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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995 Commission File Number 0-12050
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SAFEGUARD HEALTH ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
[LOGO] Delaware 52-1528581
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
505 North Euclid Street
P.O. Box 3210
Anaheim, California 92803-3210
(Address of principal offices) (Zip Code)
Registrant's telephone number, including area code: (714) 778-1005
Fax telephone number, including area code: (714) 758-4383
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Securities registered to Section 12(b) of the Act:
None
Securities registered to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 1996, was $59,685,703.
The number of shares outstanding of the registrant's $0.01 par value common
stock as of March 26, 1996, was 4,707,500 (not including 3,274,788 shares held
in treasury).
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to the registrant's Proxy
Statement for the next Annual Meeting of Stockholders, to be held on May 22,
1996.
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SAFEGUARD HEALTH ENTERPRISES, INC.
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART 1
Item 1. Business .................................................. 1
Item 2. Properties................................................. 17
Item 3. Legal Proceedings.......................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........ 17
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters ....................................... 18
Item 6. Selected Financial Data.................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 23
Item 8. Financial Statements and Supplementary Data................ 25
Item 9. Changes in and Disagreements with Independent Accountants
on Accounting and Financial Disclosure..................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant......... 25*
Item 11. Executive Compensation..................................... 25*
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 25*
Item 13. Certain Relationships and Related Transactions............. 25*
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 26
* Incorporated by reference from the 1996 Proxy Statement for the
Company's Annual Meeting of Stockholders, scheduled for May 22, 1996.
(i)
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PART I
ITEM 1. BUSINESS
(a) General Development of Business.
Safeguard Health Enterprises, Inc. operates one of the largest publicly traded
managed dental care plans in the United States. The Company was founded in
California in 1974 and since 1982 has expanded its operations into Arizona,
Colorado, Illinois, Kansas, Missouri, Nevada, Ohio, Oklahoma, Oregon, Texas,
Utah and Washington. The Company also has regulatory approval to operate
similar managed dental care programs in Kentucky and is pursuing opportunities
in other states. The Company also operates a California based life and health
indemnity insurance company primarily writing dental indemnity insurance which
is licensed to transact insurance business in Arizona, California, Colorado,
Illinois, Kansas, Missouri, Nevada, Ohio, Oregon, Texas and Wisconsin and is
pursuing opportunities in other states.
The Company's predecessor, Safeguard Health Plans, Inc., a California
corporation (the "California Plan"), commenced operations in 1974 as a nonprofit
corporation. The California Plan converted from nonprofit status in December
1982 and is currently a wholly-owned subsidiary of the Company. The Company was
incorporated in California in November 1982 and acquired the California Plan in
December of that year. Wholly-owned subsidiaries conduct business in other
states. On August 24, 1987, the Company reincorporated in Delaware. In
September 1992, the Company acquired a California domiciled life insurance
company and renamed it SafeHealth Life Insurance Company. Unless the context
otherwise requires, all references to the "Company" or "Safeguard" mean
Safeguard Health Enterprises, Inc., a Delaware corporation, its predecessor
California corporation, and its subsidiaries.
The Company also operates 33 Company-owned dental offices in California which
operate under the name of Guards Dental, Inc. ("Guards"). Guard's dental
offices are established primarily for the purpose of supplementing, in
geographical areas where needed, plan coverage provided by independent dental
offices. Guards dental offices have been in operation since 1983.
The Company's executive offices are located at 505 North Euclid Street, P.O. Box
3210, Anaheim, California 92803-3210; its telephone number is (714) 778-1005 and
FAX number is (714) 758-4383.
DENTAL CARE MARKETPLACE
According to the United States Office of National Health Statistics, the total
expenditures for dental care in the United States grew from approximately $14
billion in 1980 to an estimated $43 billion in 1995. The United States Health
Care Financing Administration reports that expenditures for dental services
account for approximately 5% of total national health care expenditures.
According to the United States Department of Labor ("DOL"), the cost of dental
services has been rising at a rate higher than that for consumer goods. The DOL
statistics reported that, from 1982 to 1995, the consumer price index for all
urban consumers for dental services increased 115%, whereas this index for all
items increased 54%. As a result, the Company believes that there has been an
increased interest by employers in managing dental care costs.
