd.
and Napili have provided comprehensive management and consulting services to
dental practices around the nation.
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<PAGE> 66
In 1965, Dr. Reed founded the CeramDent Laboratory and he has maintained a
private dental practice in Phoenix since 1959. He has held associate
professorships in the Departments of Ecological Dentistry at the University of
North Carolina, Chapel Hill (1978-1988) and the University of Minnesota
(1982-1991), and has lectured extensively around the world on various subjects
related to the practice of dentistry. Dr. Reed also serves on the Board of
Directors of Century Companies of America, CUNA Mutual Insurance Group and the
American Volunteer Medical Team.
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.
JAMES L. DUNN, JR. has served as Pentegra's Senior Vice President and Chief
Development Officer since July 1997 and served as a Director from March 1997 to
March 1998. Since 1987, Mr. Dunn has been an attorney practicing as a sole
practitioner in Houston, Texas. His legal practice is focused on providing
services to members of the dental community. He has been actively involved in
the valuation and sale of dental practices over the past five years. In 1995,
Mr. Dunn was appointed to the Texas Medical Disclosure Panel, the body that
determines which dental procedures require informed consent. Mr. Dunn is a
member of the American Society of Pension Actuaries and is a certified public
accountant.
JOHN G. THAYER has served as Pentegra's Senior Vice President and Chief
Operating Officer since March 1997. Prior thereto, Mr. Thayer was Managing
General Partner of England and Company, a public accounting firm he co-founded
in 1983, which provides accounting and practice management counseling to health
care professionals in the Texas Gulf Coast area. In 1994, he co-founded Medtek
Management, Inc., a privately held management information company specializing
in the data processing needs of health care professionals.
RONNIE L. ANDRESS, D.D.S. has been engaged in the private practice of
dentistry in Freeport, Texas since 1995 and is President of Ronnie L. Andress,
D.D.S., Inc., one of the Founding Affiliated Practices. Prior to 1995, Dr.
Andress was engaged in the private practice of dentistry in Houston, Texas for
over 12 years.
JAMES H. CLARKE, JR., D.D.S. has been engaged in the private practice of
dentistry in Houston, Texas since 1974 and is President of James H. Clark, Jr.,
D.D.S., Inc., one of the Founding Affiliated Practices.
RONALD E. GEISTFELD, D.D.S. is Professor Emeritus at the University of
Minnesota School of Dentistry, where he has taught since 1982. Dr. Geistfeld
also maintained a part-time dental practice in Minnesota from 1973 to 1992. He
is a member of the Minnesota Dental Association, the Minneapolis District Dental
Society, the American College of Dentists, the Academy of Operative Dentistry,
the Minnesota Academy of Restorative Dentistry and the Minnesota Academy for
Gnathological Research.
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<PAGE> 67
MACK E. GREDER, D.D.S. has been engaged in the private practice of
dentistry in Omaha, Nebraska since 1970 and is President of Mack E. Greder,
D.D.S., P.C., one of the Founding Affiliated Practices.
ROGER ALLEN KAY, D.D.S. has been engaged in the private practice of
dentistry in Farmington and Livermore Falls, Maine since 1972 and is President
of Roger Allen Kay, D.D.S., P.A., one of the Founding Affiliated Practices. He
is a member of the Maine Dental Association, the American Dental Association,
the Academy of General Dentistry and the American Society of Dentistry for
Children.
GERALD F. MAHONEY has been Chairman of the Board and Chief Executive
Officer of Mail-Well, Inc., a public company engaged in printing and envelope
manufacturing with over 50 printing offices throughout the United States, since
1994. Prior thereto, he served as Chairman of the Board, President and Chief
Executive Officer of Pavey Envelope beginning in 1991. Mr. Mahoney is a
certified public accountant.
ANTHONY P. MARIS is a consultant to health care businesses. From 1987 to
1996, Mr. Maris was a Director, Vice President, Chief Financial Officer and
Treasurer of Roberts Pharmaceutical Corporation, a public company engaged in
pharmaceuticals manufacturing. Prior thereto, Mr. Maris was a Director and Chief
Financial Officer of Hoffmann -- La Roche Inc., a pharmaceutical manufacturer.
GEORGE M. SIEGEL was President and Chief Executive Officer of Parcelway
Courier Systems, Inc., a publicly traded messenger and courier business with
operations throughout North America, from 1990 to 1997. In 1993, Mr. Siegel
co-founded U.S. Delivery Systems, a public company engaged in consolidating
local messenger and delivery companies. Prior thereto, Mr. Siegel founded and
was the President and Chief Executive Officer of U.S. Messenger & Delivery
Service and Direct Dispatch Corporation, two messenger and courier service
companies that he sold to Mayne Nickless Courier System, Inc.
RONALD M. YAROS, D.D.S. has been engaged in the private practice of
dentistry in Aurora, Colorado since 1973 and is President of Ronald M. Yaros,
D.D.S., P.C., one of the Founding Affiliated Practices. He is a member of the
American Dental Association, the Colorado Dental Association, the Metro Denver
Dental Society and the Academy of General Dentistry.
Board of Directors
The Board of Directors is divided into three classes with at least three
directors in each class, with the term of one class expiring at the annual
meeting of stockholders in each year, commencing in 1998. At each annual meeting
of stockholders, directors of the class the term of which then expires will be
elected by the holders of the Common Stock to succeed those directors whose
terms are expiring. The first class, whose term of office will expire at the
first annual meeting of stockholders, is comprised of Drs. Andress, Geistfeld
and Kay; the second class, whose term will expire one year thereafter, is
comprised of Drs. Clarke, Greder and Yaros and Mr. Carr; and the third class,
whose term will expire two years thereafter, is comprised of Dr. Reed, Dr.
Powers and Messrs, Mahoney, Maris and Siegel. Pentegra's Bylaws provide that a
majority of the members of the Board of Directors must be licensed to practice
dentistry and affiliated with one of the Affiliated Practices.
There are five committees of the Board: Audit, Compensation, Acquisition,
Nominating and Executive. The members of the Audit Committee are Messrs. Maris
and Mahoney. The members of the Compensation Committee are Messrs. Maris and
Siegel. The members of the Acquisition Committee are Dr. Powers and Mr. Carr,
which
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<PAGE> 68
committee has been delegated the authority to approve the terms of any business
combination transaction involving the payment by Pentegra of consideration with
a value of up to $3,000,000. The members of the Nominating Committee are Drs.
Reed and Powers and Mr. Maris. The members of the Executive Committee are Drs.
Reed and Powers and Mr. Siegel. The members of the Audit and Compensation
Committees are not employees of Pentegra.
Directors who are employees of Pentegra or an Affiliated Practice do not
receive additional compensation for serving as directors. Each director who is
not an employee of Pentegra or an Affiliated Practice will receive a fee of
$1,500 for attendance at each Board of Directors meeting and $750 for each
committee meeting (unless held on the same day as a Board of Directors meeting),
and an initial grant of nonqualified options to purchase 10,000 shares of
Pentegra common stock (except with respect to Mr. Siegel, who has waived his
right to receive those options). Directors who are not employees of Pentegra
will also receive annual grants of nonqualified options to purchase 5,000 shares
on the first business day of the month following the date on which each annual
meeting of Pentegra's stockholders is held. See "-- 1997 Stock Compensation
Plan." All directors of Pentegra are reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof,
and for other expenses incurred in their capacity as directors of Pentegra.
Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth each component of compensation paid or
awarded to, or earned by, each person who served as Chief Executive Officer of
Pentegra during the fiscal year ended March 31, 1999 and the four other most
highly compensated executive officers serving as of March 31, 1999
(collectively, the "Named Executive Officers") for the fiscal years indicated.
<TABLE>
<CAPTION>
SECURITIES
OTHER UNDERLYING ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR $ $ $ (#) ($)(-)
--------------------------- ------ ------- ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
James M. Powers, Jr............ 1999 53,974 -- 14,256 300,000 --
D.D.S.(1)(2) 1998 -- -- -- -- --
Chairman of the Board,
President and Chief Executive
Officer
Sam H. Carr(2)................. 1999 175,000 -- 38,326 -- --
Sr. Vice President, Chief 1998 98,435 -- -- 66,666 --
Financial Officer and
Secretary
John G. Thayer(2).............. 1999 125,000 25,000 14,204 -- --
Sr. Vice President and Chief 1998 32,604 25,000 -- 33,333 --
Operating Officer
James L. Dunn, Jr.(2).......... 1999 125,000 -- 23,292 -- --
Sr. Vice President and Chief 1998 27,604 -- -- 33,333 --
Development Officer
Omer K. Reed, D.D.S.(3)........ 1999 87,500 -- 310,000 -- --
Clinical Officer and Director 1998 1,823 -- -- -- --
Member
Gary S. Glatter(4)............. 1999 167,700 -- -- -- 350,000
Former President and Chief 1998 127,604 -- -- 333,333
Executive Officer
</TABLE>
- ---------------
(1) Dr. Powers commenced his employment with Pentegra on November 13, 1998.
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<PAGE> 69
(2) The amount set forth as Other Compensation represents the expenses paid by
Pentegra in connection with the Named Executive Officer's relocation to
Phoenix, Arizona.
(3) Dr. Reed's employment agreement provides for bonus payments aggregating to
$1,250,000 payable by Pentegra in installments of $10,000 on closing of each
future dental practice affiliation subsequent to the IPO until the bonus has
been paid in full, provided that the bonus must be paid in full by March 24,
2001. During the fiscal year ended March 31, 1999, Dr. Reed was paid
$310,000 of this bonus.
(4) Mr. Glatter entered into a severance agreement with the Company effective
November 13, 1998 pursuant to which he resigned as President, Chief
Executive Officer and a director of Pentegra. Mr. Glatter was paid $350,000
by Pentegra pursuant to the agreement and forfeited all options to acquire
shares of Pentegra common stock previously issued to him.
The following table provides information on stock option grants to the
Named Executive Officers in the fiscal year ended March 31, 1999 under the 1997
Stock Compensation Plan.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION PRESENT
GRANTED(1) FISCAL YEAR PRICE($/SH.) DATE VALUE($)(2)
---------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
James M. Powers, Jr., DDS....... 150,000 43.5% $3.19 03/24/03 $256,185
150,000 43.5% $6.13 03/24/03 $172,607
Sam H. Carr..................... -- -- -- -- --
John G. Thayer.................. -- -- -- -- --
James L. Dunn, Jr. ............. -- -- -- -- --
Omer K. Reed, DDS............... -- -- -- -- --
Gary S. Glatter................. -- -- -- -- --
</TABLE>
- ---------------
(1) The options granted to Dr. Powers vest annually in 20% increments beginning
on March 24, 1999. Additionally, Pentegra approved the grant of certain
contingent options to Dr. Powers. See "-- Acquisition of Liberty Dental
Alliance."
(2) The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield 0%, expected volatility of 0.50, risk-free
interest rate of 5.62% and expected life of five years.
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<PAGE> 70
The following table sets forth certain information with respect to
unexercised options to purchase Common Stock held by the Named Executive
Officers at March 31, 1999. None of the Named Executive Officers exercised
options in 1998.
YEAR-END 1999 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS HELD AT MARCH 31, 1999 MARCH 31, 1999(1)
------------------------------- ------------------------------
EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
James M. Powers, Jr.,
D.D.S................ 60,000 240,000 $0 $0
Sam H. Carr............ 13,333 53,334 0 0
John G. Thayer......... 6,667 26,666 0 0
James L. Dunn, Jr. .... 6,667 26,666 0 0
Omer K. Reed, D.D.S.... -- -- -- --
</TABLE>
- ---------------
(1) The closing price per share of Pentegra common stock as reported on the AMEX
on March 31, 1998 was $1.6875. The exercise prices for the options
previously granted to the Named Executive Officers range from $3.19 to $8.50
per share. Thus, no options held by the Named Executive Officers are
in-the-money.
(2) All these options become immediately exercisable on a change in control of
Pentegra.
Employment Agreements
Pentegra has entered into employment agreements with Drs. Reed and Powers
and Messrs. Carr, Dunn and Thayer. Each of these agreements provides for an
annual base salary in an amount not less than the initial specified amount and
entitles the employee to participate in all Pentegra's compensation plans in
which other executive officers of Pentegra participate. Dr. Reed's employment
agreement provides that he will serve as Pentegra's clinical officer and has a
three-year term commencing on completion of the IPO. Dr. Reed's base salary
under the employment agreement will be $87,500 per year, or as increased from
time to time by the Board of Directors, and provides for bonus payments
aggregating $1,250,000 payable by Pentegra in installments of $10,000 on closing
of each future dental practice affiliation subsequent to the IPO until the bonus
has been paid in full, provided that the bonus must be paid in full by March 24,
2001. Dr. Powers' employment agreement provides that he shall serve as the
Chairman, President and Chief Executive Officer of Pentegra for a term of two
years commencing on November 13, 1998 at a base annual salary of $200,000, plus
bonus payments of up to 25% of the base salary upon achievement of certain
earnings per share targets. Each of the agreements for Messrs. Carr, Dunn and
Thayer has a continuous five-year term with an annual base salary of $175,000
for Mr. Carr and a base salary of $125,000 for each of the other officers, and
is subject to the right of Pentegra to terminate the employee's employment at
any time. For purposes of determining the applicable year's earnings per share
change, the cash bonuses payable under all other employment agreements between
Pentegra and its officers will be taken into account. Each of the other Named
Executive Officers (except Drs. Reed and Powers) is eligible to receive an
annual cash bonus in an amount equal to 5%, 10%, 15%, 20% or 25% of his or her
base salary in the event that Pentegra experiences 20% to 22.5%, 22.5% to 25%,
25% to 27.5%, 27.5% to 30% or greater than 30%, respectively, growth in earnings
per share on a year-to-year basis (calculated on a pro forma basis for the
calendar year prior to Pentegra's first fiscal year of operations). For purposes
of
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<PAGE> 71
determining the applicable year's earnings per share change, the cash bonuses
payable to the officer and under all other employment agreements between
Pentegra and its officers will be taken into account.
If the employee's employment is terminated by Pentegra without cause (as
therein defined), Dr. Powers and Messrs. Carr, Dunn and Thayer will be entitled
to a payment equal to 12 months' salary, and Dr. Reed will be entitled to a
payment equal to the salary payable over the remaining term of his employment
agreement. Each of the foregoing agreements also contains a covenant limiting
competition with Pentegra for one year following termination of employment.
1997 Stock Compensation Plan
In August 1997, the Board of Directors adopted, and the stockholders of
Pentegra approved, the 1997 Stock Compensation Plan. The purpose of the 1997
Stock Compensation Plan is to provide Pentegra's employees, non-employee
directors and advisors and employees and directors of Affiliated Practices with
additional incentives by increasing their proprietary interest in Pentegra. The
aggregate number of shares of common stock with respect to which options and
awards may be granted under the 1997 Stock Compensation Plan may not exceed
2,000,000 shares.
The 1997 Stock Compensation Plan provides for the grant of incentive stock
options ("ISOs"), as defined in Section 422 of the Code, nonqualified stock
options (collectively with ISOs, "Options") and restricted stock awards
("Awards"). The 1997 Stock Compensation Plan is administered by the Compensation
Committee of the Board of Directors, which must be comprised of not less than
two members of the Board of Directors (the "Committee"). Prior to the
consummation of the IPO, the 1997 Stock Compensation Plan was administered by
Pentegra's full Board of Directors. The Committee has, subject to the terms of
the 1997 Stock Compensation Plan, the sole authority to grant Options and Awards
under the 1997 Stock Compensation Plan, to interpret the 1997 Stock Compensation
Plan and to make all other determinations necessary or advisable for the
administration of the 1997 Stock Compensation Plan.
All of Pentegra's employees, non-employee directors and advisors and
employees and directors of Affiliated Practices are eligible to receive
nonqualified stock options and Awards under the 1997 Stock Compensation Plan,
but only employees of Pentegra are eligible to receive ISOs. Options will be
exercisable during the period specified in each option agreement and will
generally be exercisable in installments pursuant to a vesting schedule to be
designated by the Committee. Notwithstanding the provisions of any option
agreement, options will become immediately exercisable in the event of certain
events including certain Merger or consolidation transactions and changes in
control of Pentegra. No Option will remain exercisable later than ten years
after the date of grant (or five years from the date of grant in the case of
ISOs granted to holders of more than 10% of the outstanding common stock). An
Award grants the recipient the right to receive a specified number of shares of
Common Stock, which shall become vested over a period of time, not exceeding 10
years, specified by the Committee. Restricted stock transferred to a recipient
shall be forfeited upon the termination of the recipient's employment or service
other than for death, permanent disability or retirement unless the Committee,
in its sole discretion, waives the restrictions for all or any part of an Award.
The exercise price for ISOs granted under the 1997 Stock Compensation Plan
may be no less than the fair market value of the Common Stock on the date of
grant (or 110% of the fair market value in the case of ISOs granted to employees
owning more than 10% of
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<PAGE> 72
the common stock). The exercise price for nonqualified options granted under the
1997 Stock Compensation Plan may not be less than the fair market value of the
Common Stock on the date of grant.
Payment upon exercise of an Option may be made in cash or by check, by
means of a "cashless exercise" involving the sale of shares by, or a loan from,
a broker, or, in the discretion of the Committee, by delivery of shares of
common stock, by payment of the par value of the shares subject to the Option
plus a promissory note for the balance of the exercise price or in any other
form of valid consideration permitted by the Committee.
There are generally no federal income tax consequences upon the grant of an
Option under the 1997 Stock Compensation Plan. Upon exercise of a nonqualified
option, the optionee generally will recognize ordinary income in an amount equal
to the difference between the fair market value of the shares at the time of
exercise and the exercise price, and Pentegra is generally entitled to a
corresponding deduction. When an optionee sells shares issued upon the exercise
of a nonqualified stock option, the optionee generally recognizes capital gain
or loss equal to the difference between the amount realized on the sale and the
adjusted tax basis of the shares (generally, the exercise price plus the amount
of ordinary income recognized by the optionee at the time of exercise). The
capital gain or loss will be short-term or long-term capital gain or loss,
depending on the length of the holding period of the shares. If the optionee
holds the shares for more than one year, the capital gain or loss will be
long-term capital gain or loss. Otherwise, the capital gain or loss will be
short-term capital gain or loss. Pentegra is not entitled to any deduction in
connection with such sale.
An optionee will not be subject to federal income taxation upon the
exercise of ISOs granted under the 1997 Stock Compensation Plan, and Pentegra
will not be entitled to a federal income tax deduction by reason of such
exercise. A sale of shares of Common Stock acquired upon exercise of an ISO that
does not occur within one year after the date of exercise or within two years
after the date of grant of the option generally will result in the recognition
of long-term capital gain or loss by the optionee in an amount equal to the
difference between the amount realized on the sale and the exercise price, and
Pentegra is not entitled to any deduction in connection therewith. If a sale of
shares of Common Stock acquired upon exercise of an ISO occurs within one year
from the date of exercise of the option or within two years from the date of the
option grant (a "disqualifying disposition"), the optionee generally will
recognize ordinary income equal to the lesser of (i) the excess of the fair
market value of the shares on the date of exercise of the options over the
exercise price or (ii) the excess of the amount realized on the sale of the
shares over the exercise price. Any amount realized on a disqualifying
disposition in excess of the amount treated as ordinary income will be long-term
or short-term capital gain, depending upon the holding period of the shares.
Pentegra generally will be entitled to a tax deduction on a disqualifying
disposition corresponding to the ordinary income recognized by the optionee.
For alternative minimum tax purposes, the difference between the fair
market value, on the date of exercise, of Common Stock purchased upon the
exercise of an ISO, and the exercise price increases alternative minimum taxable
income. Additional rules apply if an optionee makes a disqualifying disposition
of the Common Stock.
Pentegra has (i) outstanding options to purchase a total of 673,333 shares
of common stock under the 1997 Stock Compensation Plan and (ii) 1,326,667
additional shares available for future awards under the 1997 Stock Compensation
Plan.
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<PAGE> 73
Certain Transactions
In connection with the formation of Pentegra, in February 1997, Pentegra
Investments, Inc., a Delaware corporation and, as of March 30, 1998, a wholly
owned subsidiary of Pentegra ("PII"), issued common stock to J. Michael Casas, a
former director of Pentegra (200,000 shares), James L. Dunn, Jr. (100,000
shares), John G. Thayer (66,667 shares) and Allen M. Gelwick, a former director
of Pentegra, (66,667 shares), at a purchase price per share of $0.015. In May
1997, PII issued Class B Preferred to J. Michael Casas (66,667 shares) and James
L. Dunn, Jr. (33,334 shares), at a purchase price per share of $0.01. In May
1997, PII issued Common Stock to George M. Siegel (300,000 shares), Dr. Reed
(150,000 shares), Kelly W. Reed (150,000 shares) and Stephen E. Stapleton
(33,333 shares) at a purchase price per share of $0.015. In September 1997 and
October 1997, PII repurchased 46,667 shares and 20,000 shares, respectively, of
its common stock from George M. Siegel at a purchase price per share of $0.015.
In September 1997, Pentegra issued 66,667 shares of common stock to Sam H. Carr
at a purchase price per share of $0.015.
In connection with the raising of $1,450,000 by PII in order to fund a
portion of the expenses for the IPO in June 1997, PII issued capital stock to
Dr. Reed (37,500 shares of preferred stock and 7,500 shares of common stock),
Gary S. Glatter (37,500 shares of preferred stock and 7,500 shares of common
stock), George M. Siegel (37,500 of preferred stock and 7,500 shares of common
stock), Mack E. Greder, D.D.S. (25,000 shares of preferred stock and 5,000
shares of common stock) and Roger Allen Kay, D.D.S. (25,000 shares of preferred
stock and 5,000 shares of common stock), at a purchase price per share of $1.00
for the preferred stock and of $0.015 for the common stock.
In September 1997, (i) each owner of shares of common stock of PII agreed
to exchange those shares for shares of common stock of Pentegra on a one-for-one
basis and (ii) each of Dr. Reed and Messrs. Glatter, Dunn, Casas and Siegel
agreed to sell to PII all shares of preferred stock he owns at a price per share
equal to the subscription price he paid to PII for those shares, which
transactions were consummated concurrently with the closing of the IPO. In
addition, immediately after the completion of the repurchases described in the
foregoing sentence, all outstanding shares of preferred stock of PII was
redeemed by PII at a redemption price, as established by resolution of the board
of directors of PII, of $1.50 per share, of which $1.15 per share was paid in
cash from the proceeds of the IPO and $0.35 per share was paid in the form of a
6.0% promissory note that becomes due and payable by Pentegra on the earlier of
the fifth anniversary of the date of the closing of the IPO or the date on which
Pentegra offers and sells an amount of equity securities for gross proceeds
equal to or greater than the gross proceeds from the IPO.
In December 1997, the owners of the outstanding shares of common stock of
PII agreed to sell to PII on a pro rata basis at a purchase price of $.015 per
share, an aggregate of 909,237 shares (approximately 51.8% of each such
stockholder's shares), which sale has been consummated in accordance with that
agreement.
Pentegra purchased substantially all the tangible and intangible assets of
Pentegra, Ltd. and Napili for consideration of $200,000 upon completion of the
IPO. Of the $200,000 in consideration, $100,000 was paid from the proceeds of
the IPO and $100,000 was paid in the form of a 9.0% promissory note due April 1,
1999. This purchase price was negotiated by Mr. Glatter, on behalf of Pentegra,
by Dr. Reed, on behalf of himself, and by the administrators of the Reed Family
Trust, and was approved unanimously by Pentegra's Board of Directors, which Dr.
Reed serves on as Chairman of the Board.
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Dr. Reed beneficially owns approximately 51.0% of the capital stock of each of
Pentegra, Ltd. and Napili and the Reed Family Trust (which is administered by,
and whose beneficiaries are, the children of Dr. Reed) beneficially owns 49% of
the capital stock of each of Pentegra, Ltd. and Napili. The assets that Pentegra
acquired from Pentegra, Ltd. and Napili include office furniture and equipment,
marketing systems, recall systems, telephone systems, customer/client lists,
books and records and video tapes.
From February 1997 to January 1998, Pentegra occupied and had access to the
facilities, equipment and staff of James L. Dunn & Assoc., Inc., an affiliate of
James L. Dunn, Jr. Beginning June 1, 1997, Pentegra agreed to compensate James
L. Dunn & Assoc., Inc. for use of and access to its office facilities, equipment
and staff at the rate of $10,000 per month. James L. Dunn & Assoc., Inc. also
provided Pentegra monthly invoices for delivery, telephone, travel and other
out-of-pocket expenses and obtained reimbursement for those expenses from
Pentegra. Through March 31, 1998, Pentegra has reimbursed James L. Dunn &
Assoc., Inc. for approximately $11,600 of such expenses. Pentegra believes that
the compensation paid to James L. Dunn & Assoc., Inc. represents the fair market
value of the services (which includes the shared use of two clerical employees,
use of office furniture, copy machines, computers and other office equipment,
and office supplies) provided to Pentegra.
Pentegra has leased a portion of the office facilities, equipment and staff
of Pentegra, Ltd., which is wholly owned by Dr. Reed, beginning June 1, 1997.
Pentegra has agreed to compensate Pentegra, Ltd. for use of and access to its
office facilities, equipment and staff at the rate of $11,000 per month.
Pentegra, Ltd. will also provide Pentegra a monthly invoice for delivery,
postage, telephone, travel and other out-of-pocket expenses and obtain
reimbursement for those expenses from Pentegra. Through March 31, 1998, Pentegra
reimbursed Pentegra, Ltd. and Napili for approximately $8,000 of such expenses.
Pentegra believes that the compensation to be paid to Pentegra, Ltd. represents
the fair market value of the goods and services (which includes utilities,
furniture, office equipment and clerical services) being provided to Pentegra
under this arrangement.
The following table provides certain information concerning the
affiliations with the directors of Pentegra who own an Affiliated Practice:
<TABLE>
<CAPTION>
CONSIDERATION RECEIVED
DEBT AND -------------------------------
ASSETS LIABILITIES NUMBER OF VALUE OF
FOUNDING AFFILIATED PRACTICE CONTRIBUTED(1) ASSUMED SHARES SHARES(2) CASH
---------------------------- -------------- ----------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Ronnie L. Andress, D.D.S., Inc....... 111,690 181,623 101,801 865,308 216,326
James H. Clarke, Jr., D.D.S., 148,515 54,000 70,632 600,372 150,092
Inc. ..............................
Mack E. Greder, D.D.S., P.C. ........ 48,067 37,505 67,380 572,730 143,183
Roger Allen Kay, D.D.S., P.A. ....... 2,837 4,816 67,773 576,070 144,017
Omer K. Reed, D.D.S. ................ 5,495 0 36,821 312,978 --
Ronald M. Yaros, D.D.S., P.C. ....... 139,371 29,570 139,214 1,183,319 295,830
</TABLE>
- -------------------------
(1) Assets contributed reflects the historical book value of the nonmonetary
assets of each practice transferred to Pentegra. These nonmonetary assets
are reflected at historical cost in accordance with SAB No. 48. All monetary
assets are recorded at fair value, which is approximated by the historical
costs recorded by the practices. The consideration paid by Pentegra for each
of these Founding Affiliated Practices was determined by negotiations
between executive officers of Pentegra not affiliated with any Founding
Affiliated Practice and a representative of that Founding Affiliated
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<PAGE> 75
Practice. Pentegra used the same valuation method to negotiate the
consideration being paid to each of the Founding Affiliated Practices,
including the respective practices wholly owned by Drs. Reed, Andress,
Clarke, Greder, Kay and Yaros, which method was based upon the Founding
Affiliated Practice's gross revenue net of certain operating expenses, and
Pentegra's assessment of growth potential.
(2) Based upon a price of $8.50 per share, the offering price in Pentegra's IPO.
It is anticipated that future transactions with affiliates of Pentegra will
be minimal, will be approved by a majority of the disinterested members of the
Board of Directors and will be made on terms no less favorable to Pentegra than
could be obtained from unaffiliated third parties. Pentegra does not intend to
incur any further indebtedness to, or make any loans to, any of its executive
officers, directors or other affiliates.
Security Ownership of Certain Beneficial Owners and Management
The following table shows, as of March 31, 1999 the "beneficial ownership"
of the Pentegra common stock of (i) each director, (ii) each executive officer,
(iii) all executive officers and directors of Pentegra as a group and (iv) each
person who owns more than 5% of the outstanding common stock. The address of
each person in the table is c/o Pentegra Dental Group, Inc., 2999 North 44th
Street, Suite 650, Phoenix, Arizona 85018.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
CLOSING(1) CLOSING(1)
-------------------- --------------------
NUMBER PERCENT NUMBER PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Omer K. Reed, D.D.S. ................ 135,200(2) 1.5% 135,200(2) 1.2%
James M. Powers, Jr., D.D.S. ........ 125,865(3) 1.4% 125,865(3) 1.1%
Sam H. Carr.......................... 45,494(4) * 45,494(4) *
James L. Dunn, Jr. .................. 51,691(5) * 51,691(5) *
John G. Thayer....................... 38,827(5) * 38,827(5) *
Ronald M. Yaros, D.D.S. ............. 152,214 1.7% 152,214 1.4%
George M. Siegel..................... 116,180 1.3% 116,180 1.1%
Ronnie L. Andress, D.D.S. ........... 102,101 1.1% 102,101 *
James H. Clarke, Jr., D.D.S. ........ 70,632 * 70,632 *
Roger Allen Kay, D.D.S. ............. 70,185 * 70,185 *
Mack E. Greder, D.D.S. .............. 114,884(6) 1.3% 114,884(6) 1.1%
Ronald E. Geistfeld, D.D.S. ......... 1,000 * 1,000 *
Gerald F. Mahoney.................... 5,000(7) * 5,000(7) *
Anthony P. Maris..................... 9,000(8) * 9,000(8) *
All executive officers and directors
as a group (14 persons)............ 1,038,273 11.3% 1,038,273 9.4%
</TABLE>
- -------------------------
* less than 1%.
(1) Shares shown in the above table do not include shares that could be acquired
upon exercise of currently outstanding stock options which do not vest
within 60 days of the date of this Joint Proxy Statement/Prospectus. All
computations are based upon
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<PAGE> 76
9,102,503 shares outstanding prior to the consummation of the Merger and
10,902,503 shares outstanding following the consummation of the Merger.
(2) Includes 2,400 shares owned by OMR Trust, of which Dr. Reed is the
beneficiary. Excludes shares owned by Dr. Reed's adult children.
(3) Includes 60,000 shares that may be acquired upon the exercise of incentive
and nonqualified stock options and 10,858 shares that may be acquired upon
the conversion of a convertible promissory note.
(4) Includes 13,333 shares that may be acquired upon the exercise of an
incentive stock option.
(5) Includes 6,666 shares that may be acquired upon the exercise of an incentive
stock option.
(6) Includes 900 shares owned by Dr. Greder's IRA and 2,618 shares owned by Dr.
Greder's spouse's IRA.
(7) Consists of shares that may be acquired upon the exercise of a nonqualified
stock option.
(8) Includes 5,000 shares that may be acquired upon the exercise of a
nonqualified stock option.
DESCRIPTION OF CAPITAL STOCK
Pentegra's authorized capital stock consists of 40,000,000 shares of Common
Stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.001 per share ("Preferred Stock"). At March 31, 1999, 9,102,503 shares
of Common Stock were issued and outstanding and held of record by 157
stockholders. The following summary is qualified in its entirety by reference to
Pentegra's Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Joint Proxy Statement/ Prospectus is a
part.
COMMON STOCK
Pentegra common stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, and each share has one
vote. Pentegra common stock affords no cumulative voting rights, and the holders
of a majority of the shares voting for the election of directors can elect all
the directors if they choose to do so. The common stock carries no preemptive
rights, is not convertible, redeemable or assessable. The holders of Pentegra
common stock are entitled to dividends in such amounts and at such times as may
be declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy" for information regarding Pentegra's dividend policy.
PREFERRED STOCK
Pentegra preferred stock may be issued from time to time by Pentegra's
Board of Directors as shares of one or more series. Subject to the provisions of
Pentegra's Certificate of Incorporation and limitations prescribed by law, the
Board of Directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional, exchange or
other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation
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preferences of the shares constituting any class or series of Pentegra preferred
stock, in each case without any further action or vote by the holders of
Pentegra common stock.
Although Pentegra has no present intention to issue shares of preferred
stock, the issuance of shares of preferred stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For example, the issuance of a series of preferred stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of preferred stock could adversely affect the voting power of the
holders of the Pentegra common stock. Although the board of directors is
required to make any determination to issue such stock based on its judgment as
to the best interests of the stockholders of Pentegra, the board of directors
could act in a manner that would discourage an acquisition attempt or other
transaction that some or a majority of the stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock over the then-market price of such stock. The board of directors does not
at present intend to seek stockholder approval prior to any issuance of
currently authorized stock, unless otherwise required by law or the rules of any
market on which Pentegra's securities are traded.
STATUTORY BUSINESS COMBINATION PROVISION
Pentegra is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer) or (iii) following the
transaction in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Section 203, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
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OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission. Pentegra's Certificate of
Incorporation limits the liability of directors of Pentegra to Pentegra or its
stockholders to the fullest extent permitted by Delaware law. Specifically,
directors of Pentegra will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL.
The inclusion of this provision in Pentegra's Certificate of Incorporation
may have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefitted Pentegra and its
stockholders. Pentegra's Bylaws provide indemnification to Pentegra's officers
and directors and certain other persons with respect to certain matters.
The Bylaws provide that, from and after the first date that Pentegra has
received funding from the sale of capital stock in an initial public offering,
the stockholders may act only at an annual or special meeting of stockholders
and may not act by written consent. The Bylaws provide that special meetings of
the stockholders can be called only by the Chairman of the Board, the Chief
Executive Officer, the President or the Board of Directors.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered terms. As a result,
it is currently contemplated that approximately one-third of Pentegra's Board of
Directors will be elected each year. The classified board provision could
prevent a party who acquires control of a majority of the outstanding voting
stock of Pentegra from obtaining control of the Board of Directors until the
second annual stockholders' meeting following the date the acquirer obtains the
controlling interest. In addition, Pentegra's Bylaws provide that a majority of
the members of the Board of Directors must be licensed dentists affiliated with
one of the Affiliated Practices. See "Management -- Directors and Executive
Officers."
The Certificate of Incorporation provides that the number of directors
shall be as specified in the Bylaws. The Bylaws provide that the number of
directors shall be determined by the Board of Directors from time to time, but
shall be at least one and not more than nineteen. It also provides that
directors may be removed only for cause, and then only by the affirmative vote
of the holders of at least a majority of all outstanding voting stock entitled
to vote. This provision, in conjunction with the provision of the Bylaws
authorizing the Board of Directors to fill vacant directorships, will prevent
stockholders from removing incumbent directors without cause and filling the
resulting vacancies with their own nominees.
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INFORMATION ABOUT OMEGA
DESCRIPTION OF BUSINESS
Introduction
Omega provides management and marketing services primarily to Orthodontic
and other specialty dental practices in the United States. Since its inception
in August 1996, Omega has provided these services on a fee for services basis.
Following its initial public offering on October 1, 1997, Omega has typically
offered its services under an affiliate relationship with each practice. Under
this arrangement, Omega purchases the equity interests in a management services
organization ("MSO") that holds certain assets of and is associated with an
affiliate of Omega ("Affiliated Practices" or "Orthodontic Affiliate(s)") and
enters into a long-term management services agreement ("Management Services
Agreement") with the Orthodontic Affiliate.
As of December 31, 1998, Omega had 15 operating Orthodontic Affiliates,
consisting of 18 doctors in 10 states. Of the 15 Orthodontic Affiliates, one is
based on an interim management agreement with the practice under terms similar
to its standard affiliation agreement.
Business Operations
Pursuant to its Management Service Agreements, Omega receives a monthly
management fee for providing facilities, support staff and supplies to its
Affiliated Practices and institutes a program of systems, methods and procedures
Omega refers to as the Omega Exceptional Practice Model (the "Model"). The Model
is designed to increase the Orthodontic Affiliate's profitability by focusing on
and improving customer service while simultaneously reducing costs and
increasing operating efficiency.
Since its inception, Omega has sought to affiliate with established
orthodontic and other specialty dental practices that Omega believes have the
potential for significant growth utilizing the Model. Omega considers financial
and operational factors that include the practice's gross income, cost
structure, existing treatment contracts, fees, schedules, referral rates and
sources, health maintenance organization relationships, case starts,
appointments per day and average treatment times. Omega also evaluates
demographic factors that include the practice's location with respect to the
average income levels and concentration of families with children in the area.
Omega's strategy is to (i) enter into affiliation relationships and
Management Service Agreements with established orthodontic practices that meet
Omega's criteria and (ii) achieve operating efficiencies and increased
profitability for each such practice through implementation of the Model. The
Model is designed to permit the practice to meet or exceed patient expectations
by (a) offering flexible payment plans, (b) scheduling convenient appointment
times, (c) ensuring that treatment is delivered on time, (d) updating patients
and their referring dentists regularly on treatment programs and (e) training
staff to anticipate and address patient needs.
To date, Omega has focused its marketing efforts on the practices of the
approximately 4,500 orthodontists over the age of 47 who Omega believes are
planning their transition to retirement. Omega believes it can generally place a
higher value on a mature practice than other potential affiliates or buyers,
many of whom are recent orthodontic graduates. Omega believes that this higher
valuation, combined with consideration in the form of a combination of cash,
notes and Omega's common stock and
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the opportunity to delegate managerial and marketing responsibilities to an
experienced management team, generally makes affiliation with Omega an
attractive alternative for orthodontists planning their transition to
retirement. Omega also targets younger orthodontists who may want to merge their
practices with the practice of an orthodontist in transition or take over such a
practice.
The Orthodontic Industry
General. Omega believes that the annual market for orthodontic treatment
and services is approximately $3.6 billion. Based on U.S. census data that
indicate that the number of children between the ages of 5 and 19 will increase
by approximately 10.4 million by the year 2000, Omega expects that the growth in
this population group will result in increased demand for orthodontic services.
The orthodontic marketplace is highly fragmented and consists of approximately
9,000 practicing orthodontists, a significant majority of whom are sole
practitioners. Omega believes that many of the orthodontists in practice today
have excess patient capacity and lack the training and resources in management
and marketing techniques to fill that capacity effectively. It is Omega's belief
that less than 5% of the orthodontic practices in the United States are
presently managed by independent, professional management service organizations
and that an opportunity exists for Omega to market and sell its services to the
orthodontic practices that are not currently managed by such organizations.
The projected growth of the orthodontics market derives from several
demographic and economic factors. Omega believes that the number of patients of
prime orthodontic treatment age (12 years old) will likely remain at a level
that is 15% higher in the 10 years ending in 2002 than in the prior 10-year
period. Also, although orthodontic treatment has been historically viewed as an
expensive elective, advances in practice methods and technologies have made it
relatively more affordable. As a result, orthodontic treatment is being sought
by a broadening segment of American society.
Orthodontic Practice Dynamics. Although there exists a large and growing
demand for orthodontic services in the United States, Omega believes that the
orthodontic industry is presently ill-prepared to meet that demand.
Orthodontists, the vast majority of whom are sole practitioners, are often
highly skilled clinicians but generally are not trained in marketing themselves
as professional service providers. Most rely on referrals from other dentists
and from current or past patients. Accordingly, Omega believes that achieving
sustainable growth through referrals requires both clinical excellence and a
patient focus that emphasizes value, flexibility and efficiency.
In order to increase profitability, Omega believes that orthodontists must
improve their management and marketing techniques. Unlike many other medical and
dental specialties, orthodontics involves treatment delivered over a period of
two to three years for a fixed fee. Much of the treatment can be provided
efficiently by the orthodontist delegating certain clinical and communications
tasks to trained assistants. Omega believes that creative management and
effective delegation will reduce per patient treatment costs. In addition, Omega
believes that the well managed orthodontic practice will also be able to handle
a larger patient base, and, with a patient centered emphasis on the quality and
efficiency of the services it offers, will expand that base through professional
and patient referrals. As a result, Omega believes that an orthodontic practice
with a qualified and capable orthodontist operating under a well-designed
efficient schedule and utilizing professional management and marketing practices
is capable of enhancing its profitability.
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Market for Orthodontic Practices. The value of orthodontic practices in the
United States has fallen for the past several years. The number of potential
sellers, generally orthodontists approaching retirement age, is relatively large
compared to the potential purchasers. This downward pressure on prices for
orthodontic practices results primarily from the fact that approximately 4,500,
or 50%, of the practicing orthodontists in the United States are over the age of
47. Omega believes that many are looking to make a transition out of active
practice while realizing as much value as possible from the goodwill they have
built up over their years in practice.
State laws governing the practice of dentistry and its specialties and the
shrinking number of orthodontic graduates intending to practice in the United
States have combined to limit the number of potential purchasers of orthodontic
practices. State dental practice statutes and professional codes generally
provide that only orthodontists may own, operate or control an orthodontic
practice. These restrictions have functioned to depress the market for
orthodontic practices and have inhibited the development of professional
management in the industry.
Another major factor in limiting the value of orthodontic practices is the
historic oversupply of orthodontists in the United States which has reduced the
number of recent orthodontic graduates. In addition, many of the more recent
graduates are foreign students who plan to return to their own countries. The
orthodontic graduates who seek to buy a practice generally have student loans
and limited financial resources. As a result, Omega believes that the average
purchase price for an orthodontic practice has fallen from roughly one year's
gross revenues to approximately 70% of that number. In addition, the selling
orthodontists often must finance the purchase by accepting a note for a
significant part of the purchase price and, in order to ensure that the practice
performs well enough to service the debt, often must stay involved in the
management and marketing of the practice.
Business Strategy
Over the past year, Omega's strategy has been to seek out and affiliate
with established orthodontic practices that it believes have potential for
significant growth utilizing the Model. Upon the consummation of an affiliation,
Omega implements the Model in an effort to achieve operating efficiencies and
increase profitability for the practice.
At the present time, Omega believes that due to its size and limited
capital resources, the ability of the Company to continue external expansion
will depend upon the availability of additional financing to fund additional
affiliations, which may be obtained through the development of strategic
alliances with other companies. Over the past year, the Company has evaluated
and held discussions regarding such potential strategic alliances with other
companies, which culminated on March 15, 1999 when Omega and Pentegra signed the
Merger Agreement.
The Company's future success will largely depend upon its ability to
increase the internal rate of return from its current practices, as well as to
lower current operating costs. Omega believes that the addition of nine new
practices in the twelve months ended December 31, 1998, three of which were
consummated in the third quarter of 1998, will contribute significantly to
future revenues.
In affiliating with the new practices and in searching for future
affiliates, Omega will continue to conduct a comprehensive analysis of the
prospective affiliate, including a
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thorough financial and operational review and evaluation of staff, facilities,
equipment and systems. Initially, an estimate of the current value of the
practice is calculated based on the practice's gross income, net profit and new
treatment contracts written during the prior twelve months. Omega evaluates the
practice's capacity for improvement under the Model by analyzing (i) the number
of new patient exams, treatment starts, patients in active treatment and
patients seen per day, (ii) the fees charged for different treatments, (iii) the
costs incurred by the practice for employees, facilities, supplies and
laboratory work and (iv) the number of treatment chairs and dental and clinical
assistants and the square footage of office space employed by the practice.
Also, current staff are interviewed to determine their suitability for and
commitment to the practice, and facilities and equipment are reviewed to ensure
that they will support a larger and growing practice without significant
additional cost. Finally, Omega analyzes the prospective affiliate's current
systems for starting new patients, reviewing treatment programs, scheduling,
communicating with patients and referral sources, marketing and controlling
expenses, and the cost of upgrading or replacing the systems.
Omega seeks practices that have the capacity to increase their
profitability initially through improved performance on existing patient bases
rather than through immediately increasing new patient exams. Omega generally
requires that practices demonstrate the potential to grow approximately 40% with
a relatively small increase in new patient exams. Practices that have developed
strong professional referral relationships and have attractive locations and
facilities are preferred over those that rely on mass marketing techniques and
health maintenance organization relationships to grow.
Omega also evaluates demographic factors affecting the practice. Practices
located where there are significant concentrations of families with young
children are attractive, particularly when the families have higher incomes than
the national average and these populations are stable or growing. To date, Omega
has focused its efforts on locating practices in the South or far West of the
United States. At year end 1998, Affiliated Practices were situated in the
following locales: Goodyear and Bullhead City, Arizona; Huntington Beach, Acton,
Hawthorne, Garden Grove, Woodland Hills, and Encino, California; Colorado
Springs, Colorado; Champaign, Illinois; Elko and Reno, Nevada; Austin, Texas;
Conyers, Georgia; Bend, Oregon; Glen Allen, Virginia; and Watertown, Brookings
and Sisseton, South Dakota.
If the practice satisfies Omega's criteria for an affiliation, an offer is
made for the practice to become an Affiliated Practice. Omega outlines proposed
financial terms of the affiliation, including Omega's valuation of the practice
and the amount of cash, notes and shares of Omega's common stock that Omega
proposes to pay to acquire the equity interests in the MSO associated with the
practice. Once the basic business terms of the affiliation are agreed to, the
parties proceed to execute an affiliation agreement and the related practice
Management Services Agreement. Omega has paid, on average for each of its
current Affiliated Practices, an aggregate purchase price per MSO of
approximately $567,000, of which the cash portion was approximately $292,000
and, in certain cases, issued notes bearing interest ranging between 8.0% and
8.5% and ranging between $30,000 and $374,000.
Implementing the Omega Exceptional Practice Model. The Model is patient
centered and designed to promote customer service and increase the Orthodontic
Affiliate's productivity while permitting the orthodontist practicing at the
Orthodontic Affiliate (the "Affiliated Orthodontist") to continue to deliver
quality orthodontic treatment. The Model focuses the orthodontic team on
understanding patient expectations and provides the
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orthodontic team with the training, systems and other tools necessary to meet or
exceed those expectations. The Model is generally implemented in the Affiliated
Practice over a period of 12 months and involves the active participation of
Omega's professional staff, the Affiliated Orthodontist and his or her staff, as
well as a practice facilitator assigned by Omega to oversee the entire
installation of the Model, monitor its progress and provide follow-up support.
Customer service permeates all aspects of the Model. Omega provides a
scheduling system that offers patients a wide choice of appointment times,
including night and weekend appointments. The scheduling system also carefully
plans the Affiliated Orthodontist's time so that the patient is seen on schedule
and the treatment is performed within the allotted appointment time. The Model
offers flexible payment plans that meet the varying financial situations of the
patients and provides for the review of insurance benefits and credit issues
with the patient in advance so that patients coming to a first exam will have
sufficient information at the end of that exam to commit to the proposed plan of
treatment.
Omega believes that good communication between patients and the orthodontic
team is essential to building successful relationship and developing customer
satisfaction. Omega trains the Affiliated Orthodontist and his or her staff in
interpersonal skills and communication techniques and carefully plans and
scripts patient interactions so that the orthodontic team is attuned to patient
needs and can handle their questions accurately and efficiently. The staff is
instructed to make courtesy calls to patients after long or particularly
difficult appointments to inquire about patient comfort and answer questions. In
addition, the Model uses computerized analysis and video imaging to provide the
patient with a clear understanding of the proposed treatment, including all
planned tooth and jaw movements, and its intended results.