Employer-sponsored dental benefits are one of the most common employee welfare
benefits. The National Association of Dental Plans ("NADP") estimates that
approximately 119 million persons, representing approximately 47% of the total
United States population, are covered by some form of dental benefit coverage at
the end of 1994. The NADP estimates that managed care enrollment has grown from
7.8 million covered lives in 1992, to approximately 19 million covered lives by
the end of 1994. This compares to over 50 million Americans who were enrolled
in medical HMOs in 1994, accordingly to the Group Health Association of America.
The Company believes that the relatively high growth rate for managed care
dental care plans, is attributable to (i) the greater acceptance of managed
care by employers and employees; (ii) the significant price advantage relative
to traditional fully-insured open panel fee-for-service or reimbursement plans;
(iii) the cost effectiveness to employers of managed dental care plans as an
employee benefit; and (iv) the growing acceptance of managed care dental plans
by dentists throughout the country, resulting in improved accessibility and
convenience for members. Members of managed dental benefit plans represent
approximately 16% of the population with dental care coverage, and approximately
7% of the total United States population. As a result of these factors, the
Company believes that there will continue to be significant growth opportunity
in the managed dental benefits industry.
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It has been the Company's experience that larger employers have been more likely
to offer dental benefit coverage to their employees. Additionally, according to
the 1993 Foster Higgins Survey of Employee Sponsored Health Plans, nationally,
approximately 87% of employers with more than 200 employees offer some type of
dental benefits to some or all employees, and approximately 64% of these
employers have a stand-alone dental plan, distinct and separate from other
health and welfare benefits offered to employees. By comparison, this survey
reported that only 37% of employers that had less than 200 employees, offer
dental benefits. It has been the Company's experience that many employers in
the small to mid-size range, that do not offer dental benefits, are willing to
consider offering a plan, initially in which the employee pays the full cost or
substantially the full cost of such benefits through payroll deductions
collected by the employer.
The managed dental care industry as a whole, is currently fragmented and
characterized by participation of several large, national insurance companies
and numerous independent organizations. As of December 31, 1994, the NADP
estimated that there were over 150 managed dental care companies in the United
States, with no dominant market leader.
The increase in the number of dentists nationally during the last two decades,
has exceeded the rate of population growth. According to the American Dental
Association ("ADA"), the number of practicing dentists in the United States per
100,000 population, has increased from 53 in 1980 to 60 1991. In addition, the
dental delivery marketplace is highly fragmented with approximately 88% of all
practicing dentists, working in a one or two-dentist office, according to the
ADA. Also, according to a survey of dental practices published by DENTAL
ECONOMICS in 1994, the median of staff and other costs that are part of total
overhead expenses for practicing dentists were approximately 60% of the gross
revenue of solo and group dental practices. The significant increase in the
number of dentists as a proportion of the population, the fragmented dental
delivery marketplace, the high proportion of overhead costs for dentists and an
improved level of overall dental health in the country, has created a highly
competitive environment among dentists, particularly in major metropolitan
areas. The Company believes that these factors have contributed to the
increased willingness of qualified dentists to participate in managed care and
preferred provider organization networks, such as those maintained by the
Company, as dentists seek alternative methods to increase practice revenues.
As in the case of medical coverage, the substantial majority of dental coverage
is provided through traditional fee-for-service fully-insured open panel
indemnity dental plans. Under a traditional fee-for-service indemnity plan,
coverage is provided based on a reimbursement formula of the usual and customary
charges submitted by the dentist. Compared to medical coverage, the average
cost of dental services is lower and the utilization of services is more
predictable. Unlike medical coverage, dental coverage generally does not cover
catastrophic risks. Dental care is provided almost exclusively on an outpatient
basis and, according to a 1990 ADA survey, over 80% of all dental services are
performed by general dentists. Also, dental plans generally do not include
coverage for hospitalization, typically the most expensive component of medical
services.
Common features of dental indemnity plans include deductibles, maximum annual
benefits of less than $2,000 per person and significant patient cost-sharing.
Patient cost-sharing typically varies by type of dental procedure ranging from
no cost sharing for preventive procedures to 50% cost-sharing for dentures and
even greater cost-sharing for orthodontic care. This high patient cost-sharing
and the relatively predictable nature of dental expenditures substantially
limits the underwriting risk of a dental plan when compared to the underwriting
risk of a medical plan which covers catastrophic illness and injuries.
Furthermore, since most dental problems are neither life threatening nor
represents serious impairments to overall health, there is a higher degree of
patient cost sensitivity and discretion associated with obtaining dental
services. Many dental conditions also have a range of appropriate courses of
treatment, each of which has a different out-of-pocket cost for patients. For
example, a deteriorated amalgam filling may be replaced with another amalgam
filling (a low-cost alternative) a pin-retained crown build-up (a more costly
alternative) or a crown with associated periodontal treatment (the most costly
alternative). The level of coverage provided to the patient and the dental
plan's reimbursement methodology may influence the type of services selected by
the patient or rendered by the dentist.
Under a traditional indemnity insurance plan or fee-for-service arrangement, the
insurer and the patient each pays a percentage of the fee charged by the
dentist, subject to cost-sharing, maximum benefit allowances and usual and
customary limits. Under such an indemnity plan, dentists have little incentive
to reduce total charges because they are compensated on a fee-for-service basis.
By contrast, under a managed dental care plan capitation payments are fixed and
co-payments for additional services are pre-negotiated by the Company. The co-
payments generally are designed to exceed the dentist's variable costs, but are
typically less than the dentist's usual and customary fee. Fixed capitation
payments that do not vary with the frequency of services provided create an
incentive for dentists to emphasize preventive care, control costs and maintain
a long-term patient relationship that generates consistent capitation revenue.
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Fixed capitation payments also substantially reduce the underwriting risk to the
Company associated with the high utilization of dental services.
(b) Financial Information about Industry Segments.
The Company operates in a single industry segment, providing both managed care
and indemnity dental benefits.
(c) Narrative Description of Business.
GENERAL DESCRIPTION OF THE COMPANY
The Company contracts with large and medium sized governmental or private sector
employers, and multiple employer trusts. In addition, over the last several
years the Company has focused its marketing efforts on mid-sized and small
employer groups, usually with less than 1,000 employees. At the end of 1995,
dental care under the Company's plans, is provided by a panel of approximately
2,600 independent dental offices (including 33 Company-owned dental offices,
consisting of approximately 3,300 dentists.)
As of December 31, 1995, the Company had contracts with approximately 2,700
employer clients providing benefits to approximately 761,000 members,
representing a 5.5% increase in membership from 721,000 at December 31, 1994.
This increase in membership resulted primarily due to the growth in new small
and mid-sized clients, an increase in the number of persons covered under
indemnity insurance products offered by the Company's insurance subsidiary, and
an increase in the number of members covered as a result of strategic
relationships with other health care providers. Enrollment increases as a
result of sales to new groups entirely offset the continued workforce reduction
in a number of the Company's major group clients.
The Company's managed care contracts with its clients generally require the
client to pay a monthly per capita fee that is usually fixed for a period of one
to three years. The typical fee for a managed care program for an employee and
his or her dependents, averages $19.50 per month and varies depending on the
level of dental benefits, dependent coverage and member co-payment requirements
stipulated in the contract. Each employee or dependent member receives covered
services from a dental office selected by the member or dependent which is on
the Company's panel of providers, whereas the individual is ordinarily free to
select any dentist under a traditional indemnity insurance program. The
Company's managed care plans do not require the member to pay deductibles, file
claim forms, or be subject to an annual dollar limitation on the amount of
dental care for which they are eligible.
Under the Company's indemnity dental insurance programs, members are required to
pay small deductibles and copayments which are traditionally higher than that
which are required by the Company's managed care dental products. However,
members may select any dentist of their choice for their dental care under these
plans. The typical fee for an indemnity dental program for an employee and his
or her dependents averages $38 per month, depending upon the level of dental
benefits provided in the contract.
PRODUCTS
MANAGED DENTAL PLANS. The Company offers a variety of managed dental care plans
under the name Safeguard Health Plans-Registered Trademark- and Safeguard Dental
Plans-TM-. The Company's managed dental care plans operate similarly in each
state in which business is conducted. Under the Company's managed dental care
plans, a premium is paid to the Company on behalf of the subscriber by the
employer from the date the subscriber enrolls in the plan. A portion of this
contribution is used by the Company to "prepay" for dental care for members
through regular monthly capitation payment by the Company to a specific selected
primary care dentist. The capitation rate does not vary with the nature or the
extent of services utilized. In exchange for the capitation payments, the
selected provider is obligated to provide all necessary dental services to plan
members.