In order to enhance the total dental care the patient receives and to
improve the Orthodontic Affiliate's professional referral sources, the Model
also encourages frequent communication between the orthodontic team and the
referring dentist. Automated diagnostic letters that include a treatment status
report and video images of the patient are periodically delivered to the
referring dentist. Brief seminars on current orthodontic developments are
planned from time to time at the Orthodontic Affiliate's office in order to keep
referring dentists and their staffs informed and to promote opportunities for
professional and staff interaction. By encouraging the close integration of
orthodontic and general dental services, the Model promotes improved overall
dental care for the patient and fosters strong relationships with the general
dentists for future referrals.
Omega believes that a more productive practice also serves the interest of
the orthodontic patients. In order to increase the Orthodontic Affiliate's
productivity, the Model requires the orthodontic team to establish operational
goals, such as increasing the number of treatment starts, percentage of patients
seen on time and the revenue generated per minute of chair time. The orthodontic
team also sets financial and quality goals for the practice. In order to assist
the orthodontic team in accomplishing these goals, the Model contains written
policies and procedures for the orthodontic team to adopt and follow. In
addition, the Model will generally require either an upgrade to the Orthodontic
Affiliates present systems or the installation of a new, computerized
operational and financial reporting system so that progress can be measured
regularly.
Omega believes that implementation of the Model generally should be
accomplished over a 12-month period. The program is overseen by one of Omega's
experienced practice facilitators who coordinates the efforts of the orthodontic
team and Omega. The practice
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facilitator visits the Orthodontic Affiliate monthly during this period to train
the orthodontic team, install systems and programs and audit and debug their
performance. By the end of the first 12 months, the Orthodontic Affiliate
generally will have completed the following tasks: (i) established a new staff
organizational structure; (ii) installed a communication and marketing system;
(iii) installed a sophisticated scheduling system to increase treatment
productivity; (iv) instituted a new, flexible fee and payment program; (v)
installed a new or upgraded financial and operational reporting system; (vi)
conducted staff relationship training; (vii) conducted initial and final patient
surveys; and (viii) installed a patient communication and treatment completion
review program.
Agreements with Affiliated Orthodontists
Omega affiliates with orthodontic practices through a series of contractual
arrangements. Initially, Omega and an Affiliated Orthodontist enter into an
affiliation agreement through which Omega acquires the equity interests in the
MSO associated with the Affiliated Orthodontist's practice. (Omega may cause a
wholly owned subsidiary to acquire the equity interests in the MSO to reduce
adverse tax consequences in certain cases.) The Affiliated Orthodontist, who
generally practices through and holds the practice assets in a professional
corporation, converts that entity into a general corporation (the MSO) and
creates a new professional corporation through which the Affiliated Orthodontist
continues to provide orthodontic care (the Orthodontic Affiliate). Omega
acquires the equity interests in the MSO, and the Affiliated Orthodontist causes
the Orthodontic Affiliate to enter into a long-term Management Services
Agreement with Omega.
Through the Management Services Agreement, Omega provides practice
management and marketing services, facilities and non-professional personnel to
the Orthodontic Affiliate for a monthly fee. In order to provide for an orderly
transition in the event that the Management Services Agreement is terminated or
expires or the Affiliated Orthodontist ceases practice with the Orthodontic
Affiliate, the parties enter into a Stock Put/Call Option and Successor
Designation Agreement (the "Put/Call Agreement"). This agreement creates for the
Affiliated Orthodontist certain rights and obligations to repurchase the
practice assets held by Omega in the event that the Management Services
Agreement is terminated and grants Omega certain rights to designate a successor
orthodontist to purchase the stock of the Orthodontic Affiliate when the
Affiliated Orthodontist ceases practice through retirement, death, disability or
in other enumerated cases.
Affiliation Agreement. The affiliation agreement is the mechanism through
which Omega acquires the equity interests in the MSO of the Orthodontic
Affiliate, typically in exchange for a combination of cash, a promissory note
and shares of common stock of Omega ("Affiliation Agreement"). The completion of
the transaction under the Affiliation Agreement is subject to certain
conditions, including, without limitation, that there has been no material
adverse change to the Orthodontic Affiliate between the time the Affiliation
Agreement is signed and the transaction is closed and that the Orthodontic
Affiliate and Omega have entered into the Management Services Agreement and the
Put/ Call Agreement.
Management Services Agreement. Pursuant to the Management Services
Agreement, Omega provides the Orthodontic Affiliate with comprehensive
management, financial and marketing services and facilities, equipment (in the
control of the Orthodontic Affiliate, where required by statute) and support
personnel required by the Orthodontic Affiliate to operate its clinical
orthodontic practice. Omega maintains existing orthodontic equipment
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at the offices of the Orthodontic Affiliate at Omega's expense and, after
consultation with the Affiliated Orthodontist and agreement upon the equipment
needs of the Orthodontic Affiliate, purchases new equipment for use by the
Orthodontic Affiliate. Omega is appointed the sole and exclusive business
manager of the Orthodontic Affiliate. In addition to providing facilities,
equipment (in the control of the Orthodontic Affiliate, where required by
statute) and support services, Omega undertakes all purchasing, payment,
billing, collection and payroll functions for the Orthodontic Affiliate and
facilitates the implementation of the Model.
The Orthodontic Affiliate is solely responsible for and has complete
control and supervision over the professional aspects of its practice, as well
as the provision of all professional services, including, without limitation,
the selection of the course of treatment for a patient, procedures or materials
to be used as part of such treatment and the manner in which such treatment is
carried out. The Orthodontic Affiliate has sole authority to direct the
business, professional and ethical aspects of its practice. It makes all
professional hiring decisions, renders patient care, and keeps all patient
dental records. The Orthodontic Affiliate is also responsible for entering into
an employment agreement, including non-competition provisions, with each
orthodontist engaged by it, including the Affiliated Orthodontist, and paying
all salaries for dental professionals, professional licensure and board
certification fees and professional liability insurance premiums.
The Management Services Agreement typically has an initial term of 20 years
and is renewable for two successive 10-year periods. During the initial term and
any renewal term, the Management Services Agreement may be terminated by Omega
or the Orthodontic Affiliate only for "cause," which includes the bankruptcy of
or a material default by the other party. In exchange for the performance of its
duties and obligations under the Management Services Agreement, Omega receives a
monthly management fee. The fee, which varies somewhat from practice to
practice, is generally 65% to 75% of the Orthodontic Affiliate's gross
collections for the period. From the monthly fee, Omega pays all of its expenses
in providing services to the Orthodontic Affiliate, including, without
limitation, the salaries and benefits of Omega's employees, the costs of any
consultants, corporate overhead, lease obligations and taxes. In the event that
the gross collections of an Orthodontic Affiliate in a given month are not
sufficient to pay the entire amount of salaries, benefits and other direct costs
payable by the Orthodontic Affiliate and Omega's monthly fee for such month,
Omega anticipates making routine advances to the Orthodontic Affiliate to fund
any shortfalls for such month. Such advances will generally be repaid by the
Orthodontic Affiliate to Omega without interest as adequate funds are generated
by the Orthodontic Affiliate in subsequent months.
Put/Call Agreement. The Put/Call Agreement governs the dissolution of the
affiliation between the Orthodontic Affiliate and Omega, whether caused by a
termination or expiration of the Management Services Agreement or as a result of
the cessation of practice by the Affiliated Orthodontist. In the case of a
termination or expiration of the Management Services Agreement, the Orthodontic
Affiliate may be required to repurchase the assets of the MSO utilized in the
practice of the Affiliated Orthodontist as set forth on the MSO's balance sheet
as of the end of the month immediately preceding the date of such termination
(when the termination is initiated by Omega) or may have the right to repurchase
such assets (when the termination is initiated by the Orthodontic Affiliate).
Such assets typically will include leasehold improvements, fixtures, furniture,
furnishings, equipment, inventory, supplies and intangibles. In the event that
Omega initiates the termination, the Orthodontic Affiliate is typically required
to pay book value for the assets as shown on the MSO's balance sheet, and, in
the event the Orthodontic Affiliate initiates
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the termination, Omega is typically required to pay an amount equal to the sum
of (a) the amount of cash paid to the Affiliated Orthodontist by Omega under the
Affiliation Agreement, (b) the original principal amount of the Promissory Note
(if any) issued by Omega to the Affiliated Orthodontist under the Affiliation
Agreement, and (c) the value of that number of shares of Common Stock issued to
the Affiliated Orthodontist under the Affiliation Agreement, such value to be
determined by multiplying such number of shares by the average last sales (or
closing) price for Omega's common stock for each of the 60 trading days
immediately preceding the date the notice of the Orthodontic Affiliate's
determination to repurchase such assets is delivered to Omega. When the
Affiliated Orthodontist ceases practicing with the Orthodontic Affiliate,
whether as a result of retirement, death, disability or other reason, Omega
typically has the option to designate a successor orthodontist to purchase the
Orthodontic Affiliate from the Affiliated Orthodontist in order to ensure that
the Orthodontic Affiliate continues to operate and to perform its obligations
under the Management Services Agreement. Omega may choose not to exercise this
option where the Affiliated Orthodontist proposes to sell the Orthodontic
Affiliate to another orthodontist previously approved by Omega to be the
Affiliated Orthodontist's successor in the ownership of the Orthodontic
Affiliate.
Competition
The business of providing orthodontic services is highly competitive in
each of the markets in which Omega operates. Each of Omega's Orthodontic
Affiliates faces competition from orthodontists who maintain single offices or
operate a single satellite office, as well as from orthodontists that maintain
group practices or operate in multiple offices. The Orthodontic Affiliates also
compete with dentists who provide certain orthodontic services. The provision of
orthodontic services by such dentists has increased in recent years.
At this time, Omega believes that there are four publicly traded companies
actively competing in the orthodontic practice management market and that there
are several other companies participating in the market. In addition, Omega
believes that several general dental management services organization may be
taking steps to enter the orthodontic management area and are establishing
divisions to compete in Omega's target markets. Omega believes that of the
above-mentioned competitors, most are significantly larger and have greater
financial, marketing and other resources than Omega. Management still believes
Omega appeals to a niche orthodontic market that relies primarily on traditional
patient and general dentist referrals to generate new business rather than
relying on mass marketing and low fees. However, given the disparity in
resources, there can be no assurance that Omega will be able to compete
effectively.
Government Regulation
The field of orthodontics is highly regulated, and there can be no
assurance that the regulatory environment in which Omega operates will not
change significantly in the future. In general, regulation of health care
companies in increasing.
Every state imposes licensing requirements on orthodontics and on
facilities operated and services provided by orthodontists. In addition, federal
and state laws regulate health maintenance organizations and other managed care
organizations for which orthodontists may be providers. In connection with the
entry into new markets, Omega and its Affiliated Orthodontists may become
subject to compliance with additional regulations.
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The operations of the Orthodontic Affiliates must meet federal, state and
local regulatory standards in the areas of safety and health. Based on its
familiarity with the operations of its current Affiliated practices and the
activities of the Affiliated Orthodontists, Omega believes that its Orthodontic
Affiliates are in compliance in all material respects with all applicable
federal, state and local laws and regulations.
The laws of many states prohibit orthodontists from splitting fees with
non-orthodontists and prohibit non-orthodontic entities (such as Omega) from
practicing dentistry, including orthodontics, and from employing orthodontists
or, in certain circumstances, orthodontic assistants. The laws of some states
prohibit advertising of orthodontic services under a trade or corporate name and
require that all advertising be in the name of the orthodontist. A number of
states also regulate the content of advertisement or orthodontic services and
the use of promotional gift items. A number of states limit the ability of a
non-licensed dentist or non-licensed orthodontist to own equipment or offices
used in an orthodontic practice. Some of these states allow leasing of equipment
and office space to an orthodontic practice, under a bona-fide lease, if the
equipment and office remain in the complete care and custody of the
orthodontist. Management believes, based on its familiarity with the operations
of its current Affiliated Practices, the activities of Omega's Affiliated
Orthodontists and the applicable regulations, that Omega's current and planned
activities do not constitute the prohibited practices contemplated by these
statutes and regulations. There can be no assurance, however, that future
interpretations of such laws, or the enactment of more stringent laws, will not
require structural and organizational modifications of Omega's existing
relationships with its Affiliated Orthodontists or the operation of the
Orthodontic Affiliates. In addition, statutes in some states could restrict
expansion of Company operations in those jurisdictions.
Omega regularly monitors developments in laws and regulations relating to
dentistry. Omega may be required to modify its agreements, operations and
marketing from time to time in response to changes in the business and
regulatory environment. Omega plans to structure all of its agreements,
operations and marketing in accordance with applicable law, although there can
be no assurance that its arrangements will not be successfully challenged or
that required changes may not affect operations or profitability.
Employees
At December 31, 1998, Omega had approximately 160 employees and utilized a
number of independent contractors to assist with certain corporate functions and
to provide consulting services to orthodontic practices. None of Omega's
employees are represented by a collective bargaining agreement. Omega considers
its relationship with its employees to be satisfactory.
Insurance
Providing orthodontic services entails an inherent risk of professional
malpractice and other similar claims. Although Omega does not influence or
control the practice of dentistry by the Affiliated Orthodontists or have
responsibility for compliance with certain regulatory and other requirements
directly applicable to Orthodontic Affiliates, the contractual relationship
between Omega and the Orthodontic Affiliates may subject Omega to medical
malpractice actions. There can be no assurance that claims, suits or complaints
relating to services and products provided by Orthodontic Affiliates will not be
asserted against Omega in the future. The availability and cost of professional
liability insurance has been affected by various factors, many of which are
beyond the control of Omega. The
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cost of such insurance to the Orthodontic Affiliates may have an adverse effect
on the Company's operations.
The Management Services Agreements will require the Orthodontic Affiliates
to maintain, at their expense, professional liability insurance for themselves
and each orthodontist employed by or otherwise providing orthodontic services on
behalf of the Orthodontic Affiliate in the minimum amount of $500,000 per
occurrence and $1,000,000 in the aggregate. In addition, each Orthodontic
Affiliate will undertake to comply with all applicable regulations and
requirements, and Omega will be indemnified under the Management Services
Agreements for claims against Omega arising in connection with actions by the
Orthodontic Affiliates. Omega has general liability insurance for itself and
requires that it be named as an additional insured party on the professional
liability insurance policies of the Orthodontic Affiliates pursuant to the
Management Services Agreement. Omega does not maintain professional liability
insurance for itself.
Omega maintains other insurance coverages including property, workers'
compensation and directors' and officers' liability insurance which Management
considers to be adequate for the size of Omega and the nature of its business.
Description of Property
Omega leases facilities for each of its current affiliates, under various
operating leases which expire at various times through October 2017. Omega
subleases office space and maintains its financial records in Boston,
Massachusetts.
Legal Proceedings
Omega is not a party to any material pending legal proceedings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
General
Omega was incorporated in Delaware in August 1996. Following its initial
public offering ("Omega IPO") on October 1, 1997, Omega began to offer its
services primarily under an "affiliate" relationship whereby it purchases,
pursuant to an affiliation agreement ("Affiliation Agreement"), the equity
interests of a management services organization ("MSO") that holds certain
assets and is associated with an orthodontic or other dental specialty practice
("Affiliated Practice") and enters into a long term management services
agreement ("Management Services Agreement") with the Affiliated Practice of the
selling orthodontist or other dental specialist ("Affiliated Practitioner").
Pursuant to the Management Services Agreement, Omega receives a monthly
management fee for providing all of the Affiliated Practice's practice needs,
including facilities, support staff and supplies, as well as a program of
systems, methods and procedures designed to enhance the growth, efficiency and
profitability of the Affiliated Practice.
Pursuant to the Affiliation Agreement, the Affiliated Practitioner
typically converts his or her existing professional corporation into a general
corporation that will function as the MSO and creates a new professional
corporation (the Affiliated Practice) through which the Affiliated Practitioner
will continue to provide orthodontic or other dental specialty care. The MSO
retains certain assets and liabilities which typically include the lease for the
Affiliated Practice's office space, clinical supplies and equipment and office
furniture, supplies and equipment. The Affiliated Practice retains certain other
assets and liabilities (if any) which typically include all cash and cash
equivalents, real property, automobiles, patient records, related patient
information and notes payable unrelated to assets purchased. Omega generally
acquires all of the equity interest of the MSO from the Affiliated Practitioner,
the purchase price for which is determined through an assessment of immediate
and future return on investment. The MSO typically is acquired for a combination
of cash, 5-year notes and unregistered Common Stock or stock options. As of
December 31, 1998, Omega had completed 17 affiliations with an average MSO
purchase price of approximately $567,000, of which the cash portion was
approximately $292,000.
The Omega Management Services Agreement provides that the Affiliated
Practice will utilize the facility and Omega's services for a period of 20
years, with two 10-year extensions. While each Omega Management Services
Agreement is negotiated based on specific circumstances, the management fees
charged typically range between 65% and 75% of the Affiliated Practice's gross
income, which is expected to be sufficient to pay all of the MSO's expenses and
provide a return on Omega's investment. If the Affiliated Practice's expenses
payable by the MSO are less than an agreed target amount of expenses, the
difference between the target amount and the actual expenses will typically be
shared equally by the MSO and the Affiliated Practice. At the retirement,
disability or death of the Affiliated Practitioner, Omega will identify a
replacement Affiliated Practitioner to purchase the Affiliated Practice and
assume the Management Services Agreement.
Concurrent with the Omega IPO, Omega executed Affiliation Agreements with
seven initial Affiliated Practices. In addition, between October and December
31, 1997 Omega entered into Affiliation Agreements with two additional
Affiliated Practices. During the twelve months of 1998, Omega entered into
Affiliation Agreements with nine additional practices (three of which merged
with existing Affiliated Practices). Pursuant to those agreements, Omega
acquired the equity interests in the MSOs. Each of the Affiliated Practices is
typically operated with one practitioner, and a support staff of three dental
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assistants and three office personnel. As of December 31, 1998, Omega had 15
operating Affiliated Practices, consisting of 18 doctors in 10 states. Included
in the Affiliated Practices is an interim management agreement with one practice
under terms similar to its standard Management Services Agreement.
In consideration for acquiring the nine MSOs during the twelve months ended
December 31, 1998, Omega paid an aggregate of approximately $2.7 million in
cash, issued an aggregate of approximately $986,000 in notes bearing interest at
8.5%, assumed approximately $393,000 of liabilities and issued an aggregate of
707,511 shares of Common Stock.
In light of current market conditions and the prevailing view of MSOs by
the dental industry, Omega expects that its future internal growth will come
from continuing to implement its Omega Exceptional Practice Model with
Affiliated Practices and the reduction of internal expenses through the
implementation of a comprehensive restructuring program.
As a result of the affiliations consummated by Omega during the 12 months
ended December 31, 1998, Omega has depleted its capital resources and is
exploring avenues through which to improve its working capital and cash
position. Omega believes that active recruitment of additional practice
affiliations in the first half of 1999 will only serve to further deplete the
capital resources of Omega. Accordingly, the ability of Omega to continue to
pursue its business strategy will depend on obtaining additional outside
financing.
Results of Operations
For the year ended December 31, 1998, compared to the year ended December
31, 1997.
Revenues
Net revenue increased approximately $6,412,000 to approximately $7,388,000
for 1998 from approximately $976,000 in 1997. This growth was attributable to a
full year of operations for the seven affiliates purchased in 1997 and the
addition of eight affiliates in 1998.
Costs and Expenses
Costs and expenses increased approximately $3,344,000 to approximately
$7,950,000 for 1998 from approximately $4,606,000 in 1997. Omega completed the
Omega IPO on October 1, 1997 and simultaneously completed affiliations with
seven practices. The increase in costs and expenses for 1998 was attributable to
a full year of operations for the practices affiliated with in 1997 and the
addition of eight affiliations in 1998.
Omega's costs and expenses include:
Employee Costs. Includes all salaries, payroll taxes and fringe benefits
of the dental assistants, office staff and corporate office personnel and
increased approximately $2,970,000 to approximately $3,715,000 for 1998 from
approximately $745,000 in 1997.
Other Direct Costs. Includes dental and office supplies, laboratory costs,
facilities and equipment for the Affiliated Practices and corporate office and
increased approximately $963,000 to approximately $1,136,000 for 1998 from
approximately $174,000 in 1997.
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General Administrative. Includes all other operating expenses, including
advertising, repairs and maintenance, computer support, telephone, utilities,
taxes and licenses for the Affiliated Practices and corporate office, as well as
the cost of consultants, professional fees and travel related to providing
support to the Affiliated Practices and corporate office and increased
approximately $1,664,000 to approximately $2,643,000 for 1998 from approximately
$979,000 in 1997.
Depreciation and Amortization. Includes depreciation of equipment and
leasehold improvements of the Affiliated Practices and amortization of
intangible assets related to the Omega Management Services Agreements and
increased approximately $340,000 to approximately $456,000 for 1998 from
approximately $116,000 in 1997.
Non-recurring Consulting Expense. Relates to approximately $2.3 million
value ascribed to stock and stock options issued to consultants of Omega in
April 1997 and $305,000 relates to cash payments made in 1998 in connection with
those stock grants.
Interest Expense
Interest expense of approximately $107,000 for the year ended December 31,
1998, reflects the cost of borrowings under notes payable to Affiliated
Practices issued as part of the purchase price for affiliating with those
practices. Interest expense of approximately $91,000 for the year ended December
31, 1997, reflects the cost of borrowing under bridge financing outstanding at
that time used to finance the cost of operations and Omega IPO costs as well as
the cost of borrowing under notes payable to Affiliated Practices from the date
of the Omega IPO until December 31, 1997. The bridge financing notes were paid
in full with a portion of the proceeds of the IPO.
Interest Income
Interest income was approximately $127,000 for the year ended December 31,
1998, and reflects interest earned on Omega's net proceeds from the Omega IPO
and notes from related parties. Interest income was approximately $79,000.
Interest income is derived from interest earned on the net proceeds of the
bridge financing notes and net proceeds from the IPO from October, 1997 to
December 31, 1997.
Net Loss
As a result of the foregoing factors, Omega generated a net loss of
approximately $525,000, or $.11 per share, for the year ended December 31, 1998,
compared to a net loss of approximately $3.6 million, or $1.59 per share, for
the year ended December 31, 1997.
Liquidity and Capital Resources
Omega has financed its capital requirements to date with borrowings from
bridge and interim notes and the issuance of equity securities.
Omega has experienced operating losses, negative cash flows, a deficit in
working capital and an accumulated deficit since its inception. Omega's
accumulated deficit from inception (August 30, 1996) to October 1, 1997 (the
closing date of the Omega IPO) was approximately $3.9 million. Omega reported a
loss from operations for the year ended December 31, 1997 of approximately $3.6
million due primarily to the value ascribed to certain stock compensation earned
by consultants in April 1997 and has reported a loss from operations for the
year ended December 31, 1998 of approximately $525,000.
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Omega makes routine cash advances from time to time to its Affiliated
Practices under its Management Services Agreements to fund any deficits in
monthly cash flows of the Affiliated Practices. Such advances will generally be
repaid by the Affiliated Practices to Omega without interest as adequate funds
are generated by the Affiliated Practices. The balance of advances to Affiliated
Practices as of December 31, 1998 was $300,000. Pursuit of Omega's business
strategy requires substantial capital resources. Capital is needed not only for
the affiliation with future Affiliated Practices, but also for the effective
integration, operation and expansion of the existing and future Affiliated
Practices. In addition, the Affiliated Practices may from time to time require
capital for renovation and expansion and for the addition of equipment and
technology.
Since consummation of the Omega IPO, Omega has funded its affiliations
through use of a combination of cash, notes and shares of its common stock.
During 1998, the ability of Omega to use shares of common stock for affiliations
was adversely affected by the decrease in the market value of the common stock.
The decrease, as well as the relatively low market value of the common stock in
dollar terms, has affected the willingness of owners of potential Affiliated
Practices to accept common stock as full or partial payment for their
affiliations. Even if future affiliations could be funded with Omega's common
stock, such a use would result in substantial dilution to existing shareholders.
As a result, Omega has not consummated an affiliation since August 1998 and
Omega does not expect to be able to consummate any future affiliations. During
the year ended December 31, 1998, Omega paid approximately $2.7 million in cash
and issued $986,000 in notes bearing interest at 8.0% to 8.5%, assumed
approximately $393,000 of liabilities and issued approximately 707,511 shares of
common stock in connection with affiliations with Affiliated Practices.
Aside from cash flows derived from the investment of net proceeds from the
Omega IPO, Omega has not realized positive cash flow from operations since its
inception. Accordingly, Omega has had to use net proceeds from the Omega IPO for
its working capital requirements for its operations. At the year ended December
31, 1998 Omega had approximately $1,064,000 of working capital consisting of
cash and cash equivalents of approximately $982,000, all of which represented
remaining net proceeds from the Omega IPO.
In order for Omega to grow, it is likely that Omega will be required to
seek additional financing for working capital and liquidity purposes. Further,
any additional financing obtained by Omega could have a dilutive effect on
existing stockholders. In the event Omega fully utilizes the remaining net
proceeds from the Omega IPO to fund additional affiliations and/or working
capital requirements, and in the event Omega is not able to thereafter continue
to meet its working capital requirements or liquidity needs with bank borrowings
(which to date have been unavailable to Omega), Omega will need to find other
public or private debt or equity sources. The availability of these capital
sources will depend on prevailing market conditions, interest rates and the
financial condition of Omega. There can be no assurance, however, that Omega
will be able to obtain additional financing for future affiliations or its
working capital and liquidity needs. See "Safe Harbor Statement Under the
Private Securities Litigation Reform Act of 1995 -- Doubt About Ability to
Continue as a Going Concern."
Year 2000
Like many other companies, the Year 2000 computer issue creates risk for
Omega. If both information technology systems and embedded technology do not
correctly recognize
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date information when the year changes to 2000, it could have an adverse impact
on Omega's operations. Omega is currently confirming that its software and
programming logic properly interprets Year 2000 dates and will review any
embedded technology in its software and hardware to determine whether the
technology is compliant. If necessary Omega will update and remediate any
non-compliant technology. Omega believes that all of its software and hardware
is currently compliant. Also, Omega does not anticipate difficulty in resolving
issues relating to software or embedded technology in any programs or equipment
provided by third-party vendors. In addition, Omega believes that certain
software employed by the Affiliated Practices is not Year 2000 compliant. Omega
is currently working with the Affiliated Practices to repair any non-compliant
software. It is unknown what cost Omega will incur to correct any non-compliant
software.
Based on Omega's work to date and assuming that the software updating
projects can be implemented as planned Omega believes that it will be Year 2000
compliant on a timely basis and that future costs relating to the Year 2000
issue will not have a material impact on Omega's financial position, results of
operations or cash flows.
Once the Year 2000 remediation process is substantially complete Omega
intends to formulate a comprehensive contingency plan to address remaining
material risks, if any.
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Omega's plans and
objectives are based on a successful execution of Omega's restructuring strategy
and assumptions that the Orthodontic Affiliates will be profitable, that the
orthodontic industry will not change materially or adversely, and that there
will be no unanticipated material adverse change in Omega's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of Omega. Although Omega
believes that its assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this Proxy
Statement/Prospectus will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by
Omega or any other person that the objectives and plans of Omega will be
achieved.
The following discussion identifies certain important factors that could
affect Omega's actual results and actions and could cause results to differ
materially from any forward-looking statement made by or on behalf of Omega.
Other factors, which are not identified herein, could also have such an effect.
Doubt About Ability to Continue as a Going Concern. Omega's
independent public accountants have audited the attached financial
statements and have prepared
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<PAGE> 94
such financial statements assuming Omega will continue as a going concern.
See Note 1 to the Omega financial statements.
Risks Associated with Expansion. Omega has consummated Affiliation
Agreements with the 15 Orthodontic Affiliates. The success of Omega's
business strategy will depend on a number of factors, including (i) Omega's
ability to attract orthodontists to affiliate with Omega, the availability
of suitable markets and Omega's ability to obtain good locations within
those markets; (ii) Omega's ability to locate existing practices for
affiliation, affiliate with such practices on favorable terms and
successfully integrate the affiliated operations into Omega's existing
operations; (iii) the availability of additional adequate financing to
affiliate with orthodontic practices, and (iv) regulatory constraints.
There can be no assurance that Omega's business strategy will be
successful, that additional modifications to Omega's strategy will not be
required or that Omega will be able to manage effectively and enhance the
profitability of its Orthodontic Affiliates.
Dependence on Orthodontic Affiliates. Omega receives fees for
management services provided to Orthodontic Affiliates under Management
Services Agreements, but does not employ orthodontists or control practices
of its Orthodontic Affiliates. Omega's revenue is dependent on revenue
generated by Omega's Orthodontic Affiliates and, therefore, the performance
and professional reputation of Affiliated Orthodontists (those
orthodontists who practice through the Orthodontic Affiliates) and
Orthodontic Affiliates are essential to Omega's success. The Management
Services Agreements with the Orthodontic Affiliates are for terms of 20
years and are renewable at the election of Omega for two additional 10-year
periods. The Management Services Agreements may only be terminated by
either party for "cause," which includes a material default by or
bankruptcy of the other party. Any material loss of revenue by the
Orthodontic Affiliates would have a material adverse effect on Omega.
Nasdaq Small Cap Market Delisting; Risk of Low-Priced Securities; Risk
of Application of Penny Stock Rules. The Board of Governors of the
National Association of Securities Dealers, Inc. has established certain
standards for the initial listing and continued listing of a security on
the Nasdaq Small Cap Market. The standards for initial listing require,
among other things, that an issuer have net tangible assets of $4,000,000;
that the minimum bid price for the listed securities be $4.00 per share;
that the minimum market value of the public float (the shares held by
non-insiders) be at least $5,000,000; and that there be at least two market
makers for the issuer's securities. The maintenance standards require,
among other things, that an issuer have net tangible assets of at least
$2,000,000; that the minimum bid price for the listed securities be $1.00
per share, that the minimum market value of the "public float" be at least
$1,000,000; and that there be at least two market makers for the issuer's
securities. A deficiency in either the market value of the public float or
the bid price maintenance standard will be deemed to exist if the issuer
fails the individual stated requirement for ten consecutive trading days.
Omega was notified by Nasdaq that its common stock was delisted on April
21, 1999 for failure to maintain the minimum bid price. Because Omega's
securities were delisted from the Nasdaq Small Cap Market, it may adversely
affect the prices of such securities and the ability of holders to sell
them, and Omega will be required to comply with the initial listing
requirements to be relisted on the Nasdaq Small Cap Market. The Omega
common stock now trades on the OTC Bulletin Board.
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<PAGE> 95
Omega's securities are subject to certain penny stock rules
promulgated by the SEC. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the
rules, to deliver a standardized risk disclosure document prepared by the
SEC that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction
and monthly account statements showing the market value of each penny stock
held in the customer's account. In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise exempt from such
rules, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure
requirements may have the effect of further reducing the level of trading
activity in the secondary market for a stock that becomes subject to the
penny stock. As a result of the Omega common stock becoming subject to the
penny stock rules, stockholders may find it more difficult to sell their
shares.
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<PAGE> 96
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to the
directors and executive officers of Omega.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------------------------------------- --------
<S> <C> <C> <C>
Robert J. Schulhof............. 57 President, Chief Executive Officer, 1996
Treasurer and Director
Dean C. Bellavia, Ph.D......... 55 Director of Affiliate Programs and 1996
Director
John J. Clarke, Jr. (1)(2)..... 56 Director 1997
Floyd V. Elliott............... 56 Director of Professional Relations and 1996
Staff Development and Director
C. Joel Glovsky, D.D.S. 66 Chairman of the Board 1996
(1)(2).......................
David T. Grove, D.D.S. (2)..... 58 Director 1996
</TABLE>
- -------------------------
(1) Member of Omega's Audit Committee.
(2) Member of Omega's Compensation.
Robert J. Schulhof, Omega's founder, has been the President and Chief
Executive Officer of Omega since its formation in August 1996. In 1995, Mr.
Schulhof founded OMEGA, LLC, a principal stockholder of Omega, and is the sole
manager of OMEGA, LLC. From 1990 to 1994, Mr. Schulhof was the Chief Executive
Officer of Solutions Providers, a California general partnership and a firm that
offered integrated computer technology and practice management consulting
services to the orthodontic industry, and from 1994 until he founded OMEGA, LLC
in 1995, Mr. Schulhof was an officer, director and principal stockholder of
Integrated Management Systems, Inc., a firm providing software and consulting
services to the orthodontic industry. He holds a masters degree in Mathematical
Statistics and Probability from the University of California at Los Angeles.
Dean C. Bellavia is a co-founder of Omega and was employed as the Director
of Affiliate Programs since its formation in August 1996 until December 31,
1997. As of January 1, 1998, Dr. Bellavia entered into a consulting agreement
with Omega pursuant to which he continues to perform the services he was
performing as the Director of Affiliate Programs. Dr. Bellavia is also the
founder and President of The Bio Engineering Company, a consulting firm serving
the orthodontic industry which he will continue to operate to the extent it does
not adversely affect his duties for Omega. He holds a Ph.D. in Bio-Engineering
from Carnegie Mellon University.
John J. Clarke, Jr., was elected to the Board of Directors of Omega in
March 1997. Since 1971, Mr. Clarke has been a principal in Baldwin & Clarke
Companies, a diversified financial services organization that provides
investment banking and other financial advisory services. He is a director of
Centerpoint Bank, a wholly owned subsidiary of Community Bankshares, Inc., a
bank holding company in Concord, New Hampshire. Mr. Clarke holds a B.A. from
Northeastern University.
Floyd V. ("Sonny") Elliott, joined Omega's Board of Directors in December
1996 and since October 1, 1997 has been Omega's Director of Professional
Relations and Staff
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<PAGE> 97
Development. Mr. Elliott is the founder and President of Elliott Enterprises, a
consulting firm serving the orthodontic industry which he will continue to
operate to the extent it does not adversely affect his duties for Omega. Prior
to founding Elliott Enterprises, Mr. Elliott was President of Paradigm Practice
Management, a management consulting firm working primarily with orthodontic
practices.
C. Joel Glovsky, a co-founder of Omega, has served as the Chairman of the
Board of Directors of Omega since its formation in August 1996. Dr. Glovsky has
been engaged in the private practice of orthodontics since 1961. He is a
graduate of the dental school of Tufts University and served as Assistant
Clinical Professor there for 15 years. Dr. Glovsky is a diplomat of the American
Board of Orthodontics. In October 1989, Dr. Glovsky co-founded The Standish Care
Company, an assisted living company, and he served on the Board of Directors of
Standish from 1989 to 1994.
David T. Grove, has served on the Board of Directors of Omega since its
inception in August 1996. Dr. Grove has been in the private practice of
orthodontics in Nevada since 1971. Dr. Grove holds a dental degree from the
University of Louisville, a Masters degree in Orthodontics from St. Louis
University and a Masters degree in education from the University of South
California. He served as Clinic Director for two years in the Orthodontics
Department at the University of California at San Francisco. He is the Chairman
of Omega's Clinical Advisory Board.
Meetings of the Board of Directors and Committees
The Board of Directors of Omega held five meetings during 1998. The Board
of Directors also acted on three occasions by unanimous written consent in lieu
of special meetings. Each director attended at least 75% of the aggregate number
of all meetings of the Board of Directors and committees of which he was a
member during 1998.
Board Committees
The Board of Directors has established an Audit Committee and a
Compensation Committee.
Audit Committee. The Audit Committee has the responsibility for reviewing
and supervising the financial controls of Omega. The Audit Committee makes
recommendations to the Board of Directors of Omega with respect to Omega's
financial statements and the appointment of independent auditors, reviews
significant audit and accounting policies and practices, meets with Omega's
auditors concerning, among other things, the scope of audits and reports, and
reviews the performance of overall accounting and financial controls of Omega.
The Audit Committee consists of Dr. Glovsky and Mr. Clarke. The Audit Committee
did not meet in 1998.
Compensation Committee. The Compensation Committee has the responsibility
for reviewing the performance of the officers of Omega and recommending to the
Board of Directors of Omega salary and bonus amounts for all officers of Omega,
subject to the terms of existing employment agreements. The Compensation
Committee also has the responsibility for oversight and administration of
Omega's stock and other compensatory plans. The Compensation Committee consists
of Dr. Glovsky, Dr. Grove and Mr. Clarke. The Compensation Committee met twice
in 1998.
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<PAGE> 98
Director Compensation
Members of the Board who are not full-time employees of Omega (currently
Dr. Grove and Mr. Clarke) receive a fee of $500 for each Board meeting attended
and a fee of $250 for each committee meeting attended. Such Board members are
reimbursed for their out-of-pocket expenses for each meeting attended.
Executive Officers and Compensation
Executive officers of Omega hold their positions until the next annual
meeting of the Board of Directors and until their respective successors are
elected and qualified. In addition to Mr. Schulhof (President, Chief Executive
Officer and Treasurer) and Mr. Elliott (Director of Professional Relations and
Staff Development), Mr. Edward M. Mulherin and Mr. Peter I. Wexler are executive
officers of Omega.
Edward M. Mulherin has provided consulting services as the Chief Financial
Officer of Omega since October 1996. Such services have been provided through
LMG, a firm in which Mr. Mulherin is a principal stockholder and with which he
has been associated since 1991. Mr. Mulherin is a certified public accountant
and holds a B.S. in Accounting from Boston College and a J.D. from Suffolk
University Law School. Mr. Mulherin is 39.
Peter I. Wexler has served as the General Counsel of Omega since March
1998. From 1995 to 1998, Mr. Wexler was Corporate Counsel and Commercial Manager
for Stone and Webster Engineering Corporation, a global engineering and
construction company, where he specialized in domestic and international
transactions. Prior to Stone and Webster, Mr. Wexler was associated with the law
firm Jackson Parton in London, England. Mr. Wexler is 31.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Omega's directors, executive
officers and persons who beneficially own more than 10% of a registered class of
Omega's equity securities, to file reports of ownership and changes in ownership
on Forms 3, 4 and 5 with the Commission and the Nasdaq Stock Market. Directors,
executive officers and greater than 10% stockholders are required to furnish
Omega with copies of all Forms 3, 4 and 5 they file.
Based solely on Omega's review of the copies of such Forms it has received
and written representations from certain reporting persons that they were not
required to file Forms 5, Omega believes that each person who was a director,
executive officer or greater than 10% beneficial owner of any class of its
equity securities during the year December 31, 1998 complied with all Section
16(a) filing requirements applicable to them.
Executive Compensation
The following Summary Compensation Table sets forth compensation awarded
to, earned by or paid to Robert J. Schulhof, Omega's Chief Executive Officer. No
other executive officer or director earned a salary and bonus of more than
$100,000 during either (a) the period from August 30, 1996 (inception) to
December 31, 1996 or Omega entered into an employment agreement with Mr.
Schulhof effective January 1, 1997. See "Employment Agreements." Omega did not
grant any restricted stock awards, options or stock appreciation rights or make
any long-term incentive plan payouts to any named executive officer during such
periods, nor did any of the named executive officers own options or stock
appreciation rights during such periods. Omega has no defined benefit or
actuarial plans covering its employees.
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<PAGE> 99
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND FISCAL YEAR ALL OTHER
PRINCIPAL POSITION ENDED SALARY($) COMPENSATION($)
------------------ ----------- --------- ---------------
<S> <C> <C> <C>
Robert J. Schulhof.......................................... 12/31/98 $120,000(1) $3,400(2)
President, Chief 12/31/97 $120,000(1) $3,500(2)
Executive Officer 12/31/96 $ 49,200 --
Edward M. Mulherin.......................................... 12/31/98 $120,000 --
Chief Financial Officer
Dean C. Bellavia, Ph.D. .................................... 12/31/98 $120,000 --
Director of Affiliate Programs and Director
Floyd V. Elliott............................................ 12/31/98 $120,000 --
Director of Professional Relations and Staff Development
and Director
</TABLE>
- -------------------------
(1) Reflects amounts paid pursuant to an employment agreement between Omega and
Mr. Schulhof which became effective January 1, 1997. See "Employment
Agreements."
(2) Reflects amounts paid to Mr. Schulhof as an automobile allowance.
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<PAGE> 100
Employment Agreements
Omega has entered into employment agreements (individually, an "Employment
Agreement" and collectively, the "Employment Agreements") with each of Mr.
Schulhof, Dr. Bellavia (whose agreement has been terminated and replaced with a
consulting agreement -- see "Certain Relationships and Related Transactions")
and Mr. Elliott (collectively, the "Executives"). Mr. Schulhof's Employment
Agreement became effective January 1, 1997 and provides that he is employed as
the President and Chief Executive Officer of Omega. The initial term of Mr.
Schulhof's Employment Agreement is three years, and such term will be extended
automatically on January 1, 2000 and on each January 1 thereafter for an
additional year, unless Mr. Schulhof receives notice of termination prior to
such extension. Mr. Schulhof is paid an annual base salary of $120,000, which
amount is subject to annual review, and bonuses, the amounts of which are
determined by the Compensation Committee. Mr. Schulhof also has the use of a
company car or, at his election, will be paid an automobile allowance of $700
per month. During 1998, Mr. Schulhof received an automobile allowance of $8,400.
Dr. Bellavia's Employment Agreement became effective upon the closing of
the Omega IPO and provided that he was employed as the Director of Affiliate
Programs of Omega. The initial term of Dr. Bellavia's Employment Agreement was
three years. Dr. Bellavia was paid a monthly advance of $10,000, which advance
was subject to review and reduction in the event that certain affiliation
targets were not met by Omega. The Board of Directors of Omega determined that
such targets had been met during 1997, and no reduction of Dr. Bellavia's
advances was imposed. As of January 1, 1998, Dr. Bellavia and Omega terminated
his Employment Agreement and replaced it with a consulting agreement on
substantially the same terms. See "Certain Relationships and Related
Transactions".
Mr. Elliott's Employment Agreement became effective upon the closing of the
Omega IPO and provides that he is employed as the Director of Professional
Relations and Staff Development of Omega. The initial term of Mr. Elliott's
Employment Agreement is three years, and such term will be extended
automatically on the third anniversary date of the effectiveness and on each
anniversary date thereafter for an additional year, unless either party receives
notice of termination prior to such extension. Mr. Elliott was paid a monthly
advance of $10,000, which advance was subject to review and reduction in the
event that certain affiliation targets were not met by Omega. The Board of
Directors of Omega determined that such targets had been met during 1997, and no
reduction of Mr. Elliott's advances was imposed. Beginning in 1998 and
thereafter, Mr. Elliott's Employment Agreement provides for a base salary of
$10,000 per month, which amount is subject to annual review, and bonuses, the
amounts of which are determined by the Compensation Committee.
The Employment Agreements may be terminated by Omega or the respective
Executives without cause with 90 days' prior written notice. If the Executive
suffers a "termination other than for cause" (as defined in the Employment
Agreements), including such termination within 24 months after a "change in
control" (as defined in the Employment Agreements), the Executive is entitled to
receive his accrued salary, earned bonus compensation, vested deferred
compensation (other than plan benefits which will be payable in accordance with
the applicable plan) and other benefits through the date of termination and
severance payments of salary (at the rate payable at the time of such
termination) for the longer of 12 months or the remaining term of the Employment
Agreement. Each of the Executives may elect to receive from Omega a lump sum
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<PAGE> 101
severance payment equal to the present value of the flow of cash flow from the
severance payments of salary. In addition, each Executive is entitled to an
accelerated vesting of any awards granted to the Executive under the Incentive
Stock Plan. Notwithstanding the foregoing, Omega is not required to pay any
amount which is not deductible for federal income tax purposes.
If the Executive is terminated for "cause" (as defined in the Employment
Agreements), he is entitled to receive his accrued salary, earned bonus
compensation, vested deferred compensation (other than plan benefits which will
be payable in accordance with the applicable plan) and other benefits through
the date of termination, but shall receive no other severance benefits. Each of
the Executives may also be terminated if he dies or becomes disabled for a
period of 12 consecutive months. In the event of termination due to death or
disability, the Executive (or his estate) shall receive the same payments, but
no additional severance, except that, if the Executive becomes disabled, Omega
will maintain his insurance benefits for the remaining term of his Employment
Agreement.
Incentive Stock Plan
Effective as of January 31, 1997, Omega adopted the Omega Orthodontics
Incentive Stock Plan (the "Incentive Stock Plan"). Omega reserved 300,000 of the
authorized shares of Common Stock for issuance under the Incentive Stock Plan.
On April 28,1997, the Incentive Stock Plan was amended to increase the number of
shares of Common Stock authorized for issuance under the Incentive Stock Plan to
450,000. On April 24, 1998, the Incentive Stock Plan was further amended to
increase the number of shares of Common Stock authorized for issuance under such
Plan to 700,000. Unless terminated earlier, the Incentive Stock Plan will
terminate on January 30, 2007. The Incentive Stock Plan is administered by a
committee consisting solely of two or more non-employee Directors (the
"Committee").
On April 28, 1997, the Committee granted options with respect to 350,000
shares of Common Stock to Dr. Bellavia, Mr. Elliott and LMG in the amounts of
50,000, 150,000 and 150,000 shares, respectively, at an exercise price of $6.00
per share. On December 24, 1997, the Committee granted options with respect to
20,000 shares of Common Stock to Mr. Clarke and Dr. Grove in the amounts of
10,000 shares each at an exercise price of $3.00 per share. On March 25, 1998,
the Committee granted options with respect to 25,000 shares of Common Stock to
Mr. Wexler and an aggregate of 30,000 shares of Common Stock to two employees at
an exercise price of $3.0625 per share. On August 28, 1998, 10,000 options were
granted to one employee and 10,000 options to Mr. Robert Daskal, an Observer
Director appointed by National Securities. At March 15, 1999 255,000 shares of
Common Stock were reserved for issuance pursuant to future grants under the
Incentive Stock Plan.
The options granted to Mr. Elliott, LMG, Mr. Wexler and the two employees
vest in three equal installments on each of the first three anniversaries of the
date of grant, the options granted to Dr. Bellavia vest fully on the first
anniversary of the date of grant and the options granted to Mr. Clarke and Dr.
Grove vest six months following the date of grant. On March 25, 1998, the
Committee voted to accelerate the vesting of the options granted to LMG
retroactively to December 31, 1997.
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<PAGE> 102
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 15, 1999
with respect to the beneficial ownership of Omega's common stock by each
director, each named executive officer in the Summary Compensation Table under
"Executive Officers and Compensation" above, all directors and executive
officers as a group, and each person known by Omega to be the beneficial owner
of 5% or more of Omega's common stock. This information is based upon
information received from or on behalf of the named individuals.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER(1) BENEFICIALLY OWNED PERCENTAGE
- ------------------- ------------------ ----------
<S> <C> <C>
The Orthodontic Management Effectiveness Group of
America, LLC(2)................................... 1,050,000 20.8%
3621 Silver Spur Lane
Acton, CA 93510
Robert J. Schulhof(3)............................... 1,050,000 20.8%
3621 Silver Spur Lane
Acton, CA 93510
Putnam Investments, Inc.(4)......................... 332,953 6.6%
One Post Office Square
Boston, MA 02109
C. Joel Glovsky, D.D.S.(5).......................... 231,000 4.6%
44 Grey Lane
Lynnfield, MA 01940
The Mayflower Group Ltd.(6)......................... 225,000 4.4%
393 Commonwealth Avenue
Boston, MA 02115
David T. Grove(7)................................... 144,721 2.9%
581 12th Street
Elko, NV 89801
Dean C. Bellavia, Ph.D.(8).......................... 68,850 1.3%
44 Capen Boulevard
Buffalo, NY 14214
Edward M. Mulherin(9)............................... 160,000 3.1%
63 Chatham Street
Boston, MA 02109
Floyd V. Elliott(10)................................ 50,000 *
2555 Homeland Drive
Elko, NV 89801
</TABLE>
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<PAGE> 103
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER(1) BENEFICIALLY OWNED PERCENTAGE
- ------------------- ------------------ ----------
<S> <C> <C>
John J. Clarke, Jr.(11)............................. 10,000 *
116 B South River Road
Bedford, NH 03110
All directors and executive officers as a group (7
persons)(12)...................................... 1,714,571 32.2%
</TABLE>
- -------------------------
* Represents less than 1%.