Members covered under the Company's managed dental care plans obtain certain
basic dental procedures, such as examinations, x-rays, cleanings and fillings,
at no additional charge, other than, in some cases, a small per office visit
copayment. The plan's established copayments for more complicated procedures
provided by the selected primary care dentist, such as root canals and crowns,
which vary in accordance with the complexity of the service and the level of
benefits provided. The Company's managed dental care plans also cover services
provided by specialists participating in the panel rather than the primary care
dentists selected by the subscriber, including oral surgery, endodontics,
periodontics, orthodontics, and pedodontics. The Company assumes responsibility
under its managed dental care plans for such specialty care arrangements and is
responsible for such payments, usually at a discounted fee-for-service basis.
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DUAL CHOICE PLANS. The Company's products also include dual choice dental plans
which allow subscribers to choose between a managed dental care plan and an
indemnity dental insurance plan. The Company believes that its ability to offer
dual choice plans is an important element of its business success because it
enables the Company to offer perspective customers flexibility, particularly
when there are potential subscribers outside the area served by the Company's
managed dental care panel. Certain states, such as Nevada, require that managed
dental care plans be offered only as part of a dual choice plan and other states
may do so in the future. Dual choice plans are particularly effective as part
of the Company's growth strategy in areas in which the Company's dental panel is
less well developed and members may value the ability to choose non-panel
dentists. The Company also believes that securing customers through dual choice
arrangements provides an opportunity to cross sell managed dental care plans.
PREFERRED PROVIDER ORGANIZATIONS. The Company's products also include a dental
plan which provides for an increased level of benefits in the event a member
utilizes a dentist participating on its Preferred Provider Organization ("PPO")
panel. The level of benefits provided to members who select a PPO dentist is
usually increased by at least 10% and usually provides for a waiver of annual
deductibles required to be paid by plan members. In exchange, the dentist has
contracted to provide dental benefits to plan members at a fee which is usually
discounted by at least 30% off of the dentist's usual and customary fee or the
Company's fee allowance, whichever is less. Additionally, the cost savings
through reduced fees charged by PPO dentists are shared equally between the
Company and the member. In the event the member utilizes a PPO dentist, the
member also receives the same level of discount off of the provider's usual and
customary fee, as applied to the member's coinsurance.
The indemnity insurance portion of the Company's Dual Choice and PPO dental plan
is underwritten by SafeHealth Life, a subsidiary of the Company. These plans
subject the Company to underwriting risks associated with over utilization and
pricing variances which are different from those pricing and reimbursement
mechanisms utilized by the Company's managed dental care plans.
For self-insured employers, the Company provides claims administration under an
Administrative Services Organization ("ASO") arrangement whereby the Company
does not assume the underwriting risk for the indemnity claims. The Company
receives an administrative fee to process claims and the underwriting risk is
retained by the employer sponsoring the self-insured plan. The Company also
provides access to its PPO network for a fee to clients. Under this program,
the PPO network providers offer a reduced fee schedule for services performed.
Eligible participants pay reduced fees when they receive dental services from a
PPO network provider. The Company charges its PPO network clients a monthly fee
for each participant eligible to access the Company's PPO fee arrangements. The
Company does not make any payment to its PPO network providers on behalf of the
participant eligible to access the reduced fee arrangement.
In terms of product strength, the Company has several distinct advantages over
its competition. First, the Company has the advantage of having no debt
allowing its bids to be most competitive. Secondly, its Company-owned dental
offices in California are strategically located to meet the needs of its
clients. Thirdly, the Company provides a vast array of dental and vision
products. The Company's ability to design a program to meet a client's specific
needs in many product areas allows it to be extremely flexible and responsive.
Many of the Company's competitors offer standard plans only. In the area of
service, the Company continues to improve its client service approach keeping
clients well informed and serviced. In the marketing area, the Company projects
a highly favorable image of being on the cutting edge with its approach to the
business. Its pricing is known to be extremely competitive in the industry. In
the corporate area, the Company is supported by a state-of-the-art computer
system.
PROVIDER RELATIONS
The Company believes that the most essential element in its managed care
enrollment growth is a stable panel of quality focused dentists in convenient
locations. The Company also requires that all managed care and PPO providers
meet all Quality Assessment program standards. The program includes current
license verification, current liability insurance, and a risk management review
of the dental facility to ensure that all OSHA and regulatory requirements are
met, an inspection of the office's sterilization practices, and a review of the
facilities location -- parking availability and handicap access. See "QUALITY
REVIEW."