(1) Except as otherwise indicated, Omega believes that the persons named in the
table above, based upon information furnished by such persons, have sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws
where applicable. Amounts and percentages shown are based on calculations
that, pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), include shares issuable pursuant to stock
options which may be exercised on or before March 15, 1999.
(2) Omega has relied on information reported on a Statement on Schedule 13G
dated February 24, 1999 filed jointly by The Orthodontic Management
Effectiveness Group of America, LLC ("OMEGA, LLC") and Mr. Schulhof with
the SEC. Mr. Schulhof holds 330 membership points in OMEGA, LLC, or 27.7%
of the voting power of OMEGA, LLC, and is the sole manager of OMEGA, LLC
with authority to vote and dispose of shares of the common stock of Omega
held by OMEGA, LLC. Each of the following other directors of Omega holds
more than five percent of the membership points of OMEGA, LLC, and the
amount of such holdings is as set forth in the parenthetical following the
holder's name: C. Joel Glovsky (75 points or 6.3%); David T. Grove (150
points or 12.6%); Dean C. Bellavia (100 points or 8.4%); and Floyd V.
Elliott (20 points or 1.7%).
(3) Omega has relied on information reported on a Statement on Schedule 13G
dated February 24, 1999 filed jointly by OMEGA, LLC and Mr. Schulhof with
the SEC. Includes the 1,050,000 shares held by OMEGA, LLC which Mr.
Schulhof may be deemed to beneficially own as the principal membership
point holder and the sole manager of OMEGA, LLC. In connection with that
certain Underwriting Agreement dated as of October 1, 1997 between Omega
and National Securities Corporation, as the representative of the several
underwriters of Omega's initial public offering of securities (the
"Underwriting Agreement"), Mr. Schulhof has agreed in his individual
capacity and not as an officer or director of Omega, that for a period of
two years after the date of the Underwriting Agreement, in any stockholder
vote other than the election of the directors of the Omega, or security
holder proposals presented for the vote of stockholders in accordance with
Rule 14a-8 under the Exchange Act, he will vote all shares of common stock
beneficially owned by him individually or in his capacity as the sole
manager of OMEGA, LLC with authority to vote shares of the Common Stock of
Omega held by such entity, but no other affiliates, in accordance with the
vote of a majority of the holders of common stock of Omega which has been
registered under the Securities Act, except if such action, in the opinion
of legal counsel, would not be consistent with his fiduciary duties as a
director or officer or principal stockholder of Omega.
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<PAGE> 104
(4) Omega has relied on information reported on a Statement on Schedule 13G/A
dated February 9, 1999 filed by Putnam Investments, Inc. with the SEC.
(5) Omega has relied on information reported on a Statement on Schedule 13G
dated February 12, 1998 filed by Dr. Glovsky with the Commission. Includes
5,000 shares held of record by Dr. Glovsky's Individual Retirement Account.
(6) Omega has relied on information reported on a Statement on Schedule 13G
dated February 12, 1998 filed by The Mayflower Group Ltd. with the SEC.
(7) Includes 10,000 shares issuable upon the exercise of options held by Dr.
Grove.
(8) Includes 50,000 shares issuable upon the exercise of options held by Dr.
Bellavia. Also includes 8,100 shares held by certain trusts for the benefit
of Dr. Bellavia and 750 shares held by certain trusts for the benefit of
Dr. Bellavia's spouse.
(9) Includes 10,000 shares held of record by Leonard, Mulherin & Greene, P.C.
("LMG"), a public accounting firm that provides accounting services to
Omega and makes Mr. Mulherin available to be Omega's Chief Financial
Officer pursuant to a consulting agreement, and of which Mr. Mulherin is a
principal stockholder. Also includes 150,000 shares issuable upon the
exercise of options held by LMG.
(10) Includes 50,000 shares issuable upon the exercise of options held by Mr.
Elliott.
(11) Includes 10,000 shares issuable upon the exercise of options held by Mr.
Clarke.
(12) See Notes 3, 5, 7, 8, 9, 10 and 11.
Certain Relationships and Related Transactions
On August 31, 1996, Omega acquired OMEGA, LLC's orthodontic practice
management business and certain related assets, management contracts and
practice affiliation agreements in exchange for 1,050,000 shares of Omega's
common stock. The related assets, contracts and agreements included certain
computer and other office equipment; non-binding letters of intent with
orthodontic practices to affiliate with OMEGA, LLC, four of which were
superseded by affiliation agreements that closed simultaneously with the Omega
IPO; consulting services agreements which provided limited revenues to Omega
pending the closing of the Omega IPO; consulting agreements with Dr. Bellavia
and Mr. Elliott, both of which were superseded by Employment Agreements; and the
consulting agreement (which is described below) with Dr. Glovsky and Mayflower.
Mr. Schulhof and Drs. Glovsky and Bellavia, all of the then directors of the
Omega, held 330 (27.7%), 75 (6.3%), 150 (12.6%) and 100 (8.4%) of the membership
points of OMEGA, LLC, respectively, at the time of the transaction, and Mr.
Schulhof was the sole manager of OMEGA, LLC.
In connection with the acquisition by Omega of OMEGA, LLC's orthodontic
practice management business, Omega assumed OMEGA, LLC's rights and obligations
under an agreement with Dr. Glovsky and Mayflower, a private banking firm,
whereby Dr. Glovsky and Mayflower (the "Consultants") agreed to provide certain
consulting services to Omega regarding Omega's business plan, initial capital
structure and private financing and orthodontic practice affiliation
transactions and the identification and retention of Omega's Board of Directors,
senior management team and professional advisors. Under the terms of the
agreement, as amended and restated, 225,000 shares of Omega's Common Stock were
issued to each of the Consultants to be held in escrow pending fulfillment of
their consulting obligations. Following completion of the consulting services,
all of such shares were released from the escrow on April 28, 1997 at an imputed
value of approximately
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$4.50 per share and delivered to the Consultants. In addition, Omega agreed to
make cash payments to the Consultants aggregating $842,000 over three years
beginning in January 1998. Omega is obligated to make quarterly payments to each
of Dr. Glovsky and Mayflower on January 1, April 1, June 1 and September 1,
1998, 1999 and 2000 of $67,500, $27,000 and $10,800, respectively. Omega made
payments under this agreement aggregating $305,000 to Dr. Glovsky and Mayflower
during 1998. Mayflower is a stockholder of Omega and holds 75 membership points
of OMEGA, LLC, Omega's principal stockholder. See "Security Ownership of Certain
Beneficial Owners and Management."
Omega has entered into another consulting agreement with Dr. Glovsky which
became effective upon the closing of the IPO. The initial term of the agreement
is three years, and Dr. Glovsky provides consulting services to Omega in
connection with identifying orthodontic practices with potential to affiliate
with Omega and negotiating and closing affiliation agreements with such
practices. Dr. Glovsky was paid a monthly advance of $5,000, which advance was
subject to review and reduction in the event that certain affiliation targets
were not met by Omega. The Board of Directors of Omega determined that such
targets had been met during 1997, and no reduction of Dr. Glovsky's advances was
imposed. Beginning in 1998 and thereafter, Dr. Glovsky's consulting agreement
provides for a maximum monthly fee of $5,000. In 1998, Omega paid Dr. Glovsky
fees of $60,000 and expects to pay him fees of approximately $60,000 under this
agreement in 1999.
Omega entered into a consulting agreement with LMG which became effective
on May 1, 1997 and provides that LMG shall make Mr. Mulherin, a principal
stockholder of LMG, available to serve as Omega's Chief Financial Officer. The
initial term of the agreement is three years. For the services of Mr. Mulherin
as Chief Financial Officer, LMG was paid a monthly retainer fee of $5,000 prior
to the closing of the Omega IPO and a monthly retainer fee of $10,000 thereafter
and for the term of the agreement. In addition, in connection with work done by
LMG in preparation for and completion of the Omega IPO, Omega paid LMG fees of $
148,565 and issued LMG 10,000 shares of unregistered Common Stock. Omega granted
LMG a non-qualified stock option under the Incentive Stock Plan to acquire
150,000 shares of Omega's Common Stock at an exercise price of $6.00 per share.
Omega has also agreed to indemnify LMG against certain liabilities that may
arise in connection with the services to be rendered by LMG under the agreement.
During September 1996, Drs. Glovsky and Bellavia, both directors of Omega
and more than 5% owners of OMEGA, LLC, Omega's principal stockholder, purchased
$25,000 and $50,000, respectively, of certain 15% bridge financing notes issued
prior to the Omega IPO (the "Bridge Notes") and received 5,000 and 10,000
shares, respectively, of Omega's Common Stock in connection therewith. In April,
1997, Dr. Glovsky and Dr. Grove, also a director of Omega, purchased an
additional $5,000 and $25,000 of Bridge Notes, respectively, and received an
additional 1,000 and 5,000 shares of the Common Stock, respectively, in
connection therewith. In October 1997, Omega repaid all of its Bridge Notes
(including interest accrued thereon) from the net proceeds of the Omega IPO,
including the Bridge Notes held by Drs. Glovsky, Bellavia and Grove.
In June, 1997, Dr. Glovsky and Dr. Grove purchased $25,000 each of certain
16% interim financing notes issued prior to the Omega IPO (the "Interim Notes"),
and Dr. Glovsky subsequently purchased an additional $60,000 of Interim Notes.
In October 1997, Omega repaid all of its Interim Notes (including interest
accrued thereon)
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from the net proceeds of the Omega IPO, including the Interim Notes held by Dr.
Glovsky and Dr. Grove.
Omega entered into an affiliation agreement with Dr. Grove which Omega
closed concurrently with the closing of the Omega IPO. Pursuant to its agreement
with Dr. Grove, a director of Omega, Omega acquired certain assets of Dr.
Grove's orthodontic practice in exchange for a cash payment of $333,567 and
129,721 shares of Omega's common stock.
In December 1997, Omega loaned Mr. Schulhof $100,000 in exchange for his
promissory note (the "Schulhof Note"). The Schulhof Note is a demand note which
bears interest at the rate of prime (as published in The Wall Street Journal)
plus two percent. Principal and interest are due upon demand, but if not sooner
demanded, then in December 2000.
Effective as of January 1, 1998, Omega and Dr. Bellavia terminated his
Employment Agreement and entered into a consulting agreement. The initial term
of the agreement is three years. Dr. Bellavia will provide services relating to
the design, schedule of installation and follow up on the effectiveness of all
managerial systems used by Omega's affiliated orthodontic practices and the
management of the consultants used by Omega to optimize and maintain the
affiliate practices' programs. Dr. Bellavia is paid a monthly retainer fee of
$10,000, and Omega expects to pay Dr. Bellavia consulting fees in 1998 of
approximately $120,000.
Omega entered into a consulting agreement with Mr. Wexler which became
effective on March 9, 1998 and provides that Mr. Wexler will serve as Omega's
Chief Legal Officer. The initial term of the agreement is three years. Mr.
Wexler is paid a monthly retainer fee of $7,350, and Omega has agreed to
reimburse Mr. Wexler for certain bar association and professional liability
expenses he incurs in connection with his services as Chief Legal Officer of
Omega. Omega granted Mr. Wexler a non-qualified stock option under the Incentive
Stock Plan to acquire 25,000 shares of Omega's Common Stock at an exercise price
of $3.0625 per share. Omega has also agreed to indemnify Mr. Wexler against
certain liabilities that may arise in connection with the services to be
rendered under the agreement and to pay him in a lump sum the amount that he
would be entitled to receive under the agreement in the event that his
employment terminates within six months following a change in control of Omega.
Omega has adopted a policy to the effect that transactions between it and
its officers, directors, principal stockholders and the affiliates of the
foregoing persons be on terms no less favorable to Omega than could reasonably
be obtained in arms-length transactions with independent third parties, and that
any such transactions also be approved by a majority of Omega's outside
independent directors disinterested in the transaction.
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THE SPECIAL MEETINGS
This document is furnished in connection with the solicitation of proxies
from the holders of Omega common stock by Omega's board of directors for use at
the special meeting of Omega's stockholders (the "Omega Special Meeting"). This
document and accompanying form of proxy are first being mailed to the Omega
stockholders on or about May , 1999.
This document is also furnished in connection with the solicitation of
proxies from the holders of Pentegra common stock by Pentegra's board of
directors for use at the special meeting of Pentegra's stockholders (the
"Pentegra Special Meeting"). This document and accompanying form of proxy are
first being mailed to the Pentegra stockholders on or about May , 1999.
THE OMEGA SPECIAL MEETING
TIME AND PLACE; PURPOSE
The Omega special meeting will be held at Omega's offices in Boston,
Massachusetts on June 30, 1999, starting at 1:00 p.m., local time. At the
special meeting, the Omega stockholders will be asked to consider and vote upon
the Merger Agreement proposal.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
Omega's board of directors has fixed the close of business on May 14, 1999
as the record date for Omega stockholders entitled to notice of and to vote at
the special meeting.
Currently, the only outstanding voting securities of Omega are the Omega
common stock. Only holders of record of Omega common stock on the Omega record
date are entitled to notice of the Omega Special Meeting, and to vote at the
Omega Special Meeting. Each holder of record, as of the record date, of Omega
common stock is entitled to cast one vote per share on the Merger Agreement
proposal.
On the record date, there were approximately shares of Omega
common stock outstanding and entitled to vote at the Omega Special Meeting, held
by approximately stockholders of record.
The favorable vote of a majority of all outstanding shares of Omega common
stock outstanding on the record date is required to approve the Merger
Agreement.
On the record date, the directors and executive officers of Omega and their
affiliates beneficially owned and were entitled to vote shares of
Omega common stock, or approximately % of the shares of Omega common stock
outstanding on the Omega record date.
VOTING OF PROXIES
All shares of Omega common stock represented by proxies properly received
prior to or at the Omega Special Meeting and not revoked will be voted in
accordance with the instructions indicated in such proxies. If no instructions
are indicated on a properly executed returned proxy, such proxies will be voted
FOR the approval of the Merger Agreement.
If a proposal to adjourn the Omega Special Meeting is properly presented,
the persons named in the enclosed form of proxy will not have discretion to vote
shares voted against the Merger Agreement, in favor of the adjournment proposal.
Omega is not aware of any
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matters expected to be presented at its meeting other than as described in its
notice of special meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by:
1. filing, including by telecopy, with the Secretary of Omega, before
taking the vote at the special meeting, a written notice of revocation
bearing a later date than the date of the proxy or a later-dated proxy
relating to the same shares; or
2. attending the relevant meeting and voting in person.
In order to vote in person at the Omega Special Meeting, Omega stockholders
must attend the meeting and cast their votes in accordance with the voting
procedures established for the meeting. Attendance at a meeting will not in and
of itself constitute a revocation of a proxy. Any written notice of revocation
or subsequent proxy must be sent so as to be delivered at or before the taking
of the vote at the applicable meeting as follows:
- to Omega Orthodontics, Inc., 374 Congress Street, Suite 407, Boston,
Massachusetts 02210
Omega stockholders who require assistance in changing or revoking a proxy
should contact Peter Wexler at (617) 523-5717.
Abstentions may be specified on the Merger Agreement proposal. Because the
favorable vote of holders of a majority of the outstanding shares of Omega
common stock on the Merger Agreement proposal is required to approve such
proposal, a proxy marked "ABSTAIN" with respect to any such proposal will have
the effect of a vote against such proposal. In addition, the failure of an Omega
stockholder in connection with the Merger Agreement proposal to return a proxy
will have the effect of a vote against the Merger Agreement proposal.
Under Nasdaq rules, brokers who hold shares in street name for customers
have the authority to vote on certain "routine" proposals when they have not
received instructions from beneficial owners. Under Nasdaq rules, such brokers
are precluded from exercising their voting discretion with respect to the
approval and adoption of non-routine matters such as the Merger Agreement
proposal and, thus, absent specific instructions from the beneficial owner of
such shares, brokers are not empowered to vote such shares with respect to the
approval and adoption of such proposal (i.e., "broker non-votes"). Since the
affirmative votes described above are required for approval of the Merger
Agreement proposal, a "broker non-vote" with respect to such proposal will have
the effect of a vote against such proposal.
It is the policy of Omega to keep proxy cards, ballots and voting
tabulations that identify individual stockholders confidential, except where
disclosure is mandated by law and in other limited circumstances.
Omega expects the cost of solicitation to be approximately $2,000. In
addition to solicitation by mail, arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send the proxy
materials to beneficial owners and Omega will, upon request, reimburse such
brokerage houses and custodians for their reasonable expenses in so doing. Omega
has retained Continental Stock and Transfer Company to aid in the solicitation
of proxies and to verify certain records related to the solicitations.
Continental Stock and Transfer Company will receive customary fees and expense
reimbursement for such services. To the extent necessary in order to ensure
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sufficient representation at its meeting, Omega may request by telephone or
telecopy the return of proxy cards. The extent to which this will be necessary
depends entirely upon how promptly proxy cards are returned. Stockholders are
urged to send in their proxies without delay.
Omega stockholders should not send in any stock certificates with their
proxy cards. A transmittal form with instructions for the surrender of
certificates representing Omega common stock will be mailed by Pentegra to
former Omega stockholders as soon as practicable after the consummation of the
Merger.
THE PENTEGRA SPECIAL MEETING
TIME AND PLACE; PURPOSE
The Pentegra special meeting will be held at Pentegra's offices at 2999
North 44th Street, Suite 650, Phoenix, Arizona on June 30, 1999, starting at
10:00 a.m., local time. At the special meeting, the Pentegra stockholders will
be asked to consider and vote upon the Merger agreement proposal.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the Pentegra special meeting, where they will have the opportunity to make a
statement, if they so desire, and will be available to respond to appropriate
questions.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
Pentegra's board of directors has fixed the close of business on May 14,
1999 as the record date for Pentegra stockholders entitled to notice of and to
vote at the special meeting.
Currently, the only outstanding voting securities of Pentegra is the
Pentegra common stock. Only holders of record of Pentegra common stock on the
Pentegra record date are entitled to notice of the Pentegra Special Meeting, and
to vote at the Pentegra Special Meeting. Each holder of record, as of the record
date, of Pentegra common stock is entitled to cast one vote per share on the
Merger Agreement proposal.
On the record date, there were approximately shares of Pentegra common
stock outstanding and entitled to vote at the Pentegra Special Meeting, held by
approximately stockholders of record.
The presence in person or by proxy of a majority of all shares of Pentegra
common stock outstanding on the record date is required for a quorum. A majority
of all votes cast at the Pentegra Special Meeting is required to approve the
Merger Agreement.
On the record date, the directors and executive officers of Pentegra and
their affiliates beneficially owned and were entitled to vote shares
of Pentegra common stock, or approximately % of the shares of Pentegra
common stock outstanding on the Pentegra record date.
VOTING OF PROXIES
All shares of Pentegra common stock represented by proxies properly
received prior to or at the Pentegra Special Meeting and not revoked will be
voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated on a properly executed returned proxy, such proxies
will be voted FOR the approval of the Merger Agreement. Abstentions may be
specified on the Merger Agreement proposal.
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If a proposal to adjourn the Pentegra Special Meeting is properly
presented, the persons named in the enclosed form of proxy will not have
discretion to vote shares voted against the Merger Agreement, in favor of the
adjournment proposal. Pentegra is not aware of any matters expected to be
presented at its meeting other than as described in its notice of special
meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by:
1. filing, including by telecopy, with the Secretary of Pentegra, before
taking the vote at the special meeting, a written notice of revocation
bearing a later date than the date of the proxy or a later-dated proxy
relating to the same shares; or
2. attending the relevant meeting and voting in person.
In order to vote in person at the Pentegra Special Meeting, Pentegra
stockholders must attend the meeting and cast their votes in accordance with the
voting procedures established for the meeting. Attendance at a meeting will not
in and of itself constitute a revocation of a proxy. Any written notice of
revocation or subsequent proxy must be sent so as to be delivered at or before
the taking of the vote at the applicable meeting as follows:
- to Pentegra Dental Group, Inc., 2999 North 44th Street, Suite 650,
Phoenix, Arizona 85018
Pentegra stockholders who require assistance in changing or revoking a
proxy should contact at .
Under AMEX rules, brokers who hold shares in street name for customers have
the authority to vote on certain "routine" proposals when they have not received
instructions from beneficial owners. Under Amex rules, such brokers are
precluded from exercising their voting discretion with respect to the approval
and adoption of non-routine matters such as the Merger Agreement proposal and,
thus, absent specific instructions from the beneficial owner of such shares,
brokers are not empowered to vote such shares with respect to the approval and
adoption of such proposal (i.e., "broker non-votes").
It is the policy of Pentegra to keep proxy cards, ballots and voting
tabulations that identify individual stockholders confidential, except where
disclosure is mandated by law and in other limited circumstances.
Pentegra expects the cost of solicitation to be approximately $ .
In addition to solicitation by mail, arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send the proxy
materials to beneficial owners and Pentegra will, upon request, reimburse such
brokerage houses and custodians for their reasonable expenses in so doing.
Pentegra has retained to aid in the solicitation of proxies and
to verify certain records related to the solicitations. will
receive customary fees and expense reimbursement for such services. To the
extent necessary in order to ensure sufficient representation at its meeting,
Pentegra may request by telephone or telecopy the return of proxy cards. The
extent to which this will be necessary depends entirely upon how promptly proxy
cards are returned. Stockholders are urged to send in their proxies without
delay.
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COMPARISON OF STOCKHOLDER RIGHTS
Holders of shares of Omega common stock will, upon the exchange of their
shares pursuant to the merger, become holders of shares of Pentegra common
stock, and their rights as such will be governed by Delaware law and Pentegra's
charter and by-laws. The material differences between the rights of holders of
shares of Omega common stock and the rights of holders of shares of Pentegra
common stock, which result from differences in their governing corporate
documents, are summarized below.
<TABLE>
<CAPTION>
PENTEGRA OMEGA
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<S> <C>
GENERAL
Pentegra is a Delaware corporation subject to Omega is a Delaware corporation subject to the
the provisions of the General Corporation Law provisions of the General Corporation Law of the
of the State of Delaware. State of Delaware.
The rights of Pentegra stockholders are governed The rights of Omega stockholders are governed by
by Pentegra's charter and by-laws, in addition Omega's charter and by-laws, in addition to
to Delaware law. Delaware law.
Omega stockholders will, upon consummation of
the Merger, become Pentegra stockholders.
AUTHORIZED CAPITAL
The authorized and outstanding capital stock of The authorized and outstanding capital stock of
Pentegra consists of: Omega consists of:
40,000,000 Pentegra common shares, $0.001 par 9,500,000 Omega common stock $0.01 par value, of
value, of which 5,052,584 shares are outstanding which 5,052,584 shares are outstanding as of the
as of the Pentegra record date; Omega record date; and
10,000,000 shares of preferred stock, with a par 500,000 shares of preferred stock, with a par
value of $0.001 per share. There are no shares value of $0.01 per share. There are no shares of
of Pentegra preferred stock outstanding as of Omega preferred stock outstanding as of the
the Pentegra record date. Omega record date.
AMENDMENT OF GOVERNING DOCUMENTS
CHARTER
The following is required to amend the Pentegra The following is required to amend the Omega
charter: charter:
the board shall first approve a proposed the board shall first approve a proposed
amendment and submit it to the stockholders; and amendment and submit it to the stockholders; and
the approval of a majority of the votes cast by the approval of a majority of the votes cast by
stockholders entitled to vote is required. stockholders entitled to vote is required.
</TABLE>
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<TABLE>
<CAPTION>
PENTEGRA OMEGA
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<S> <C>
AMENDMENT OF GOVERNING DOCUMENTS
BY-LAWS
The Pentegra by-laws may be amended, adopted or The Omega by-laws may be amended by:
repealed by:
a majority of the votes cast by stockholders
a majority of the votes cast by stockholders entitled to vote; or
entitled to vote; or
a majority vote of the board of directors.
a majority vote of the board of directors.
DIRECTORS
NUMBERS
The number of directors must be between 1 and The number of directors must be between 1 and 9,
19, with the actual number to be determined by with the actual number to be determined by the
the board of directors. board of directors.
The current number of directors is 13. The current number of directors is 6.
CLASSIFICATION
The Pentegra board of directors is divided into One class.
three classes, each as nearly equal in number
as possible, with one class being elected
annually to a three year term.
VACANCIES
Any vacancy which occurs during the year or A vacancy occurring on the Omega board of
which occurs as a result of an increase in the directors, including a vacancy resulting from an
size of the Pentegra board of directors may be increase in the number of directors, may be
filled for the balance of the term by (i) a filled by the vote of a majority of the
majority vote of the directors then in office, remaining Omega directors (whether or not a
even if less than a quorum, or (ii) a majority quorum). Directors chosen in this manner shall
of the votes cast by stockholders entitled to remain in office for the unexpired term and
vote. until his or her successor is elected and
qualified or until his or her earlier
resignation or removal.
</TABLE>
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<TABLE>
<CAPTION>
PENTEGRA OMEGA
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<S> <C>
DIRECTORS
INDEMNIFICATION
As permitted by Delaware law, the Pentegra As permitted by Delaware law, the Omega charter
charter contains a provision that eliminates contains a provision that eliminates the
the personal liability of directors or officers personal liability of directors to the
to the corporation or to its stockholders for corporation or to its stockholders for damages
damages for breaches of any duty, except where a for breaches of duty, except where the
judgment or other final adjudication establishes director's acts or omissions:
that the director's acts or omissions:
were in breach of such person's duty of loyalty
were in breach of such director's or officer's to Omega and its stockholders;
duty of loyalty to Pentegra or its stockholders;
were in bad faith or involved intentional
were not in good faith or involving a knowing misconduct or a knowing violation of the law;
violation of law;
involved transactions from which such director
resulted in receipt by such director or officer derived an improper personal benefit; or
of an improper personal benefit.
resulted in a violation of a statute prohibiting
The Pentegra charter provides that the certain dividend declarations, certain payments
corporation shall indemnify its officers, to stockholders, and particular types of loans.
directors, employees and certain corporate
agents for any expenses and liabilities incurred Omega is required by its by-laws to indemnify a
in their official capacity to the maximum extent director, officer, employee, or agent of Omega
permissible under Delaware law. who is or was made a party to any proceeding by
reason of the fact that he is or was such a
Under Delaware law, a corporation may indemnify director, officer, employee or agent or is or
any director, officer, employee and corporate was serving any other corporation, partnership,
agent made, or threatened to be made, a party to joint venture, trust, employee benefit plan or
any action or proceeding by reason of his other enterprise, at the request of Omega if he
position in the corporation. In order to be acted:
indemnified, the director, officer, employee or
corporate agent must have acted: in good faith;
in good faith; in a manner which he reasonably believed to be
in or not opposed to the best interests of the
in a manner which he reasonably believed to be corporation; and
in or not opposed to the best interests of the
corporation; and with respect to any criminal proceeding, with no
reasonable cause to believe that his conduct was
with respect to any criminal proceeding, with no unlawful.
reasonable cause to believe that his conduct was
unlawful. Furthermore, the Omega by-laws provide that each
director, officer, employee or agent of Omega
Under Delaware Law, the expenses incurred by a shall be indemnified against all costs and
director, officer, employee or corporate agent expenses reasonably incurred by or imposed upon
in connection with any such proceeding may be him in connection with or resulting from any
paid by Pentegra action, suit or proceeding to which he may be
made a party by reason of his being or having
been a director, officer, employee
</TABLE>
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<TABLE>
<CAPTION>
PENTEGRA OMEGA
-------- -----
<S> <C>
DIRECTORS
INDEMNIFICATION
in advance of its final disposition upon the or agent of Omega (whether or not he continues
receipt of an undertaking by or on behalf of the to be such at the time of incurring such cost or
director, officer, employee or corporate agent expense), provided that payment of expenses by a
to repay such amount if it shall be determined director or officer in advance of the final
that he is not entitled to be indemnified as disposition of the proceeding shall be made only
provided under Delaware law. upon delivery to Omega of an undertaking that
the director or officer will repay all amounts
if it is determined that he is not entitled to
be indemnified.
</TABLE>
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ANTI-TAKEOVER PROVISIONS
<TABLE>
<CAPTION>
PENTEGRA OMEGA
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<S> <C>
Certain provisions of Pentegra's Omega is subject to Section 203 of the
Restated Certificate of Incorporation Delaware General Corporation Law
(the "Certificate of Incorporation") ("Section 203"). In general, Section
and Bylaws and of the DGCL could, 203 prohibits a publicly held Delaware
together or separately, discourage corporation from engaging in a
potential acquisition proposals, delay "business combination" with an
or prevent a change in control of "interested stockholder" for a period
Pentegra or limit the price that of three years following the date that
certain investors might be willing to such stockholder became an interested
pay in the future for shares of the stockholder, unless (i) prior to such
Common Stock. The Certificate of date either the business combination or
Incorporation provides for "blank the transaction which resulted in the
check" preferred stock, which may be stockholder becoming an interested
issued without stockholder approval and stockholder is approved by the board of
provides for a "staggered" Board of directors of the corporation, (ii) upon
Directors. In addition, certain consummation of the transaction which
provisions of Pentegra's Bylaws resulted in the stockholder becoming an
restrict the right of the stockholders interested stockholder, the interested
to call a special meeting of stockholder owns at least 85 percent of
stockholders, to nominate directors, to the voting stock of the corporation
submit proposals to be considered at outstanding at the time the transaction
stockholders' meetings and to adopt commenced (excluding for purposes of
amendments to the Bylaws, and the determining the number of shares
Bylaws require that at least a majority outstanding, shares owned by (A)
of the members of the Board of persons who are both directors and
Directors be licensed dentists who are officers and (B) employee stock plans
affiliated with Affiliated Practices. in certain circumstances), or (iii) on
Pentegra is subject to Section 203 of or after such date the business
the DGCL, which, subject to certain combination is approved by the board
exceptions, prohibits a Delaware and authorized at an annual or special
corporation from engaging in any of a meeting of stockholders, and not by
broad range of business acquisitions written consent, by the affirmative
with an "interested stockholder" for a vote of at least 66 2/3 percent of the
period of three years following the outstanding voting stock which is not
date such stockholder became an owned by the interested stockholder. A
interested stockholder. "business combination" includes a
Merger, consolidation, asset sale, or
other transaction resulting in a
financial benefit to the interested
stockholder. An "interested
stockholder" is a person who, together
with affiliates and associates, owns
(or within three years, did own) 15
percent or more of the corporation's
voting stock. The restrictions imposed
by Section 203 will not apply to a
corporation if, among other things, (i)
the corporation's original charter
contains a provision expressly electing
not to be governed by Section 203 or
(ii) 12 months have passed after the
corporation, by action of its
stockholders holding a majority of the
outstanding stock, adopts an amendment
to its charter or by-laws expressly
electing not to be governed by Section
203. Omega has not elected not to be
governed by Section 203 and, therefore,
the restrictions imposed by Section 203
apply to Omega.
</TABLE>
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LEGAL MATTERS
The validity of the Pentegra common shares to be issued to Omega
stockholders pursuant to the Merger will be passed upon by Jackson Walker LLP,
special counsel to Pentegra.
EXPERTS
The consolidated financial statements of Omega Orthodontics, Inc.
incorporated by reference into this Joint Proxy Statement/Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
L.L.P., independent public accountants, as indicated in their report with
respect thereto, and are incorporated herein by reference in reliance upon
authority of said firm as experts in accounting and auditing.
The financial statements of Pentegra Dental Group, Inc. as of December 31,
1997 and for the period from inception, February 21, 1997, through December 31,
1997, as detailed in the index on page F-1, included in this Joint Proxy
Statement/Prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
FUTURE STOCKHOLDER PROPOSALS
Omega does not intend to hold an 1999 Annual Meeting of Stockholders
because of the merger. As such, it will not deliver proxy materials for such a
meeting. If proxy materials are required to be delivered and completion of the
merger does not occur, however, stockholder proposals intended to be presented
at the 2000 Annual Meeting of stockholders of Omega must be received by the
Secretary of Omega by December 24, 1999 for inclusion in the proxy materials for
such meeting.
Stockholder proposals intended to be presented at the 2000 Annual Meeting
of Stockholders of Pentegra must be received by the Secretary of Pentegra by
March 31, 2000 for inclusion in the proxy materials for such meeting.
WHERE YOU CAN FIND MORE INFORMATION
Pentegra and Omega file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Pentegra's and Omega's SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
Pentegra filed a Registration Statement on Form S-4 to register with the
SEC the shares at Pentegra common stock to be issued to Omega stockholders in
the merger. This document is a part of that Registration Statement and
constitutes a Joint Proxy Statement/Prospectus of Pentegra in addition to being
a proxy statement of Omega and Pentegra for their special meetings. As permitted
by SEC rules, this document does not contain all the information you can find in
the Registration Statement or the exhibits to the Registration Statement.
The SEC allows Pentegra and Omega to "incorporate by reference" information
into this document, which means that Pentegra and Omega can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
document, except for
109
<PAGE> 117
any information superseded by information in this document. This document
incorporates by reference the documents set forth below that Pentegra and Omega
have previously filed with the SEC. These documents contain important
information about Pentegra and Omega and their financial performance.
<TABLE>
<CAPTION>
PENTEGRA SEC FILINGS
(FILE NO. 1-13725) PERIOD
- -------------------- -------------------------------------
<S> <C>
Quarterly Reports on Form 10-Q....... Quarters ended June 30, 1998,
September 30, 1998 and December 31,
1998
Registration Statement on Form S-4... Filed on November 17, 1998 (amended
on January 25, 1999) and September
10, 1998
Registration Statement on Form S-8... Filed on November 16, 1998 and June
30, 1998
</TABLE>
Pentegra is also incorporating by reference additional documents that
Pentegra files with the SEC between the date of this document and the date of
the Pentegra special meeting.
<TABLE>
<CAPTION>
OMEGA'S SEC FILINGS
(FILE NO. 1-4001) PERIOD
- ------------------- -------------------------------------
<S> <C>
Annual Report on Form 10-K........... Fiscal year ended December 31, 1998
Quarterly Reports on Form 10-K....... Quarters ended March 31, 1998, June
30, 1998 and September 30, 1998
Current Reports on Form 8-K.......... Filed on February 9, 1999
</TABLE>
Omega is also incorporating by reference additional documents that Omega
files with the SEC between the date of this document and the date of the Omega
special meeting.
Pentegra has supplied all information contained or incorporated by
reference in this document relating to Pentegra, and Omega has supplied all such
information contained or incorporated by reference in this document relating to
Omega.
You may already have been sent some of the documents incorporated by
reference, but you can obtain any of them from Pentegra or Omega, as
appropriate, or the SEC. Documents incorporated by reference are available from
Pentegra or Omega, as appropriate, without charge, excluding all exhibits unless
an exhibit has been specifically incorporated by reference in this document.
Stockholders may obtain documents incorporated by reference in this document by
Pentegra by requesting them in writing or by telephone at the following address:
Pentegra Dental Group, Inc.
2999 North 44th Street, Suite 650
Phoenix, Arizona 85018
(602) 952-1200
110
<PAGE> 118
Stockholders may obtain documents incorporated by reference in this
document by Omega by requesting them in writing or by telephone at the following
address:
Omega Orthodontics, Inc.
374 Congress St., Suite 407
Boston, MA. 02210
Attention: Peter Wexler
Phone Number: (617) 523-5717
If you would like to request documents from Pentegra or Omega, please do so
by , 1999 to receive them before the Omega stockholder meeting.
Pentegra or Omega will send such documents by first-class mail within one
business day of receiving any such request.
You should rely only on the information contained or incorporated by
reference in this document to vote on the Merger Agreement proposal. We have not
authorized anyone to provide you with information that is different from what is
contained in this document. This document is dated May , 1999. You should not
assume that the information contained in this document is accurate as of any
date other than such date, and neither the mailing of this document to
stockholders nor the issuance of Pentegra common shares in the Merger shall
create any implication to the contrary.
111
<PAGE> 119
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
PENTEGRA DENTAL GROUP, INC. AND OMEGA ORTHODONTICS, INC.
Unaudited Pro Forma Combined Statements................... F-2
Unaudited Pro Forma Combined Balance Sheet................ F-3
Unaudited Pro Forma Combined Statement of Operations...... F-4
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-5
PENTEGRA DENTAL GROUP, INC.
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-7
Balance Sheet as of December 31, 1997..................... F-8
Statement of Operations for the period from inception,
February 21, 1997, through December 31, 1997........... F-9
Statement of Changes in Stockholders' Deficit for the
period from inception, February 21, 1997, through
December 31, 1997...................................... F-10
Statement of Cash Flows for the period from inception,
February 21, 1997, through December 31, 1997........... F-11
Notes to Financial Statements............................. F-12-22
UNAUDITED FINANCIAL STATEMENTS
Balance Sheets -- December 31, 1997 and March 31, 1998.... F-23
Statements of Operations for the period from inception,
February 21, 1997 through March 31, 1997 and for the
Three Months ended March 31, 1998...................... F-24
Statement of Changes in Stockholders' Equity for the
period from inception, February 21, 1997 through
December 31, 1997 and for the Three Months ended March
31, 1998............................................... F-25
Statement of Cash Flows for the period from inception
February 21, 1997, through March 31, 1997 and for the
Three Months ended March 31, 1998...................... F-26
Notes to Financial Statements............................. F-27-30
Balance Sheets -- March 31 and December 31, 1998.......... F-31
Statements of Operations for the Nine Months Ended
December 31, 1997 and 1998............................. F-32
Statement of Changes in Stockholders' Equity for the Nine
Month Period Ended December 31, 1998................... F-33
Statements of Cash Flows for the Nine Months Ended
December 31, 1997 and 1998............................. F-34
Notes to Unaudited Financial Statements................... F-35-38
OMEGA ORTHODONTICS, INC.
Consolidated Financial Statements:
Report of Independent Public Accountants.................. F-39
Consolidated Balance Sheets............................... F-40
Consolidated Statements of Operations..................... F-41
Consolidated Statements of Stockholders' Equity........... F-42
Consolidated Statements of Cash Flows..................... F-43-44
Notes to Consolidated Financial Statements................ F-45-58
</TABLE>
F-1
<PAGE> 120
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the acquisition of all the outstanding capital stock of Omega.
The pro forma combination of Pentegra and Omega has been accounted for under the
purchase method of accounting.
The Unaudited Pro Forma Combined Condensed Balance Sheet is derived from
the unaudited condensed consolidated balance sheets of Pentegra and Omega and is
presented as if the merger had been consummated on the balance sheet date. The
Unaudited Pro Forma Combined Statements of Operations for the nine months ended
December 31, 1998 are presented as if the merger had been consummated on April
1, 1998. Omega results have been recast to conform to the presentation of the
nine months ended December 31, 1998 by adjusting Omega's audited results for the
year ended December 31, 1998 to exclude the unaudited results for the three
months ended March 31, 1998.
The Unaudited Pro Forma Combined Financial Statements do not purport to
indicate what the combined results of operations of Pentegra and Omega would
have been had the merger occurred as of the dates indicated of the results of
operations that may be obtained in the future. The Unaudited Pro Forma Combined
Statements of Operations do not reflect the anticipated cost savings resulting
from integration of the operations of Pentegra and Omega. The pro forma
adjustments described in the accompanying notes are based on estimates derived
from information currently available.
The unaudited pro forma financial information should be read in conjunction
with the consolidated financial statements and related notes of Pentegra and
Omega contained in the Annual Report on Form 10-K of Omega for the period ended
December 31, 1998, and Pentegra's Quarterly Report on Form 10-Q for the nine
month period ended December 31, 1998, which are also included elsewhere in this
Proxy Statement/Prospectus.
F-2
<PAGE> 121
PENTEGRA DENTAL GROUP, INC. AND OMEGA ORTHODONTICS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PENTEGRA OMEGA ADJUSTMENTS PROFORMA
-------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 4,717 $ 982 $ (330)(B) $ 5,369
Receivables from affiliated practices..... 4,632 2,486 -- 7,118
Deferred tax asset........................ 342 -- -- 342
Prepaid and other current assets.......... 1,033 314 -- 1,347
------- ------- -------- -------
Total current assets................... 10,724 3,782 (330) 14,176
Property and equipment, net................. 4,698 908 100(B) 5,706
Intangible assets, net...................... 21,028 9,721 (6,595)(B) 24,154
Notes receivables from affiliated
practices................................. 1,168 -- -- 1,168
Deferred tax asset.......................... 475 -- -- 475
Other assets, net........................... 264 43 -- 307
------- ------- -------- -------
Total assets........................... $38,357 $14,454 $ (6,825) $45,986
======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities............................ $ 2,118 $ 388 $ -- $ 2,506
Accrued employment agreement.............. 1,050 -- -- 1,050
Patient prepayments....................... -- 1,813 -- 1,813
Notes payable............................. 2,337 517 -- 2,854
------- ------- -------- -------
Total current liabilities.............. 5,505 2,718 -- 8,223
Line of credit.............................. 8,000 -- -- 8,000
Subordinated Notes -- Series A.............. 4,211 -- -- 4,211
Long-term debt.............................. 568 1,055 -- 1,623
Shareholders' equity
Common stock.............................. 9 51 (49)(A),(B) 11
Additional paid-in capital................ 21,638 15,031 (11,177)(A),(B) 25,492
Retained earnings (deficit)............... (1,574) (4,401) 4,401(B) (1,574)
------- ------- -------- -------
Total shareholders' equity............. 20,073 10,681 (6,825) 23,929
------- ------- -------- -------
Total liabilities and shareholders'
equity............................... $38,357 $14,454 $ (6,825) $45,986
======= ======= ======== =======
</TABLE>
See accompanying notes to the unaudited merger pro forma combined financial
statements
F-3
<PAGE> 122
PENTEGRA DENTAL GROUP, INC. AND OMEGA ORTHODONTICS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDING DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PENTEGRA OMEGA ADJUSTMENTS PROFORMA
---------- ------ ----------- ----------
<S> <C> <C> <C> <C>
Net revenue....................................... $ 26,039 $5,747 $ 100(C) $ 31,886
Operating expenses:
Clinical salaries, wages and benefits........... 9,952 2,172 -- 12,124
Dental supplies and lab fees.................... 4,836 887 -- 5,723
Rent............................................ 2,042 586 -- 2,628
Advertising and marketing....................... 468 137 -- 605
General and administrative...................... 3,248 1,528 (479)(D) 4,297
Other operating expenses........................ 3,577 645 -- 4,222
Depreciation and amortization................... 689 359 (200)(E) 848
---------- ------ ------ ----------
Total operating expenses..................... 24,812 6,314 (679) 30,447
Earnings (loss) from operations................... 1,227 (567) 779 1,439
Interest income (expense), net.................. 2 12 -- 14
Other income.................................... 21 21
---------- ------ ------ ----------
Income (loss) before income taxes................. 1,229 (534) 779 1,474
Income taxes expense (benefit).................. (511) -- 10(F) (501)
---------- ------ ------ ----------
Net income (loss)................................. $ 1,740 $ (534) $ 769 $ 1,975
========== ====== ====== ==========
Basic and diluted earnings per share.............. $ 0.23 $ 0.21
========== ==========
Weighted average number of shares outstanding:
Basic and diluted............................... 7,457 (G) 9,257
========== ==========
</TABLE>
See accompanying notes to the unaudited merger pro forma combined financial
statements
F-4
<PAGE> 123
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following is a summary of the significant assumptions and adjustments
used in preparing the Unaudited Pro Forma Combined Balance Sheet as of December
31, 1998 and the Unaudited Pro Forma Combined Statements of Operations for the
nine months ended December 31, 1998.
(A) To reflect the purchase of Omega for 1,800,000 shares of Pentegra
common stock in exchange for 100% of the issued and outstanding shares
of Omega plus assumed liabilities of $3.8 million. These amounts
represent the conversion of each Omega share into 0.356 of a share of
Pentegra common stock. Pentegra common stock was valued at $1.87 per
share, which represents the average market price of Pentegra common
stock for the five-day period prior to the agreement as to the final
merger terms. Additionally, the purchase price reflects the issuance by
Pentegra of 188,000 options and 866,000 warrants to purchase 866,000
shares of Pentegra commons stock, which were valued at their estimated
fair market value in exchange for the outstanding options and warrants
of Omega.
The purchase prices has been calculated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Common stock, valued at 1.87 per share.................... $3,366
Options and warrants...................................... 90
Estimated acquisition costs............................... 400
------
Purchase price, including acquisition costs............. $3,856
======
</TABLE>
(B) The purchase price, including estimated acquisition costs, has been
allocated to assets acquired and liabilities assumed based upon their
estimated fair values. The excess purchase price over the estimated
fair value of the tangible assets acquired and liabilities assumed has
been assigned to intangible assets.
The allocation of the purchase price of Omega is as follows:
<TABLE>
<CAPTION>
PURCHASE
HISTORICAL PRICE PRO FORMA
AMOUNT ALLOCATION ADJUSTMENTS
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current assets....................... $ 3,782 $ 3,452 $ (330)
Property and equipment............... 908 1,008 100
Other long-term assets............... 9,764 3,169 (6,595)
Current liabilities.................. (2,718) (2,718) --
Long-term obligations, excluding
current maturities................. (1,055) (1,055) --
Common stock......................... (51) -- 51
Capital in excess of par value....... (15,031) -- 15,031
Accumulated deficit.................. 4,401 -- (4,401)
-------- ------- --------
$ -- $ 3,856 $ 3,856
======== ======= ========
</TABLE>
(C) Reflects the increase in management fee revenue recognition for Omega's
affiliated practices resulting from the amendments to service
agreements agreed to in connection with the merger.
F-5
<PAGE> 124
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(D) Reflects the reduction in salaries and benefits previously paid
pursuant to certain Omega employee agreements that will terminate upon
completion of the merger.
(E) Reflects the net effect of the reduction in amortization of intangible
assets and increase in depreciation of property and equipment.
(F) Income tax expense is adjusted to reflect the tax effect of the pro
forma adjustments, as well as to reflect the combined tax position of
the pro forma combined companies and utilization of net operating
losses.