The Company believes that dental providers on the Company's managed care and PPO
panels are willing to provide their services at a lower capitated (fixed) rate
per month in exchange for the relatively steady, extended stream of revenue
generated by panel participation. Furthermore, this contractual revenue source
for the provider is free from the collection problems and administrative costs
sometimes associated with other forms of dental coverage. Thus, qualified
dentists and/or dental groups have generally been available and willing to
participate on the Company's panels and supplement their fee-for-service
practice.
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The Company compensates each panel dental office on its managed care plans on a
monthly capitation rate for each member who selects that office, regardless of
the amount or character of service provided during the month. The capitation
rate does not vary with the nature or extent of services utilized. The total
amount paid to each dental office is determined by the capitation rate per each
client contract applicable thereto, and the number of eligible members served by
the participating dental office. For dentists who provide services to the
Company's insured members, compensation is based upon a percentage of the
provider's usual and customary fee based upon established tables of allowances
utilized by the Company in its claims paying processing systems. Benefits are
provided in accordance with percentages that are established for each member's
benefit program. Providers who participate on the Company's PPO program are
compensated at a fee which is less than the provider's usual and customary fee,
usually at a discount of up to 30%, or 30% off of the Company's usual and
customary fee for the area, whichever is less.
The Company currently employs 15 Provider Relations Representatives nationally.
All have extensive dental office management backgrounds and act as consultants
to assist our panel providers with the administration of the plan in the day-to-
day operation of their offices.
Should a dental office terminate its contract with the Company, if necessary a
new provider will be recruited in a timely manner to meet the needs of the
members assigned to that office, and so there will be no delay in the member's
care. No dental office, other than the 33 Guards dental offices as a group,
provided service to more than 10% of the Company's members at December 31, 1995.
The Company's panel dental offices are free to contract with other dental plans
and both they and the Company can terminate the contract at any time upon 120
days notice. In accordance with the contract, the Company may also terminate
the contract "for cause" upon 15 days written notice. The Company may also, at
anytime, change the terms, rates, benefits and conditions of the various plans
serviced by its providers with ten (10) days notice to the provider. The
Company's contracts with panel dental offices require them to maintain their own
professional liability insurance for a minimum of $100,000 per claim, and
$300,000 per annual aggregate and to indemnify the Company for claims arising
from their acts or omissions.
At December 31, 1995, approximately 2,600 primary care and specialty care dental
offices, consisting of 3,300 dentists were participating panel providers on the
Company's managed care plans. General dentists are required to render all basic
dental care and refer members to specialists only as required. Under its
policy, the Company offers nearly all specialty dental services, including oral
surgery, endodontics, periodontics, orthodontics, and pediatric dentistry. If
the specialty care falls within the Company's guidelines, all or a substantial
portion of the specialists fees is paid by the Company. Such payments were 5.5%
and 4.8% of the Company's health care services expenses in 1995 and 1994,
respectively. At December 31, 1995, the Company contracted with approximately
9,700 primary care and specialty care dentists on the Company's PPO panel.
MANAGEMENT INFORMATION SYSTEMS
During 1995, the Company continued to enhance its proprietary in-house
management information system to better manage its operational resources and to
provide better analysis of data. However, a review was performed to determine
the future needs of the Company and how well the Company is equipped to compete
with new technologies. With this in mind, the Company made a decision in
September 1995 to purchase a new software system for the Company operations that
operates in a more open environment (UNIX) and that takes advantage of the power
of personal computers on the work desk. This new system provides a much easier
and more efficient interface using Windows based screens. Data extraction via
queries is easier and allows each individual to customize his or her queries for
their own needs. Reports can be printed to the screen or to a printer, and both
report and query data can be easily downloaded into a word processor and/or
spreadsheet. The new system has integrated accounts receivable and accounts
payable components that will allow the Company to more easily track, report and
perform analysis on revenue and expense. The Company expects to implement the
new system in May 1996 for its managed dental care plans.
In December 1995, the Company also purchased a personal computer networked based
general ledger system. The new general ledger system provides better reporting
and analysis tools. It also allows the Company to extract and download data to
word processors and spreadsheets. The Company also expanded the use of its
electronic mail system, and will expand it to its regional offices during 1996.