(G) Weighted average shares of common stock outstanding is summarized
below:
<TABLE>
<S> <C>
Pentegra historical weighted average common stock
equivalents basic and diluted............................. 7,457,000
Pentegra shares issued for the acquisition of Omega......... 1,800,000
---------
Total number of shares used in net income per share
calculation basic and diluted.......................... 9,257,000
=========
</TABLE>
F-6
<PAGE> 125
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pentegra Dental Group, Inc.:
We have audited the accompanying balance sheet of Pentegra Dental Group,
Inc. as of December 31, 1997, and the related statements of operations, changes
in stockholders' deficit, and cash flows for the period from inception, February
21, 1997, through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pentegra Dental Group, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the period from inception, February 21, 1997, through December 31, 1997 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Houston, Texas
March 24, 1998,
except for the second and
third paragraphs of Note 8,
as to which the
date is May 5, 1998
F-7
<PAGE> 126
PENTEGRA DENTAL GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 100
-------
Total current assets................................... 100
-------
Property and equipment...................................... 409
Deferred offering costs..................................... 2,743
Organizational costs........................................ 5
-------
Total assets........................................... $ 3,257
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 2,095
Notes payable, net of discount of $135.................... 215
-------
Total current liabilities.............................. 2,310
-------
Commitments and contingencies (See Notes)
Class A redeemable preferred stock, $0.01 par value,
5,000,000 shares authorized, 900,000 shares issued and
outstanding (liquidation preference
of $900).................................................. 675
Class B redeemable preferred stock, $0.01 par value,
5,000,000 shares authorized, 683,335 shares issued and
outstanding (liquidation preference
of $683).................................................. 414
Stockholders' deficit:
Common stock, $0.01 par value, 40,000,000 shares
authorized, 1,756,667 shares issued and outstanding.... 18
Additional paid-in capital.................................. 1,194
Accumulated deficit......................................... (1,354)
-------
Total stockholders' deficit............................ (142)
-------
Total liabilities and stockholders' deficit............ $ 3,257
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 127
PENTEGRA DENTAL GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, FEBRUARY 21, 1997, THROUGH DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenue..................................................... $ --
Expenses:
General and administrative expenses....................... 709
Compensation expense in connection with issuance of common
stock.................................................. 645
-------
Total expenses......................................... 1,354
-------
Net loss............................................... $(1,354)
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 128
PENTEGRA DENTAL GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION, FEBRUARY 21, 1997, THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at February 21, 1997.... -- $ -- $ -- $ -- $ --
Issuance of common stock ($0.015
per share cash on February 21,
1997)......................... 667 7 3 -- 10
Issuance of common stock ($0.015
per share cash and $0.14 per
share compensation on May 22,
1997)......................... 767 8 107 -- 115
Issuance of common stock ($1.27
per share cash on
June 13, 1997)................ 290 3 365 -- 368
Issuance of common stock ($0.015
per share cash and $1.26 per
share compensation on June 13,
1997)......................... 33 -- 42 -- 42
Purchases of common stock....... (87) (1) -- -- (1)
Issuance of common stock ($0.015
per share cash and $7.46 per
share compensation on
September 1, 1997)............ 67 1 497 -- 498
Issuance of common stock with
promissory notes ($9.00 per
share discount on promissory
notes on October 8, 1997)..... 20 -- 180 -- 180
Net loss........................ -- -- -- (1,354) (1,354)
----- ----- ------ ------- -------
Balance at December 31, 1997.... 1,757 $ 18 $1,194 $(1,354) $ (142)
===== ===== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 129
PENTEGRA DENTAL GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, FEBRUARY 21, 1997, THROUGH DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,354)
Accretion of discount on notes payable.................... 45
Compensation associated with issuance of common stock..... 645
Increase in accounts payable and accrued liabilities...... 57
-------
Net cash used by operating activities.................. (607)
-------
Net cash used in investing activities -- additions to
property and equipment.................................... (166)
-------
Cash flows provided by financing activities:
Proceeds from issuance of common and preferred stock...... 1,476
Proceeds from issuance of notes payable................... 350
Offering costs............................................ (948)
Organizational costs...................................... (5)
-------
Net cash provided by financing activities.............. 873
-------
Net increase in cash and cash equivalents................... 100
Balance at inception, February 21, 1997..................... --
-------
Balance at December 31, 1997................................ $ 100
=======
Non-cash activities:
Offering costs accrued.................................... $ 1,795
=======
Acquisition of property and equipment accrued............. $ 243
=======
Discount on notes payable................................. $ 180
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE> 130
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Pentegra Dental Group, Inc. (the "Company") was organized as a Delaware
corporation on February 21, 1997, for the purpose of creating a dental practice
management company.
In July 1997, the Company changed its name to Pentegra Investments, Inc.
and formed a new wholly owned subsidiary named Pentegra Dental Group, Inc.
("Pentegra Dental"). Pentegra Dental's operations to date have consisted
primarily of seeking affiliations with dental practices, negotiating to acquire
the tangible assets of those practices, and negotiating agreements to provide
management services to those practices. Pentegra Dental plans to complete an
initial public offering of its common stock, par value $0.001 per share (the
"Offering") and simultaneously exchange cash and shares of its common stock for
selected assets and liabilities (the "Affiliations") of 50 dental practices (the
"Founding Affiliated Practices" and, together with dental practices with which
the Company may enter into similar transactions in the future, the "Affiliated
Practices") (see Note 4). In December 1997, the owners of the outstanding shares
of the Company's common stock agreed that, in the event the initial public
offering price is less than $12.04 per share, it will repurchase (the "Share
Repurchase") from those stockholders, on a pro rata basis, at a purchase price
of $0.015 per share, that number of shares as will be necessary so that the
aggregate number of shares of Pentegra Dental common stock issuable in
connection with the Affiliations and the Share Exchange (as defined below) will
not exceed 3,941,898 shares. Pursuant to that agreement, the Company will
repurchase approximately 51.8% of each such stockholder's shares of the Company
common stock, or an aggregate of 909,237 shares. The current shareholders will
exchange on a share-for-share basis, their remaining shares of the Company's
common stock, par value $0.015 per share, for shares of common stock of Pentegra
Dental (the "Share Exchange"). It is contemplated that 245,835 shares of Class B
preferred stock held by affiliates of the Company will be repurchased at their
original issuance prices ranging from $0.01 to $1.00 per share and 1,337,500
shares of Class A and Class B preferred stock held by nonaffiliates will be
redeemed at a price of $1.50 per share (see Note 5). Pentegra Dental has also
entered into an agreement to acquire substantially all the assets and operations
of a dental management consulting firm, Pentegra, Ltd., and a dental management
seminar company, Napili, International (the "Pentegra/Napili Transaction") (see
Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as highly liquid financial
instruments with maturities of three months or less at the date of purchase.
DEFERRED IPO COSTS
Deferred IPO costs include legal, accounting and other costs directly
related to the IPO. All deferred IPO costs will be charged against the proceeds
of the IPO upon its completion. Such costs would be charged to expense if the
IPO were not completed.
F-12
<PAGE> 131
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ORGANIZATIONAL COSTS
Organizational costs are being amortized on a straight-line basis over a
five-year period.
STOCK OPTION PLAN
In September 1997, the board of directors of Pentegra Dental adopted the
1997 Stock Compensation Plan (the "Plan"). Employees, non-employee directors and
advisors and directors will be eligible to receive awards under the Plan and
only employees of the Company will be eligible to receive incentive stock
options. The aggregate number of options to purchase shares of common stock and
other awards of shares of common stock that may be granted under the Plan may
not exceed 2,000,000 shares. As of December 31, 1997, Pentegra Dental had
authorized for issuance options to acquire approximately 672,000 shares to
employees, practice employees and directors on the date the initial public
offering price is determined. The exercise price of these options will be the
initial public offering price per share. The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which establishes accounting and reporting standards for
stock-based compensation plans. The Company will account for options issued to
employees and non-employee directors under the Plan in accordance with APB
Opinion No. 25 and provide disclosure of the pro forma effect of using the fair
value of options granted to employees to measure compensation. Of the amounts
authorized as of December 31, 1997, options to purchase approximately 58,000
shares will be issued to owners of Founding Affiliated Practices, practice
employees and other advisors. The fair value of such options will be charged to
operations over their vesting period.
EARNINGS PER SHARE
Earnings per share has been excluded from the financial statements because
the Company has limited historical operations and does not have a significant
operating history. Additionally, the historical operations do not reflect the
planned distribution to promoters in connection with the Affiliations, which
will be paid with a portion of the proceeds of the IPO (See Note 4).
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may in some instances differ from previously
estimated amounts.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred taxes are determined based on differences between
the financial reporting
F-13
<PAGE> 132
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and tax bases of assets and liabilities and are measured using the enacted
marginal tax rates currently in effect when the differences reverse.
As reflected in the accompanying statement of operations, the Company
incurred a net loss of $1,354,000 during the period from inception, February 21,
1997, through December 31, 1997. The Company has recognized no tax benefit from
this net loss. Due to the limited operations of the Company since its inception,
a valuation allowance has been established to offset the deferred tax asset
related to these net losses that have been capitalized for tax purposes. There
is no other significant difference in the tax and book bases of the Company's
assets or liabilities that would give rise to deferred tax balances.
RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation,
presentation and disclosure requirements of earnings per share and supersedes
Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share, which excludes the impact of common stock equivalents,
replaces primary earnings per share. Diluted earnings per share, which utilizes
the average market price per share as opposed to the greater of the average
market price per share or ending market price per share when applying the
treasury stock method in determining common stock equivalents, replaces fully
diluted earnings per share. SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 131 establishes standards for reporting
segment information by public enterprises in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. Both these statements are
effective for fiscal years beginning after December 15, 1997. The Company
believes implementation of SFAS Nos. 130 and 131 will not have a material effect
on its financial position, results of operations or cash flows.
In November 1997, the Emerging Issues Task Force of the FASB (the "EITF")
reached a consensus relating to the conditions under which a physician or dental
practice management company would consolidate the accounts of an affiliated
physician or dental practice. The Company believes that its accounting policies
conform to the EITF consensus.
3. RELATED PARTY TRANSACTIONS:
Pentegra Dental has entered into an agreement with the Chairman of its
Board of Directors effective at the date the IPO closes, to purchase
substantially all the assets and the operations of Pentegra, Ltd. and Napili,
International for total consideration of $200,000, consisting of an aggregate of
$100,000 in cash from the proceeds of the IPO and a $100,000 principal amount
9.0% promissory note due April 1999. Pentegra Dental will
F-14
<PAGE> 133
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
enter into an employment agreement effective at the date the IPO closes, that
provides for the payment to the Chairman of the Board of Directors of an
employment bonus of $1,250,000. The bonus is due in installments of $10,000 on
the closing of each future dental practice affiliation subsequent to the
Affiliations. However, the bonus must be paid in full within three years. The
employment bonus will be charged to operations at its effective date because its
payment is not contingent on any future services to be provided by the Chairman.
Since the Company's inception, it has occupied and had access to the
facilities, equipment and staff of a relative of an executive officer and
director of the Company. Prior to June 1, 1997, that use was insignificant. From
June 1, 1997 through January 31, 1998, the Company compensated the affiliate for
use of and access to its office facilities, equipment and staff at the rate of
$10,000 per month.
The Company has agreed to lease a portion of the office facilities,
equipment and staff of Pentegra, Ltd., which is owned by the Company's Chairman
of the Board, members of his family and other related entities. The Company has
agreed to compensate Pentegra, Ltd. for use of and access to its office
facilities, equipment and staff at the rate of $11,000 per month until the
Pentegra/Napili Transaction is completed, whereupon the entire lease of those
facilities will be assumed by Pentegra Dental.
The Company believes that the compensation being paid to these related
parties represents the fair market value of the services that are being provided
to the Company.
4. PLANNED TRANSACTIONS:
Pentegra Dental plans to complete the Affiliations through a series of
mergers and asset transfers. Owners of the Founding Affiliated Practices (the
"Promoters") will receive 3,094,468 shares of Common Stock and approximately
$6,400,000 in cash. In December 1997, the owners of the outstanding shares of
common stock of PII agreed that, in the event the initial public offering price
is less than $12.04 per share, PII will repurchase from those stockholders, on a
pro rata basis, at a purchase price of $0.015 per share, that number of shares
as will be necessary so that the aggregate number of shares of Common Stock
issuable in connection with the Affiliations and the Share Exchange will not
exceed 3,941,898 shares. Pursuant to that agreement, PII will repurchase
approximately 51.8% of each such stockholder's shares of PII common stock, or an
aggregate of 909,237 shares. Each Founding Affiliated Practice transaction was
individually negotiated between the Company and the Founding Affiliated Practice
as to all material terms, including, but not limited to, valuation. The shares
to be issued were based on a common allocation method that considered each
Founding Affiliated Practice's gross revenue, net of certain operating expenses,
and the Company's assessment of growth potential. No independent appraisals of
the Founding Affiliated Practices were obtained. Of the total consideration for
each transaction, each Founding Affiliated Practice could elect to receive up to
20% in cash and the balance in shares of Common Stock. The assets to be
transferred in the Affiliations include supplies inventory, equipment and
certain other current and non-current assets. The liabilities to be transferred
primarily consist of long-term debt. In connection with the Affiliations, the
Promoters and their professional corporations, professional associations or
other entities (collectively, the "PCs") will enter into long-term service
agreements with Pentegra Dental (the "Service Agreements").
F-15
<PAGE> 134
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, those Promoters will enter into employment and noncompete
agreements with their respective PCs.
As of December 31, 1997, officers and directors of the Company, those who
will become officers and directors of the Company in connection with the IPO and
certain Promoters held common and preferred stock that was issued in connection
with the funding of a portion of the expenses for the IPO, as follows (in
thousands):
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------ ------------------
CARRYING CARRYING
SHARES AMOUNT SHARES AMOUNT
------ -------- ------ --------
<S> <C> <C> <C> <C>
Officers and directors.................... 1,049 $303 263 $123
Promoters and affiliates who are not
officers and directors.................. 80 101 400 300
----- ---- ------ ----
1,129 $404 663 $423
===== ==== ====== ====
</TABLE>
All of the preferred stock will be repurchased or redeemed upon completion
of the IPO as described in Note 5.
Pentegra Dental will not employ dentists or control the practice of
dentistry by the dentists employed by the PCs. As Pentegra Dental will be
executing management service agreements and will not hold any equity ownership
in the PCs, the Affiliations are deemed not to be business combinations. Because
each of the owners of the Founding Affiliated Practices is a promoter of the
IPO, Securities and Exchange Commission's Staff Accounting Bulletin No. 48,
"Transfers of Nonmonetary Assets by Promoters or Shareholders" requires (i) the
transferred nonmonetary assets to be accounted for at the historical cost basis
of the Founding Affiliated Practices, (ii) any monetary assets and assumed
monetary liabilities included in the Affiliations to be recorded at fair value
and (iii) cash consideration paid and assumed liabilities in excess of net
assets transferred, to be reflected as a dividend paid by Pentegra Dental.
The information set forth below assumes all the Founding Affiliated
Practices will participate in the Affiliations. Although management expects that
all the practices will participate, there is no assurance that will be the case.
The net assets to be transferred and liabilities to be assumed from the
Founding Affiliated Practices are summarized, on a combined basis, in the
following table (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Property, equipment and improvements, net........... $ 2,912 $ 2,841
------- -------
Assets transferred................................ 2,912 2,841
Current portion of notes payable.................... (1,078) (624)
Long-term portion of notes payable.................. (1,411) (1,997)
------- -------
Net assets transferred, net of liabilities
assumed........................................ $ 423 $ 220
======= =======
</TABLE>
F-16
<PAGE> 135
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company will also purchase certain net monetary assets from the
founding Affiliated Practices for a cash amount of $276,000. The net assets
purchased will be recorded at their fair value as of December 31, 1997. The fair
value of the net monetary assets to be acquired as of December 31, 1997 was as
follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable, net.................................... $306
Less accounts payable....................................... (30)
----
Net monetary assets to be acquired........................ $276
====
</TABLE>
Upon consummation of the Affiliations, Pentegra Dental will enter into a
Service Agreement with each Founding Affiliated Practice under which Pentegra
Dental will become the exclusive manager and administrator of non-dental
services relating to the operation of the Founding Affiliated Practices. The
actual terms of the various Service Agreements vary from the description below
on a case-by-case basis, depending on negotiations with the individual Founding
Affiliated Practices and the requirements of applicable law and governmental
regulations.
The management service revenues that will be earned by Pentegra Dental
subsequent to the closing of the Affiliations and the execution of the Service
Agreements will be based on various arrangements. In general, the resulting fee
will be based primarily on the patient revenues less operating expenses
associated with each PC, excluding dentists' salaries and depreciation. Patient
revenues are determined based on net patient revenues, as determined under
generally accepted accounting principles, including adjustments for contractual
allowances and other discounts, less an adjustment for uncollectable accounts.
The Company will pay all operating expenses incurred by each Affiliated Practice
that are required to operate a dental office, and the Affiliated Practice will
be responsible for reimbursing the Company for such expenses. These expenses
will include the following:
- Salaries, benefits, payroll taxes, workers compensation, health insurance
and other benefit plans, and other direct expenses of all employees of
the Company at each location of the Affiliated Practice, excluding those
costs associated with the dentists and any other classification of
employee which the Company is prohibited from employing by law;
- Direct costs of all employees or consultants that provide services to
each location of the Affiliated Practice;
- Dental and office supplies, as permitted by law;
- Lease or rent payments, as permitted by law, and utilities, telephone and
maintenance expenses for practice facilities;
- Property taxes on the Company's assets located at the Affiliated
Practice's offices;
- Property, casualty, liability and malpractice insurance premiums relating
to the operations of the Affiliated Practice;
- Dentist recruiting expenses relating to the operations of the Affiliated
Practice; and
- Advertising and other marketing costs attributable to the promotion of
the Affiliated Practice's offices.
F-17
<PAGE> 136
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
All of the above expenses will be incurred and paid by the Company directly
to the third-party provider of the goods or services indicated. In exchange for
incurring these expenses and providing management services, the Company will
record revenues in amounts equal to those incurred expenses, which the
Affiliated Practice will reimburse to the Company, together with a service fee
based on the type of Service Agreement entered into by the Affiliated Practice.
The Founding Affiliated Practices will retain responsibility for the
payment of any and all direct employment expenses, including benefits, for any
dentist or other employee that the Company is prohibited from employing by law.
The management service fees (the "Service Fees") payable to the Company by
the Founding Affiliated Practices under the Service Agreements, together with
operating and non-operating expenses of each Affiliated Practice to be paid to
the Company pursuant to the Service Agreements, are payable monthly and consist
of various combinations of the following: (i) "Standard Service Agreement",
which provides for (a) a percentage (ranging from 30% to 40%) of the Affiliated
Practice's revenues related to dental services less operating expenses
associated with the operation of the Affiliated Practice or (b) a percentage
(16%) of the Affiliated Practice's dental service revenues, not to exceed a
percentage (35%) of the difference between those revenues and operating expenses
associated with the operation of the Affiliated Practice; or (ii) "Alternative
Service Agreement," which provides for the greater of (a) a percentage (35%) of
the Affiliated Practice's revenues related to dental services less operating
expenses associated with the operation of the Affiliated Practice or (b) a
specified fixed Service Fee (ranging from $54,000 to $305,000 annually). In
addition, with respect to four of the Founding Affiliated Practices, the Service
Fees are based on fixed fees that are subject to renegotiation on an annual
basis.
Service Fees payable to the Company under clause (i)(a) above are payable
by 37 of the Founding Affiliated Practices, located in each state in which the
Founding Affiliated Practices are located other than New York and California,
and are calculated by subtracting the operating expenses of the Founding
Affiliated Practice (including non-dental salaries, insurance, rent and other
non-dentist costs) from the net revenues of the Founding Affiliated Practice and
multiplying the resulting amount by 30%, 35% or 40%, depending on the terms of
the particular Service Agreement. One Founding Affiliated Practice located in
California will pay its Service Fee according to the formula set forth in clause
(i)(b) above, equal to the greater of 16% of its net revenues or 35% of the
difference between its net revenues and operating expenses. Service Fees to be
received by the Company under clause (ii)(b) above are payable by eight of the
Founding Affiliated Practices in Texas and will result in a minimum service fee
being received by the Company (ranging from $54,000 to $305,000 annually). The
annual fixed fees payable by the four Founding Affiliated Practices in New York
are $66,009, $115,251, $83,579 and $140,127 and will be subject to renegotiation
each year based on the fair value of the services to be received by those
Founding Affiliated Practices from the Company. On a monthly basis, the Company
will calculate the Service Fee due from each Founding Affiliated Practice
pursuant to the terms of each Service Agreement. In addition, if the costs
related to providing dental services pursuant to capitated managed care
arrangements exceed the revenues received for those services, the Affiliated
Practice will remain
F-18
<PAGE> 137
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
responsible for reimbursing the Company for all of the costs associated with
providing those services, even if no Service Fee is due to the Company under its
Service Agreement. The patient revenues and operating expenses (excluding
depreciation and dentists' salaries) of the Founding Affiliated Practices are
summarized, on a combined basis, in the following tables for the years ended
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997
--------------------- ---------------------
OPERATING
PATIENT EXPENSES PATIENT OPERATING
REVENUES 1996 REVENUES EXPENSES
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Practices participating under the
Standard Service Agreement......... $28,371 $16,913 $29,156 $17,071
Practices participating under the
Alternative Service Agreement...... 6,921 4,776 6,602 4,470
Practices participating under
fixed-fee agreements............... 2,599 1,393 2,519 1,408
------- ------- ------- -------
Totals for Founding
Affiliated Practices.... $37,891 $23,082 $38,277 $22,949
======= ======= ======= =======
</TABLE>
Subsequent to the Affiliations, substantially all the operating expenses of
the Founding Affiliated Practices (excluding dentists' salaries) will be paid by
Pentegra Dental and billed to the PCs. The historical operating expenses of the
Founding Affiliated Practices for the years ended December 31, 1996 and 1997,
excluding those employment expenses for any dentist or other employee that the
Company is prohibited from employing by law, are summarized, on a combined
basis, in the following table (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Salaries, wages and benefits of employees, excluding the
dentists................................................. $ 8,495 $ 8,214
Dental supplies............................................ 5,680 5,572
Rent....................................................... 1,884 2,055
Advertising and marketing expenses......................... 567 567
General and administrative expenses........................ 5,716 5,790
Other expenses............................................. 740 751
------- -------
Total operating expenses......................... 23,082 22,949
Depreciation and amortization.............................. 879 833
------- -------
Total expenses................................... $23,961 $23,782
======= =======
</TABLE>
The Company will continue to recognize depreciation and amortization on
assets transferred in connection with the Affiliations. However, such charges
are not considered
F-19
<PAGE> 138
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
operating expenses under the Service Agreements and will not enter into the
calculation of the service fees.
The combined historical financial information of the Founding Affiliated
Practices presented herein does not represent the financial position or results
of operations of Pentegra Dental or the Company. Because of the significant
relationship that will exist among the Company and the Founding Affiliated
Practices upon completion of the IPO, this information is presented solely for
the purpose of providing disclosures to potential investors regarding the group
of entities with which Pentegra Dental will be contracting to provide future
services. The Founding Affiliated Practices were not operated under common
control or management during the fiscal years ended December 31, 1996 or 1997.
However, combined financial information has been presented because entering into
the Service Agreements with all of the Founding Affiliated Practices is
contingent upon a single event, the completion of the IPO.
5. REDEEMABLE PREFERRED STOCK
In May 1997, the Company authorized the designation, out of the authorized
and unissued preferred stock, of two classes of 5,000,000 shares each,
designated as "Class A" and "Class B." In May 1997, the Company issued 133,335
shares of Class B nonvoting preferred stock for cash of approximately $1,000. In
June 1997, the Company issued 900,000 shares of Class A nonvoting preferred
stock, 550,000 shares of Class B nonvoting preferred stock and 435,000 shares of
common stock for $1,457,000. The Company allocated $675,000 of the proceeds to
the Class A preferred stock, $413,000 to the Class B preferred stock and
$369,000 to the common stock based on the value of $0.75, $0.75 and $0.85 per
share, respectively, as determined by an independent valuation of the fair value
of those shares as of the date of issuance. The proceeds from these stock
issuances were reserved for legal and accounting costs associated with the IPO,
as well as operating costs. Holders of both classes of preferred stock are
entitled to per share dividends equivalent to any dividends that may be declared
on the common stock, but not to cumulative dividends. The preferred stock
entitles the holders thereof to preference in liquidation over the common stock.
The terms of the Class A and B preferred stock provide for it to be
redeemed for $1.00 to $3.00 per share, as determined by the Company's Board of
Directors, upon completion of an initial public offering. The Board of Directors
has established the redemption price at $1.50 per share. In connection with
negotiating the IPO and the Affiliations, certain officers and directors agreed
that the Company may repurchase their shares of Class B Preferred Stock at the
subscription price. Accordingly, the Company will use a portion of the net
proceeds of the IPO to repurchase 245,835 shares of its Class B preferred stock
held by those officers and directors at repurchase prices equal to the
subscription prices, which ranged from $0.01 to $1.00 per share (aggregating to
$114,000). The remaining 1,337,500 shares of Class A and B preferred stock
outstanding will be redeemed at a price of $1.50 per share (aggregating to
$2,006,000), of which $1.15 per share will be paid in cash and $0.35 per share
will be paid in the form of a 6.0% promissory note that becomes due and payable
by the Company on the earlier of the fifth anniversary of the date of the
closing of the IPO or the date on which the Company offers and sells an amount
of equity securities with gross proceeds equal to or greater than the
F-20
<PAGE> 139
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
gross proceeds of the IPO. The Company will recognize a dividend on the
preferred stock for the difference between the redemption amount and the
recorded value at the date of redemption. That difference has not been accreted
to the redemption amount during the current period because the date of the IPO
is not determinable.
6. COMMON STOCK
All share information in the accompanying financial statements has been
retroactively restated to reflect a two-for-three share reverse stock split of
the Company's common stock, which was effected in October 1997.
In February 1997, the Company issued 666,667 shares of common stock for
cash at a price of $0.015 per share. The Company issued an additional 766,667
shares of common stock to members of management during May 1997 for cash at a
price of $0.015 per share. The Company valued these shares at $0.15 per share,
based on an independent valuation of the fair value of those shares as of the
date of issuance. In June 1997, in addition to the 290,000 shares of common
stock issued in connection with the issuance of the Class A and Class B
preferred stock, described in Note 5 above, the Company issued 33,333 shares of
common stock for cash at a price of $0.015 per share. Those shares were valued
at $1.27 per share, based on an independent valuation of the fair value of those
shares as of the date of issuance.
In September 1997, the Company repurchased 66,667 shares of its common
stock at a purchase price of $0.01 per share, of which 46,667 shares were
repurchased from a director of the Company. The Company issued 66,667 shares of
common stock to an officer of the Company at a purchase price of $0.015 per
share. Those shares were valued at the number of shares to be received by that
officer in the Share Exchange at the IPO price. The differences between the cash
received for shares of common stock and the fair value of those shares as of the
respective dates of issuance have been recognized as compensation expense.
7. NOTES PAYABLE
In October 1997, the Company repurchased an additional 20,000 shares of its
common stock from a director at a purchase price per share of $0.015, and issued
(i) 20,000 shares of common stock and (ii) $300,000 of 9.5% promissory notes due
on the earlier of 30 days after the closing of the IPO or October 1998. The
Company allocated the $300,000 proceeds between the promissory notes and the
common stock based on their relative fair values, with the value of the shares
based on $8.50 per share. The amount of the proceeds allocated to those shares
of common stock was recorded as a discount on the promissory notes of
approximately $180,000. The Company is accreting the discount over the term of
the promissory notes.
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.
F-21
<PAGE> 140
PENTEGRA DENTAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS
In February 1998, the Company issued $486,000 of 15% promissory notes due
on the earlier of three days after the closing of the IPO or eight months from
the date the notes were issued.
In March 1998, the Company completed the IPO, issuing 2,500,000 shares at
$8.50 per share, and closed the related transactions under the terms described
in the Notes above.
In April 1998, the Company's underwriters exercised their option for the
overallotment of 375,000 shares at $8.50 per share, net of underwriters
discount.
F-22
<PAGE> 141
PENTEGRA DENTAL GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
PENTEGRA DENTAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000S)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents............................ $ 100 $ 6,708
Prepaids and Other Current Assets.................... -- 101
------ -------
Total Current Assets......................... 100 6,809
Property and Equipment, Net............................ 409 3,577
Goodwill, Net.......................................... -- 183
Other Assets, Net...................................... 2,748 64
------ -------
Total Assets................................. $3,257 $10,633
====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable and Accrued Liabilities............. $2,095 $ 1,313
Accrued Employment Agreement......................... -- 1,250
------ -------
Total Current Liabilities.................... 2,095 2,563
Long Term Debt......................................... 215 1,074
Preferred Stock -- Class A............................. 675 --
Preferred Stock -- Class B............................. 414 --
Shareholders' Equity (Deficit)
Common Stock......................................... 18 6
Additional Paid in Capital........................... 1,194 10,304
Accumulated Deficit.................................. (1,354) (3,314)
------ -------
Total Shareholders' Equity (Deficit)......... (142) 6,996
------ -------
Total Liabilities and Shareholders' Equity... $3,257 $10,633
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 142
PENTEGRA DENTAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000S)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION,
FEBRUARY 21,
1997 FOR THE THREE
THROUGH MONTHS ENDED
MARCH 31, 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.
F-24
<PAGE> 143
PENTEGRA DENTAL GROUP, INC
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK ADDITIONAL
------------------ PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL EQUITY (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.
F-25
<PAGE> 144
PENTEGRA DENTAL GROUP, INC.
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED
(000S)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION,
FEBRUARY 21, 1997 FOR THE THREE
THROUGH MONTHS ENDED
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.
F-26
<PAGE> 145
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
F-27
<PAGE> 146
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.
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
F-28
<PAGE> 147
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.
In February 1998, the Company issued $486,000 of 15% promissory notes due
on the earlier of three days after the closing of the IPO or eight months from
the date the notes were issued. The notes and interest were repaid on March 30,
1998.
In connection with the IPO, the Company issued approximately $468,000 notes
payable to certain shareholders formerly owning preferred stock. The notes bear
6% interest and are payable on the earlier of the fifth anniversary of the IPO,
or the date upon which the Company offers and sells an amount of equity
securities equal or greater to the gross proceeds of the IPO.
5. ACCUMULATED DEFICIT
The Company's accumulated deficit at March 31, 1998 is primarily
attributable to compensation costs and other costs of managing the Company prior
to its IPO. On March 30, 1998, an employment bonus of $1,250,000 to the Chairman
of the Board of Directors (the "Chairman") was recorded, and therefore is
included in the Company's accumulated deficit. Payment of the bonus will be made
in increments of $10,000 on the closing of each future dental practice
affiliation until the bonus has been paid in full. Pursuant to the terms of the
Company's employment agreement with the Chairman, the employment bonus must be
paid in full within three years of the Offering.
6. YEAR 2000
The year 2000 issue is the result of computer programs using two digits to
define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system that is not year 2000 compliant would not be
able to correctly process certain data, or, in extreme situations, system
failure could result.
F-29
<PAGE> 148
The Company has recently completed the purchase and installation of year
2000 compliant software for its operations. Accordingly the Company does not
expect the year 2000 issue to have a material effect on its financial position,
results of operations or cash flows.
7. SUBSEQUENT EVENTS
In April 1998, the underwriters of the IPO exercised their option to sell
an additional 375,000 shares of common stock for $8.50 per share. The net
proceeds after commissions provided an additional $3 million in cash to the
Company.
Also in April 1998, the Company filed a Form S-4, registering an additional
1.5 million shares of Common Stock in the Company. The shares will be issued by
the Company as consideration for the affiliation of practices.
F-30
<PAGE> 149
PENTEGRA DENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
--------- ------------
<S> <C> <C>
ASSETS
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
Long-term debt....................................... 1,074 568
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.
F-31
<PAGE> 150
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 MONTHS MONTHS MONTHS
ENDED ENDED ENDED 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 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.
F-32
<PAGE> 151
PENTEGRA DENTAL GROUP, INC
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ 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.
F-33
<PAGE> 152
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.
F-34
<PAGE> 153
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
F-35
<PAGE> 154
PENTEGRA DENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. 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.
F-36
<PAGE> 155
PENTEGRA DENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
F-37
<PAGE> 156
PENTEGRA DENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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 recorded, and therefore is
included in the Company's retained earnings (deficit). Payments of the bonus
have been and will continue to be made in increments of $10,000 on the closing
of each future dental practice affiliation until the bonus has been paid in
full. Pursuant to the terms of the Company's employment agreement with the
Chairman, the employment bonus must be paid in full within three years of the
IPO. At 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, $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 intangibles aggregating to $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.
F-38
<PAGE> 157
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Omega Orthodontics, Inc.:
We have audited the accompanying consolidated balance sheets of Omega
Orthodontics, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These consolidated
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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Omega
Orthodontics, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
(except for the matter
discussed in Note 12,
as to which is March 15, 1999)
F-39
<PAGE> 158
OMEGA ORTHODONTICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (includes restricted
cash of $150,000).............................. $ 982,157 $ 5,421,721
Receivable from affiliated practices, net of
allowance for doubtful accounts of $121,583 in
1998........................................... 2,485,991 836,189
Notes and interest receivable from affiliated
practices...................................... 74,824 50,348
Notes and interest receivable from related
parties........................................ 129,259 120,859
Prepaid expenses and other current assets......... 109,464 55,791
----------- -----------
Total current assets........................... 3,781,695 6,484,908
Property and equipment, at cost, net................ 908,484 503,339
Intangible assets, net of accumulated amortization
of $337,059 and $35,145 in 1998 and 1997,
respectively...................................... 9,721,133 5,099,043
Other assets........................................ 42,985 80,303
----------- -----------
Total assets................................... $14,454,297 $12,167,593
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand line of credit............................. $ 149,772 $ --
Current portion of long-term debt................. 366,585 76,130
Accounts payable.................................. 158,537 155,671
Accrued expenses.................................. 229,602 359,540
Patient prepayments............................... 1,813,433 775,699
Due to related parties............................ -- 305,000
----------- -----------
Total current liabilities...................... 2,717,929 1,672,040
Long-term debt, less current portion................ 1,055,206 468,551
----------- -----------
Total liabilities.............................. 3,773,135 2,140,591
----------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value; 500,000 shares
authorized; no shares issued................... -- --
Common stock, $.01 par value; 9,500,000 shares
authorized; 5,052,584 and 4,338,823 shares
outstanding at December 31, 1998 and 1997,
respectively................................... 50,526 43,388
Additional paid-in capital.......................... 15,031,372 13,858,851
Accumulated deficit................................. (4,400,736) (3,875,237)
----------- -----------
Total stockholders' equity..................... 10,681,162 10,027,002
----------- -----------
Total liabilities and stockholders' equity..... $14,454,297 $12,167,593
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 159
OMEGA ORTHODONTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues:
Service fees.............................. $7,366,192 $ 918,312
Consulting fees........................... 21,393 57,606
---------- -----------
Total revenues......................... 7,387,585 975,918
---------- -----------
Costs and expenses:
Employee costs............................ 3,715,246 744,731
General and administrative................ 2,643,084 979,247
Other direct costs........................ 1,136,270 173,538
Depreciation and amortization............. 455,583 116,203
Non-recurring consulting expense.......... -- 2,592,500
---------- -----------
Total costs and expenses............... 7,950,183 4,606,219
---------- -----------
Loss from operations........................ (562,598) (3,630,301)
Interest expense............................ (106,800) (91,489)
Interest income............................. 126,564 78,665
Other income................................ 17,335 --
---------- -----------
Net loss............................... $ (525,499) $(3,643,125)
========== ===========
Basic and diluted net loss per share........ $ (0.11) $ (1.59)
========== ===========
Weighted average number of common shares
outstanding............................... 4,895,394 2,289,623
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 160
OMEGA ORTHODONTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------- ADDITIONAL STOCKHOLDERS'
NUMBER OF $.01 PAID-IN ACCUMULATED DEFERRED EQUITY
SHARES PAR VALUE CAPITAL DEFICIT COMPENSATION (DEFICIT)
--------- --------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996.................. 1,615,000 $16,150 -- $ (232,112) $(4,500) $ (220,462)
Issuance of common stock
in connection with
debt offering......... 60,000 600 -- -- -- 600
Release from escrow of
common stock
previously issued to
advisors.............. -- -- 2,020,500 -- 4,500 2,025,000
Issuance of common stock
to consultants........ 10,000 100 -- -- -- 100
Initial public offering
of common stock and
warrants, net of
issuance costs of
$3,101,831............ 2,070,000 20,700 9,504,487 -- -- 9,525,187
Issuance of common stock
and stock options to
new affiliated
practices............. 583,823 5,838 2,071,364 -- -- 2,077,202
Issuance of stock
options to
non-employee.......... -- -- 262,500 -- -- 262,500
Net loss................ -- -- -- (3,643,125) -- (3,643,125)
--------- ------- ----------- ----------- ------- -----------
Balance, December 31,
1997.................. 4,338,823 43,388 13,858,851 (3,875,237) -- 10,027,002
Issuance of common stock
to new affiliated
practices............. 707,511 7,076 1,164,146 -- -- 1,171,222
Issuance of common stock
to non-employee....... 6,250 62 8,375 -- -- 8,437
Net loss................ -- -- -- (525,499) -- (525,499)
--------- ------- ----------- ----------- ------- -----------
Balance, December 31,
1998.................. 5,052,584 $50,526 $15,031,372 $(4,400,736) -- $10,681,162
========= ======= =========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 161
OMEGA ORTHODONTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (525,499) $(3,643,125)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for bad debts................... 121,583 --
Depreciation and amortization............. 455,583 116,203
Stock compensation........................ 8,437 2,288,200
Changes in assets and liabilities, excluding
the effects of acquisitions:
Receivable from affiliated practices...... (1,520,063) (661,125)
Prepaid expenses and other current
assets................................. (53,673) (51,791)
Accounts payable.......................... 2,866 134,437
Accrued expenses.......................... (374,813) (260,890)
Patient prepayments....................... 982,423 436,782
Due to related parties.................... (305,000) 277,964
----------- -----------
Net cash used in operating
activities........................... (1,208,156) (1,363,345)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment,
net.................................... (377,972) (93,716)
Decrease (increase) in other assets....... 27,721 (80,648)
Acquisition of management services
agreements and related assets.......... (2,749,355) (2,216,134)
Notes receivable.......................... (82,876) (170,859)
----------- -----------
Net cash used in investing
activities........................... (3,182,482) (2,561,357)
----------- -----------
Cash flows from financing activities:
Debt financing costs...................... -- (22,049)
Repayment of borrowings................... (198,926) (1,089,000)
Proceeds from issuance of notes payable... -- 510,000
Proceeds from line of credit.............. 150,000 --
Net proceeds from issuance of common stock
and warrants........................... -- 9,626,415
----------- -----------
Net cash (used in) provided by
financing activities................. (48,926) 9,025,366
----------- -----------
Net increase (decrease) in cash and
cash equivalents..................... (4,439,564) 5,100,664
Cash and cash equivalents, beginning of
period.................................... 5,421,721 321,057
----------- -----------
</TABLE>
F-43
<PAGE> 162
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents, end of period.... $ 982,157 $ 5,421,721
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest.... $ 103,387 $ 97,607
=========== ===========
Supplemental disclosure of cash flows
related to acquisitions:
Fair value of assets acquired, excluding
cash................................... $ 5,355,008 $ 5,708,177
Issuance of common stock.................. (1,171,222) (2,077,202)
Issuance of notes payable................. (986,435) (440,868)
Payments in connection with acquisitions,
net of
cash acquired.......................... (2,749,355) (2,216,134)
----------- -----------
Liabilities assumed.................... $ 447,996 $ 973,973
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE> 163
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Omega Orthodontics, Inc. (the Company) was incorporated in Delaware in
August 1996 and subsequently acquired the assets and certain consulting
contracts held by The Orthodontic Management Effectiveness Group of America, LLC
(Omega, LLC), a California-based orthodontic practice management and consulting
firm, in exchange for 1,050,000 shares of the Company's common stock.
The Company provides management and marketing services to orthodontic and
other dental specialty practices in the United States. The Company offers its
services primarily under an "affiliate" relationship whereby it purchases the
equity interests of the management services organization (MSO) that holds
certain assets of and is associated with an orthodontic or other dental
specialty practice (Affiliated Practice) and enters into a long-term management
services agreement (Management Services Agreement) with the Affiliated Practice
of the selling orthodontist or other dental specialist (Affiliated
Practitioner). Pursuant to that agreement, the Company receives a monthly
management fee, based on the revenue of the Affiliated Practice, for providing
all of the Affiliated Practice's needs, including facility, staff and supplies,
as well as a program of systems, methods and procedures designed to enhance the
growth, efficiency and profitability of the Affiliated Practices.
On October 1, 1997, the Company completed its initial public offering of
securities pursuant to which the Company sold 2,070,000 shares of common stock
and 2,070,000 common stock purchase warrants. The Company received proceeds from
the offering, net of the underwriter's discount, fees and expenses, of
approximately $9.5 million. From the net proceeds, the Company paid in full the
notes payable used to finance operations prior to the offering and paid the cash
portion of the affiliations with seven orthodontists.
The Company is subject to a number of risks associated with emerging,
growth companies. Principal among these are the risks associated with managing
growth, marketing the Company's services and the need to obtain adequate
additional financing to fund future operations and acquisitions. Management's
financial plans indicate that additional financing and/or strategic alliances
and partnerships will be required in future periods to meet the Company's
strategic business plan; therefore, management is exploring various
alternatives.
The Company has incurred cumulative losses of $4,400,736 from inception
through December 31, 1998. Information subsequent to December 31, 1998 indicates
that losses are continuing. The Company has funded those losses primarily
through the sale of common stock. The Company is dependent on the proceeds from
additional financing, finding strategic alliances and/or restructuring its
operations to achieve its business plan. Management has entered into a merger
agreement as discussed in Note 12 and will implement as necessary a
restructuring plan to reduce operating expenses.
F-45
<PAGE> 164
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
During 1997, the Emerging Issues Task Force (EITF) of the FASB issued EITF
97-02 Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements which provides guidance regarding the accounting
treatment of contractual management relationships. The EITF established specific
criteria to be met for consolidating physician practices. The criteria include
the existence by the Physician Practice Management Entity of a controlling
financial interest in the physician's practice based on terms of the agreement,
control of the non-medical operating decisions, and financial interest. Based on
its most recent analysis, management believes the Company does not have a
controlling financial interest in the orthodontic practices with which it
contracts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash and cash
equivalents. Cash equivalents consist primarily of a money market account at
December 31, 1998 and commercial paper at December 31, 1997 and are carried at
cost, which approximates market value. In addition, the Company has
collateralized $150,000 of cash for a line of credit. (See Note 5)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Equipment under capital lease is
stated at the net present value of the future minimum lease payments at the
inception of the related leases. Depreciation and amortization expense is
provided using the straight-line method over the estimated useful lives of the
assets, three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or estimated useful life
of the assets.
INTANGIBLE ASSETS
Intangible assets consist primarily of the value ascribed to Management
Services Agreements which are amortized over the life of the Management Services
Agreements (ranging from 25 to 40 years) with the respective Affiliated
Practices. The Company's management periodically evaluates the realizability of
the intangible assets on a practice by
F-46
<PAGE> 165
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 overstated, an adjustment will be made in the period that the
adjustment is identified. If it is determined that the estimated remaining
service period requires revision, that revision will be made on a prospective
basis. Based on its most recent analysis, management believes that no impairment
of intangible assets exists.
RECLASSIFICATIONS
Certain amounts in the prior year have been reclassified to conform with
the current year presentation.
REVENUE RECOGNITION
The Company's services are provided under Management Services Agreements
and an interim management agreement with an Affiliated Practice (Management
Agreements). Net revenue earned by the Company under the Management Agreements
is equal to approximately 25% of new patient contract balances in the first
month of new patient contracts plus a portion of existing contract balances,
less amounts retained by the Affiliated Practices. The Company provides practice
management and marketing services, facilities and non-professional personnel and
receives 65% to 75% of the Affiliated Practices' gross patient fee collections
as a management fee. The Affiliated Practices retain all revenue not paid to the
Company as the management fee. The amounts retained by the Affiliated Practices
are dependent on their financial performance, based in significant part on their
cash receipts and disbursements. If total expenses of an Affiliated Practice are
below prescribed percentages, the Affiliate Practice is entitled to retain 50%
of the difference. Under the terms of the Management Agreements, the Affiliated
Practices assign their receivables to the Company in payment of their management
fees. The Company is responsible for collections. The Company also assumes its
portion of patient prepayments, deposits from patients for dental care to be
performed in future periods.
LOSS PER SHARE
The Company reports earnings (loss) per share in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share and
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 98 (SAB
98).
Basic loss per share was determined by dividing net loss by the weighted
average common shares outstanding during the period. Diluted loss per share is
the same as basic loss per share as the effects of the Company's potential
common stock are antidilutive. During the period preceding the Company's initial
public offering, the Company issued 185,000 shares of common stock that have
been treated as "nominal issuances" in accordance with SAB 98 in the calculation
of net loss per share. Basic and diluted loss per share do not include options
and warrants to purchase 2,323,333 shares of common stock in 1998 and 2,303,333
shares of common stock in 1997 because the effects are antidilutive.
F-47
<PAGE> 166
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosures of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet risk and credit
risk concentrations. The Company maintains the majority of its cash balances
with one financial institution. The Company maintains reserves for the potential
write-off of accounts receivable. The Company's accounts receivable credit risk
is concentrated within the United States, and no customer represents a
significant credit risk to the Company.
FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. The Company's
financial instruments consist of cash, cash equivalents, receivables, accounts
payable, patient prepayments and debt instruments. The estimated fair value of
these financial instruments approximate their carrying value.
SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosures about Segments of and
Enterprise and Related Information in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision maker as defined
under SFAS No. 131 is the Senior Management Team. To date, the Company has
viewed its operations and manages its business as principally one operating
segment.
POST-RETIREMENT BENEFITS
The Company has no obligations for post-retirement benefits.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
the fiscal years beginning after December 15, 1997 because there were no items
of comprehensive income, other than the Company's net loss.
F-48
<PAGE> 167
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Instruments. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Based upon the current
structure and operations, the Company does not anticipate that adoption of SFAS
No. 133 will have any effect on the financial statements.
NOTE 3 -- ORTHODONTIC AFFILIATIONS
On October 1, 1997, the Company entered into Management Services Agreements
with seven Affiliated Practices in the United States, simultaneously with the
closing of its initial public offering (see Note 1). During the period from the
initial public offering, October 1, 1997 through December 31, 1997, the Company
completed affiliations with two additional practices. For the year ended
December 31, 1998, the Company completed affiliations with nine practices, three
of which merged with existing affiliated practices.
Total consideration related to the affiliated practices for the years ended
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Value of common stock and options issued.............. $1,171,222 $2,077,202
Cash paid............................................. 2,749,355 2,216,134
Notes payable......................................... 986,435 440,868
---------- ----------
Total................................................. $4,907,012 $4,734,204
========== ==========
</TABLE>
The cost of each MSO has been allocated on the basis of the estimated fair
value of the assets acquired and liabilities assumed, resulting in management
service contract intangibles of approximately $4.9 million and $5.1 million for
1998 and 1997, respectively. These allocations may be adjusted to the extent
that management becomes aware of additional information within one reporting
year of the affiliation date, which results in a material change in the amount
of any contingency or changes in the estimated fair value of assets acquired and
liabilities assumed.
F-49
<PAGE> 168
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allocation of the purchase price of the MSO, including acquisition
costs of approximately $192,000 and $67,000 for 1998 and 1997, respectively, is
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Patient receivables................................... $ 234,910 $ 152,090
Property and equipment................................ 196,094 421,900
Management service contract intangibles............... 4,924,004 5,134,187
Patient prepayments................................... (55,311) (338,916)
Assumed liabilities................................... (392,685) (635,057)
---------- ----------
$4,907,012 $4,734,204
========== ==========
</TABLE>
Concurrent with the affiliation with the MSOs, the Company and each MSO
entered into a 20-year Management Services Agreement, renewable for two
additional 10-year periods, with each Affiliated Practice. The agreement
stipulates that the MSO provide practice management and marketing services,
facilities and non-clinical personnel to the Affiliated Practices for a monthly
fee, generally equal to 65% to 75% of the Affiliated Practice's gross patient
fee collections. If the total expenses of each Affiliated Practice are below
prescribed percentages, the Affiliated Practice is entitled to receive 50% of
the difference. The Affiliated Practice has sole authority to direct the
business, professional and ethical aspects of the practice, make all
professional hiring decisions, render patient care, and keep all patient
records. Each Affiliated Practice has also entered into an employment agreement,
including non-competition provisions, with each orthodontist employed and has
agreed to pay all salaries for dental professionals, professional licensure and
board certification fees and professional liability insurance premiums.
Each Affiliated Practitioner has certain rights and obligations to
repurchase, and each MSO has the right to require the Affiliated Practitioner to
repurchase, the non-clinical practice assets held by such MSO in the event that
the Management Services Agreement is terminated. Such purchases will generally
require payment of the book value of the net assets of the MSO. The MSO also has
certain rights to designate a successor orthodontist to acquire the practice of
the Affiliated Practitioner when the Affiliated Practitioner ceases practice.
In addition, during 1998, the Company entered into an interim management
agreement with a separate orthodontic practice, pursuant to which the Company
provides management services under essentially the same terms as its Management
Services Agreement.
F-50
<PAGE> 169
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Leasehold improvements.................................. $ 399,935 $163,138
Office equipment........................................ 324,530 45,072
Dental equipment........................................ 253,756 272,486
Furniture and fixtures.................................. 90,648 46,132
---------- --------
1,068,869 526,828
Less: accumulated depreciation and amortization......... 160,385 23,489
---------- --------
$908,484... $503,339
========== ========
</TABLE>
NOTE 5 -- DEBT
LONG TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Notes payable of affiliate practices assumed by the
Company, due in monthly installments ranging from $100
to $1,213 through December, 2003, with interest
ranging from 4% to 13.2% and secured by the personal
guarantees of the
affiliated orthodontists.............................. $ 192,441 $ 51,948
Unsecured notes payable to affiliate practices, issued
in connection with affiliation agreement (see Note 3)
due in monthly installments ranging from $630 to
$4,860 through January, 2003, with interest ranging
from 8% to 8.5%....................................... 1,219,068 436,868
Capitalized lease obligations, due in monthly
installments ranging from $652 to $1,646 through
December, 2003, with interest ranging from 13% to 23%
and secured by certain equipment. Paid in full in
1999.................................................. 10,282 55,865
---------- --------
1,421,791 544,681
Less: current portion................................... 366,585 76,130
---------- --------
$1,055,206 $468,551
========== ========
</TABLE>
F-51
<PAGE> 170
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................... $ 366,585
2000............................................... 346,522
2001............................................... 361,135
2002............................................... 242,173
2003............................................... 33,142
Thereafter......................................... 72,234
----------
$1,421,791
==========
</TABLE>
LINE OF CREDIT
The Company has a demand line of credit with a bank that provides for
borrowing up to $200,000 and expires on demand. Borrowings under the line of
credit bear interest at the bank's prime rate plus .5% (7.75% at December 31,
1998). The line of credit is collateralized by $150,000 of cash held by the
bank. As of December 31, 1998, $149,772 was outstanding under the line of
credit.
NOTE 6 -- STOCK OPTION PLAN
The Company has adopted an Incentive Stock Plan (the Plan) pursuant to
which 700,000 shares of common stock have been reserved for under the plan.
Awards in the form of stock options, stock appreciation rights, restricted stock
and stock grants may be issued to employees, consultants and advisors of the
Company at prices to be determined by a committee of the Board of Directors. The
Plan will terminate on January 31, 2007.
The Plan is administered by the Compensation Committee of the Board of
Directors, which has the authority to designate participants, determine the
number and type of options to be granted, the time at which options are
exercisable, the method of payment and any other terms or conditions of the
options. Options generally vest annually over a three-year period and generally
expire 10 years from the date of grant.
While the Compensation Committee determines the price at which options may
be exercised under the Plan, the exercise price of an incentive stock option
shall be at least 100% (110% for incentive stock options granted to a 10%
stockholder) of the fair value of the Company's common stock on the date of
grant.
F-52
<PAGE> 171
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option activity under the Plan:
<TABLE>
<CAPTION>
1997
---------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding, December 31, 1996....................... -- --
Granted............................................ 370,000 5.84
Exercised.......................................... -- --
Terminated......................................... -- --
------- -----
Outstanding, December 31, 1997....................... 370,000 5.84
======= =====
Exercisable, December 31, 1997....................... 150,000 $6.00
======= =====
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding, December 31, 1997....................... 370,000 5.84
Granted............................................ 75,000 3.00
Exercised.......................................... -- --
Terminated......................................... -- --
------- -----
Outstanding, December 31, 1998....................... 445,000 5.36
======= =====
Exercisable, December 31, 1998....................... 270,000 $5.78
======= =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
WEIGHTED
- --------------------------------------------------------------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AS REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE/PRICE OF DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31 EXERCISE
RANGE OF PRICES 1998 LIFE PRICE 1998 PRICE
- --------------- --------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$3.00 95,000 9.25 $3.00 20,000 $3.00
$6.00 350,000 8.32 $6.00 250,000 $6.00
------------- ------- ---- ----- ------- -----
$3.00 - $6.00 445,000 8.52 $5.36 270,000 $5.78
============= ======= ==== ===== ======= =====
</TABLE>
Options available for future grant under the Plan as of December 31, 1998
were 255,000.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants to be included in the statement of operations or disclosed
in the notes to financial statements. The Company has determined that it will
continue to account for
F-53
<PAGE> 172
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and will elect the disclosure-only alternative under SFAS No. 123.
The Company has computed the compensation expense required under SFAS No.
123 for options granted in 1997 and 1998 using the Black-Scholes option pricing
model prescribed by SFAS No. 123, using the following assumptions:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Risk-free interest rate..................... 5.39% - 5.65% 6.61%
Expected dividend yield..................... -- --
Expected lives.............................. 7 years 7 years
Expected volatility......................... 108% 48%
Weighted average fair value of options
granted................................... $2.21 $3.37
Weighted average remaining contractual
life...................................... 8.52 years 9.36 years
</TABLE>
Had compensation cost for the Company's stock option plan been determined
consistent with SFAS No. 123, the Company's net loss and basic and diluted net
loss per common share would have been the following:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Net loss available to common stockholders
As reported............................................... (525,499)
Proforma.................................................. (913,899)
Basic and diluted net loss per common share
As reported............................................... (0.11)
Proforma.................................................. (0.19)
</TABLE>
As of December 31, 1997, none of the options granted to employees under the
plan had vested, and therefore, no proforma disclosure of compensation expense
is necessary. As of December 31, 1997, the Company granted 150,000 nonqualified
stock options exercisable at $6.00, which are fully vested, to a consultant as
payment for services performed. The Company recorded $262,500 of non-recurring
consulting expense in the accompanying consolidated statements of operations for
the year ended December 31, 1997 related to this transaction, which represents
the estimated fair value of the services received. The options are fully
exercisable and expire ten years from the date of grant.
NOTE 7 -- STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
The Company is authorized to issue 500,000 shares of preferred stock. The
preferred stock will be issuable in one or more series, each such series to have
such rights and preferences, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by the Board of Directors. At December 31, 1998, there are no
shares of preferred stock outstanding.
F-54
<PAGE> 173
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(B) INITIAL PUBLIC OFFERING
Pursuant to the Company's initial public offering (see Note 1), the Company
issued 2,070,000 warrants. Each warrant entitles the registered holder thereof
to purchase one share of common stock at an initial exercise price of $6.60 per
share, at any time during the period commencing April 1, 1998 and terminating
September 30, 2002. The warrant exercise price is subject to adjustment under
certain circumstances. Commencing April 1, 1999, the Company may redeem the
warrants, in whole but not in part, at $.10 per warrant, provided the average
closing bid price of the common stock equals or exceeds $12.00 per share for a
period of time.
In addition, the Company issued 180,000 warrants to its underwriter. These
warrants entitle the holder to purchase up to 180,000 shares of common stock
and/or 180,000 warrants at an initial exercise price of $9.90 per share of
common stock and $0.165 per warrant, commencing after October 1, 1998 and
expiring October 1, 2001.
(C) RESERVED COMMON STOCK
The Company has reserved common stock for the following:
<TABLE>
<S> <C>
Options to purchase common stock.................... 783,333
Warrants to purchase common stock................... 2,070,000
Underwriter's warrants.............................. 360,000
---------
3,213,333
=========
</TABLE>
NOTE 8 -- INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets or
liabilities are computed based on the difference between the financial statement
and income tax basis of assets and liabilities using the enacted tax rates.
Deferred income tax expense or credits are based on changes in the asset or
liability from period to period.
As of December 31, 1998, the Company had available net operating loss
carryforwards of approximately $2,940,000 available to reduce future federal
income taxes, if any. These carryforwards expire through 2013 and are subject to
review and possible adjustment by the Internal Revenue Service. The Tax Reform
Act of 1986 limits a corporation's ability to utilize certain net operating loss
carryforwards in the event of a cumulative change in ownership in excess of 50%,
as defined.
F-55
<PAGE> 174
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximate income tax effect of each type of temporary difference and
carryforward and valuation allowance is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net operating losses................ $ 1,177,000 $ 1,084,000
Other temporary differences......... 44,000 (1,000)
Less: valuation allowance........... (1,221,000) (1,083,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Due to the uncertainty relating to the timing of realizing the benefits of
its favorable tax attributes in future income tax returns, the Company has
placed a full valuation allowance against its net deferred tax asset.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company has an agreement with a private merchant bank and the Chairman
of the Board of Directors (the Consultants), whereby the Consultants have agreed
to provide certain consulting services to the Company. In August 1996, as
consideration for such services, the Company contingently issued 450,000 shares
of common stock to the Consultants at no cost and simultaneously placed such
shares in escrow.
In April 1997, following the completion of the consulting services, all of
the shares were released from escrow at an imputed aggregate value of
$2,025,000. In addition, the Company paid additional cash payments to the
Consultants aggregating $305,000 in 1998. Total expense of $2,330,000 was
recorded as non-recurring consulting expense in the accompanying consolidated
statements of operations in 1997.
During 1997, three directors of the Company loaned an aggregate of $140,000
to the Company and received 6,000 shares of the Company's common stock in
connection therewith. In addition, the three directors performed consulting
services for the Company, for which they were paid an aggregate of approximately
$166,000 in 1997.
The Company has employment contracts with two directors and a consulting
contract with one director, which became effective upon the completion of the
Company's initial public offering. The Company paid $360,000 and $75,000 in 1998
and 1997, respectively, in connection with these employment and consulting
contracts. In addition, during 1997, the Company granted two directors an
aggregate of 200,000 stock options exercisable at $6.00 per share (see Note 6).
In December 1997, the Company granted two directors non-qualified stock options
under the Incentive Stock Option Plan to each acquire 10,000 shares of the
Company's common stock at an exercise price of $3.00 per share. In 1998, the
Company granted options to purchase 10,000 shares of common stock to its
Director Observer at an exercise price of $3.00 per share.
During 1997, the Company entered into a consulting agreement with an
accounting firm for services relating to the Company's initial public offering
and for the services of the Company's Chief Financial Officer who is also a
principal stockholder of the accounting firm. The Company paid consulting fees
of $120,000 and $203,565 in 1998 and 1997, respectively in connection with the
above services. In addition, in 1998 the Company paid
F-56
<PAGE> 175
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the accounting firm $63,244 for additional accounting and computer consulting
services and $38,944 for reimbursed expenses The Company also granted the
accounting firm 10,000 shares of common stock and non-qualified stock options
under the Stock Incentive Option Plan to acquire 150,000 shares of the Company's
common stock at an exercise price of $6.00 per share in 1997 (see Note 6).
The Company entered into an affiliation agreement with a director, which
became effective concurrently with the closing of the Company's initial public
offering. Pursuant to the affiliation agreement, the Company acquired certain
assets of the Director's orthodontic practice in exchange for a cash payment of
$333,567, issuance of 129,721 shares of the Company's common stock and the
assumption of certain liabilities.
During 1997, the Company loaned its President and CEO $100,000 and a
director $20,000 in exchange for demand promissory notes, which bear interest at
the prime rate (7.75% at December 31, 1998) plus 2%. Principal and interest are
due upon demand, but not later than December, 2000.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases facilities under various operating leases which expire
through October 2017. Future minimum lease payments at December 31, 1998 are
approximately as follows:
<TABLE>
<S> <C>
1999............................................... $ 631,000
2000............................................... 585,000
2001............................................... 580,000
2002............................................... 541,000
2003............................................... 290,000
Thereafter......................................... 807,000
----------
$3,434,000
==========
</TABLE>
Rent expense for all operating leases was approximately $648,000 and $86,100 for
the years ended December 31, 1998 and 1997, respectively.
LITIGATION
In the ordinary course of business, the Company is party to various types
of litigation. The Company believes it has meritorious defenses to all claims,
and, in its opinion, all litigation currently pending or threatened will not
have a material effect on the Company's financial position or results of
operations.
OTHER
The Company is contingently liable for any increase in the purchase price
to an Affiliated Practitioner for an Affiliation completed in April 1998. Under
the terms of the agreement, the Company agreed to pay additional cash and stock
if certain operating criteria were met for the year ending March 31, 1999; the
one year anniversary of the the
F-57
<PAGE> 176
OMEGA ORTHODONTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affiliation. Any additional consideration payable to the Affiliated Practitioner
will be charged to operations when determined.
NOTE 11 -- ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Salary and related....................... $117,155 $ 18,403
Professional fees........................ 105,000 327,721
Rents.................................... 3,000 13,416
Other.................................... 4,447 --
-------- --------
$229,602 $359,540
======== ========
</TABLE>
NOTE 12 -- SUBSEQUENT EVENT
On March 15, 1999, the Company entered into an Agreement and Plan of Merger
with Pentegra Dental Group, Inc. ("Pentegra"), a multi-specialty dental practice
management company located in Arizona. The Company has agreed to exchange all of
its outstanding common stock for 1,800,000 shares of Pentegra's common stock.
The transaction requires shareholder approval of both companies.
F-58
<PAGE> 177
-------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
PENTEGRA DENTAL GROUP, INC.,
("PARENT")
SPECIAL OMEGA ACQUISITION CORPORATION,
("MERGER SUB")
OMEGA ORTHODONTICS, INC.
(THE "COMPANY")
AND
CERTAIN STOCKHOLDERS OF
OMEGA ORTHODONTICS, INC.
DATED AS OF MARCH 15, 1999
-------------------------
<PAGE> 178
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I........................... A-1
DEFINITIONS....................... A-1
1.1 DEFINITIONS............... A-1
ARTICLE II.......................... A-7
THE MERGER........................ A-6
2.1 THE MERGER................ A-6
2.2 CONSUMMATION OF THE A-6
MERGER....................
2.3 EFFECTS OF THE MERGER..... A-6
2.4 CERTIFICATES OF A-6
INCORPORATION AND
BYLAWS....................
2.5 DIRECTORS................. A-6
2.6 OFFICERS.................. A-6
2.7 CONVERSION OF SHARES OF A-6
COMPANY COMMON STOCK......
2.8 CERTIFICATES FOR PARENT A-7
COMMON STOCK; DIVIDENDS;
TRANSFER TAXES............
2.9 NO FRACTIONAL A-7
SECURITIES................
ADJUSTMENTS...............
2.10 A-8
CLOSING OF COMPANY
2.11 TRANSFER BOOKS............ A-8
STOCKHOLDERS' APPROVAL....
2.12 A-8
COMPANY OPTIONS...........
2.13 A-8
CLOSING...................
2.14 A-9
ARTICLE III......................... A-9
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE SUBSTANTIAL
STOCKHOLDERS...................
A-9
3.1 ORGANIZATION AND A-9
QUALIFICATION.............
3.2 CAPITALIZATION............ A-9
3.3 AUTHORITY RELATIVE TO THIS A-10
AGREEMENT.................
3.4 SUBSIDIARIES.............. A-10
3.5 STATUTORY APPROVALS....... A-11
3.6 NON-CONTRAVENTION......... A-11
3.7 AUTHORIZATIONS............ A-11
3.8 COMPLIANCE WITH LAWS...... A-12
3.9 COMPANY SEC DOCUMENTS AND A-13
COMPANY FINANCIAL
STATEMENTS................
ABSENCE OF CHANGES........
3.10 A-14
NO UNDISCLOSED
3.11 LIABILITIES............... A-14
LITIGATION................
3.12 A-14
LABOR MATTERS.............
3.13 A-14
ENVIRONMENTAL
3.14 COMPLIANCE................ A-14
EMPLOYEE BENEFIT PLANS....
3.15 A-15
TAX MATTERS...............
3.16 A-16
AFFILIATED PRACTICES AND
3.17 PROVIDERS................. A-18
CONTRACTS; NO DEFAULT.....
3.18 A-19
LEASE AGREEMENTS..........
3.19 A-20
INSURANCE.................
3.20 A-20
ACCOUNTS RECEIVABLE.......
3.21 A-21
TARGET PRACTICES..........
3.22 A-22
YEAR 2000.................
3.23 A-22
BROKERS...................
3.24 A-22
NO MATERIAL ADVERSE
3.25 EFFECT.................... A-22
INFORMATION...............
3.26 A-22
ARTICLE IV.......................... A-23
REPRESENTATIONS AND WARRANTIES OF
PARENT AND MERGER SUB..........
A-23
4.1 ORGANIZATION AND A-23
QUALIFICATION.............
4.2 CAPITALIZATION............ A-23
4.3 AUTHORITY RELATIVE TO THIS A-23
AGREEMENT.................
4.4 STATUTORY APPROVALS....... A-24
4.5 NON-CONTRAVENTION......... A-24
4.6 PARENT SEC DOCUMENTS AND A-24
PARENT FINANCIAL
STATEMENTS................
4.7 ABSENCE OF CHANGES........ A-25
4.8 TAX MATTERS............... A-25
4.9 BROKERS................... A-26
ARTICLE V........................... A-26
ADDITIONAL AGREEMENTS............. A-26
5.1 INTERIM CONDUCT........... A-26
5.2 FORBEARANCES.............. A-26
</TABLE>
i
<PAGE> 179
<TABLE>
<S> <C> <C>
5.3 INVESTIGATION OF BUSINESS A-28
AND PROPERTIES............
5.4 EXPENSES.................. A-28
5.5 PUBLIC ANNOUNCEMENTS...... A-28
5.6 SUBSEQUENT EVENTS......... A-28
5.7 EFFORTS TO CONSUMMATE..... A-28
5.8 SOLICITATION.............. A-29
5.9 LISTING OF PARENT COMMON A-30
STOCK.....................
TAX MATTERS...............
5.10 A-30
PROXY STATEMENT AND FORM
5.11 S-4 REGISTRATION STATEMENT A-30
INFORMATION...............
ARTICLE VI.......................... A-31
CONDITIONS........................ A-31
6.1 CONDITIONS TO EACH PARTY'S A-31
OBLIGATION TO EFFECT THE
MERGER....................
6.2 CONDITIONS TO PARENT'S AND A-31
MERGER SUB'S OBLIGATIONS
TO EFFECT THE MERGER......
6.3 CONDITIONS TO THE A-33
COMPANY'S OBLIGATIONS TO
EFFECT THE MERGER.........
ARTICLE VII......................... A-34
TERMINATION....................... A-34
7.1 TERMINATION............... A-34
7.2 EFFECT OF TERMINATION..... A-35
ARTICLE VIII........................ A-36
INDEMNITY......................... A-36
8.1 INDEMNIFICATION BY THE A-36
COMPANY AND THE
SUBSTANTIAL
STOCKHOLDERS..............
8.2 PROCEDURE FOR A-37
INDEMNIFICATION -- THIRD
PARTY CLAIMS..............
8.3 PROCEDURE FOR A-38
INDEMNIFICATION -- OTHER
CLAIMS....................
8.4 EXCLUSIVE REMEDIES AND A-39
APPLICABILITY OF LIABILITY
LIMITATIONS...............
ARTICLE IX.......................... A-39
GENERAL PROVISIONS................ A-39
9.1 NOTICES................... A-39
9.2 INTERPRETATION............ A-39
9.3 ENTIRE AGREEMENT.......... A-40
9.4 SUCCESSORS AND ASSIGNS.... A-40
9.5 SEVERABILITY.............. A-40
9.6 EXTENSION; WAIVER......... A-40
9.7 SPECIFIC PERFORMANCE...... A-40
9.8 NONSURVIVAL OF A-40
REPRESENTATIONS,
WARRANTIES AND
AGREEMENTS................
9.9 AMENDMENTS................ A-41
COUNTERPARTS..............
9.10 A-41
GOVERNING LAW.............
9.11 A-41
EXHIBIT LIST
2.13 Form of Amended Company
Option Agreement
6.2(f) Amendments to Management
Services Agreement
6.2(g) Form of Release
6.2(j) Form of Lock-Up Agreement
6.2(l) Form of Opinion of Counsel
to Company
6.3(g) Form of Opinion of Counsel
to Parent
</TABLE>
ii
<PAGE> 180
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March 15,
1999, is among PENTEGRA DENTAL GROUP, INC., a Delaware corporation ("Parent"),
SPECIAL OMEGA ACQUISITION CORPORATION, a Delaware corporation and a wholly-owned
subsidiary of Parent ("Merger Sub"), OMEGA ORTHODONTICS, INC., a Delaware
corporation (the "Company"), The Orthodontic Management Effectiveness Group of
America, LLC, Robert J. Schulhof, C. Joel Glovsky, David T. Grove, Dean C.
Bellavia and Floyd V. Elliott (the foregoing individuals and entities (other
than Parent, the Company and Merger Sub) collectively referred to in this
Agreement as the "Substantial Stockholders").
RECITALS
A. This Agreement provides for the merger (the "Merger") of Merger Sub into
the Company, with the Company as the surviving corporation in such
Merger, all in accordance with the provisions of this Agreement.
B. The respective Boards of Directors of Parent, Merger Sub and the Company
each have determined that the Merger is in the best interests of their
respective companies and stockholders, and accordingly have agreed to
effect the Merger upon the terms and subject to the conditions set forth
herein. The Company intends to submit promptly to its stockholders the
approval of the Merger and the approval and adoption of this Agreement.
C. It is intended for Federal income tax purposes that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the
Code.
NOW THEREFORE, in consideration of the foregoing and the representations,
warranties, and agreements herein contained, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Acquisition Proposal" has the meaning set forth in SECTION 5.8.
"Action" means (i) any complaint, claim, prosecution, indictment, action,
suit, arbitration or investigation or (ii) any proceeding by or before any
Governmental Authority.
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly, through one or more intermediaries controls, is
controlled by or is under common control with such specified Person. For this
purpose the term "control" (including the terms "controlling", "controlled by"
and "under common control with") shall mean the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person whether through the ownership of voting securities, by contract, or
otherwise.
"Affiliated Practice" means any entity (including sole proprietorships)
with which the Company or a Company Subsidiary has entered into a management
services agreement or similar agreement requiring the Company or a Company
Subsidiary to provide practice management or similar services.
A-1
<PAGE> 181
"Affiliated Provider" means any (i) orthodontist, (ii) dentist or (iii)
other licensed professional providing healthcare-related services employed by or
affiliated with any Affiliated Practice.
"AMEX" means the American Stock Exchange or its successor entity.
"Board" means the board of directors or similar governing body of a Person.
"Business Day" means any day other than a Saturday or Sunday on which
national banks are open for business in Phoenix, Arizona.
"Capitalization Date" has the meaning set forth in SECTION 3.2.
"Cash and Cash Equivalents" means cash and marketable securities owned by
the Company.
"Cash Closing Payments" has the meaning set forth in SECTION 6.2(I).
"Certificates" has the meaning set forth in SECTION 2.8(A).
"Certificate of Merger" has the meaning set forth in SECTION 2.2.
"Closing" has the meaning set forth in SECTION 2.14.
"Closing Date" has the meaning set forth in SECTION 2.14.
"Closing Liabilities" means the difference between (i) the sum of (a) all
liabilities of the Company evidenced by notes payable or capital leases, (b)
legal, accounting and printing fees and expenses incurred by the Company in
connection with the consummation of the transactions contemplated by this
Agreement and (c) all other accrued but unpaid liabilities of the Company and
(ii) the sum of (a) amounts (other than management services fees) contractually
owed to the Company by Affiliated Practices or Affiliated Providers pursuant to
the terms of management services agreement and (b) all accrued accounts payable
for goods or services obtained by the Company in the ordinary course of business
not to exceed $387,000.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the introductory paragraph of this
Agreement.
"Company Authorizations" has the meaning set forth in SECTION 3.7.
"Company Business" means the business conducted by the Company and its
Subsidiaries taken as a whole.
"Company Common Stock" means the common stock, par value $0.01 per share,
of the Company.
"Company Disclosure Letter" means the disclosure letter delivered by the
Company to Parent concurrently with the execution and delivery of this
Agreement.
"Company Employee Benefit Plans" has the meaning set forth in SECTION
3.15(A).
"Company Financial Statements" has the meaning set forth in SECTION 3.9.
"Company Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the business, financial condition or
results of operations of the Company and its Subsidiaries that is material to
the Company and its Subsidiaries taken as a whole, excluding any such condition,
circumstance or development which affects the U.S. economy or the dental or
orthodontic practice management industry generally.
A-2
<PAGE> 182
"Company Material Contracts" has the meaning set forth in SECTION 3.18.
"Company Options" means all options granted and outstanding under the
Company Stock Plan and related option agreements.
"Company Pension Plan" has the meaning set forth in SECTION 3.15(D).
"Company Preferred Stock" means the preferred stock, par value $0.01 per
share, of the Company.
"Company Reports" has the meaning set forth in SECTION 3.9.
"Company Required Consents" has the meaning set forth in SECTION 3.6.
"Company Required Statutory Approvals" has the meaning set forth in SECTION
3.5.
"Company SEC Documents" has the meaning set forth in SECTION 3.9.
"Company Securities" has the meaning set forth in SECTION 3.2.
"Company Special Meeting" has the meaning set forth in SECTION 2.12.
"Company Stockholder Approval" has the meaning set forth in SECTION 2.12.
"Company Stock Plan" means the Omega Orthodontics Incentive Stock Plan.
"Company Subsidiaries" means the Subsidiaries of the Company.
"Company Subsidiary Securities" has the meaning set forth in SECTION 3.4.
"Company Warrants" means the (i) warrants to purchase 2,070,000 shares of
Company Common Stock issued pursuant to the Warrant Agreement dated October 1,
1997 between the Company and Continental Stock Transfer Trust Company and (ii)
warrants to purchase (x) 180,000 shares of Company Common Stock and/or (y)
redeemable warrants to purchase 180,000 shares of Company Common Stock issued to
National Securities Corporation acting in its capacity as representative (the
"Representative") under the Underwriting Agreement dated as of October 1, 1997
by and among the Company, the Representative and the several underwriters named
therein.
"DGCL" means the Delaware General Corporation Law, as amended.
"Consummation of the Merger" has the meaning set forth in SECTION 2.2.
"Environmental Law" means any law, regulation, decree, judgment, permit or
authorization relating to the environment, including pollution, contamination,
cleanup and protection of the environment.
"Environmental Liabilities and Costs" means all damages, penalties or
cleanup costs assessed or levied pursuant to any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all of the rules and regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business, whether or not incorporated,
which together with the Company and its Subsidiaries would be deemed a
"single-employer" within the meaning of Section 4001 of ERISA.
"Exchange Agent" means Continental Stock Transfer & Trust Company.
"Exchange Ratio" has the meaning set forth in SECTION 2.7(B).
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"GAAP" means generally accepted accounting principles for financial
reporting in the U.S., consistently applied.
"Governmental Authority" means any U.S. federal, state, local, foreign,
supernational or supranational court or tribunal, governmental, regulatory or
administrative agency, department, bureau, authority or commission or arbitral
panel.
"Indebtedness" has the meaning set forth in SECTION 3.18(A).
"Indemnified Persons" has the meaning set forth in SECTION 8.1.
"IRS" means the Internal Revenue Service.
"Lease Agreements" has the meaning set forth in SECTION 3.19.
"Management Options" means all Company Options held by Robert Schulhof,
Dean Bellavia, Sonny Elliott, Joel Glovsky, Peter Wexler, Ed Mulherin, Steve
DeAngelis, Steve Crisilieo, John Clarke, David Grove, Robert Daskal and George
Bodiroga.
"Merger" has the meaning set forth in the Recitals of this Agreement.
"Merger Sub" has the meaning set forth in the introductory paragraph of
this Agreement.
"Parent" has the meaning set forth in the introductory paragraph of this
Agreement.
"Parent Business" means the business conducted by Parent and the Parent
Subsidiaries taken as a whole.
"Parent Common Stock" means the common stock, par value $0.001 per share,
of Parent.
"Parent Disclosure Letter" means the disclosure letter delivered by Parent
to the Company concurrently with the execution and delivery of this Agreement.
"Parent Employment Agreements" has the meaning set forth in SECTION 6.2(I).
"Parent Financial Statements" has the meaning set forth in SECTION 4.6.
"Parent Material Adverse Effect" means any condition, circumstance or
development having an adverse effect on the business, financial condition or
results of operations of Parent and its Subsidiaries that is material to Parent
and its Subsidiaries taken as a whole, excluding any such condition,
circumstance or development which affects the U.S. economy or the dental or
orthodontic practice management industry generally.
"Parent Option Agreements" has the meaning set forth in SECTION 6.2(I).
"Parent Preferred Stock" means the preferred stock, par value $0.001 per
share, of Parent.
"Parent Reports" has the meaning set forth in SECTION 4.6.
"Parent Required Consents" has the meaning set forth in SECTION 4.5.
"Parent Required Statutory Approvals" has the meaning set forth in SECTION
4.4.
"Parent SEC Documents" has the meaning set forth in SECTION 4.6.
"Parent Securities" has the meaning set forth in SECTION 4.2.
"Parent Special Meeting" has the meaning set forth in SECTION 2.12.
"Parent Stockholder Approval" has the meaning set forth in SECTION 2.12.
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"Parent Subsidiaries" means the Subsidiaries of Parent.
"Permitted Encumbrances" means (i) liens for Taxes not yet due and payable;
(ii) mechanics', carriers', workers', repairers' and other similar liens arising
or incurred in the ordinary course of business relating to obligations as to
which there is no default on the part of the Company or its Subsidiaries,
provided that the same shall be fully discharged of record before the Closing;
(iii) exceptions shown on the surveys furnished by the Company to Parent on or
before the date hereof and which do not materially affect the use or occupancy
of the real property covered thereby; and (iv) such other recorded liens,
imperfections in title, charges, easements, restrictions and encumbrances which
do not materially affect the use or occupancy of such real property.
"Person" means any individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including any
Governmental Authority.
"Proceeding" has the meaning set forth in SECTION 8.2(A).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and all of
the rules and regulations promulgated thereunder.
"Stockholders" means the holders of outstanding shares of Company Common
Stock.
"Subsidiary" means, with respect to any Person, any corporation or other
entity (including partnerships and other business associations) in which a
person directly or indirectly owns at least a majority of the outstanding voting
securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.
"Substantial Stockholders" has the meaning set forth in the introductory
paragraph to this Agreement.
"Superior Proposal" means a bona fide Acquisition Proposal which the Board
of the Company concludes in good faith (after consultation with its financial
advisors and legal counsel) would, if consummated, result in a transaction that
is more favorable to the Company's stockholders (in their capacities as
stockholders), from a financial point of view, than the transactions
contemplated by this Agreement; provided that for purposes of this definition,
the term "Acquisition Proposal" shall have the meaning assigned to such term in
SECTION 5.8 except that the references to "19.9%" in the definition of
"Acquisition Proposal" shall each be deemed to be a reference to "50%" and
"Acquisition Proposal" shall only be deemed to refer to a transaction involving
the Company, or with respect to assets (including the shares of any Subsidiary
of the Company) of the Company and its Subsidiaries, taken as a whole, and not
any of its Subsidiaries alone.
"Surviving Corporation" has the meaning set forth in SECTION 2.1.
"Target Practice" has the meaning set forth in SECTION 3.22.
"Taxes" means all federal, state, local and foreign income, franchise,
property, sales, use, excise and other taxes, including obligations for
withholding taxes from payments due or made to any other Person and any
interest, penalties or additions to taxes.
"Tax Returns" means all original and amended returns, declarations,
certifications, statements, notices, elections, estimates, reports, claims for
refund and information returns
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relating to or required to be filed or maintained in connection with any Tax,
together with all schedules and attachments thereto.
"Transfer Taxes" has the meaning set forth in SECTION 5.10.
"U.S." means the United States of America.
"Year 2000" has the meaning set forth in SECTION 3.23.
ARTICLE II
THE MERGER
2.1 THE MERGER. Upon the terms and subject to the satisfaction or waiver,
if permissible, of the conditions of this Agreement, and in accordance with
Section 251 of the DGCL, at the Consummation of the Merger, Merger Sub shall be
merged with and into the Company, the separate corporate existence of Merger Sub
shall cease and the Company shall continue as the surviving corporation (the
"Surviving Corporation") under the laws of the State of Delaware.
2.2 CONSUMMATION OF THE MERGER. As soon as practicable after the
satisfaction or waiver, if permissible, of all the conditions to the Merger, the
parties shall cause the Merger to be consummated by filing with the Secretary of
State of the State of Delaware, in accordance with the relevant provisions of
the DGCL, a certificate of merger (the "Certificate of Merger") in such form as
is required by, and executed in accordance with the relevant provisions of, the
DGCL. The Merger shall become effective at the time (the "Consummation of the
Merger") as the Secretary of State of the State of Delaware shall, upon such
filing of the Certificate of Merger, issue a certificate of merger in respect of
the Merger.
2.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and Section 259 of the DGCL.
2.4 CERTIFICATES OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation of Merger Sub, as amended and in effect immediately prior to the
Consummation of the Merger, shall be the Certificate of Incorporation of the
Surviving Corporation. The Bylaws of Merger Sub, as in effect immediately prior
to the Consummation of the Merger, shall be the Bylaws of the Surviving
Corporation until duly amended.
2.5 DIRECTORS. Until changed pursuant to the Certificate of Incorporation
and Bylaws of the Surviving Corporation, the directors of Merger Sub immediately
prior to the Consummation of the Merger shall be the directors of the Surviving
Corporation.
2.6 OFFICERS. Until changed pursuant to the Certificate of Incorporation
and Bylaws of the Surviving Corporation, the officers of Merger Sub immediately
prior to the Consummation of the Merger shall be the officers of the Surviving
Corporation.
2.7 CONVERSION OF SHARES OF COMPANY COMMON STOCK.
As of the Consummation of the Merger, by virtue of the Merger and without
any further action on the part of any Stockholder of the Company:
(a) All shares of Company Common Stock which are held in the treasury
of the Company, and any Company Common Stock owned by Parent, Merger Sub or
any other Subsidiary of Parent, shall be canceled and shall cease to exist.
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(b) Each remaining issued and outstanding share of Company Common
Stock, shall be converted into the right to receive such number of share(s)
(subject to SECTION 2.10) of validly issued, fully paid and nonassessable
Parent Common Stock equal to the quotient (such quotient, the "Exchange
Ratio") obtained by dividing (i) 1,800,000 by (ii) such number of remaining
issued and outstanding shares of Company Common Stock.
2.8 CERTIFICATES FOR PARENT COMMON STOCK; DIVIDENDS; TRANSFER TAXES.
(a) As soon as practicable after the Consummation of the Merger, each
holder of shares of Company Common Stock converted into shares of Parent Common
Stock pursuant to SECTION 2.7 upon surrender to the Exchange Agent of one or
more certificates for such shares of Company Common Stock ("Certificates") for
cancellation, will be entitled to receive certificates representing the number
of shares of Parent Common Stock into which such shares have been converted
pursuant to SECTION 2.7. No dividends or other distributions that are declared
with respect to Parent Common Stock will be paid to persons entitled to receive
certificates representing Parent Common Stock until such persons surrender their
Certificates. Upon such surrender, there shall be paid to the person in whose
name the certificates representing such Parent Common Stock shall be issued, any
dividends which shall have become payable with respect to such Parent Common
Stock between the Consummation of the Merger and the time of such surrender,
without interest.
(b) If any certificates for any shares of Parent Common Stock are to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such exchange that
the person requesting such exchange shall pay to the Exchange Agent any transfer
or other Taxes required by reason of the issuance of certificates for such
shares of Parent Common Stock in a name other than the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of the Exchange
Agent that such Tax has been paid or is not applicable.
(c) All shares, dividends or other distributions held by the Exchange Agent
for payment or delivery to the holders of unsurrendered Certificates and
unclaimed at the end of one year after the Consummation of the Merger pursuant
to this SECTION 2.8 shall be returned by the Exchange Agent to Parent which
shall thereafter act as Exchange Agent subject to the rights of holders of
unsurrendered Certificates hereunder. Notwithstanding the foregoing, none of
Parent, Merger Sub, the Exchange Agent nor any other party hereto shall be
liable to a holder of Company Common Stock for any Parent Common Stock, or
dividends or distributions thereon, delivered to a public official pursuant to
applicable escheat laws.
2.9 NO FRACTIONAL SECURITIES. Notwithstanding any other provision of this
Agreement, no certificates or scrip for fractional shares of Parent Common Stock
shall be issued upon the surrender for exchange of Certificates pursuant to this
ARTICLE II and no Parent dividend, stock split or interest shall relate to any
fractional security, and such fractional interests shall not entitle the owner
thereof to vote or to any rights of a security holder. In lieu of any such
fractional securities, each holder of Company Common Stock who would otherwise
have been entitled to a fraction of a share of Parent Common Stock upon
surrender of Certificates for exchange pursuant to this ARTICLE II will be
entitled to receive cash upon such surrender in an amount equal to such fraction
multiplied by the closing price of Parent Common Stock as reported on the AMEX
on the Business Day immediately preceding the Closing Date. Following the
Consummation of the Merger, Parent shall, upon the request of the Exchange
Agent, provide the Exchange Agent with
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sufficient cash (in immediately available funds) to allow for cash payments in
lieu of fractional shares pursuant to this SECTION 2.9.
2.10 ADJUSTMENTS. If, between the date hereof and the Consummation of the
Merger, the outstanding shares of Parent Common Stock shall be changed into a
different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment, or if a stock dividend thereon shall be declared with a record
date within such period, the number of shares of Parent Common Stock to be
issued and delivered in the Merger for each outstanding share of Company Common
Stock as provided in this Agreement shall be correspondingly adjusted and any
new conversion ratio resulting from any such adjustment shall be rounded to
three decimal places.
2.11 CLOSING OF COMPANY TRANSFER BOOKS. Upon the Consummation of the
Merger, the Company Common Stock transfer books of the Company shall be closed
and no transfer of Company Common Stock shall thereafter be made. If, after the
Consummation of the Merger, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for cash and/or certificates
representing Parent Common Stock.
2.12 STOCKHOLDERS' APPROVAL.
(a) Subject to applicable law and the terms and conditions of this
Agreement, the Company, acting through its Board, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting
(which, as may be duly adjourned, shall be referred to as the "Company Special
Meeting") of its Stockholders as soon as practicable for the purpose of
approving the plan of merger (within the meaning and in accordance with the
provisions of Section 251 of the DGCL) set forth in this Agreement (the "Company
Stockholder Approval"); and, subject to the terms and conditions of this
Agreement, include in the proxy statement related to the Company Special Meeting
the recommendation of the Company's Board that the Company's Stockholders vote
in favor of the plan of merger set forth in this Agreement.
(b) Subject to applicable law and the terms and conditions of this
Agreement, Parent, acting through its Board, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting
(which, as may be duly adjourned, shall be referred to as the "Parent Special
Meeting") of its stockholders as soon as practicable for the purpose of
approving the plan of merger (within the meaning and in accordance with the
provisions of Section 251 of the DGCL) set forth in this Agreement (the "Parent
Stockholder Approval"); and, subject to the terms and conditions of this
Agreement, include in the proxy statement related to the Parent Special Meeting
the recommendation of Parent's Board that Parent's stockholders vote in favor of
the plan of merger set forth in this Agreement.
2.13 COMPANY OPTIONS. All Company Options (other than the Management
Options, which shall be terminated) shall remain outstanding following the
Consummation of the Merger and shall remain exercisable pursuant to their terms
except as hereinafter provided. At the Consummation of the Merger, all Company
Options shall, by virtue of the Merger and without any further action on the
part of the Company or the holder of any such Company Options, be assumed by
Parent in such manner that Parent, except as hereinafter provided, (x) is a
corporation "assuming a stock option in a transaction to which Section 424(a)
applies" within the meaning of Section 424 of the Code or (y) to the extent that
Section 424(a) of the Code does not apply to any such Company Option, would be
such a corporation were Section 424(a) applicable to such Company Option.
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Each Company Option assumed by Parent shall be amended and restated as set forth
in EXHIBIT 2.13 and each such amended and restated Company Option shall be
exercisable (at an exercise price of $6.125 per share of Parent Common Stock)
for that whole number of shares of Parent Common Stock (rounded to the next
whole share) equal to the product of (i) the number of shares of Company Common
Stock subject to such Company Option immediately prior to the Consummation of
the Merger multiplied by (ii) 0.3561084. From and after the date of this
Agreement, no additional options shall be granted by the Company or the
Company's Subsidiaries under the Company Stock Plan or otherwise. In respect
each Company Option assumed by Parent, and the shares of Parent Common Stock
underlying such Company Option, Parent shall file within thirty (30) days after
the Consummation of the Merger a Form S-8 or other appropriate Registration
Statement with respect to the assumption by Parent of the Company Options
referred to in this SECTION 2.13 and with respect to the issuance of Parent
Common Stock upon exercise of such Company Options. Parent shall use
commercially reasonable efforts to keep such Registration Statement effective
for as long as the Company Options remain outstanding.
2.14 CLOSING. On the date which is the third Business Day after the
satisfaction of the conditions set forth in ARTICLE VI hereof (or such other
time as the parties may mutually agree), a closing (the "Closing") will be held
at the Dallas, Texas offices of Jackson Walker L.L.P., (or such other place as
the parties may agree) for the purpose of confirming all of the foregoing;
provided, that nothing herein shall be deemed to affect the conditions to the
respective parties' obligations hereunder contained in ARTICLE VI hereof.
Notwithstanding the foregoing, the date and time at which such Closing actually
occurs are herein referred to as the "Closing Date." As soon as practicable
after the satisfaction or, if permissible, waiver of the conditions set forth in
ARTICLE VI hereof, the Company and Merger Sub shall execute in the manner
required by the DGCL and deliver to the Secretary of State of the State of
Delaware a duly executed and verified Certificate of Merger and the parties
shall take such other and further actions as may be required by law to make the
Merger effective.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SUBSTANTIAL STOCKHOLDERS
The Company and the Substantial Stockholders jointly and severally
represent and warrant to Parent and Merger Sub the following:
3.1 ORGANIZATION AND QUALIFICATION. Each of the Company and the Company
Subsidiaries is a corporation or other entity duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation or
organization, and has corporate or other power and authority to own all of its
properties and assets and to carry on its business as now being conducted. Each
of the Company and the Company Subsidiaries is duly qualified and in good
standing to transact business in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be in good standing or
to be duly qualified would not, individually or in the aggregate, have or
reasonably be expected to have a Company Material Adverse Effect.
3.2 CAPITALIZATION. The authorized capital stock of the Company consists
of 9,500,000 shares of Company Common Stock and 500,000 shares of Company
Preferred Stock. As of the close of business on February 28, 1999 (the
"Capitalization Date"):
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5,052,584 shares of Company Common Stock were issued and outstanding; no shares
of Company Preferred Stock were issued and outstanding; no shares of Company
Common Stock were held in the Company's treasury; there were outstanding Company
Options (excluding the Management Options) with respect to 83,333 shares of
Company Common Stock and there were outstanding Company Warrants with respect to
2,430,000 shares of Company Common Stock. Since the Capitalization Date, the
Company (i) has not issued any shares of Company Common Stock other than upon
the exercise or vesting of Company Options outstanding on such date; (ii) has
not granted any options or rights to purchase or acquire shares of Company
Common Stock under the Company Stock Plan or otherwise; (iii) has not split,
combined or reclassified any of its shares of capital stock and (iv) has not
issued any shares of Company Preferred Stock. All of the outstanding shares of
Company Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable and are free of preemptive rights. Except as disclosed in
this Section or in Section 3.2 of the Company Disclosure Letter, there are no
outstanding (i) shares of capital stock or other voting securities of the
Company; (ii) securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company; or (iii) options,
warrants, rights or other agreements or commitments to acquire from the Company,
or obligations of the Company to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Company, or to grant, extend or enter into any subscription,
warrant, option, right, convertible or exchangeable security or other similar
agreement or commitment (the items in clauses (i), (ii) and (iii) being referred
to collectively as "Company Securities"). Except as disclosed in Section 3.2 of
the Company Disclosure Letter, there are no outstanding obligations of the
Company or any Subsidiary to repurchase, redeem or otherwise acquire any Company
Securities.
3.3 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all requisite
power and authority to enter into this Agreement and, subject to the Company
Stockholder Approval, the Company Required Statutory Approvals and the Company
Required Consents, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and, subject to Company Stockholder
Approval, the consummation by the Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company. This Agreement has been duly and validly executed and delivered
by the Company and, assuming the due authorization, execution and delivery
hereof by Parent and Merger Sub, constitutes the valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as would be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, may be subject to the discretion of
any court before which any proceeding therefor may be brought.
3.4 SUBSIDIARIES. Except as disclosed in Section 3.4 of the Company
Disclosure Letter, the Company is, directly or indirectly, the record and
beneficial owner of all the outstanding shares of capital stock or other
ownership interests of each of its Subsidiaries, free and clear of any lien,
mortgage, pledge, charge, security interest or encumbrance of any kind, and
there are no irrevocable proxies with respect to any such shares. Except as
disclosed in this Section or in Section 3.4 of the Company Disclosure Letter,
there are no outstanding (i) shares of capital stock or other voting securities
of any Subsidiary of the Company; (ii) securities of the Company or any of its
Subsidiaries convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in
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any such Subsidiary; or (iii) options or other rights to acquire from the
Company or any of its Subsidiaries, or other obligations of the Company or any
of its Subsidiaries to issue, any capital stock, voting securities or other
ownership interests in, or any securities convertible into or exchangeable for
any capital stock, voting securities or ownership interests in, any of the
Subsidiaries of the Company, or to grant, extend or enter into any subscription,
warrant, right, convertible or exchangeable security or other similar agreement
or commitment (the items in clauses (i), (ii) and (iii) being referred to
collectively as "Company Subsidiary Securities"). There are no outstanding
obligations of the Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any outstanding Company Subsidiary Securities.
3.5 STATUTORY APPROVALS. Except as set forth in Section 3.5 of the
Company Disclosure Letter or otherwise contemplated by this Agreement, no
declaration, filing or registration with, or notice to or authorization, consent
or approval of any Governmental Authority is necessary for the execution and
delivery of this Agreement by the Company or the consummation by the Company of
the transactions contemplated hereby, the failure to obtain, make or give which
would reasonably likely have a Company Material Adverse Effect (the "Company
Required Statutory Approvals"), it being understood that references in this
Agreement to "obtaining" such Company Required Statutory Approvals shall mean
making such declarations, filings or registrations; giving such notice;
obtaining such consents or approvals; and having such waiting periods expire as
are necessary to avoid a violation of law.
3.6 NON-CONTRAVENTION. Subject to obtaining the Company Required
Statutory Approvals and the receipt of the Company Stockholder Approval, the
execution and delivery of this Agreement by the Company do not, and the
consummation of the transactions contemplated hereby will not, result in any
violation by the Company or any of its Subsidiaries under any provisions of:
(a) the Certificates of Incorporation, Bylaws or similar governing
documents of the Company or any of its Subsidiaries,
(b) any statute, law, ordinance, rule, regulation, judgment, decree,
order, injunction, writ, permit or license of any Governmental Authority
applicable to the Company or any of its Subsidiaries or any of their
respective properties or assets,
(c) subject to obtaining the third-party consents or other approvals
set forth in Section 3.6 of the Company Disclosure Letter (the "Company
Required Consents"), any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which the Company or any
of its Subsidiaries is now a party or by which it or any of its properties
or assets may be bound or affected, excluding from the foregoing clauses
(ii) and (iii) such violations as would not, in the aggregate, reasonably
likely have a Company Material Adverse Effect; or
(d) the Company Warrants.
3.7 AUTHORIZATIONS. Except as described in Section 3.7 of the Company
Disclosure Letter, the Company, each of the Company Subsidiaries, each of the
Affiliated Practices and each of the Affiliated Providers have obtained all
licenses, certificates of authority, permits, authorizations, orders and
approvals of, and have made all registrations or filings with, all Governmental
Authorities as required in connection with the conduct of its business or dental
or orthodontic practice (as the case may be) as currently conducted
(collectively, the "Company Authorizations"). All Company Authorizations are
valid and
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in full force and effect. No notice that the Company, any of the Company
Subsidiaries, any of the Affiliated Practices or any of the Affiliated Providers
is in violation of any such Company Authorization has been received by the
Company or any of the Company Subsidiaries, or to the knowledge of the Company,
recorded or published, and no proceeding is pending or, to the knowledge of the
Company threatened, to revoke or limit any of them. Neither the Company nor any
of the Substantial Stockholders has any knowledge that the Company
Authorizations in effect on the date hereof will not be renewed.
3.8 COMPLIANCE WITH LAWS.
(a) Except as expressly set forth in Section 3.8 of the Company Disclosure
Letter, none of the Company, any Company Subsidiary, any Affiliated Practice or
any Affiliated Provider has been or shall be as of the Closing Date (by virtue
of any action, omission to act, contract to which it is a party or any
occurrence or state of facts whatsoever) in violation of any applicable local,
state or federal law, ordinance, regulation, order, injunction or decree, or any
other requirement of any governmental body, agency or authority or court binding
on it, or relating to its property or business or its advertising, sales,
referral or pricing practices (including Titles 18 and 19 of the Social Security
Act and all applicable zoning and use laws), excluding such violations as would
not, in the aggregate, have a Company Material Adverse Effect.
(b) BILLING PRACTICES/REGULATORY COMPLIANCE.
(i) BILLING PRACTICES GENERALLY. Except as expressly set forth in
Section 3.8 of the Company Disclosure Letter, all billing practices by the
Company, all Company Subsidiaries, all Affiliated Practices and all
Affiliated Providers to all third party payors, including, but not limited
to, the federal Medicare program, state Medicaid programs and private
insurance companies, have been true, fair and correct and in compliance
with all applicable laws, regulations and policies of all such third party
payors, and none of the Company, any Company Subsidiary, any Affiliated
Practice or any Affiliated Provider have billed for or received any payment
or reimbursement in excess of amounts allowed by law.
(ii) FRAUD AND ABUSE. None of the Company, any Company Subsidiary,
any Affiliated Practice, their respective officers and directors, any
Affiliated Provider and any other person and entity providing professional
services for any of the Affiliated Practices have engaged in any activities
which are prohibited under the federal Fraud and Abuse Statute, 42 U.S.C.
sec.1320 a-7b and Regulations contained in 42 CFR sec.1001 et seq. (the
"Fraud and Abuse Statute"), or 42 U.S.C. sec.1395 nn and Regulations
contained in 42 CFR sec. 411 et seq. ("Stark I and Stark II"), or related
state or local statutes or regulations, or which are prohibited by rules of
professional conduct, including, but not limited, to the following: (a)
knowingly and willfully making or causing to be made a false statement or
representation of a material fact in any application for any benefit or
payment; (b) knowingly and willfully making or causing to be made any false
statement or representation of a material fact for use in determining
rights to any benefit or payment; (c) knowingly and willfully soliciting or
receiving any remuneration (including any kickback, bribe or rebate),
directly or indirectly, overtly or covertly, in cash or in kind (1) in
return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may
be made in whole or in part by Medicare or Medicaid or (2) in return for
purchasing, leasing, ordering or arranging for or recommending purchasing,
leasing or ordering any good, facility, service or item for which payment
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may be made in whole or in part by Medicare or Medicaid; and (d) knowingly
and willfully offering or paying any remuneration (including any kickback,
bribe or rebate), directly or indirectly, overtly or covertly, in cash or
in kind to any person to induce such person (1) to refer an individual to a
person for the furnishing or arranging for the furnishing of any item or
service for which payment may be made in whole or in part under Medicare or
Medicaid or (2) to purchase, lease, order, arrange for or recommend
purchasing, leasing or ordering any good, facility, service or item for
which payment may be made in whole or in part under Medicare or Medicaid.
(c) TRANSACTIONS WITH REFERRAL SOURCES. None of the Company, any Company
Subsidiary, any Affiliated Practice, their respective officers and directors,
any of the Affiliated Providers and any other persons and entities providing
professional services for any of the Affiliated Practices is a party to any
contract, lease, agreement or arrangement, including, but not limited to, any
joint venture or consulting agreement with any dentist, orthodontist, physician,
hospital, nursing facility, home health agency or other person who is in a
position to make or influence referrals to or otherwise generate business for
any Affiliated Practice or Affiliated Provider to provide services, lease space,
lease equipment or engage in any other venture or activity.
3.9 COMPANY SEC DOCUMENTS AND COMPANY FINANCIAL STATEMENTS. Except as set
forth in Section 3.9 of the Company Disclosure Letter or as would not be
reasonably likely to have a Company Material Adverse Effect, the Company and the
Company Subsidiaries have timely filed all reports, registrations, statements
and other filings, together with any amendments required to be made with respect
thereto, that were required to be filed since December 31, 1996 with the SEC
(all such reports and statements, including the financial statements, exhibits
and schedules thereto, being collectively referred to herein as the "Company
Reports"). The Company has or will have made available to the Parent prior to
the Closing copies of each registration statement, offering circular, report,
definitive proxy statement or information statement filed by it with the SEC
with respect to periods since January 1, 1997 through the date of this Agreement
and will promptly provide each such registration statement, offering circular,
report, definitive proxy statement or information statement filed or circulated
after the date hereof (collectively, the "Company SEC Documents"), each in the
form (including exhibits and any amendments thereto) filed with the SEC.
As of their respective dates (and without giving effect to any amendments
or modifications filed after the date of this Agreement), each of the Company
SEC Documents, including the financial statements, exhibits and schedules
thereto, filed or circulated prior to the date hereof complied (and each of the
Company SEC Documents filed after the date of this Agreement, will comply) in
all material respects as to form with applicable federal securities laws and did
not (or in the case of reports, statements, or circulars filed after the date of
this Agreement, will not) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading.
Each of the Company's consolidated statements of condition or balance
sheets included in or incorporated by reference into the Company SEC Documents,
including the related notes and schedules, fairly presented in accordance with
GAAP the consolidated financial position of the Company and the Company
Subsidiaries as of the date of such statement of condition or balance sheet and
each of the consolidated statements of income, cash flows and stockholders'
equity included in or incorporated by reference into Company
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SEC Documents, including any related notes and schedules (collectively, the
foregoing financial statements and related notes and schedules are referred to
as the "Company Financial Statements"), fairly presented the consolidated
results of operations, cash flows and stockholders' equity, as the case may be,
of the Company and the Company Subsidiaries for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments and the absence of certain notes), in each case in accordance with
GAAP (except as may be noted therein and except that such unaudited statements
include no notes).
3.10 ABSENCE OF CHANGES. Except as contemplated by this Agreement or as
set forth in Section 3.10 of the Company Disclosure Letter, since September 30,
1998, the Company Business and the orthodontic or dental practice of each
Affiliated Practice has been operated in the ordinary and usual course and none
of the Company, any of any of the Company Subsidiaries, any of the Affiliated
Practices or any of the Affiliated Providers have entered into any agreement
that would require the Company, any of the Company Subsidiaries or any of the
Affiliated Practices to operate the Company Business (or the orthodontic or
dental practice of the Affiliated Practices, as the case may be) other than in
the ordinary and usual course.
3.11 NO UNDISCLOSED LIABILITIES. To the knowledge of the Company, none of
the Company or any of the Company Subsidiaries has any liabilities or
obligations except (i) as and to the extent set forth or contemplated in the
Company SEC Documents or Company Financial Statements, (ii) liabilities and
obligations incurred in the ordinary course of business, (iii) as would not have
a Company Material Adverse Effect or (iv) as set forth in Section 3.11 of the
Company Disclosure Letter.
3.12 LITIGATION. Except as set forth in Section 3.12 of the Company
Disclosure Letter, there are no Actions pending or, to the knowledge of the
Company or the Substantial Stockholders, threatened, against the Company, any of
the Company Subsidiaries, any of the Affiliated Practices or any of the
Affiliated Providers which (i) have, or, if adversely determined, could
reasonably be expected to have a Company Material Adverse Effect or (ii) seek
specifically to prevent, restrict or delay consummation of the transactions
contemplated hereby or fulfillment of any of the conditions of this Agreement.
Except as set forth in Section 3.12 of the Company Disclosure Letter, there are
no judgments, decrees or orders of any Governmental Authority outstanding
against the Company, any of its Subsidiaries, any of the Affiliated Practices or
any of the Affiliated Providers except for such orders, writs, injunctions and
decrees as would not individually or in the aggregate have a Company Material
Adverse Effect or a material adverse effect on the ability of the Company to
consummate the transactions contemplated hereby.
3.13 LABOR MATTERS.
(a) There are no labor unions or other organizations representing,
purporting to represent or attempting to represent any employees of the Company,
the Company Subsidiaries or the Affiliated Practices.
(b) Except as set forth in Section 3.13 of the Company Disclosure Letter,
there are no controversies pending or, to the knowledge of the Company or the
Substantial Stockholders, threatened, between the Company, any of the Company
Subsidiaries or any of the Affiliated Practices, on the one hand, and any of
their respective employees, on the other hand.
3.14 ENVIRONMENTAL COMPLIANCE. Except as disclosed in Section 3.14 of the
Company Disclosure Letter or in the Company SEC Documents, (i) the assets,
properties,
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businesses and operations of the Company, the Company Subsidiaries and the
Affiliated Practices are in compliance with applicable Environmental Laws,
except for such instances of non-compliance as would not individually or in the
aggregate have a Company Material Adverse Effect; (ii) the Company, the Company
Subsidiaries and the Affiliated Practices have obtained and, as currently
operating are in compliance with, all permits necessary for any Environmental
Law for the conduct of the business and operations of the Company, the Company
Subsidiaries and the Affiliated Practices in the manner now conducted, except
for such instances of non-compliance as would not individually or in the
aggregate have a Company Material Adverse Effect; and (iii) none of the Company,
any of the Company Subsidiaries, any of the Affiliated Practices nor any of
their respective assets, properties, businesses or operations has received or is
subject to any outstanding order, decree, judgment, complaint, agreement, claim,
citation, notice, or proceeding indicating that the Company, any of the Company
Subsidiaries or any of the Affiliated Practices is or may be liable for (A) a
violation of any Environmental Law or (B) any Environmental Liabilities and
Costs, except, in each case, for such liabilities as would not individually or
in the aggregate have a Company Material Adverse Effect.
3.15 EMPLOYEE BENEFIT PLANS.
(a) Section 3.15 of the Company Disclosure Letter includes a complete list
of all material employee benefit plans, programs, policies, practices and other
arrangements providing benefits to any employee or former employee or
beneficiary or dependent thereof, sponsored or maintained by the Company or the
Company Subsidiaries or to which the Company or the Company Subsidiaries
contribute or are obligated to contribute (collectively, "Company Employee
Benefit Plans"). "Company Employee Benefit Plans" includes all employee welfare
benefit plans within the meaning of Section 3(1) of ERISA and all employee
pension benefit plans within the meaning of Section 3(2) of ERISA. Except as set
forth in Section 3.15 of the Company Disclosure Letter, the Company or the
Company Subsidiaries may amend or terminate any Company Employee Benefit Plan
without incurring any material liability thereunder.
(b) With respect to each Company Employee Benefit Plan, there has been made
(or will be made prior to the Closing) available to Parent a true, correct and
complete copy of: (i) all plan documents, trust agreements, and insurance
contracts and other agreements related to funding vehicles; (ii) the three most
recent annual reports on Form 5500 and accompanying schedules, if any, filed
with the IRS; (iii) the current summary plan description, if any; (iv) the most
recent annual financial report, if any, filed with the IRS; and (v) the most
recent determination letter, if any, issued by the IRS. All financial statements
for each Company Employee Benefit Plan have been prepared in accordance with
GAAP.
(c) All Company Employee Benefit Plans which are "employee benefit plans,"
as defined in Section 3(3) of ERISA, in all material respects are in compliance
with and have been administered in compliance with all applicable requirements
of law, including the Code and ERISA, and all unpaid contributions required to
be made to each such plan under the terms of such plan, ERISA or the Code as of
the date hereof have been fully reflected in the appropriate Company Financial
Statements except where the failure to do so could not reasonably be expected to
have a Company Material Adverse Effect.
(d) Section 3.15 of the Company Disclosure Letter identifies each Company
Employee Benefit Plan that is intended to be a "qualified plan" satisfying the
requirements of Section 401(a) of the Code (a "Company Pension Plan"). A
favorable IRS determination letter as to the qualification of each Company
Pension Plan under
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Section 401(a) of the Code has been issued and remains in effect and the related
trust has been determined to be exempt from taxation under Section 501(a) of the
Code and any amendment made or event relating to such Company Pension Plan
subsequent to the date of such determination letter has not adversely affected
the qualified status of such Company Pension Plan. No issue concerning
qualification of any Company Pension Plan is pending before or, to the knowledge
of Company, threatened by, the IRS. Each Company Pension Plan has been
administered in accordance with its terms, except for those terms which are
inconsistent with the changes required by the Code and any regulations and
rulings promulgated thereunder for which changes are not yet required to be
made, in which case each Company Pension Plan has been administered in
accordance with the provisions of the Code and such regulations and rulings, and
neither the Company or the Company Subsidiaries, nor any fiduciary of any
Company Pension Plan has done anything which would adversely affect the
qualified status of any Company Pension Plan or related trust. The Company and
the Company Subsidiaries have performed all obligations required to be performed
by them under, and are not in default under or in violation of, the terms of any
of the Company Employee Benefit Plans in any manner that could reasonably be
expected to have a Company Material Adverse Effect. None of the Company or the
Company Subsidiaries or any other "disqualified person" (as defined in Section
4975 of the Code) or "party-in-interest" (as defined in Section 3(14) of ERISA)
has engaged in any "prohibited transaction" (as such term is defined in Section
4975 of the Code or Section 406 of ERISA), which could subject any Company
Employee Benefit Plan (or its related trust), the Company or the Company
Subsidiaries or any officer, director or employee of the Company or the Company
Subsidiaries to the tax or penalty imposed under Section 4975 of the Code or
Section 502(i) of ERISA; and all "fiduciaries," as defined in Section 3(21) of
ERISA, with respect to the Company Employee Benefit Plans have complied in all
material respects with the requirements of Section 404 of ERISA.
(e) None of the Company Employee Benefit Plans are subject to Section 412
of the Code. None of the Company, its Subsidiaries or ERISA Affiliates
maintains, or has any liability with respect to, a Company Pension Plan that is
subject to Title IV of ERISA.
(f) The Company and its Subsidiaries have no liability for life, health,
medical or other welfare benefits to former employees or beneficiaries or
dependents thereof, except for health continuation coverage as required by
Section 4980B of the Code or Part 6 of Title I of ERISA, and at no expense to
the Company or its Subsidiaries.
(g) Except as set forth on Section 3.15(g) of the Company Disclosure
Letter, no compensation or benefit that is or will be payable in connection with
the execution and delivery of this Agreement or in connection with the
transactions contemplated under this Agreement will be characterized as an
"excess parachute payment" within the meaning of Sections 280G and 4999 of the
Code.
3.16 TAX MATTERS.
(a) All Tax Returns required to have been filed by the Company and each of
its Subsidiaries have been timely filed (taking into account duly granted
extensions) and are true, correct and complete in all respects. Except as
disclosed in Section 3.16(a) of the Company Disclosure Letter, (i) neither the
Company nor any of its Subsidiaries is currently the beneficiary of any
extension of time within which to file any Tax Return, and (ii) no claim has
ever been made by any Governmental Authority in a jurisdiction where the Company
or any of its Subsidiaries does not file Tax Returns that the Company or any of
its Subsidiaries is or may be subject to taxation by that jurisdiction.
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(b) All Taxes of the Company or any of its Subsidiaries which have
become due (without regard to any extension of the time for payment and
whether or not shown on any Tax Return) have been paid. The Company and
each of its Subsidiaries has withheld and paid over all Taxes required to
have been withheld and paid over and has complied with all information
reporting and back-up withholding requirements relating to Taxes. There are
no liens with respect to Taxes on any of the assets of the Company or any
of its Subsidiaries, other than liens for Taxes not yet due and payable.
(c) The unpaid Taxes of the Company and each of its Subsidiaries for
all periods ending on or before December 31, 1998 did not exceed the amount
of the current liability accruals for Taxes (exclusive of reserves for
deferred Taxes established to reflect timing differences) reflected on the
Company's consolidated balance sheet as of December 31, 1998, and the
unpaid Taxes of the Company and each of its Subsidiaries for all periods
ending on or before the Closing Date will not exceed the amount of such
current liability accruals reflected in the Company's books and records as
of the Closing Date.
(d) To the knowledge of the Company, no deficiencies exist or have
been asserted or are expected to be asserted (verbally or in writing) with
respect to Taxes of the Company or any of its Subsidiaries. Neither the
Company nor any of its Subsidiaries has received notice or expects to
receive notice (verbally or in writing) that it has not filed a Tax Return
or paid any Taxes required to be filed or paid by it. No audit,
examination, investigation, action, suit, claim or proceeding relating to
the determination, assessment or collection of any Tax of the Company or
any of its Subsidiaries is currently in process, pending or threatened
(verbally or in writing). Except as disclosed in Section 3.16(d) of the
Company Disclosure Letter, no waiver or extension of any statute of
limitations relating to the assessment or collection of any Tax of the
Company or any of its Subsidiaries is in effect. None of the consolidated
federal income Tax Returns of the Company and its Subsidiaries have been
examined by the IRS. There are no outstanding requests for rulings with any
Tax authority relating to Taxes of the Company or any of its Subsidiaries.
(e) Except as disclosed in Section 3.16(e) of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries is or ever has been
(i) a party to any Tax sharing agreement or arrangement (formal or
informal, verbal or in writing), or (ii) a member of an affiliated group of
corporations (within the meaning of Code Section 1504) filing a
consolidated federal income Tax Return, or any similar group under
analogous provisions of other law, other than the affiliated group of which
the Company is presently the common parent. Neither the Company nor any of
its Subsidiaries is liable for the Taxes of any other person pursuant to
Treasury regulations Section 1.1502-6 or other law, as a transferee or
successor, by contract or otherwise, other than for the Taxes of another
member of the affiliated group of which the Company is presently the common
parent.
(f) Neither the Company nor any of its Subsidiaries (i) has filed a
consent under Code Section 341(f) concerning collapsible corporations; (ii)
has made any payments, obligated itself to make any payments or become a
party to any agreement that under any circumstance could obligate it or any
successor or assignee of it to make any payments that are not or will not
be deductible under Code Section 280G, or that would be subject to excise
Tax under Code Section 4999; (iii) is a "foreign person" as defined in Code
Section 1445(f)(3); (iv) has participated in any
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"international boycott" within the meaning of Code Section 999; (v) is or
ever has been a U.S. real property holding corporation within the meaning
of Code Section 897(c)(2) during the applicable period specified in Code
Section 897(c)(1)(A)(ii); (vi) owns or ever has owned any interest in any
"controlled foreign corporation" as defined in Code Section 957 or "passive
foreign investment company" as defined in Code Section 1296; (vii) is not
and has not been a party to any agreement or arrangement for which
partnership Tax Returns are required to be filed; (viii) owns any asset
that is subject to a "safe harbor lease" within the meaning of Code Section
168(f)(8), as in effect prior to amendment by the Tax Equity and Fiscal
Responsibility Act of 1982; (ix) owns any "tax-exempt use property" within
the meaning of Code Section 168(h) or "tax exempt bond financed property"
within the meaning of Code Section 168(g)(5); (x) has agreed to or is
required to make any adjustment under Code Section 481(a) by reason of a
change in accounting method or otherwise; or (xi) has made any election
under Section 13261(g)(2) or (3) of the Omnibus Budget Reconciliation Act
of 1993, as amended, relating to Code Section 197.
(g) Section 3.16(g) of the Company Disclosure Letter sets forth the
following information with respect to the Company and each of its
Subsidiaries as of the most recent practicable date: (i) the federal income
Tax adjusted basis of each of its assets; (ii) the federal income Tax
adjusted basis of the stock of each Company Subsidiary (or the amount of
any excess loss account); (iii) its current and accumulated earnings and
profits, (iv) the amount (for both regular and alternative minimum Tax
purposes) of all federal income Tax attribute carryovers; and (v) a
schedule of any deferred gain or loss arising out of any intercompany
transactions between the Company and its Subsidiaries.
(h) The Company and its Subsidiaries have no net operating losses or
other federal income Tax attributes presently subject to limitation under
Code Sections 382, 383 or 384, or the consolidated return regulations
issued pursuant to the Code.
(i) Neither the Company nor any of its Subsidiaries (i) has filed and
pending (nor will they have filed prior to the Closing, except with the
prior written consent of Parent) any claim for refund of any Taxes
attributable to any net operating or other loss or credit carryover or
carryback, or (ii) has made or prior to the Closing Date will make any
election under Code Section 172(b)(3).
3.17 AFFILIATED PRACTICES AND PROVIDERS. Section 3.17 of the Company
Disclosure Letter lists the following:
(a) Each Affiliated Practice;
(b) with respect to each Affiliated Practice, the type of entity that
comprises the Affiliated Practice, its jurisdiction of organization or
formation, all locations at which the Affiliated Practice conducts business
and the nature of the Affiliated Practice's business;
(c) with respect to each Affiliated Practice, the name of each
Affiliated Provider, an indication of whether such Affiliated Provider has
a written or oral employment, engagement or similar agreement with such
Affiliated Practice or otherwise and the expiration date of the term of
such employment, engagement or similar agreement, if any; and
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(d) with respect to each Affiliated Practice and Affiliated Provider,
a description of any alleged actions or failures to act on the part of any
party to any management services agreement (or similar agreement) or any
employment agreement (or similar agreement) to which such Affiliated
Practice or Affiliated Provider is a party which, to the knowledge of the
Company, is or was at any time alleged to constitute a breach under such
management services agreement (or similar agreement) or employment
agreement (or similar agreement).
To the knowledge of the Company, each Affiliated Provider is in good health
and there is no presently existing condition with respect to any Affiliated
Provider that would cause or enable such Affiliated Provider to terminate his or
her employment agreement on the basis of disability or otherwise restrict such
Affiliated Provider from the practice of orthodontics or dentistry, as the case
may be. Each employment, engagement or similar agreement to which an Affiliated
Provider is a party is in full force and effect and is a legal, valid and
binding agreement and there is no material default (or any event which, with the
giving of notice or lapse of time or both, would be a material default) by any
party thereunder in the timely performance of any obligation to be performed or
paid under any such employment agreement, except where the failure to be in full
force and effect or to be valid and binding, or where such default, individually
or in the aggregate, could not reasonably be expected to result in a cost or
loss of income to the Company or any Company Subsidiary in excess of $50,000.
True, correct and complete copies of each such employment, engagement or similar
agreement to which an Affiliated Provider is a party have been delivered to
Parent.
3.18 CONTRACTS; NO DEFAULT.
(a) Section 3.18 of the Company Disclosure Letter sets forth as of the date
of this Agreement a list of each contract (other than the Lease Agreements,
defined below) of the Company or the Company Subsidiaries (each, a "Company
Material Contract"):
(i) involving an aggregate payment or commitment per Company Material
Contract on the part of any party of more than $50,000 during the 12-month
period ending on the Closing Date;
(ii) with an individual or entity rendering services as an employee of
or contractor to the Company or any Company Subsidiary under which, during
the last 12 months, the Company or one of the Company Subsidiaries was
obligated or became committed to pay in excess of $50,000 or under which,
during the next 12 months, the Company or one of the Company Subsidiaries
is reasonably expected to pay or to become obligated to pay in excess of
$50,000;
(iii) concerning a partnership or joint venture with another person;
(iv) concerning employment arrangements with their respective
directors, officers or employees (which arrangements, in the case of
employees other than the officers or directors of the Company, provide for
annual compensation in excess of $50,000 to such persons), or providing for
severance payments to any such directors, officers or employees;
(v) involving the provision by the Company or any Company Subsidiary
of medical practice management or similar services;
(vi) involving an acquisition of assets or securities, which
acquisition has not yet been consummated or has been consummated during the
24 months immediately preceding the date of this Agreement; or
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(vii) evidencing Indebtedness of the Company or any Company Subsidiary
in an amount greater than $50,000. "Indebtedness" means any liability in
respect of (w) borrowed money, (x) capitalized lease obligations, (y) the
deferred purchase price of property or services (other than trade payables
in the ordinary course of business) and (z) guarantees of any of the
foregoing incurred by any other person other than the Company or any of its
Subsidiaries, except that Indebtedness shall not include short term credit
facilities entered into in the ordinary course of business.
(b) Section 3.18 of the Company Disclosure Letter lists each Company
Material Contract to which the Company, any of the Company Subsidiaries, any of
the Affiliated Practices or any of the Affiliated Providers is a party limiting
the right of the Company, any of the Company Subsidiaries, any of the Affiliated
Practices or any of the Affiliated Providers to engage in, or to compete with
any person in, any business, including each contract or agreement containing
exclusivity provisions restricting the geographical area in which, or the method
by which, any business may be conducted by the Company, any of the Company
Subsidiaries, any of the Affiliated Practices or any of the Affiliated
Providers.
(c) Each Company Material Contract, and each other contract or agreement of
the Company or the Company Subsidiaries which would have been required to be
disclosed in the Company Disclosure Letter had such contract or agreement been
entered into prior to the date of this Agreement, is in full force and effect
and is a legal, valid and binding contract and there is no material default (or
any event which, with the giving of notice or lapse of time or both, would be a
material default) by the Company or any Company Subsidiary, or, to the knowledge
of the Company, any other party, in the timely performance of any obligation to
be performed or paid under any Company Material Contracts or any such other
contract or agreement, except where the failure to be in full force and effect
or to be valid and binding, or where such default, individually or in the
aggregate could not reasonably be expected to result in a cost to the Company or
any Company Subsidiaries in excess of $50,000.
3.19 LEASE AGREEMENTS. Section 3.19 of the Company Disclosure Letter
contains a current list of all the lease agreements and license agreements to
which the Company, any Company Subsidiary or any Affiliated Practice is a party
and pursuant to which the Company, any Company Subsidiary or any Affiliated
Practice lease (whether as lessor or lessee) or license (whether as licensor or
licensee) any real or personal property (the "Lease Agreements"). The Company
has delivered to Parent true and complete copies of all of the Lease Agreements.
Each of the Lease Agreements is valid and effective in accordance with its
terms, and there is not under any of such Lease Agreements (a) any change in
control provision that will be triggered by the transactions contemplated
hereby, (b) any existing or claimed default by the Company, any Company
Subsidiary, or any Affiliated Practice or event of default or event which with
notice or lapse of time, or both, would constitute a default by the Company, any
Company Subsidiary or any Affiliated Practice, or (c) any existing default by
any other party under any of the Lease Agreements or any event of default or
event which with notice or lapse of time, or both, would constitute a default by
any such party.
3.20 INSURANCE.
(a) The Company and the Company Subsidiaries have (i) property, fire and
casualty insurance policies, with extended coverage (subject to reasonable
deductibles), sufficient to allow them to replace any of their properties that
might be damaged or destroyed, and (ii) except for professional liability
insurance which is specifically covered in
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SECTION 3.20(B) below, have liability, workers compensation insurance and bond
and surety arrangements reasonably adequate, in light of the business in which
they are engaged, to protect them and their financial condition against the
risks involved in the business conducted by them. Section 3.20 of the Company
Disclosure Letter sets forth a list of all such policies.
(b) Section 3.20 of the Company Disclosure Letter contains a list of each
policy of professional liability insurance and errors and omissions insurance,
and all amendments and endorsements thereto currently in effect, which provide
insurance for the Company, any of the Company Subsidiaries, any of the
Affiliated Practices or any of the Affiliated Providers, including the name of
each insurer, the amount of coverage provided under the policy, all persons,
groups and entities that are afforded coverage under the policies, the term of
the policy and type of coverage (whether "claims made" or otherwise and whether
such policies include "tail" coverage) and whether the policy is in effect as of
the date hereof. The Company, the Company Subsidiaries, the Affiliated Practices
and the Affiliated Providers have been covered by one or more policies of
professional liability insurance continuously for all services provided pursuant
to all management services or other professional activities of the Company, the
Company Subsidiaries and the Affiliated Practices, and any of their predecessors
or affiliates, whether currently in effect or previously in effect, with limits
at least as great as those set forth in Section 3.20 of the Company Disclosure
Letter.
(c) Section 3.20 of the Company Disclosure Letter sets forth any pending
claims under each of the policies listed therein, and there are no other pending
claims under any of such policies, and no event has occurred and no condition
exists that could reasonably be expected to give rise to or serve as a basis for
any such claim.
(d) Neither the Company, any Company Subsidiary, any Affiliated Practice or
any Affiliated Provider is in default under any insurance policy or bond
described in SECTION 3.20(A) or (B), and no event which would (with the passage
of time, notice or both) constitute a breach or default thereunder by the
Company, any Company Subsidiary, any Affiliated Practice or any Affiliated
Provider or, to the Company's knowledge, the insurer thereunder, has occurred,
or, to the Company's knowledge, will occur as a result of the transactions
contemplated herein. Consummation of the transactions contemplated herein will
not (and will not give any person or entity a right to) terminate or modify any
material rights of, or accelerate or augment any material obligation of the
Company, any Company Subsidiary, any Affiliated Practice or any Affiliated
Provider under any insurance policy or bond insofar as such policy or bond
relates to or covers incidents that give rise to claims for incidents taking
place prior to the Closing Date. Neither the Company, any Company Subsidiary,
any Affiliated Practice or any Affiliated Provider have done anything by way of
action or inaction which might invalidate or diminish coverage under any of such
policies in whole or in part. There are no outstanding requirements or
recommendations of any insurance company that has issued a policy to the
Company, any Company Subsidiary, any Affiliated Practice or any Affiliated
Provider which require or recommend any changes to the conduct of the business
of the Company, any Company Subsidiary, any Affiliated Practice or any
Affiliated Provider, or any repair or other work with respect to any of its or
their respective properties.
3.21 ACCOUNTS RECEIVABLE. Except as set forth in Section 3.21 of the
Company Disclosure Letter, the accounts receivable of the Company and the
Company Subsidiaries as reflected in the most recent financial statements
contained in the Company Reports, to the extent uncollected on the date hereof,
and the accounts receivable reflected on the
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books of the Company and the Company Subsidiaries, are valid and existing and
represent monies due, and the Company has made reserves reasonably considered
adequate for receivables not collectible in the ordinary course of business, and
(subject to the aforesaid reserves) are subject to no refunds or other
adjustments and to no defenses, rights of setoff, assignments, restrictions,
encumbrances or conditions enforceable by third parties on or affecting any
thereof, except for such refunds, adjustments, defenses, rights of setoff,
assignments, restrictions, encumbrances or conditions as would not have a
Company Material Adverse Effect.
3.22 TARGET PRACTICES. Section 3.22 of the Company Disclosure Letter
lists:
(a) Each person or entity with which the Company has entered into a
letter of intent (true and correct copies of which have been delivered to
Parent) with respect to an affiliation or acquisition (each such person or
entity is referred to herein as a "Target Practice" and collectively such
entities are referred to herein as the "Target Practices"); and
(b) to the extent available to the Company, with respect to each
Target Practice, the type of entity that comprises the Target Practice and
its jurisdiction of organization or formation.
3.23 YEAR 2000. Date sensitive computer applications that currently
record years in two-digit, rather than four-digit, format may be unable to
properly categorize and process dates occurring after December 31, 1999 (the
"Year 2000" problem). The Company has (i) initiated a review and assessment of
all areas within its business and operations (including those affected by
suppliers and vendors) that could be adversely affected by the Year 2000
problem, (ii) developed a plan and timeline for addressing the Year 2000 problem
on a timely basis, and (iii) to date, implemented that plan in accordance with
that timetable. The Company reasonably believes that all computer applications
(including those of its suppliers and vendors) that are material to its business
and operations will on a timely basis be able to perform properly date-sensitive
functions for all dates before and after January 1, 2000 (that is, be "Year 2000
compliant"), except to the extent that a failure to do so could not reasonably
be expected to have a Company Material Adverse Effect. The Company will promptly
notify Parent in the event the Company discovers or determines that any computer
application (including those of its suppliers and vendors) that is material to
its business and operations will not be Year 2000 compliant on a timely basis,
except to the extent that such failure could not reasonably be expected to have
a Company Material Adverse Effect.
3.24 BROKERS. Except as set forth in Section 3.24 of the Company
Disclosure Letter, no broker, finder, or other investment banker or other Person
is or will be entitled to receive any brokerage, finder's or other fee or
commission in connection with this Agreement or the transactions contemplated
hereby based upon agreements made by or on behalf of the Company or any of the
Company Subsidiaries.
3.25 NO MATERIAL ADVERSE EFFECT. Except as disclosed in Section 3.25 of
the Company Disclosure Letter, none of the Company or any Substantial
Stockholder is aware of any fact which, alone or together with another fact, is
likely to result in a Company Material Adverse Effect.
3.26 INFORMATION. No representation or warranty made by the Company or
any Substantial Stockholder contained in this Agreement and no statement
contained in any certificate, list, exhibit or other instrument specified in
this Agreement, including the Company Disclosure Letter, contains any untrue
statement of a material fact or omits or
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will omit to state a material fact necessary to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to the
Company the following:
4.1 ORGANIZATION AND QUALIFICATION. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation. Each of Parent and the Parent Subsidiaries is
duly qualified and in good standing to transact business in each jurisdiction in
which the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be in good standing or to be duly qualified would not, individually or in the
aggregate, have or reasonably be expected to have a Parent Material Adverse
Effect.
4.2 CAPITALIZATION. The authorized capital stock of the Parent consists
of 40,000,000 shares of Parent Common Stock and 10,000,000 shares of Parent
Preferred Stock. As of the close of business on the Capitalization Date:
8,680,298 shares of Parent Common Stock were issued and outstanding; no shares
of Parent Preferred Stock were issued and outstanding; no shares of Parent
Common Stock were held in the Parent's treasury; and no shares of Parent Common
Stock were reserved for issuance except that 2,000,000 shares of Parent Common
Stock were reserved for issuance pursuant to Parent's 1997 Stock Compensation
Plan. Since the Capitalization Date, the Parent (i) has not split, combined or
reclassified any of its shares of capital stock and (ii) has not issued any
shares of Parent Preferred Stock. All of the outstanding shares of Parent Common
Stock have been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in this Section, there are no outstanding (i)
shares of capital stock or other voting securities of the Parent; (ii)
securities of the Parent convertible into or exchangeable for shares of capital
stock or voting securities of the Parent; or (iii) options, warrants, rights or
other agreements or commitments to acquire from the Parent, or obligations of
the Parent to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Parent, or to grant, extend or enter into any subscription, warrant, option,
right, convertible or exchangeable security or other similar agreement or
commitment (the items in clauses (i), (ii) and (iii) being referred to
collectively as "Parent Securities"). Except as disclosed in Section 4.2 of the
Parent Disclosure Letter, there are no outstanding obligations of the Parent or
any Subsidiary to repurchase, redeem or otherwise acquire any Parent Securities.
4.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and Merger Sub
has all requisite power and authority to enter into this Agreement and, subject
to the Parent Required Statutory Approvals, the Parent Required Consents and the
Parent Stockholder Approval, to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and, subject to the Parent
Stockholder Approval, the consummation by Parent and Merger Sub of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and Merger Sub. This Agreement has been
duly and validly executed and delivered by Parent and Merger Sub and, assuming
the due authorization, execution and delivery hereof by the Company, constitutes
the valid and binding obligation of Parent and Merger Sub,
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enforceable against Parent and Merger Sub in accordance with its terms, except
as would be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, may be subject to the discretion of
any court before which any proceeding therefor may be brought.
4.4 STATUTORY APPROVALS. Except as set forth in Section 4.4 of the Parent
Disclosure Letter or otherwise contemplated by this Agreement, no declaration,
filing or registration with, or notice to or authorization, consent or approval
of any Governmental Authority is necessary for the execution and delivery of
this Agreement by Parent and Merger Sub or the consummation by Parent and Merger
Sub of the transactions contemplated hereby, the failure to obtain, make or give
which would reasonably likely have a Parent Material Adverse Effect (the "Parent
Required Statutory Approvals"), it being understood that references in this
Agreement to "obtaining" such Parent Required Statutory Approvals shall mean
making such declarations, filings or registrations; giving such notice;
obtaining such consents or approvals; and having such waiting periods expire as
are necessary to avoid a violation of law.
4.5 NON-CONTRAVENTION. Subject to obtaining the Parent Required Statutory
Approvals and the Parent Stockholder Approval, the execution and delivery of
this Agreement by Parent and Merger Sub do not, and the consummation of the
transactions contemplated hereby will not, result in any violation by Parent or
any of its Subsidiaries under any provisions of:
(a) the Certificates of Incorporation, Bylaws or similar governing
documents of the Parent or any of its Subsidiaries,
(b) any statute, law, ordinance, rule, regulation, judgment, decree,
order, injunction, writ, permit or license of any Governmental Authority
applicable to Parent or any of its Subsidiaries or any of their respective
properties or assets, or
(c) subject to obtaining the third-party consents or other approvals
set forth in Section 4.5 of the Parent Disclosure Letter (the "Parent
Required Consents"), any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which Parent or any of
its Subsidiaries is now a party or by which it or any of its properties or
assets may be bound or affected, excluding from the foregoing clauses (ii)
and (iii) such violations as would not, in the aggregate, reasonably likely
have a Parent Material Adverse Effect.
4.6 PARENT SEC DOCUMENTS AND PARENT FINANCIAL STATEMENTS. Except as set
forth in Section 4.6 of the Parent Disclosure Letter or as would not be
reasonably likely to have a Parent Material Adverse Effect, the Parent and its
Subsidiaries have timely filed all reports, registrations, statements and other
filings, together with any amendments required to be made with respect thereto,
that were required to be filed since March 31, 1997 with the SEC (all such
reports and statements, including the financial statements, exhibits and
schedules thereto, being collectively referred to herein as the "Parent
Reports"). Each of the Parent Reports, when filed, complied (or will comply) as
to form with the statutes, rules, regulations and orders enforced or promulgated
by the Governmental Authority with which they were filed. The Parent has or will
have made available to the Company prior to the Closing copies of each
registration statement, offering circular, report, definitive proxy statement or
information statement filed by it with the SEC with respect to periods since
January 1, 1997 through the date of this Agreement and will promptly provide
each such
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registration statement, offering circular, report, definitive proxy statement or
information statement filed or circulated after the date hereof (collectively,
the "Parent SEC Documents"), each in the form (including exhibits and any
amendments thereto) filed with the SEC.
As of their respective dates (and without giving effect to any amendments
or modifications filed after the date of this Agreement), each of the Parent SEC
Documents, including the financial statements, exhibits and schedules thereto,
filed or circulated prior to the date hereof complied (and each of the Parent
SEC Documents filed after the date of this Agreement, will comply) in all
material respects as to form with applicable federal securities laws and did not
(or in the case of reports, statements, or circulars filed after the date of
this Agreement, will not) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading.
Each of the Parent's consolidated statements of condition or balance sheets
included in or incorporated by reference into the Parent SEC Documents,
including the related notes and schedules, fairly presented in accordance with
GAAP the consolidated financial position of the Parent and the Parent
Subsidiaries as of the date of such statement of condition or balance sheet and
each of the consolidated statements of income, cash flows and stockholders'
equity included in or incorporated by reference into Parent SEC Documents,
including any related notes and schedules (collectively, the foregoing financial
statements and related notes and schedules are referred to as the "Parent
Financial Statements"), fairly presented the consolidated results of operations,
cash flows and stockholders' equity, as the case may be, of the Parent and the
Parent Subsidiaries for the periods set forth therein (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments and the
absence of certain notes), in each case in accordance with GAAP (except as may
be noted therein and except that such unaudited statements include no notes).
4.7 ABSENCE OF CHANGES. Except as contemplated by this Agreement or as
set forth in Section 4.7 of the Parent Disclosure Letter or in the Parent SEC
Documents, since December 31, 1998, the Parent Business has been operated in the
ordinary and usual course and neither the Parent nor any of any of its
Subsidiaries has entered into any agreement that would require the Parent or any
of its Subsidiaries to operate the Parent Business other than in the ordinary
and usual course.
4.8 TAX MATTERS. The Parent and each of the Parent Subsidiaries has filed
all Tax Returns required to be filed, or requests for extensions to file such
Tax Returns have been timely filed and granted and have not expired, except for
such failures to file as would not individually or in the aggregate have a
Parent Material Adverse Effect. The Parent and each of the Parent Subsidiaries
has paid (or the Parent has paid on its behalf) or made provision for all Taxes
shown as due on such Tax Returns. The most recent Parent Financial Statements
contained in the Parent SEC Documents reflect adequate reserves for all Taxes
payable by the Parent and the Parent Subsidiaries for all taxable periods and
portions thereof accrued through the date of such Parent Financial Statements.
To the best knowledge of the Parent, no deficiencies exist or have been asserted
with respect to Taxes of the Parent or any of the Parent Subsidiaries and to the
knowledge of the Parent, neither the Parent nor any of the Parent Subsidiaries
has received notice that it has not filed a Tax Return or paid any Taxes
required to be filed or paid. No audit, examination, investigation, action,
suit, claim or proceeding relating to the determination, assessment or
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collection of any Tax of the Parent or any of the Parent Subsidiaries is
currently in process or pending. No waiver or extension of any statute of
limitations relating to the assessment or collection of any Tax of the Parent or
any of the Parent Subsidiaries is in effect.
4.9 BROKERS. Except as set forth in Section 4.9 of the Parent Disclosure
Letter, no broker, finder or investment banker is entitled to any fee or
commission from Parent or Merger Sub for services rendered on behalf of Parent
or Merger Sub in connection with transactions contemplated by this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 INTERIM CONDUCT. From the date hereof until the Closing, Parent, the
Company and their respective Subsidiaries will (i) conduct their business only
in the ordinary course and (ii) use reasonable efforts to preserve intact their
relationships with customers, suppliers and others having business relationships
with them (including, in the case of the Company and its Subsidiaries, the
Affiliated Practices and the Affiliated Providers) and keep available their
present officers and employees. The management of the Company will meet with
Parent on a regular and frequent basis to discuss the general status of the
ongoing operations of the Company and its Subsidiaries and any problems relating
to the conduct of the Business.
5.2 FORBEARANCES.
(a) BY THE COMPANY. Except as contemplated by this Agreement or as set
forth in Section 5.2 of the Company Disclosure Letter, the Company and its
Subsidiaries will not, from the date hereof until the Closing, without the
written consent of Parent:
(i) sell, lease or otherwise dispose of any of its material assets,
except in the ordinary course of business;
(ii) mortgage, pledge or otherwise encumber, or permit to exist any
new security interest, lien or encumbrance on, any of its assets, except in
the ordinary course of business;
(iii) except in accordance with the ordinary course of its business,
enter into, amend, modify or cancel any Company Material Contract;
(iv) incur any obligation or liability for borrowed money except in
the ordinary course of business;
(v) make any material investment in, purchase any material assets or
securities of, or merge with any Person;
(vi) assume, guarantee, endorse or otherwise become responsible for
the obligations of any Person, or make loans or advances to any Person,
except in the ordinary course of business;
(vii) increase in any manner the compensation of any of the directors,
officers or other employees of the Company or its Subsidiaries other than
increases in compensation of employees who are not officers or directors in
the ordinary course of business;
(viii) pay or agree to pay any pension or retirement allowance not
required by an existing plan or agreement to any director, officer or
employee, whether past or present, of the Company or its Subsidiaries, or
enter into or amend any employment
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agreement or any incentive compensation, profit sharing, stock purchase,
stock option, stock appreciation rights, savings, consulting, deferred
compensation, severance, retirement, pension or other benefit plan or
arrangement with or for the benefit of any of its directors, officers,
employees or of any other Person, or approve or grant any stock options,
stock appreciation rights or similar awards to any Person;
(ix) declare, set aside or pay any dividend in cash or property,
repurchase or otherwise make any distribution, with respect to its capital
stock other than in accordance with prior practice;
(x) split, combine or otherwise similarly change its capital stock, or
redeem any of its capital stock;
(xi) authorize the creation or issuance of, or issue or sell (other
than upon the exercise of Company Options or the Company Warrants), any
shares of its capital stock or any securities or obligations convertible
into or exchangeable for, or giving any Person any right to acquire from
it, any shares of its capital stock;
(xii) enter into any joint venture, partnership or other similar
arrangement except in the ordinary course of business;
(xiii) enter into any agreement or arrangement with an Affiliate of
the Company or any of its Subsidiaries except in the ordinary course of
business;
(xiv) enter into any agreement which restricts in any way its ability
to compete with any other Person;
(xv) amend its Certificate of Incorporation or Bylaws;
(xvi) cancel or compromise any indebtedness owed to it except in the
ordinary course of business;
(xvii) alter in any way the manner in which it has regularly and
customarily maintained its books of account and records, or change any of
its accounting principles or the methods by which such principles are
applied for tax or reporting purposes;
(xviii) allow any of the Management Options to be exercised,
transferred or assigned; or
(xix) agree or commit to do any of the things described in clauses (i)
through (xviii) above;
provided, however, that the foregoing does not restrict any transactions between
or among the Company or any of its Subsidiaries.
(b) By Parent. Except as contemplated by this Agreement or as set forth in
Section 5.2 of the Parent Disclosure Letter, the Parent and its Subsidiaries
will not, from the date hereof until the Closing, without the written consent of
Company:
(i) sell, lease or otherwise dispose of any of its material assets,
except in the ordinary course of business;
(ii) alter in any way the manner in which it has regularly and
customarily maintained its books of account and records, or change any of
its accounting principles or the methods by which such principles are
applied for tax or reporting purposes;
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(iii) make any material investment in, purchase any material assets or
securities of, or merge with any Person that is a competitor of the
Company;
(iv) make any investment in, purchase any material assets or
securities of, or merge with any Person in a transaction in which the
Parent's investment or purchase or merger consideration is valued in excess
of $10,000,000;
(v) enter into any joint venture, partnership, or other similar
agreement that would change materially the character of Parent's business;
or
(vi) agree or commit to do any of the things described in clauses (i)
through (iv) above;
provided, however, that the foregoing does not restrict any transactions between
Parent and any of its Subsidiaries.
5.3 INVESTIGATION OF BUSINESS AND PROPERTIES. From the date hereof until
the Closing, the Company, on the one hand, and Parent, on the other hand, each
will afford the other and its attorneys, accountants, financial advisors and
other representatives complete access at all reasonable times to its officers,
employees, properties, contracts, and books and records. In addition, the
Company, on the one hand, and Parent, on the other hand, each will furnish the
other with such financial, operating and additional data as the other may
reasonably request concerning the business, operations, properties and personnel
of the Company or Parent, as the case may be.
5.4 EXPENSES. Except as otherwise provided in this Agreement, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by the party incurring such costs and expenses.
5.5 PUBLIC ANNOUNCEMENTS. Upon execution of this Agreement, the Company
and Parent will issue a joint press release or mutually acceptable conforming
separate press releases concerning this Agreement and the transactions
contemplated hereby. Prior to Closing, except for filings and public statements
required by law, neither party will issue any further press releases or
otherwise make any public statements with respect to this Agreement and the
transactions contemplated hereby without having first obtained the approval of
the other party, which approval shall not be unreasonably withheld.
5.6 SUBSEQUENT EVENTS. At all times prior to the Closing, each party
shall promptly notify the other party in writing of any fact, condition, event
or occurrence, whether or not existing on the date hereof, that will or may
result in the failure of any of the conditions set forth in ARTICLE VI,
including the failure of the representations and warranties set forth in
ARTICLES III AND IV to be true and correct.
5.7 EFFORTS TO CONSUMMATE. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate, as promptly as practicable,
the transactions contemplated hereby, including the obtaining of all necessary
consents, waivers, authorizations, orders and approvals of third parties,
whether private or governmental, required of it to enable it to comply with the
conditions precedent to consummating the transactions contemplated by this
Agreement. Each party agrees to cooperate fully with the other party in
assisting it to comply with this Section and to take such steps as may be
necessary to remove any liens (other than Permitted Encumbrances) which affect
the assets of itself and its Subsidiaries Notwithstanding the foregoing, neither
party shall be required to initiate any litigation, make any substantial payment
or incur any material economic burden, except for payments
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a party presently is contractually obligated to make, to obtain any consent,
waiver, authorization, order or approval, and if, despite such efforts, either
party is unable to obtain any consent, waiver, authorization, or order of
approval, the other party may terminate this Agreement and shall have no
liability therefor.
5.8 SOLICITATION.
(a) Until the earlier to occur of (i) the consummation of the Merger, (ii)
the termination of this Agreement or (iii) September 30, 1999, the Company
agrees that, subject to the fiduciary duties of the Company's Board set out
below and under applicable law, neither it nor any of its Subsidiaries nor any
of the officers and directors of it or its Subsidiaries shall, and that it shall
direct and use its reasonable efforts to cause its and its Subsidiaries'
employees, agents and representatives (including any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, directly or
indirectly, initiate, solicit, encourage or knowingly facilitate (including by
way of furnishing information) any inquiries or the making of any proposal or
offer with respect to a merger, reorganization, share exchange, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving, or any purchase (including, without limitation, by way of
tender offer) or sale of, all or any significant portion of the assets or more
than 19.9% of the outstanding shares of Company Common Stock or the common stock
of any of its Subsidiaries (any such proposal or offer (other than a proposal or
offer made by Parent or an Affiliate thereof) being hereinafter referred to as
an "Acquisition Proposal").
(b) Subject to the fiduciary duties set forth in (a) above, the Company
further agrees that neither it nor any of its Subsidiaries nor any of the
officers and directors of it or its Subsidiaries shall, and that it shall direct
and use its best efforts to cause its and its Subsidiaries' employees, agents
and representatives (including any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) not to, directly or indirectly, have
any discussion with or provide any confidential information or data to any
Person relating to an Acquisition Proposal, or engage in any negotiations
concerning an Acquisition Proposal or accept an Acquisition Proposal.
(c) Notwithstanding the foregoing or any other provision of this Agreement
to the contrary, the Company or its Board shall be permitted to do any of the
following: (i) comply, to the extent applicable, with Rule 14d-9 and Rule
14e-2(a) promulgated under the Exchange Act with regard to an Acquisition
Proposal, (ii) in response to an unsolicited bona fide written Acquisition
Proposal, recommend approval of such an unsolicited bona fide written
Acquisition Proposal to the stockholders of the Company or withdraw or modify in
any manner its recommendation of the plan of merger set forth in this Agreement
or (iii) engage in any discussions or negotiations with, or provide any
information to, any Person in response to an unsolicited bona fide written
Acquisition Proposal by any such Person, if and only to the extent that, in any
such case referred to in clause (ii) or (iii), the following condition is met:
the Board of the Company concludes that such Acquisition Proposal (1) in the
case of clause (ii) above would, if consummated, may constitute a Superior
Proposal or (2) in the case of clause (iii) above could reasonably be expected
to constitute a Superior Proposal.
(d) Except to the extent that the Board of the Company determines, based
upon the advice of Robinson & Cole, L.L.P., the Company's outside legal counsel,
that doing so would reasonably be expected to violate the fiduciary duties of
the Board of the Company under applicable law, prior to providing any
information or data to any Person or entering
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into discussions or negotiations with any Person, the Board of the Company shall
notify the Parent of any Acquisition Proposal.
(e) The Company agrees that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any Acquisition Proposal.
5.9 LISTING OF PARENT COMMON STOCK. Prior to the time of issuance, Parent
shall prepare and submit to the AMEX (or its successor entity) a listing
application covering Parent Common Stock to be issued pursuant to the Merger and
shall use its best efforts to obtain approval for the listing of such Parent
Common Stock upon official notice of issuance.
5.10 TAX MATTERS.
(a) The Company shall duly, accurately and timely (with regard to any duly
granted extensions) file all Tax Returns required to be filed, and pay all Taxes
required to be paid, by it and each of its Subsidiaries on or before the Closing
Date.
(b) Except with the prior written consent of Parent, the Company will not
(i) make, adopt or change any material Tax election or Tax accounting method,
(ii) enter into any closing agreement with respect to Taxes of the Company or
any of its Subsidiaries or settle any asserted Tax claim or assessment, or (iii)
consent to any Tax claim or assessment or to any waiver or extension of the
statute of limitations for any Tax claim or assessment.
(c) The Company shall be responsible for payment of all sales, use, excise,
documentary, registration, stamp, stock transfer and other Transfer Taxes and
fees (including any related interest, penalties or other additions to Tax)
(collectively, "Transfer Taxes") arising from the consummation of the
transactions contemplated by this Agreement, and for the costs and expenses
related to the filing of all required Tax Returns relating to such Transfer
Taxes. The party regularly required by applicable law to file any such Tax
Return shall prepare and file the Tax Return and pay all Taxes required in
respect thereof. Within fifteen (15) days after the payment of any Transfer Tax
by the Parent or Merger Sub, the Company shall reimburse the Parent or Merger
Sub for the amount of such Tax and the cost and expense of preparing and filing
any such Tax Return.
(d) Parent will file and will cause Merger Sub and Parent's other
Subsidiaries to file its and their Tax Returns for all periods beginning after
or including the Closing Date on a basis consistent with the treatment of the
Merger as a reorganization within the meaning of Section 368(a) of the Code,
unless otherwise (i) provided by order of court or (ii) determined in any
administrative or judicial proceeding that has become final and non-appealable.
(e) The Company, Parent and Merger Sub shall reasonably cooperate with each
other in connection with the filing of Tax Returns pursuant to this SECTION 5.10
and any audit, litigation, or other proceeding with respect to Taxes of the
Company or any of its Subsidiaries. Such cooperation shall include the provision
of copies, at the requesting party's expense, of records and information
relevant to any such Tax Return or proceeding and making employees available on
a mutually convenient basis to provide additional information and explanation of
any material provided hereunder.
5.11 PROXY STATEMENT AND FORM S-4 REGISTRATION STATEMENT INFORMATION.
(a) Parent shall furnish the Company with a correct and complete copy of
the audited December 31, 1998 Parent Financial Statements and the notes and
schedules thereto prepared in accordance with GAAP, together with other written
information,
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including additional quarterly financial statements that may be required under
applicable securities laws, relating to Parent for inclusion in the Company
Proxy Statement. Such Parent Financial Statements and other information relating
to Parent furnished in writing by Parent to the Company for inclusion in the
Company Proxy Statement, at the time of the mailing of the Company Proxy
Statement to the Company Stockholders and at the time of the Company Special
Meeting, will not contain any untrue statement of a material fact or omit to
state a material fact concerning Parent or omit to state a material fact
required or necessary to be stated therein in order to make the statements
contained therein concerning Parent, in light of the circumstances under which
they were made, not misleading.
(b) The Company shall furnish Parent with a correct and complete copy of
the audited December 31, 1998 Company Financial Statements and the notes and
schedules thereto prepared in accordance with GAAP, together with other written
information, including additional quarterly financial statements that may be
required under applicable securities laws, relating to the Company for inclusion
in the Form S-4 Registration Statement. Such Company Financial Statements and
other information relating to the Company furnished in writing by the Company to
Parent for inclusion in the Form S-4 Registration Statement, at the time of its
effectiveness, will not contain any untrue statement of a material fact or omit
to state a material fact concerning the Company or omit to state a material fact
required or necessary to be stated therein in order to make the statements
contained therein concerning the Company, in light of the circumstances under
which they were made, not misleading.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger or cause the Merger to
be effected shall be subject to the satisfaction at or prior to the Consummation
of the Merger of the following conditions:
(a) The Company Stockholder Approval and the Parent Stockholder
Approval shall have been obtained.
(b) No temporary restraining order or preliminary or permanent
injunction or other order by any federal or state court preventing
consummation of the Merger shall have been issued and continue in effect,
and the Merger and the other transactions contemplated hereby shall not
have been prohibited under any applicable federal or state law or
regulation.
(c) The Company Required Statutory Approvals and the Parent Required
Statutory Approvals shall have been obtained at or prior to the
Consummation of the Merger.
(d) The issuance of the shares of Parent Common Stock in connection
with the Merger shall have been registered under the Securities Act.
6.2 CONDITIONS TO PARENT'S AND MERGER SUB'S OBLIGATIONS TO EFFECT THE
MERGER. The obligations of the Parent and Merger Sub to effect the Merger or
cause the Merger to be
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effected shall be further subject to the satisfaction, at or prior to the
Consummation of the Merger, of the following conditions:
(a) There shall be no breach (which breach is not cured prior to the
Consummation of the Merger) of any covenant or agreement on the part of the
Company (i) having a Company Material Adverse Effect or (ii) such that
closing would put Parent or Merger Sub in conflict with federal securities
laws.
(b) There shall be no breach (which breach is not cured prior to the
Consummation of the Merger) of any representation or warranty on the part
of the Company (i) having a Company Material Adverse Effect or (ii) such
that closing would put Parent or Merger Sub in conflict with federal
securities laws.
(c) The Parent shall have received a certificate signed by the Chief
Executive Officer and Chief Financial Officer of the Company, dated the
Closing Date, to the effect that, to each such officer's knowledge, the
conditions set forth in SECTIONS 6.2(A) and (B) have been satisfied.
(d) No Company Material Adverse Effect shall have occurred and there
shall exist no fact or circumstance that would have, or would be reasonably
likely to have, a Company Material Adverse Effect.
(e) The Company Required Consents shall have been obtained except
those that in the aggregate would not result in and would not reasonably be
likely to result in a Company Material Adverse Effect.
(f) The Amendments to Management Services Agreement attached hereto as
EXHIBIT 6.2(F) shall have been fully executed and remain in full force and
effect.
(g) Parent shall have received the resignation of all directors and
executive officers of each of the Company and the Company Subsidiaries or
such directors and executive officers shall have been removed, and shall
have received a release substantially in the form of EXHIBIT 6.2(G) from
each of Robert Schulhof, Dean Bellavia, Sonny Elliott, Joel Glovsky, Peter
Wexler, Ed Mulherin, Steve DeAngelis, Steve Crisilieo and George Bodiroga
in form and substance reasonably acceptable to Parent from any and all
claims based upon any Company Employee Benefit Plan, compensation plan,
employment agreement or other contract, arrangement or understanding
between such executive officer and the Company or any Company Subsidiary.
Each of the foregoing individuals shall receive as consideration for such
release one or more of the following (all as more particularly set forth in
Section 6.2(g) of the Parent Disclosure Letter: (i) an Employment Agreement
with Parent or one of its Subsidiaries (to the extent specified in Section
6.2(g) of the Parent Disclosure Letter, the "Parent Employment
Agreements"); (ii) an Option Agreement with respect to Parent Common Stock
(the "Parent Option Agreements") or (iii) a cash payment not to exceed the
amounts set forth in Section 6.2(g) of the Parent Disclosure Letter, half
of which shall be payable at the Consummation of the Merger by the Company
(such cash payments due at the Consummation of the Merger, the "Cash
Closing Payments") and half of which shall be payable by the Company
without interest on the sixth (6th) monthly anniversary of the Closing Date
or such other cash payment, pay-out and structure as may be mutually agreed
between the parties.
(h) The Board of Parent shall have received an opinion from Everen
Securities to the effect that the Merger is fair to the stockholders of
Parent from a financial
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point of view, and such opinion shall not have been withdrawn prior to the
Consummation of the Merger.
(i) None of the Management Options shall have been exercised,
transferred or assigned.
(j) Fully executed agreements in the form of EXHIBIT 6.2(J)
restricting the sale, transfer or disposition of the shares of Parent
Common Stock received by the Substantial Stockholders in the Merger for a
period of one (1) year after issuance shall have been delivered to Parent.
(k) Parent shall have received evidence reasonably satisfactory to
Parent that at the Consummation of the Merger (i) Closing Liabilities do
not exceed $1,474,000 and (ii) the Cash and Cash Equivalents of the Company
are at least $346,500 less the amount by which the Company's cash severance
obligations within one year following the Consummation of the Merger are
less than $410,000. It is agreed that to the extent the actual Closing
Liabilities are less than $1,474,000, then a corresponding dollar for
dollar credit shall be allocated to Cash and Cash Equivalents to the extent
the Cash and Cash Equivalents are below $346,500. In the event that at the
Consummation of the Merger Parent determines that Closing Liabilities
exceed $1,474,000 or Cash and Cash Equivalents as adjusted as provided in
the immediately preceding sentence (increased by the positive difference if
any between $1,474,000 and Closing Liabilities at the Consummation of the
Merger) are less than $346,500, then the aggregate number of shares of
Parent Common Stock issuable in the Merger (1,800,000 Shares) shall be
reduced by a number of shares determined by dividing (i) the difference
between (a) the difference between Closing Liabilities and Cash and Cash
Equivalents at the Consummation of the Merger and (b) $1,127,500 by (ii)
the average closing price for Parent Common Stock for the ten trading days
ending three (3) trading days immediately prior to the Consummation of the
Merger. In the event that such an adjustment is required, the number
"1,800,000" in SECTION 2.7(B)(I) of this Agreement shall be reduced by the
number determined in accordance with the immediately preceding sentence in
this SECTION 6.2(K) and the Exchange Ratio shall be adjusted
correspondingly. The foregoing represents the Company's sole obligation and
Parent's sole remedy in the event the Company's Closing Liabilities at the
Consummation of the Merger exceed $1,474,000 or Cash and Cash Equivalents
at the Consummation of the Merger are less than $346,500.
At the Consummation of the Merger, the Company will present to Parent (i)
final statements of Arthur Andersen L.L.P. and Robinson & Cole LLP, (ii) a
statement of all other liabilities for which the Company is responsible for
payment in connection with the transactions contemplated by this Agreement.
(l) Parent shall have received an opinion of Robinson & Cole LLP,
counsel to the Company, substantially in the form of EXHIBIT 6.2(L).
(m) Robert Schulhof and F.V. Elliot shall have delivered to Parent and
the Company stock pledge agreements in form and substance reasonably
satisfactory to Parent, pursuant to which each of them pledges shares of
Parent Common Stock received by him in connection with the Merger as
collateral for all indebtedness owed by such individual to the Company.
6.3 CONDITIONS TO THE COMPANY'S OBLIGATIONS TO EFFECT THE MERGER. The
obligation of the Company to effect the Merger or cause the Merger to be
effected shall be further
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subject to the satisfaction, at or prior to the Consummation of the Merger, of
the following conditions:
(a) There shall be no breach (which breach is not cured prior to the
Consummation of the Merger) of any covenant or agreement on the part of
Parent or Merger Sub (i) having a Parent Material Adverse Effect or (ii)
such that closing would put the Company in conflict with federal securities
laws.
(b) There shall be no breach (which breach is not cured prior to the
Consummation of the Merger) of any representation or warranty on the part
of Parent or Merger Sub (i) having a Parent Material Adverse Effect or (ii)
such that closing would put the Company in conflict with federal securities
laws.
(c) The Company shall have received certificates signed by the Chief
Executive Officer and Chief Financial Officer of the Parent and Merger Sub,
respectively, dated the Closing Date, to the effect that, to each such
officer's knowledge, the conditions set forth in SECTIONS 6.3(A) and (B)
have been satisfied.
(d) The Parent Required Consents shall have been obtained except those
that in the aggregate would not result in and would not reasonably be
likely to result in a Parent Material Adverse Effect.
(e) The Board of the Company shall have received an opinion from
Richard Geist of Financial Strategies and Investing, Inc., Spencer Trask
Securities Incorporated or another investment banking firm reasonably
acceptable to Parent to the effect that the Merger and the consideration to
be received by the holders of Company Common Stock in the Merger is fair to
such holders from a financial point of view, and such opinion shall not
have been withdrawn prior to the Consummation of the Merger.
(f) The shares of Parent Common Stock issuable to the Stockholders
pursuant to this Agreement shall have been approved for listing on the
AMEX, subject to official notice of issuance.
(g) The Company shall have received an opinion of Jackson Walker
L.L.P., counsel to Parent, substantially in the form of EXHIBIT 6.3(G).
(h) The individuals set forth in SECTION 6.2(G) of the Parent
Disclosure Letter shall receive the Parent Employment Agreements, the
Parent Option Agreements and/or the Cash Closing Payments to the extent set
forth in SECTION 6.2(G) of the Parent Disclosure Letter.
(i) Options to purchase Parent Common Stock shall have been granted by
Parent in accordance with the provisions of SECTION 2.13 hereof.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated and the Merger may be
abandoned at any time upon written notice to the other parties hereto
notwithstanding approval thereof by the stockholders of the Company and the
Parent, but prior to the Consummation of the Merger:
(a) by mutual written consent of the Board of the Company, Merger Sub
and Parent;
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(b) by Parent or the Company if the Closing shall not have occurred or
on before September 30, 1999; provided that the right to terminate this
Agreement under this Subsection (b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Closing to occur on or before
such date;
(c) by Parent or the Company if any court of competent jurisdiction in
the U.S. or other Governmental Authority shall have issued an order, decree
or ruling, or taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall
have become final and non-appealable;
(d) by Parent or the Company if the Company Stockholder Approval
required for consummation of the Merger shall not have been obtained at the
Company Special Meeting (or any adjournment thereof);
(e) by Parent or the Company if the Parent Stockholder Approval
required for consummation of the Merger shall not have been obtained at the
Parent Special Meeting (or any adjustment thereof);
(f) by Parent or the Company if the Preliminary Company Proxy
Statement or the Form S-4 Registration Statement shall not have been filed
with the SEC within 75 days after the date hereof; provided, however, that
neither party may terminate this Agreement or abandon the Merger pursuant
to this SECTION 7.1(F) if such party's actions or failure to act is the
proximate cause of such delay in filing of the Preliminary Company Proxy
Statement or the Form S-4 Registration Statement;
(g) by Parent if Parent determines, in its sole discretion for any
reason or for no reason, at any time on or prior to March 31, 1999, that
Parent is not completely satisfied by that date with the results of its
investigation of the business and properties of the Company described in
SECTION 5.3;
(h) by the Company if the Company receives a bona fide written
Acquisition Proposal from any Person (other than Parent or its Affiliates)
which constitutes a Superior Proposal and the Company recommends the
Superior Proposal to its stockholders; or
(i) by Parent if the Board of the Company, prior to the Company
Special Meeting, (i) shall recommend a Superior Proposal pursuant to
Section 5.8 or (ii) shall resolve to take any of the actions specified in
clause (i) of this SECTION 7.1(I).
7.2 EFFECT OF TERMINATION.
(a) If this Agreement is terminated and the Merger is abandoned pursuant to
SECTION 7.1, this Agreement, except for the provisions of this Section and of
ARTICLE IX hereof, shall forthwith become void and have no effect, without any
liability on the part of any party or its directors, officers or stockholders.
Nothing in this Section shall relieve any party to this Agreement of liability
for breach of this Agreement. In the event that any person shall have made an
Acquisition Proposal for the Company and thereafter this Agreement is terminated
by either party (other than pursuant to the breach of this Agreement by Parent)
then the Company, if requested by Parent, shall, subject to the provisions set
forth below, promptly, but in no event later than two days after the date of
such request, pay Parent $300,000, which amount shall be payable by wire
transfer of same day funds; provided that no fee shall be payable to Parent
pursuant to this Section unless and until (i) any person (other than Parent or
an Affiliate of Parent) has entered into a
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letter of intent, agreement in principle or definitive agreement reflecting the
Acquisition Proposal or otherwise providing for or contemplating a merger,
reorganization, share exchange, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving, or
any purchase (including by way of tender offer) or sale of, all or any
significant portion of the assets of the Company or any Company Subsidiary or
more than 19.9% of the outstanding shares of Company Common Stock or the common
stock of any of the Company Subsidiaries.
(b) Each of the Parent and the Company acknowledges that the agreements
contained in this Section are an integral part of the transactions contemplated
in this Agreement, and that, without these agreements, Parent and Merger Sub
would not enter into this Agreement; accordingly, if the Company fails to
promptly pay the amount due pursuant to this Section, and, in order to obtain
such payment, Parent or Merger Sub commences a suit which results in a judgment
against the Company for the fee set forth in this Section, the non-prevailing
party shall pay to the prevailing party its costs and expenses (including
attorneys' fees) in connection with such suit, together with interest on the
amount of the fee at the prime rate of Bank One, N.A. in effect on the date such
payment was required to be made.
ARTICLE VIII
INDEMNITY
8.1 INDEMNIFICATION BY THE COMPANY AND THE SUBSTANTIAL STOCKHOLDERS.
(a) The Company and the Substantial Stockholders, jointly and severally,
will indemnify and hold harmless Parent, and its officers, directors,
stockholders and subsidiaries (collectively, the "INDEMNIFIED PERSONS"), and
will reimburse the Indemnified Persons, for any loss, liability, claim, damage,
expense (including costs of investigation and defense and reasonable attorneys'
fees and expenses) or diminution of value (collectively, "LOSSES"), whether or
not involving a third-party claim, arising from: (i) any breach of any
representation or warranty, covenant or agreement made by the Company or the
Substantial Stockholders in this Agreement, or any other certificate or document
delivered by the Company or any Substantial Stockholder pursuant to this
Agreement; (ii) all Taxes of the Company and each of its Subsidiaries with
respect to any taxable period ending on or before the Closing Date (or for any
taxable period beginning before and ending after the Closing Date to the extent
allocable to the portion of such period beginning before and ending on the
Closing Date) to the extent such Taxes exceed the amount of the current
liability accruals for Taxes (exclusive of reserves for deferred Taxes
established to reflect timing differences) reflected in the Company's books and
records as of the Closing Date; provided, that for purposes of this subsection
(ii), the portion of any Tax attributable to a taxable year or period beginning
before and ending after the Closing Date shall be determined by apportioning the
Tax for the entire year or period based upon the number of days in the year or
period, except that any such Tax measured by income or receipts shall be
apportioned based upon actual results of operations through the end of the
Closing Date; (iii) all Transfer Taxes arising from or as a result of the
transactions contemplated by this Agreement; (iv) any liability of the Company,
any Company Subsidiary, any Stockholder of the Company, any Affiliated Practice
or any Affiliated Provider for costs and expenses (including, attorneys' fees)
incurred in connection with the negotiation, preparation of closing of the
transactions contemplated by this Agreement or the other documents to be
executed in connection herewith; (v) any untrue statement of a material fact or
omission to state a material fact made by Parent in reliance upon and in
conformity
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with written information concerning the Company or the Affiliated Practices
furnished to Parent by the Company for use in (A) any proxy statement or other
stockholder communication related to the Parent Special Meeting or (B) any
prospectus relating to the issuance of Parent Common Stock pursuant to the
Merger and (vi) any untrue statement of a material fact or omission to state a
material fact made by the Company in any proxy statement or other stockholder
communication related to the Company Special Meeting.
(b) Notwithstanding anything in this Agreement to the contrary, the
indemnity obligations of any Substantial Stockholder under this Agreement shall
not exceed the product of the number of shares of Parent Common Stock actually
received by such individual Substantial Stockholder pursuant to the Merger
multiplied by the average closing price for Parent Common Stock as quoted on the
AMEX for the five (5) trading days immediately preceding the Consummation of the
Merger.
(c) Notwithstanding any provision of this Agreement to the contrary, any
claim for indemnification pursuant to this Agreement must be asserted by written
notice to the party from whom indemnification is sought on or before August 1,
2000. If notice of a claim is not received by the above date, the Substantial
Stockholders shall be released from all further liability under the Agreement.
(d) Notwithstanding anything in this Agreement to the contrary, in no event
shall the Company, its Substantial Stockholders, officers directors or employees
be liable for any form of indirect, special or consequential damages, including
but not limited to loss of profit, arising out of this Agreement, whether such
loss or damage arise in contract tort or otherwise, irrespective of fault,
negligence or strict liability.
(e) All payments pursuant to the indemnification provisions of this
Agreement by a Substantial Stockholder shall be treated for tax purposes as a
reduction in the amount of Merger Consideration received by such Substantial
Stockholder pursuant to the provisions of this Agreement.
8.2 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS.
(a) Promptly after receipt by an Indemnified Person under SECTION 8.1 of
notice of the commencement of any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
judicial or investigative, whether formal or informal, public or private)
commenced, brought, conducted or heard by or before or otherwise involving any
governmental body or arbitrator (a "Proceeding") against it, such Indemnified
Persons will, if a claim is to be made against an indemnifying party under this
ARTICLE VIII, give notice to the indemnifying party of the commencement of such
Proceeding, but the failure to notify the indemnifying party will not relieve
the indemnifying party of any liability that it may have to any Indemnified
Persons, except to the extent that the indemnifying party demonstrates that the
defense of such action is prejudiced by the indemnifying party's failure to give
such notice.
(b) If any Proceeding referred to in SECTION 8.2 is brought against an
Indemnified Persons and it gives notice to the indemnifying party of the
commencement of such Proceeding, the indemnifying party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such Proceeding and the Indemnified
Persons determines in good faith that joint representation would be
inappropriate, or (ii) the indemnifying party fails to provide reasonable
assurance to the Indemnified Persons of its financial capacity to defend such
Proceeding and provide indemnification with respect to such Proceeding), to
assume the defense of such
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Proceeding with counsel satisfactory to the Indemnified Persons and, after
notice from the indemnifying party to the Indemnified Persons of its election to
assume the defense of such Proceeding, the indemnifying party will not, as long
as it diligently conducts such defense, be liable to the Indemnified Persons
under this ARTICLE VIII for any fees of other counsel or any other expenses with
respect to the defense of such Proceeding, in each case subsequently incurred by
the Indemnified Persons in connection with the defense of such Proceeding, other
than reasonable costs of investigation. If the indemnifying party assumes the
defense of a Proceeding, (i) it will be conclusively established for purposes of
this Agreement that the claims made in that Proceeding are within the scope of
and subject to indemnification; (ii) no compromise or settlement of such claims
may be effected by the indemnifying party without the Indemnified Persons'
consent unless (i) there is no finding or admission of any violation of law or
any violation of the rights of any person and no effect on any other claims that
may be made against the Indemnified Persons, and (ii) the sole relief provided
is monetary damages that are paid in full by the indemnifying party; and (iii)
the indemnifying party will have no liability with respect to any compromise or
settlement of such claims effected without its prior written consent. If notice
is given to an indemnifying party of the commencement of any Proceeding and the
indemnifying party does not, within ten days after the Indemnified Persons's
notice is given, give notice to the Indemnified Persons of its election to
assume the defense of such Proceeding, the indemnifying party will be bound by
any determination made in such Proceeding or any compromise or settlement
effected by the Indemnified Persons.
(c) Notwithstanding the foregoing, if an Indemnified Persons determines in
good faith that there is a reasonable probability that a Proceeding may
adversely affect it or its affiliates or advisors other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the Indemnified Persons may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its prior written
consent (which may not be unreasonably withheld).
(d) With respect to any Proceeding subject to indemnification under this
ARTICLE VIII: (i) both the Indemnified Persons and the indemnifying party, as
the case may be, shall keep the other party fully informed of the Proceeding at
all stages thereof where such party is not represented by its own counsel, and
(ii) the parties agree (each at its own expense) to render to each other such
assistance as they may reasonably require of each other and to cooperate in good
faith with each other in order to ensure the proper and adequate defense of any
Proceeding brought by any third party.
(e) With respect to any Proceeding subject to indemnification under this
ARTICLE VIII, the parties agree to cooperate in such a manner as to preserve in
full (to the extent possible) the confidentiality of all confidential business
records and the attorney-client and work-product privileges. In connection
therewith, each party agrees that: (i) it will use its best efforts, in any
Proceeding in which it has assumed or participated in the defense, to avoid
production of confidential business records (consistent with applicable law and
rules of procedure), and (ii) all communications between any party hereto and
counsel responsible for or participating in the defense of any Proceeding shall,
to the extent possible, be made so as to preserve any applicable attorney-client
work-product privilege.
(f) Notwithstanding any provision of this Agreement to the contrary, the
Substantial Stockholders shall have no liability for the payment of
indemnification under this Section 8.1 for the first $100,000, in the aggregate,
of indemnification claims hereunder; provided,
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however, that in the event that such $100,000 threshold of indemnification
claims is exceeded in the aggregate, the Substantial Stockholders shall be
liable for the entire amount of such claims with no deduction for such $100,000
threshold (subject to the limitations set forth in SECTION 8.1(A)).
8.3 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS. A claim for
indemnification for any matter not involving a third party claim may be asserted
by notice to the party from whom indemnification is sought.
8.4 EXCLUSIVE REMEDIES AND APPLICABILITY OF LIABILITY LIMITATIONS. The
rights and remedies described in this Agreement shall constitute the exclusive
liabilities of the Company, Parent and Merger Sub and the Company's, Parent's
and Merger Sub's sole remedies. The waivers and disclaimers of liability,
releases from liability, limitation and apportionment of liability, indemnity
provisions, and exclusive remedy provisions expressed throughout this Agreement
shall apply to the full extent permitted by law, even in the event of the fault,
negligence , strict liability or other basis of liability and whether such
liability is founded in contract, tort or otherwise.
ARTICLE IX
GENERAL PROVISIONS
9.1 NOTICES. All notices required to be given hereunder shall be in
writing and shall be deemed to have been given if (i) delivered personally or by
documented courier or delivery service, (ii) transmitted by facsimile during
normal business hours or (iii) mailed by registered or certified mail (return
receipt requested and postage prepaid) to the following listed persons at the
addresses and facsimile numbers specified below, or to such other persons,
addresses or facsimile numbers as a party entitled to notice shall give, in the
manner hereinabove described, to the others entitled to notice:
<TABLE>
<S> <C>
If to the Company or any
of the Substantial
Stockholders, to: Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, California 93510
Attention: Chief Executive
Officer
Fax: (805) 272-9864
with a copy to: Robinson & Cole LLP
One Boston Place
Boston, Massachusetts 02108
Attention: David A. Garbus
Fax: (617) 557-5999
If to Parent or Merger Sub, to: Pentegra Dental Group, Inc.
2999 N. 44th Street, Suite 650
Phoenix, Arizona 85018
Attention: Chief Executive
Officer
Fax: (602) 952-0544
</TABLE>
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<TABLE>
<S> <C>
with a copy to: Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attention: James S. Ryan, III
Fax: (214) 953-5822
</TABLE>
If given personally or by documented courier or delivery service or transmitted
by facsimile, a notice shall be deemed to have been given when it is received.
If given by mail, it shall be deemed to have been given on the third Business
Day following the day on which it was posted.
9.2 INTERPRETATION. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement. For purposes of this Agreement, the words
"includes" and "including" shall mean "including without limitation." All
accounting terms not defined in this Agreement shall have the meaning determined
by GAAP. All capitalized terms defined herein are equally applicable to both the
singular and plural forms.
9.3 ENTIRE AGREEMENT. This Agreement (including the other agreements
referred to herein), the Company Disclosure Letter, the Parent Disclosure Letter
and the Exhibits hereto contain the entire agreement between the parties with
respect to the subject matter hereof and there are no agreements,
understandings, representations or warranties between the parties other than
those set forth or referred to herein. This Agreement is not intended to confer
and shall not confer upon any Person not a party hereof (and their successors
and assigns permitted hereby) any rights or remedies hereunder.
9.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided that no party hereto will assign its rights or delete its
obligations under this Agreement without the express prior written consent of
each other party hereto, except that Parent may assign any or all of its right,
title and interest under this Agreement to any one or more Affiliates, provided,
that in the event of such assignment, Parent shall not be released from any
obligations under this Agreement.
9.5 SEVERABILITY. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties shall
be excused from performance of such portions of this Agreement as shall be found
to be illegal or unenforceable under the applicable laws or regulations without
affecting the validity of the remaining provisions of this Agreement; provided
that (i) the remaining provisions of this Agreement shall in their totality
constitute a commercially reasonable agreement, and (ii) should any method of
termination of this Agreement or a portion thereof be found to be illegal or
unenforceable, such method shall be reformed to comply with the requirements of
applicable law so as, to the greatest extent possible, to allow termination by
that method. Nothing herein shall be construed as a waiver of any party's right
to challenge the validity of such law.
9.6 EXTENSION; WAIVER. At any time prior to the Consummation of the
Merger either party to this Agreement may (i) extend the time for the
performance of any of the obligations of the other party hereto, (ii) waive a
breach of a representation or warranty of the other party hereto, or (iii) waive
compliance by the other party hereto with any of the agreements or conditions
contained herein. Any such extension or waiver shall be valid only if set forth
in a written instrument signed by the party giving the extension or waiver.
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9.7 SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event any party breaches its covenants and agreements contained in
this Agreement or fails to consummate the transactions contemplated hereby, and
that the parties shall be entitled to specific performance in such event, in
addition to any other remedy at law or in equity.
9.8 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to survive the
Merger until August 1, 2000, provided, however, that the representations,
warranties and agreements contained SECTIONS 3.16 shall survive the Merger for
the relevant statute of limitations applicable to the taxable year in which the
Closing occurs plus ninety (90) days and the provisions of ARTICLE VIII shall
survive the Merger for the same time periods.
9.9 AMENDMENTS. This Agreement may be amended by action taken by or on
behalf of the Board of the Company, Parent and Merger Sub at any time before or,
to the extent permitted by applicable law, after adoption of this Agreement by
the Stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of all of the parties.
9.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.11 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Delaware without regard to its laws or regulations
relating to choice of laws.
[Intentionally left blank]
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IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed and their corporate seals to be hereto affixed and attested by their
duly authorized officers as of the date first set forth above.
THE COMPANY:
OMEGA ORTHODONTICS, INC.
By: /s/ ROBERT J. SCHULHOF
-----------------------------------------
Robert J. Schulhof
Title: President and Chief Executive
Officer
-----------------------------------------
PARENT:
PENTEGRA DENTAL GROUP, INC.
By:/s/ JAMES M. POWERS, JR., D.D.S
-----------------------------------------
James M. Powers, Jr., D.D.S.
Title: President and Chief Executive
Officer
-----------------------------------------
MERGER SUB:
SPECIAL OMEGA ACQUISITION CORPORATION
By: /s/ JAMES M. POWERS, JR.
-----------------------------------------
James M. Powers, Jr.
Title: President
-----------------------------------------
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SUBSTANTIAL STOCKHOLDERS
The Orthodontic Management
Effectiveness Group of America, LLC
By: /s/ ROBERT J. SCHULHOF
--------------------------------------
Robert J. Schulhof, its Managing
Member
/s/ ROBERT J. SCHULHOF
--------------------------------------
Robert J. Schulhof
/s/ C. JOEL GLOVSKY
--------------------------------------
C. Joel Glovsky
/s/ DAVID T. GROVE
--------------------------------------
David T. Grove
/s/ DEAN C. BELLAVIA
--------------------------------------
Dean C. Bellavia
/s/ FLOYD V. ELLIOTT
--------------------------------------
Floyd V. Elliott
A-43
<PAGE> 223
[LOGO]
ANNEX B
March 15, 1999
Board of Directors
Pentegra Dental Group, Inc.
2999 North 44(th) Street, Suite 650
Phoenix, AZ 85018
Gentlemen:
We understand that Pentegra Dental Group, Inc. ("Pentegra," or the
"Company") has agreed to acquire 100% of the outstanding capital stock of Omega
Orthodontics, Inc. ("Omega") for 1.8 million shares of Pentegra's common stock
plus the assumption of debt (the "Merger"). Using Pentegra's closing stock price
of $1.69 per share on March 8, 1999, the aggregate purchase price for Omega on a
fully-diluted basis, including the assumption of $874,000 of debt (net of cash),
is $3,916,000. Under the terms of the Merger, each share of Omega stock will be
exchanged for 0.356 shares of Pentegra stock. On a fully diluted basis, current
Pentegra and Omega shareholders will own approximately 83% and 17% of the
combined entity, respectively.
Under the terms of the Merger, Omega's outstanding warrants and options
will be converted into warrants and options to purchase Pentegra stock. For the
purposes of our analysis, we have assumed that the fully diluted number of
Pentegra shares outstanding is 8,817,372 and the fully diluted number of Omega
shares outstanding is 5,052,584 (all outstanding Omega warrants and options are
out-of-the-money). Post-Merger, Pentegra will have 10,617,372 shares outstanding
on a fully diluted basis.
Pentegra has retained EVEREN Securities, Inc. ("EVEREN") to render an
opinion (the "Opinion") to the Board of Directors of Pentegra as to whether the
Merger is fair, from a financial point of view, to the Company and its
shareholders as of the date hereof. This Opinion does not constitute a
recommendation to Pentegra or to any Pentegra shareholder. EVEREN did not
participate or advise Pentegra in the negotiations between Omega and Pentegra.
The purchase price and the amount and/or type of consideration to be paid to
Omega in the Merger was determined through negotiations between Omega and
Pentegra.
In formulating the Opinion, EVEREN has:
<TABLE>
<C> <S>
(i) reviewed the Letter of Understanding by and between Pentegra
and Omega dated January 12, 1999;
(ii) reviewed the draft Agreement and Plan of Merger among
Pentegra and Omega;
(iii) reviewed Pentegra's Form 10-Q for the three month period
ended December 31, 1998;
(iv) reviewed certain non-public operating and financial
information, including projections relating to Pentegra's
business prepared by the management of Pentegra;
(v) interviewed certain members of Pentegra's management to
discuss its operations, financial statements and future
prospects;
(vi) reviewed Omega's Form 10-K for the year ended December 31,
1997, Omega's Form 10-Q for the three month period ended
September 30, 1998 and unaudited draft financial statements
for the year ended December 31, 1998;
</TABLE>
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<TABLE>
<C> <S>
(vii) reviewed certain non-public operating and financial
information, including internal management reports and
projections, relating to Omega's business prepared by the
management of Omega and Pentegra;
(viii) interviewed certain members of Omega's management to discuss
its operations, financial statements and future prospects;
(ix) reviewed publicly available financial data and stock market
performance data of other dental practice management
companies which we deemed comparable to Pentegra and Omega;
(x) reviewed the terms of selected recent acquisitions of
companies which we deemed generally comparable to Omega;
(xi) reviewed the historical stock prices and reported traded
volumes of Pentegra's and Omega's common shares; and
(xii) conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
</TABLE>
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us by the management of Pentegra and Omega. We
have further relied upon the assurances of each management team that they are
unaware of any factors that would make the information provided to us incomplete
or misleading. In arriving at our Opinion, we have not performed any independent
valuation or appraisal of the assets of Pentegra or Omega. For purposes of this
Opinion, we assumed that the per share value of Pentegra's common stock was
equal to its closing market price on March 8, 1999.
In arriving at our Opinion, we have considered such factors as we have
deemed relevant including, but not limited to the following: (i) the historical
stock price performance of Omega relative to the purchase price per share to be
paid by Pentegra; (ii) the relative financial contributions of Pentegra and
Omega, as well as the relative contribution of number of offices and dentists,
as compared to the post-Merger ownership interests of Pentegra and Omega
shareholders; (iii) the purchase price of Omega as compared to the valuations
and multiples of publicly traded dental practice management companies; (iv) the
purchase price multiples and premiums of the Merger as compared to the purchase
price multiples and premiums of comparable healthcare services and business
services merger transactions; and (v) the projected earnings per share of
Pentegra on a stand-alone and pro forma combined basis.
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<PAGE> 225
As our Opinion has taken into consideration forward looking valuation
techniques such as projected earnings analysis, we have assumed that the
financial projections which we reviewed were reasonably prepared using
assumptions reflecting the best currently available estimates and judgments of
the future financial performance of each company. Our Opinion is necessarily
based on the economic, market, and other conditions as in effect on, and the
information made available to us as of, the date hereof. We disclaim any
undertaking or obligation to advise any person of any change in any fact or
matter affecting our Opinion which may come or be brought to our attention after
the date of this Opinion. As our Opinion is based upon the share prices of Omega
and Pentegra as of the date hereof, any material change in the stock prices may
cause EVEREN to withdraw its Opinion.
In connection with this Opinion and pursuant to the terms of an engagement
letter dated February 24, 1999, Pentegra has agreed to pay EVEREN an aggregate
cash fee of $150,000 plus reimbursement of out-of-pocket expenses. Of such fee,
(i) $25,000 was paid to EVEREN upon execution of the engagement letter; (ii)
$50,000 becomes payable upon the delivery of the Opinion to Pentegra's Board of
Directors; and (iii) the remaining $75,000 of such fee shall be payable at the
closing of the Merger. EVEREN acted as an underwriter for the Company's Initial
Public Offering in March 1998 and received compensation for its role therein.
It is understood that this Opinion may be included in its entirety in any
proxy statement or other document distributed to shareholders of the Company in
connection with the Merger and this constitutes our express written approval for
that purpose. However, no summary of, or excerpt from, this Opinion may be used,
and no published public reference (other than as provided in the preceding
sentence) to this Opinion letter may be made without our prior express written
approval, which shall not be unreasonably withheld.
This Opinion does not constitute a recommendation to any shareholder of
Pentegra as to how such shareholder should vote, or as to any other actions
which such shareholder should take in conjunction with the Merger. This Opinion
relates solely to the question of fairness to Pentegra, from a financial point
of view, of the Merger consideration as currently proposed. Further, we express
no Opinion herein as to the structure, terms or effect of any other aspect of
the Merger, including, without limitation, any effects resulting from the
application of any bankruptcy, fraudulent conveyance or other federal or state
insolvency law or of any pending or threatened litigation affecting Pentegra or
Omega.
Based on the foregoing, we are of the opinion that the Merger is fair, from
a financial point of view, to the Company and its shareholders as of the date
hereof.
Very truly yours,
EVEREN Securities, Inc.
By: /s/ KATHRYN BURRER HYER
-----------------------------------
Kathryn Burrer Hyer
Managing Director
B-3
<PAGE> 226
ANNEX C
[SPENCER TRASK SECURITIES INCORPORATED]
April 19, 1999
Omega Orthodontics, Inc.
3621 Silver Spur Lane
Acton, CA 93510
Attention: Board of Directors
Gentlemen:
You have asked for the opinion of Spencer Trask Securities, Inc. ("Spencer
Trask") as to the fairness, from a financial point of view, to the stockholders
of Omega Orthodontics, Inc. ("Omega" or the "Company") of the proposed
acquisition of Omega by Pentegra Dental Group, Inc. ("Pentegra"), pursuant to an
Agreement and Plan of Merger dated as of March 15, 1999 among Pentegra, Omega
Acquisitions Corporation, Omega and certain stockholders of Omega (the "Merger
Agreement"). The Merger Agreement provides for the issuance of 1,800,000 shares
of Pentegra common stock to the shareholders of Omega in exchange for 100% of
the outstanding shares of Omega, as well as the assumption by Pentegra of
approximately $1.4 million of Omega debt.
In arriving at our opinion, we have reviewed the Merger Agreement, along
with certain business records of Omega and Pentegra, including but not limited
to the following:
REGARDING OMEGA
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1998, and Annual Report to Stockholders for the year ended December
31, 1997
2. Quarterly reports on Form 10-QSB for the periods ended March 31, 1998,
June 30, 1998 and September 30, 1998
3. Financial projections prepared by management
4. Internal financial and operational information prepared by management
5. Representative copies of dentist affiliation agreements
6. Loan agreements
7. Press releases and industry-related articles
8. Stock issuance and trading history
REGARDING PENTEGRA:
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1998
2. Quarterly reports on Form 10-Q for the periods ended March 31, 1998,
June 30, 1998 and September 30, 1998
3. Initial public offering prospectus dated March 24, 1998
4. Prospectus dated October 21, 1998
5. Financial projections prepared by management
6. Internal financial and operational information prepared by management
7. Representative copies of dentist affiliation agreements
8. Loan agreements
9. Press releases and industry-related articles
10. Investment research reports
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<PAGE> 227
11. Stock issuance and trading history
In addition, we have visited Omega's and Pentegra's corporate facilities
and have discussed with the respective managements the current status of and
outlook for their company's operating results, assets and liabilities; industry
conditions and outlook; material contained in the foregoing documents; and other
matters we considered relevant to our inquiry.
We have considered certain financial and stock market data relating to
Omega and Pentegra and compared that data with similar data for certain other
publicly held companies in businesses similar to those of Omega and Pentegra. We
have also considered the financial terms of certain acquisitions involving
publicly held companies engaged in businesses somewhat similar to the Company.
We also conducted other financial studies and analyses as we deemed appropriate
for purposes of this opinion.
In our review and in arriving at our opinion we have not independently
verified any of the foregoing information and have relied upon its being
complete and accurate in all material aspects, and we have not made an
independent appraisal of specific properties or other assets of Omega and
Pentegra. Our opinion is provided solely for your benefit in connection with the
Merger Agreement, according to the terms of our engagement letter dated March
31, 1999.
Spencer Trask Securities, Inc., as part of its investment banking business,
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements, and valuations for
estate, corporate and other purposes. Spencer Trask is being paid a fee for
rendering this opinion and performing related valuation analyses, which fee is
not contingent upon its conclusions.
Based upon and subject to the foregoing, it is our opinion that, as of
March 15, 1999, the terms of the Merger Agreement dated as of March 15, 1999
among Pentegra Dental Group, Inc., Omega Acquisitions Corporation, Omega
Orthodontics, Inc. and certain stockholders of Omega Orthodontics, Inc. are
fair, from a financial point of view, to the stockholders of Omega Orthodontics,
Inc.
Very truly yours,
SPENCER TRASK SECURITIES, INC.
BY: /s/ROGER K. BAUMBERGER, CFA
-----------------------------------
Roger K. Baumberger, CFA
Managing Director - Corporate
Finance
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<PAGE> 228
ANNEX D
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SECTION 262 -- APPRAISAL RIGHTS. (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec.228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by National Association of Securities Dealers, Inc. or (ii) held of
record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
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<PAGE> 229
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228
or sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or
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consolidation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date or the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice
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of the time and place fixed for the hearing of such petition by registered or
certified mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the hearing,
in a newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or execution of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders
D-4
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of record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal shall be
filed within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation
II-1
<PAGE> 234
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b). Such determination shall be made (1) by a majority vote
of the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors or, if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
RESTATED CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of Pentegra provides that a
director of Pentegra shall not be personally liable to Pentegra or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided for in Section 174 of the DGCL. If the
DGCL is amended to authorize the further elimination or limitation of the
liability of directors, then the liability of a director of Pentegra, in
addition to the limitation on personal liability described above, shall be
limited to the fullest extent permitted by the amended DGCL. Further, any repeal
or modification of such provision of the Restated Certificate of Incorporation
by the stockholders of Pentegra shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of
Pentegra existing at the time of such repeal or modification.
II-2
<PAGE> 235
Furthermore, Pentegra will, to the fullest extent permitted by the DGCL, as the
DGCL currently exists or may hereafter be amended, indemnify any and all persons
it has power to indemnify under the DGCL from and against any and all of the
expenses, liabilities or other matters referred to in or covered by such law.
BYLAWS
The Bylaws of Pentegra provide that Pentegra will indemnify any director or
officer of Pentegra to the fullest extent permitted by applicable law, and may,
if and to the extent authorized by the Board of Directors, so indemnify such
other persons whom it has the power to indemnify against any liability,
reasonable expense or other matter whatsoever.
INSURANCE
Pentegra intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 as Annex A to the Proxy
Statement/Prospectus)
</TABLE>
The schedules and exhibits to the foregoing agreement have not been filed
as exhibits to this Registration Statement. Pursuant to Item 601(b)(2) of
Regulation S-K, Pentegra Dental Group, Inc. agrees to furnish a copy of such
schedules and exhibits to the Commission upon request.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(1) -- Restated Certificate of Incorporation of Pentegra Dental
Group, Inc.
3.2(1) -- Bylaws of Pentegra Dental Group, Inc.
4.1(1) -- Form of certificate evidencing ownership of Common Stock
of Pentegra Dental Group, Inc.
4.2(1) -- Form of Registration Rights Agreement for Owners of
Founding Affiliated Practices
4.3(1) -- Registration Rights Agreement dated September 30, 1997
between Pentegra Dental Group, Inc. and the stockholders
named therein
4.4 -- Form of Stockholders' Agreement for Owners of Affiliated
Practices
4.5(2) -- Form of Indenture from Pentegra Dental Group, Inc. to
U.S. Trust Company of Texas, N.A., as Trustee relating to
the Convertible Debt Securities
5.1 -- Opinion of Jackson Walker L.L.P.
10.1(1) -- Pentegra Dental Group, Inc. 1997 Stock Compensation Plan
10.2(1) -- Employment Agreement dated July 31, 1997 between Pentegra
Dental Group, Inc. and Omer K. Reed, D.D.S.
10.3(1) -- Employment Agreement dated July 1, 1997 between Pentegra
Dental Group, Inc. and Gary S. Glatter
</TABLE>
II-3
<PAGE> 236
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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(3) -- Credit Agreement dated June 1, 1998 between Bank One,
Texas, N.A. and Pentegra Dental Group, Inc.
10.18(4) -- Modification to Credit Agreement between Pentegra Dental
Group, Inc. and Bank One, Texas, N.A. dated September 9,
1998
10.19(4) -- Second Amendment to Employment Agreement between Pentegra
Dental Group, Inc. and James L. Dunn, Jr. dated April 22,
1998
10.20(4) -- Separation and Mutual Release Agreement between Pentegra
Dental Group, Inc. and Gary S. Glatter dated November 13,
1998
10.21(4) -- 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(4) -- Employment Agreement between Pentegra Dental Group, Inc.
and James M. Powers, Jr. dated November 13, 1998
10.23 -- First Amendment to Credit Agreement by and among Pentegra
Dental Group, Inc. and Bank One, Texas, N.A. dated as of
February 9, 1999
</TABLE>
II-4
<PAGE> 237
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 -- 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
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Jackson Walker L.L.P. (contained in Exhibit
5.1)
23.3 -- Consent of Arthur Andersen LLP
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
99.1 -- Letter to Stockholders of Pentagra and Omega (included as
cover page to the Proxy Statement/Prospectus)
99.2 -- Notice of Special Meeting of Stockholders (included in
the Proxy Statement/Prospectus immediately after the
cover page thereof)
99.3 -- Form of Proxy
</TABLE>
- ---------------
(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 Pentagra's Registration Statement on Form
S-4 (No. 333-64665), and incorporated herein by reference.
(3) Previously filed as an exhibit to Pentegra's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1998.
(4) Previously filed as an exhibit to Pentegra's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1998.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 22. UNDERTAKINGS.
(a) Pentegra hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no
II-5
<PAGE> 238
more than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of Pentegra pursuant to the foregoing provisions, or otherwise,
Pentegra has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the
II-6
<PAGE> 239
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
Pentegra of expenses incurred or paid by a director, officer or controlling
person of Pentegra in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Pentegra will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and Pentegra being acquired involved therein, that was
not the subject of and included in the registration statement when it became
effective.
II-7
<PAGE> 240
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Pentegra Dental Group, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Phoenix, State of Arizona, on May 12, 1999.
PENTEGRA DENTAL GROUP, INC
By: /s/ JAMES M. POWERS, JR.,
D.D.S.
------------------------------
James M. Powers, Jr., D.D.S.
Chairman, President and Chief
Executive Officer
Each person whose signature appears below hereby appoints James M. Powers,
Jr., D.D.S. and Sam H. Carr and each of them, each of whom may act without
joinder of the other, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to execute in the name of each such person
who is then an officer or director of the Registrant, and to file, any
amendments (including post-effective amendments) to this Registration Statement
and any registration statement for the same offering filed pursuant to Rule 462
under the Securities Act of 1933, as amended, and to file the same, with all
exhibits thereto and all other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing appropriate or
necessary to be done, as fully and for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on May 12, 1999.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ JAMES M. POWERS, JR., D.D.S. Chairman, President and Chief
- ----------------------------------------------------- Executive Officer (Principal
James M. Powers, Jr., D.D.S. Executive Officer)
/s/ SAM H. CARR Senior Vice President, Chief
- ----------------------------------------------------- Financial Officer, Secretary
Sam H. Carr and Director (Principal
Financial and Accounting
Officer)
/s/ OMER K. REED, D.D.S. Clinical Officer and Director
- -----------------------------------------------------
Omer K. Reed, D.D.S.
/s/ GEORGE M. SIEGEL Director
- -----------------------------------------------------
George M. Siegel
</TABLE>
II-8
<PAGE> 241
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ RONNIE L. ANDRESS, D.D.S. Director
- -----------------------------------------------------
Ronnie L. Andress, D.D.S.
/s/ JAMES H. CLARKE, JR. D.D.S. Director
- -----------------------------------------------------
James H. Clarke, Jr. D.D.S.
/s/ RONALD E. GEISTFELD, D.D.S. Director
- -----------------------------------------------------
Ronald E. Geistfeld, D.D.S.
/s/ MACK E. GREDER, D.D.S. Director
- -----------------------------------------------------
Mack E. Greder, D.D.S.
/s/ ROGER ALLEN KAY, D.D.S. Director
- -----------------------------------------------------
Roger Allen Kay, D.D.S.
/s/ GERALD F. MAHONEY Director
- -----------------------------------------------------
Gerald F. Mahoney
/s/ ANTHONY P. MARIS Director
- -----------------------------------------------------
Anthony P. Maris
/s/ RONALD M. YAROS, D.D.S. Director
- -----------------------------------------------------
Ronald M. Yaros, D.D.S.
</TABLE>
II-9
<PAGE> 242
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 as Annex A to the Proxy
Statement/Prospectus)
</TABLE>
The schedules and exhibits to the foregoing agreement have not been filed
as exhibits to this Registration Statement. Pursuant to Item 601(b)(2) of
Regulation S-K, Pentegra Dental Group, Inc. agrees to furnish a copy of such
schedules and exhibits to the Commission upon request.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(1) -- Restated Certificate of Incorporation of Pentegra Dental
Group, Inc.
3.2(1) -- Bylaws of Pentegra Dental Group, Inc.
4.1(1) -- Form of certificate evidencing ownership of Common Stock
of Pentegra Dental Group, Inc.
4.2(1) -- Form of Registration Rights Agreement for Owners of
Founding Affiliated Practices
4.3(1) -- Registration Rights Agreement dated September 30, 1997
between Pentegra Dental Group, Inc. and the stockholders
named therein
4.4 -- Form of Stockholders' Agreement for Owners of Affiliated
Practices
4.5(2) -- Form of Indenture from Pentegra Dental Group, Inc. to
U.S. Trust Company of Texas, N.A., as Trustee relating to
the Convertible Debt Securities
5.1 -- Opinion of Jackson Walker L.L.P.
10.1(1) -- Pentegra Dental Group, Inc. 1997 Stock Compensation Plan
10.2(1) -- Employment Agreement dated July 31, 1997 between Pentegra
Dental Group, Inc. and Omer K. Reed, D.D.S.
10.3(1) -- Employment Agreement dated July 1, 1997 between Pentegra
Dental Group, Inc. and Gary S. Glatter
10.4(1) -- Employment Agreement dated July 12, 1997 between Pentegra
Dental Group, Inc. and John Thayer
10.5(1) -- Employment Agreement dated September 1, 1997 between
Pentegra Dental Group, Inc. and Sam H. Carr
10.6(1) -- Employment Agreement dated July 12, 1997 between Pentegra
Dental Group, Inc. and James Dunn, Jr.
10.7(1) -- Employment Agreement dated July 12, 1997 between Pentegra
Dental Group, Inc. and Kimberlee K. Rozman
10.8(1) -- Form of Service Agreement
10.9(1) -- Amendment to Employment Agreement dated July 31, 1997
between Pentegra Dental Group, Inc. and Omer K. Reed,
D.D.S.
10.10(1) -- Second Amendment to Employment Agreement dated July 31,
1997 between Pentegra Dental Group, Inc. and Omer K.
Reed, D.D.S.
10.11(1) -- Amendment to Employment Agreement dated May 1, 1997
between Pentegra Dental Group, Inc. and Gary S. Glatter
</TABLE>
<PAGE> 243
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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(3) -- Credit Agreement dated June 1, 1998 between Bank One,
Texas, N.A. and Pentegra Dental Group, Inc.
10.18(4) -- Modification to Credit Agreement between Pentegra Dental
Group, Inc. and Bank One, Texas, N.A. dated September 9,
1998
10.19(4) -- Second Amendment to Employment Agreement between Pentegra
Dental Group, Inc. and James L. Dunn, Jr. dated April 22,
1998
10.20(4) -- Separation and Mutual Release Agreement between Pentegra
Dental Group, Inc. and Gary S. Glatter dated November 13,
1998
10.21(4) -- 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(4) -- Employment Agreement between Pentegra Dental Group, Inc.
and James M. Powers, Jr. dated November 13, 1998
10.23 -- 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 -- 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
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Jackson Walker L.L.P. (contained in Exhibit
5.1)
23.3 -- Consent of Arthur Andersen LLP
24.1 -- Power of Attorney (contained on the signature page of
this Registration Statement)
99.1 -- Letter to Stockholders of Pentagra and Omega (included as
cover page to the Proxy Statement/Prospectus)
99.2 -- Notice of Special Meeting of Stockholders (included in
the Proxy Statement/Prospectus immediately after the
cover page thereof)
99.3 -- Form of Proxy
</TABLE>
- ---------------
(1) Previously filed as an exhibit to Pentegra's Registration Statement on Form
S-1 (No. 333-37633), and incorporated herein by reference.
<PAGE> 244
(2) Previously filed as an exhibit to Pentegra's Registration Statement on Form
S-4 (No. 333-64665), and incorporated herein by reference.
(3) Previously filed as an exhibit to Pentegra's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1998.
(4) Previously filed as an exhibit to Pentegra's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1998.
<PAGE> 1
EXHIBIT 4.4
STOCKHOLDERS' AGREEMENT
THIS STOCKHOLDERS' AGREEMENT (this "Agreement") is made and entered
into as of the __ day of __________, 199__, among Pentegra Dental Group, Inc.,
a Delaware corporation (the "PDGI"), and the undersigned holders of PDGI's
common stock (each a "Stockholder" and collectively the "Stockholders").
R E C I T A L S:
A. The Stockholders have received or will receive a certain number of
shares (collectively, the "Shares") of the common stock (the "Common Stock"),
par value $0.001 per share, of PDGI pursuant to the terms of the [Agreement and
Plan of Reorganization (the "Reorganization Agreement")] [Asset Purchase
Agreement (herein so called)], dated ______________, 199__, by and among PDGI,
____________________ ("Company"), _______________ and the Stockholders.
B. The Stockholders and PDGI agree that it is to their mutual benefit
and in the best interests of PDGI to provide for a controlled disposition of
the Shares, as hereinafter set forth.
NOW, THEREFORE, for and in consideration of the sum of Ten Dollars
($10.00) (the receipt and sufficiency of which is hereby acknowledged), the
execution of the [Reorganization] [Asset Purchase] Agreement and the mutual
covenants, agreements, terms and conditions contained herein and in the
[Reorganization] [Asset Purchase] Agreement, the Stockholders and PDGI do
hereby agree as follows:
SECTION 1
RESTRICTIONS ON SALE OR TRANSFER
1.1. Restricted Shares. The parties acknowledge the Shares are being
designated as "Restricted Shares".
1
<PAGE> 2
1.2. Restricted Shares. For a period of one year following the date
hereof, each Shareholder shall not voluntarily (a) sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint or otherwise dispose of (i) any
of the Restricted Shares, (ii) any interest (including without limitation, an
option to buy or sell) any of the Restricted Shares, in whole or in part, and
no such attempted transfer shall be treated as effective for any purpose or (b)
engage in any transaction, whether or not with respect to any of the Restricted
Shares or any interest therein, the intent or effect of which is to reduce the
risk of owning the Restricted Shares.
SECTION 2
MISCELLANEOUS
2.1. Legend. All certificates representing Restricted Shares will be
conspicuously legended as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE DESIGNATED AS
RESTRICTED SHARES PURSUANT TO THE TERMS OF, AND ARE SUBJECT TO THE
PROVISIONS OF, A STOCKHOLDERS' AGREEMENT DATED __________, 199_, AS
MAY BE AMENDED FROM TIME TO TIME, AND MAY NOT BE TRANSFERRED, SOLD OR
OTHERWISE DISPOSED OF EXCEPT AS THEREIN PROVIDED. THE CORPORATION WILL
FURNISH A COPY OF SUCH AGREEMENT TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS
PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE.
2.2. Void Transfers. If the holder of any Restricted Shares attempts
to dispose of them other than in accordance with the terms and conditions of
this Agreement any such attempted disposition will be void and will not bind
PDGI. In enforcing such rights, PDGI may hold and refuse to transfer any
Restricted Shares or any certificate therefor presented to it for transfer, in
addition to and without prejudice to any and all other rights that may be
available to it.
2.3. Splits, Subdivisions etc. If during the term of this Agreement
the outstanding shares of Common Stock are changed into a different number or
class of shares by reason of any stock dividend, subdivision, reclassification,
recapitalization, split-up, combination or similar transaction, then such
additional or replacement securities shall be designated as Restricted Shares
to the same extent that the Restricted Shares for which such additional or
replacement securities are being issued are designated and such additional or
replacement securities will bear the legend set forth in Section 2.1 hereof.
2.4. Binding Effect. This Agreement will be binding upon and inure to
the benefit of:
(a) The Stockholders and their respective heirs, devisees, personal
representatives and assigns;
(b) PDGI and its successors and assigns; and
2
<PAGE> 3
(c) The spouses of the Stockholders, who join in the execution of this
Agreement to evidence their knowledge of the existence and content hereof, to
acknowledge that this Agreement is fair, equitable and in their best interest,
to bind their respective community interests, if any, in the Restricted Shares,
and to bind their respective heirs, devisees, personal representatives and
assigns to the covenants, agreements, terms and conditions contained in this
Agreement.
2.5. Entire Agreement and Amendments. This Agreement contains the
entire agreement among the parties with respect to the subject matter hereof
and no waiver, alteration or modification, or amendment of any of the
provisions hereof will be binding unless it is in writing and signed by the
parties hereto.
2.6. Notices. Any notice, reply or other communication required or
permitted by this Agreement must be given in writing and may be served by
depositing same in the United States mail, certified, postage prepaid,
addressed to the party or parties to be notified, or by delivering the notice
in person to such party or parties. Such notice will be deemed received when
deposited in the mail or when actually received, if personally delivered. For
purposes of notices, the address of PDGI will be its principal place of
business from time to time. The addresses of the Stockholders will be the
addresses shown on the security transfer records of PDGI, unless the
Stockholders give notice otherwise to the other Stockholders and PDGI pursuant
to this Section. PDGI and Stockholders will have the right to change its or
their addresses by giving at least 5 days prior written notice of its or their
new address to the other party or parties.
2.7. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision will be fully severable and this Agreement will
be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part hereof; and the remaining provisions hereof
will remain in full force and effect and will not be affected by the illegal,
invalid or unenforceable provision, and there will be added automatically as
part of this Agreement a provision as similar in its terms to such illegal,
invalid or unenforceable provision as may be possible and be legal, valid and
enforceable.
2.8. Number; Gender. Any reference in this Agreement to the singular
includes the plural and vice versa. Any reference in this Agreement to the
masculine gender includes the feminine and neuter genders and vice versa.
2.9. Captions. The headings or captions of the Sections of this
Agreement are inserted for convenience of reference only and will not be deemed
a part hereof or used in the construction or interpretation hereof.
2.10. Counterparts. This Agreement may be executed in multiple
counterparts, each binding upon the party signing same, and all of such
counterparts, when taken together, will constitute one agreement. Execution of
a copy of this Agreement by one party and the facsimile transmission thereof to
the other parties will constitute execution and delivery of an executed
Agreement by the party whose signature appears on the facsimile. Further, a
copy of this Agreement containing an original signature of one or more parties
and a facsimile copy of a signature of one or more of the other parties will
constitute a fully executed original of this Agreement.
3
<PAGE> 4
2.11. GOVERNING LAW. THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS
(WITHOUT REGARD TO ITS CHOICE OF LAW PRINCIPLES) WILL GOVERN THE VALIDITY,
CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT.
THIS AGREEMENT is executed and effective as of the day and year first
above written.
PENTEGRA DENTAL GROUP, INC.
By:
------------------------------------
Title: Senior Vice President
STOCKHOLDER:
---------------------------------------
[name]
STOCKHOLDER'S SPOUSE:
---------------------------------------
[name]
4
<PAGE> 1
May 12, 1999
Pentegra Dental Group, Inc.
2999 N. 44th Street, Suite 650
Phoenix, Arizona 85018
Re: Registration Statement on Form S-4 of Pentegra Dental Group, Inc.
Ladies and Gentlemen:
We have served as counsel to Pentegra Dental Group, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of the offering and sale of up
to 1,800,000 shares of the Company's Common Stock, par value $0.001 per share
(the "Shares"), which Shares will be issued and distributed pursuant to the
terms of the Agreement and Plan of Merger. A Registration Statement on Form
S-4 (the "Registration Statement") covering the offering and sale of the Shares
was filed with the Securities and Exchange Commission (the "Commission") on May
12, 1999.
In reaching the conclusions expressed in this opinion, we have
examined and relied upon the Registration Statement, the Restated Certificate
of Incorporation and Bylaws of the Company and the originals or certified
copies of all documents, certificates and instruments as we have deemed
necessary to the opinions expressed herein. In making the foregoing
examinations, we have assumed the genuineness of all signatures on original
documents, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us.
In connection with this opinion, we have assumed that (i) the
Registration Statement, and any amendments thereto (including post-effective
amendments), will have become effective; and (ii) the Shares will be sold in
compliance with applicable federal and state securities laws and in the manner
stated in the Registration Statement and any appropriate prospectus supplement.
Based solely upon the foregoing, subject to the comments hereinafter
stated, and limited in all respects to the laws of the State of Texas, the
General Corporation Law of the State of Delaware and the federal laws of the
United States of America, it is our opinion that:
1. The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware.
<PAGE> 2
Pentegra Dental Group, Inc.
September 29, 1998
Page 2
2. Upon issuance of the Shares upon consummation of the merger
described in the Registration Statement, the Shares will be duly
authorized, validly issued, fully paid and nonassessable.
You should be aware that we are not admitted to the practice of law in
the State of Delaware. Accordingly, any opinion herein as to the laws of the
State of Delaware is based solely upon the latest generally available
compilation of the statutes and case law of such state.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the use of our name in the Registration Statement
under the caption "Legal Matters." In giving this consent, we do not admit
that we come within the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
/s/ Jackson Walker L.L.P.
<PAGE> 1
EXHIBIT 10.23
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (herein called this
"Amendment") made as of February 9, 1999 by and among Pentegra Dental Group,
Inc., a Delaware corporation (herein called "Borrower"), and Bank One, Texas,
N.A., as Agent and Lender (herein called "Bank One").
W I T N E S S E T H:
WHEREAS, Borrower and Lenders have entered into that certain Credit
Agreement dated as of June 1, 1998, as amended by an amendment letter dated as
of September 9, 1998 (as amended to the date hereof, the "Original Agreement"),
for the purposes and consideration therein expressed, pursuant to which Lenders
became obligated to make loans to Borrower as therein provided; and
WHEREAS, Borrower and Lenders desire to amend the Original Agreement
to modify certain terms and provisions thereof;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Agreement, in
consideration of the loans which may hereafter be made by Lender to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
Definitions and References
Section 1.1. Terms Defined in the Original Agreement. Unless the
context otherwise requires or unless otherwise expressly defined herein, the
terms defined in the Original Agreement shall have the same meanings whenever
used in this Amendment.
Section 1.2. Other Defined Terms. Unless the context otherwise
requires, the following terms when used in this Amendment shall have the
meanings assigned to them in this Section 1.2.
"Amendment" means this First Amendment to Credit
Agreement.
"Credit Agreement" means the Original Agreement as
amended hereby.
1
<PAGE> 2
ARTICLE II.
Amendments to Original Agreement
Section 2.1. The definition of "Base Rate," "Default Rate" and
"Eurodollar Margin" in Section 1.1. of the Original Agreement are hereby
amended in their entirety to read as follows:
"Base Rate" means, for each day, the Prime Rate in effect on
such day; provided that if the aggregate principal balance of the
Loans outstanding on such day exceeds Tier I, "Base Rate" shall mean
for such day with respect to all Base Rate Loans that are included in
Tier II, the per annum rate of interest which is two percent (2.0%)
above the Prime Rate. If the Prime Rate changes after the date hereof
the Base Rate shall be automatically increased or decreased, as the
case may be, without notice to Borrower from time to time as of the
effective time of each change in Agent's Prime Rate. The Base Rate
shall in no event, however, exceed the Highest Lawful Rate.
"Default Rate" means, at the time in question (i) with respect
to any Base Rate Loan, the per annum rate of interest which is two
percent (2.0%) above the Base Rate then in effect for such Base Rate
Loan, (ii) with respect to any Eurodollar Loan, the per annum rate of
interest which is two percent (2.0%) above the Adjusted Eurodollar
Rate then in effect for such Eurodollar Loan; and (iii) if the
aggregate principal balance of the Loans on any day exceeds Tier I,
"Default Rate" shall mean for such day with respect to all Loans that
are included in Tier II, the per annum rate of interest which is two
percent (2.0%) above the Base Rate in effect for the Loans. The
Default Rate shall in no event however, exceed the Highest Lawful
Rate.
"Eurodollar Margin" for each day during any Fiscal Quarter
shall be determined based on the Total Senior Funded Debt to EBITDA
Ratio as set forth below calculated as of the end of the Fiscal
Quarter immediately preceding the Fiscal Quarter during which such day
occurred:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
TOTAL SENIOR FUNDED DEBT PERCENTAGE
TO EBITDA RATIO
-----------------------------------------------------------------
<S> <C>
less than = 1.00 to 1 1.5% per annum
-----------------------------------------------------------------
greater than = 2.00 to 1 2.0% per annum
-----------------------------------------------------------------
greater than = 2.01 to 1 2.5% per annum
-----------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, if the aggregate principal
balance of the Loans outstanding on any day during any Fiscal Quarter
exceeds Tier I, "Eurodollar Margin" shall mean for such day with
respect to all Eurodollar Loans that are included in Tier II, two
percent (2.0%) above the percentage set forth above in this definition
calculated for such Fiscal Quarter.
2
<PAGE> 3
Section 2.2. The following definition of "Short Term Acquisition
Notes" is hereby added to Section 1.1 of the Original Agreement immediately
after the definition of "Security Schedule" to read as follows:
"Short Term Acquisition Notes" means those notes payable of
Borrower in the aggregate amount of $2,300,000 described on Schedule 5.
The following definitions of "Tier I and "Tier II" are hereby added to
Section 1.1 of the Original Agreement immediately after the definition of
"Termination Event" to read as follows:
"Tier I" means, on any day, the first $8,000,000 of the
aggregate outstanding principal balance of the Loans; provided that in
calculating Tier I, the Base Rate Loans shall be counted first.
"Tier II" means, on any day, the aggregate outstanding
principal balance of the Loans which is in excess of Tier I.
Section 2.3. Section 7.15 Total Funded Debt to Capitalization Ratio
is hereby amended to add the following proviso at the end of such section:
"; provided, however, for the Fiscal Quarter of Borrower ending
December 31, 1998, "Total Funded Debt" shall not include the Short
Term Acquisition Notes."
Section 2.4. Section 7.16 Total Funded Debt to EBITDA Ratio is hereby
amended to add the following proviso at the end of such section:
"; provided, however, for the Fiscal Quarter of Borrower ending
December 31, 1998, "Total Funded Debt" shall not include the Short
Term Acquisition Notes."
Section 2.5. The Original Agreement is hereby amended by adding a
Schedule 5 thereto in the form attached hereto and labeled Schedule 5.
ARTICLE III.
Conditions of Effectiveness
Section 3.1. Effective Date. This Amendment shall become effective
as of the date first above written when and only when Bank One shall have
received, at Bank One's office and, if applicable, executed by Borrower or
Guarantor:
(a) this Amendment;
(b) a Consent of Guarantor in the form attached hereto;
3
<PAGE> 4
(c) a certificate of the President and Secretary of Borrower dated
the date of this Amendment certifying as to certain corporate
matters and that all of the representations and warranties set
forth in Article IV hereof are true and correct at and as of
the time of such effectiveness;
(d) an amendment fee in the amount of $10,000.
ARTICLE IV.
Representations and Warranties
Section 4.1. Representations and Warranties of Borrower. In order to
induce Bank One to enter into this Amendment, Borrower represents and warrants
to Bank One that:
(a) The representations and warranties contained in
Article V of the Original Agreement, are true and correct at and as of
the time of the effectiveness hereof except to the extent that the
facts upon which such representations are based have been changed by
transactions and events expressly permitted by the Credit Agreement.
(b) Borrower is duly authorized to execute and deliver
this Amendment and will continue to be duly authorized to borrow and
to perform its obligations under the Credit Agreement. Borrower has
duly taken all corporate action necessary to authorize the execution
and delivery of this Amendment and to authorize the performance of its
obligations hereunder and thereunder.
(c) The execution and delivery by Borrower of this Amendment,
the performance by Borrower of its obligations hereunder and the
consummation of the transactions contemplated hereby do not and will
not conflict with any provision of law, statute, rule or any of its
organizational documents, or of any material agreement, judgment,
license, order or permit applicable to or binding upon it, or result
in the creation of any lien, charge or encumbrance upon any assets or
properties or any of its assets. Except for those which have been
duly obtained, no consent, approval, authorization or order of any
court or governmental authority or third party is required in
connection with the execution and delivery by Borrower of this
Amendment or to consummate the transactions contemplated hereby.
(d) When duly executed and delivered, each of this
Amendment and the Credit Agreement will be a legal and binding
obligation of Borrower, enforceable in accordance with its terms,
except as limited by bankruptcy, insolvency and similar laws applying
to creditors' rights generally and by principles of equity applying to
creditors' rights generally.
(e) The Consolidated financial statements of Borrower dated as
of December 31, 1998 fairly present the Consolidated financial
position at such date and the Consolidated statement of operations and
the changes in Consolidated financial position for the periods ending
on such date for Borrower. Copies of such financial statements have
heretofore been
4
<PAGE> 5
delivered to Bank One. Since December 31, 1998, no Material Adverse
Change has occurred.
ARTICLE V.
Miscellaneous
Section 5.1. Ratification of Agreements. The Original Agreement as
hereby amended is hereby ratified and confirmed in all respects. The Loan
Documents, as they may be amended or affected by this Amendment are hereby
ratified and confirmed in all respects. Any reference to the Credit Agreement
in any Loan Document shall be deemed to refer to this Amendment also. The
execution, delivery and effectiveness of this Amendment shall not, except as
expressly provided herein, operate as a waiver of any right, power or remedy of
Bank One under the Credit Agreement or any other Loan Document nor constitute a
waiver of any provision of the Credit Agreement or any other Loan Document.
Section 5.2. Survival of Agreements. All representations,
warranties, covenants and agreements of Borrower herein shall survive the
execution and delivery of this Amendment and the performance hereof, including
without limitation the making or granting of the Loan, and shall further
survive until all of the Obligations are paid in full. All statements and
agreements contained in any certificate or instrument delivered by Guarantor or
Borrower hereunder or under the Credit Agreement to Bank One shall be deemed to
constitute representations and warranties by, or agreements and covenants of,
such Person under this Amendment and under the Credit Agreement.
Section 5.3. Loan Documents. This Amendment is a Loan Document,
and all provisions in the Credit Agreement pertaining to Loan Documents apply
hereto and thereto.
Section 5.4. Governing Law. This Amendment shall be governed by
and construed in accordance with the laws of the State of Texas and any
applicable laws of the United States of America in all respects, including
construction, validity and performance.
Section 5.5. Counterparts. This Amendment may be separately
executed in counterparts and by the different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Amendment.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
5
<PAGE> 6
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
PENTEGRA DENTAL GROUP, INC.
Borrower
By: /s/ James M. Powers
-------------------------------------
Name: James Powers
Title: Chief Executive Officer
BANK ONE, TEXAS, N.A.
Agent and Lender
By: /s/ James D. White
-------------------------------------
Name: James D. White
Title: Assistant Vice President,
Health Care Services
<PAGE> 7
CONSENT AND AGREEMENT
Pentegra Investments, Inc., a Delaware corporation, hereby (i)
consents to the provisions of this Amendment and the transactions contemplated
herein and (ii) ratifies and confirms the Guaranty dated as of June 1, 1998
made by it for the benefit of Bank One Texas, N.A. and any other Lenders that
become parties to the Credit Agreement ("Guaranty") and (iii) agrees that all
of its respective obligations and covenants thereunder (to the extent it is a
party thereto) shall remain unimpaired by the execution and delivery of the
Amendment and the other documents and instruments executed in connection
therewith and that the Guaranty shall remain in full force and effect.
THIS CONSENT AND AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
IN WITNESS WHEREOF, this Consent and Agreement is executed by the
undersigned as of February 9, 1999.
PENTEGRA INVESTMENTS, INC.
By: /s/ Sam H. Carr
-----------------------------------------
Name: Sam H. Carr
Title: Senior Vice President
<PAGE> 8
Schedule 5
Schedule of Short Term Acquisition Notes
1. Promissory Note dated December 11, 1998 made by Pentegra Dental Group,
Inc. in favor of Family Dental Care of Pocahontas, Holt & Baltz, Inc.
in the original principal amount of $232,726.
2. Promissory Note dated December 15, 1998 made by Pentegra Dental Group,
Inc. in favor of Patrick H. Sigmon, D.D.S. in the original principal
amount of $197,773.
3. Promissory Note dated December 15, 1998 made by Pentegra Dental Group,
Inc. in favor of Charles E. Larason, D.D.S., Inc. in the original
principal amount of $97,628.
4. Promissory Note dated December 15, 1998 made by Pentegra Dental Group,
Inc. in favor of Walter L. Pipkin, D.D.S. in the original principal
amount of $187,997.
5. Promissory Note dated December 15, 1998 made by Pentegra Dental Group,
Inc. in favor of Lee R. Centracco, D.D.S. in the original principal
amount of $307,728.
6. Promissory Note dated December 30, 1998 made by Pentegra Dental Group,
Inc. in favor of John P. Schiro, D.D.S. in the original principal
amount of $905,137.
7. Promissory Note dated December 30, 1998 made by Pentegra Dental Group,
Inc. in favor of Kline Dental Implant Institute, P.C. in the original
principal amount of $408,402.
8
<PAGE> 1
EXHIBIT 10.24
FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER
This FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER (this
"Amendment"), dated effective January 29, 1999, is by and among PENTEGRA DENTAL
GROUP, INC., a Delaware corporation ("Acquiror"), LIBERTY DENTAL ALLIANCE,
INC., a Tennessee corporation (the "Corporation"), LIBERTY ACQUISITION
CORPORATION, a Tennessee corporation and a wholly-owned subsidiary of Acquiror
("Merger Sub"), and James M. Powers, Jr. ("Powers"), Sylvia H. McAlister
("McAlister"), and William Kelly ("Kelly") (Powers, McAlister and Kelly being
collectively referred to in this Amendment as the "Liberty Class B
Shareholders").
WITNESSETH:
WHEREAS, Acquiror, the Corporation, Merger Sub and the Liberty Class B
Shareholders entered into that certain Agreement and Plan of Merger (the
"Agreement"), dated as of November 13, 1998 (each capitalized term not
expressly defined herein shall have the meaning given to it in the Agreement);
WHEREAS, Acquiror, the Corporation, Merger Sub and the Liberty Class B
Shareholders desire to amend the Agreement;
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
Acquiror, the Corporation, Merger Sub and the Liberty Class B Shareholders
hereby covenant and agree as follows:
ARTICLE I - AMENDMENTS
SECTION 1.1. RECLASSIFICATION OF CLASS B HOLDERS. The opening
paragraph to the Agreement is hereby deleted in its entirety and replaced with
the following opening paragraph to the Agreement:
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of November 13, 1998, is among PENTEGRA DENTAL GROUP, INC., a
Delaware corporation ("Acquiror"), LIBERTY DENTAL ALLIANCE, INC., a
Tennessee corporation (the "Corporation"), LIBERTY ACQUISITION
CORPORATION, a Tennessee corporation and a wholly-owned subsidiary of
Acquiror ("Merger Sub"), James M. Powers, Jr. ("Powers") and William
Kelly ("Kelly") (Powers and Kelly being collectively referred to in
this Agreement as the "Class B Holders").
<PAGE> 2
SECTION 1.2. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. Section 8.1(iv) and its related Exhibit 8.1(iv) are hereby deleted in
their entirety. Section 8.1(v) is hereby renumbered to Section 8.1(iv).
SECTION 1.3. CONDITIONS TO OBLIGATION OF ACQUIROR AND MERGER SUB TO
EFFECT THE MERGER. Sections 8.3(v) and (viii) of the Agreement are hereby
deleted in their entirety and replaced with the following Sections 8.3(v) and
(viii):
(v) Acquiror shall have received evidence reasonably
satisfactory to Acquiror that at the Closing Date the Corporation
shall have no accrued but unpaid liabilities other than as agreed to
by the Acquiror ("Closing Date Liabilities").
(viii) Acquiror shall have received letter agreements from
each of Powers and Kelly in the form requested by Acquiror providing
for the restriction of the sale of one-half (1/2) of the shares of
Pentegra Common Stock received by them hereunder for a period of one
year from the date of issuance and one-half of the shares of Pentegra
Common Stock received by them hereunder for a period of two years from
the date of issuance.
SECTION 1.4. TERMINATION BY EITHER ACQUIROR OR THE CORPORATION.
Section 9.2 of the Agreement is hereby deleted in its entirety and replaced
with the following Section 9.2:
9.2 Termination by Either Acquiror or the Corporation. This
Agreement may be terminated and the Merger may be abandoned by action
of the Board of Directors of either Acquiror or the Corporation if the
Merger shall not have been consummated by April 30, 1999, provided
that the terminating party shall not have breached in any material
respect its obligations under this Agreement in any manner that shall
have proximately contributed to the occurrence of the failure referred
to in such clause.
SECTION 1.5. INDEMNIFICATION. Section 10.1 of the Agreement is hereby
deleted in its entirety and replaced with the following Section 10.1:
10.1 Indemnification by Class B Holders. The Class B Holders,
jointly and severally, will indemnify and hold harmless Acquiror, and
its officers, directors, stockholders and subsidiaries (collectively,
the "Indemnified Persons"), and will reimburse the Indemnified
Persons, for any loss, liability, claim, damage, expense (including
costs of investigation and defense and reasonable attorneys' fees and
expenses) or diminution of value, whether or not involving a
third-party claim (collectively, "Damages"), arising from or in
connection with: (i) any breach of any representation or warranty,
covenant or agreement made by the Corporation or the Class B Holders
in this Agreement, or any other certificate or document delivered by
the Corporation or any Class B Holder pursuant to this Agreement; (ii)
any reimbursement made by the Corporation of advances by dental
practices to the Corporation pursuant to the letters of intent listed
on Exhibit 5.4; or (iii) any amount of Closing Date Liabilities of the
Corporation.
2
<PAGE> 3
SECTION 1.6. LIMITATION ON AMOUNT. Section 10.4 of the Agreement is
hereby deleted in its entirety and replaced with the following Section 10.4:
10.4 Limitation on Amount. The liability of Kelly under this
Article 10 shall be limited to an amount equal to the value of the
Class B Merger Consideration received by him pursuant to the terms of
this Agreement. For purposes of this Section 10.4 only, the shares of
Acquiror Common Stock issued as Class B Merger Consideration shall be
valued at $2.00 per share.
ARTICLE II - TRANSFER OF ASSETS
SECTION 2.1. TRANSFER OF ASSETS. Upon execution of this Amendment, the
Acquiror shall pay to the Corporation or make payments on behalf of the
Corporation in an amount that shall not exceed three hundred thousand dollars
($300,000) (the "$300,000 Payment") in consideration for dental practices
acquisitions consummated in November and December of 1998, which $300,000
Payment shall be used by Corporation only to pay certain accrued liabilities of
the Corporation. Contemporaneously with the execution of this Amendment,
Corporation shall transfer to Merger Sub all of the Corporation's personal
property, including but not limited to, furniture, equipment, inventory, name,
security deposits and other related assets, which transfer shall also occur
upon execution of this Amendment. Additionally, upon execution of this
Amendment, the Acquiror shall pay the Corporation twenty five thousand dollars
($25,000) (the "$25,000 Payment") for payment by the Corporation to Sylvia
McAlister for redemption of 140,000 shares of the Corporation's Class B common
stock and a release of all claims against the Corporation by Sylvia McAlister.
The Corporation acknowledges and agrees that there shall be no more than
405,000 outstanding shares of Class B common stock of the Corporation at
Closing and to use the proceeds of the $25,000 Payment to pay Sylvia McAlister.
ARTICLE III - CLASS B SHARES
SECTION 3.1. CLASS B SHARES. The parties acknowledge that
notwithstanding the contents of Section 5.3 of the Agreement, at the Effective
Date there will be 405,000 Class B Shares issued and outstanding because the
140,000 Class B Shares listed on Exhibit 5.3 as owned by McAlister have been,
or will prior to the Effective Time be, retired by the Corporation. The parties
acknowledge and agree that no Class B Merger Consideration shall be issuable
for the 140,000 Class B Shares so retired. Exhibit 5.3 is hereby amended to
provide for 405,000 shares of Class B common stock of the Corporation
outstanding as of the Closing Date.
3
<PAGE> 4
ARTICLE IV - MISCELLANEOUS
SECTION 4.1. BINDING EFFECT. This Amendment shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 4.2. COUNTERPARTS. This Amendment may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by
all of the parties hereto.
SECTION 4.3. ENTIRE AGREEMENT. This Amendment, together with the
Agreement and any other document executed or delivered in connection therewith,
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof. No addition to or modification of any provision of
this Amendment or the Agreement shall be binding upon any party hereto unless
made in writing and signed by all parties hereto.
SECTION 4.4. CONFLICTING PROVISIONS. In the event that any provision
of either this Amendment or the Agreement conflict with each other, the
provisions of this Amendment shall control.
SECTION 4.5. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware without regard
to its rules of conflict of laws.
SECTION 4.6. MCALISTER. Upon execution of this Amendment and to be
effective November 13, 1998, McAlister will no longer be a party to the
Agreement.
THIS AMENDMENT AND THE AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES RELATED TO THE SUBJECT MATTER HEREIN CONTAINED AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
[INTENTIONALLY LEFT BLANK]
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment and
caused the same to be duly delivered on their behalf on the day and year first
herein above written.
THE CORPORATION:
LIBERTY DENTAL ALLIANCE, INC.
By:/s/ James M. Powers, Jr.
----------------------------------------
James M. Powers, Jr., President
ACQUIROR:
PENTEGRA DENTAL GROUP, INC.
By:/s/ Sam H. Carr
----------------------------------------
Sam H. Carr, Senior Vice President
MERGER SUB:
LIBERTY ACQUISITION CORPORATION
By:/s/ Sam H. Carr
----------------------------------------
Sam H. Carr, President
/s/ James M. Powers, Jr.
-------------------------------------------
James M. Powers, Jr.
/s/ Sylvia H. McAlister
-------------------------------------------
Sylvia H. McAlister
/s/ William Kelly
-------------------------------------------
William Kelly
5
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Liberty Acquisition Corporation, a Tennessee corporation and
wholly-owned subsidiary of Pentegra Dental Group, Inc.
2. Special Omega Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of Pentegra Dental Group, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 related
to the registration of 1,800,000 shares of $0.001 common stock of Pentegra
Dental Group, Inc. of our report dated March 24, 1998, except for the second
and third paragraph of Note 8, as to which the date is May 5, 1998, relating to
the financial statements of Pentegra Dental Group, Inc., which appear in such
Registration Statement. We also consent to the reference to us under the
headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
May 12, 1999
<PAGE> 1
EXHIBIT 23.3
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to incorporation by
reference in this Registration Statement of our report dated February 16,
1999 included in Omega Orthodontics, Inc. Form 10-K for the year ended
December 31, 1998 and to all references to our firm included in this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
--------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 12, 1999
<PAGE> 1
EXHIBIT 99.3
CONFIDENTIAL -- FOR USE OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
PENTEGRA DENTAL GROUP
The undersigned hereby appoints James M. Powers, Jr., D.D.S. and Sam H.
Carr, and each and either of them, proxies for the undersigned with full power
of substitution, to vote as designated herein all of the shares of PENTEGRA
DENTAL GROUP, INC. (the "Company") owned by the undersigned at the Special
Meeting of Stockholders to be held at PENTEGRA DENTAL GROUP, 2999 North 49th
Street, Suite 650, Phoenix, Arizona 85018 on , 27, 1999 at 10:00
a.m., local time, and at any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER(S). IF NO DIRECTION IS MADE, A SIGNED PROXY WILL BE VOTED FOR THE
PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER AND WILL GRANT
DISCRETIONARY AUTHORITY PURSUANT TO ITEM 2.
1. Proposal to approve and adopt the Agreement and Plan of Merger dated as of
March 12, 1999 by and among Pentegra Dental Group, Inc., Special Omega
Acquisition Corporation, Omega Orthodontics, Inc., Robert J. Schulhof, C.
Joel Glovsky, David T. Grove, Dean C. Bellavia and Floyd V. Elliott.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Instruction: To withhold authority to vote for any individual nominee, write
that person's name is the space provided below.)
- --------------------------------------------------------------------------------
PLEASE DATE AND SIGN ON REVERSE SIDE.
<PAGE> 2
CONFIDENTIAL -- FOR USE OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
The undersigned acknowledges receipt with this Proxy of a copy of the Notice
of Special Meeting of Stockholders and a copy of the Proxy Statement/Prospectus
for Special Meeting of Stockholders, each dated , 1999, describing
more fully the proposal set forth hereinabove.
-----------------------------------
-----------------------------------
Signature(s) of stockholder(s)
Please date and sign name exactly
as it appears hereon, Executors,
administrators, trustees, etc.
should so indicate when signing. If
the stockholder is a corporation,
the full corporate name should be
inserted and this proxy card signed
by an officer of the corporation,
indicating his title.
<PAGE> 3
CONFIDENTIAL -- FOR USE OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
OMEGA ORTHODONTICS, INC.
The undersigned hereby appoints Edward Mulherin and Peter Wexler, and each
and either of them, proxies for the undersigned with full power of substitution,
to vote as designated herein all of the shares of OMEGA ORTHODONTICS, INC. (the
"Company") owned by the undersigned at the Special Meeting of Stockholders to be
held at OMEGA ORTHODONTICS, INC., 374 Congress Street, Suite 407, Boston,
Massachusetts 02210 on June 30, 1999 at 1:00 p.m., local time, and at any
adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER(S). IF NO DIRECTION IS MADE, A SIGNED PROXY WILL BE VOTED FOR THE
PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER AND WILL GRANT
DISCRETIONARY AUTHORITY PURSUANT TO ITEM 2.
1. Proposal to approve and adopt the Agreement and Plan of Merger dated as of
March 12, 1999 by and among Pentegra Dental Group, Inc., Special Omega
Acquisition Corporation, Omega Orthodontics, Inc., Robert J. Schulhof, C.
Joel Glovsky, David T. Grove, Dean C. Bellavia and Floyd V. Elliott.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Instruction: To withhold authority to vote for any individual nominee, write
that person's name is the space provided below.)
- --------------------------------------------------------------------------------
PLEASE DATE AND SIGN ON REVERSE SIDE.
<PAGE> 4
CONFIDENTIAL -- FOR USE OF THE SECURITIES AND EXCHANGE
COMMISSION ONLY
The undersigned acknowledges receipt with this Proxy of a copy of the Notice
of Special Meeting of Stockholders and a copy of the Proxy Statement/Prospectus
for Special Meeting of Stockholders, each dated May , 1999, describing more
fully the proposals set forth hereinabove.
-----------------------------------
-----------------------------------
Signature(s) of stockholder(s)
Please date and sign name exactly
as it appears hereon, Executors,
administrators, trustees, etc.
should so indicate when signing. If
the stockholder is a corporation,
the full corporate name should be
inserted and this proxy card signed
by an officer of the corporation,
indicating his title.