In conjunction with the new operations system (using UNIX and Windows based
screens), the general ledger system, and the expanded electronic mail, the
Company has installed a new network cabling system to provide a stronger data
backbone for the Company's increased data transmission needs. The new network
cabling system can be expanded as the Company grows without having to replace it
with more expensive technologies.
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As the Company's indemnity and PPO client base has grown, it also upgraded its
current network server to handle the increased activity. The managed dental
plan, accounting, indemnity and PPO, and electronic mail environments are all
interconnected at this time. With the implementation of the new general ledger
system, and as the Company implements the new UNIX system (which will later
include the indemnity and PPO processes) the entire network will be more tightly
integrated. These newly purchased systems demonstrate the Company's proactive
position in automating its computer operations and allowing it to remain
competitive in this area.
DENTAL OFFICE OPERATIONS - COMPANY-OWNED DENTAL FACILITIES
On December 31, 1995, the Company owned 33 dental offices located throughout
California. Guards dental offices are established primarily for the purpose of
supplementing, where needed, plan coverage provided by independent panel
offices. Revenue from the Guards dental offices accounted for 26% and 24% of
the Company's total revenue in 1995 and 1994, respectively. During 1995, the
Company opened two new dental offices and relocated several offices to enhance
its direct control over general and specialty care services. All of the dental
offices currently owned by the Company are in leased space with the exception of
one dental office where the underlying real property is owned by the Company.
These Guards dental offices are included on the Company's panel providing
general dental care, selected specialty care and, to a lesser extent, fee-for-
service dental care to non-plan patients. In addition, the Company expanded its
specialty care offices to provide enhanced specialty dental services. These
offices are established in dental offices owned by providers under contract to
the Company and are rented from such providers on a per diem basis. The Company
is responsible for providing all of its own supplies and staff for these
specialty care offices; however, the Company utilizes existing equipment already
in place in these leased dental offices.
Ownership of the Guards dental offices continues to provide the Company with
additional direct control over plan dental services and related costs in the
areas served. However, such ownership directly exposes the Company to the risks
inherent in having to meet fixed costs and provide necessary levels of dental
care service, which the Company normally transfers to independent dental
providers on the panel. These risks include the possibility of incurring
significant losses from operations until such time as dental offices opened by
the Company attain significant enrollment and revenue to offset fixed operating
expenses. These risks continue to be taken in order to meet specific plan
client needs in areas where independent dental provider coverage is limited, or
otherwise unavailable.
In the last quarter of 1995, new senior management was appointed to the dental
office operations. Significant steps were taken to reduce costs, streamline
administrative processes and evaluate technology to achieve efficiencies. The
Company plans to open another new dental office and strategically relocate seven
offices in 1996. This expansion will allow for continued growth of general and
specialty care programs.
Over the last year, the Company intensified its delivery of specialty dental
care services by utilizing more specialists in its Company-owned dental offices.
This allows for cost savings in health care premium and assists in effectuating
quality specialty care services in a staff model environment. By providing a
greater amount of the specialty care services required under the various
contracts between the Company and employer groups, the Company has experienced a
reduction in its out-of-pocket expense for specialty care services and an
increase in the amount of copayment revenue derived from the provision of such
services. The Company is of the opinion that the provision of specialty care in
a staff model environment helps reduce health care expense to the Company;
therefore, continued expansion of specialty dental care operations is planned
for 1996.
The Company also maintains an individual dental plan primarily designed to
attract members to its Guards dental offices. Marketing efforts are focused on
individuals and small local employers who are located within close proximity to
the Guards offices, who otherwise do not provide a dental benefits program.
While not a significant contributor to revenue, this plan now has approximately
13,000 members enrolled as of December 31, 1995.
The Company's strategy is to maintain Guards dental offices as a supplement to
the coverage of the independent dental offices. See Part II, Item 7-
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and Item 8-"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
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QUALITY REVIEW
The Company has a series of quality review procedures that start with the
screening of prospective panel providers and continue through quality reviews,
member complaint monitoring and computerized analysis of data regarding
procedures performed. Screening procedures include license verification,
interviews and on-site evaluations of the applicant's facility. As part of its
continued efforts to enhance the quality of its provider services, the Company
also maintains a provider self review program. This program allows a certain
number of qualified dental providers the opportunity to participate in a
provider self review program. Effective October 1995, the Quality Review
Department was reorganized to better service the Company's members and
providers. To ensure unbiased Quality Reviews, the Company has contracted with
three private vendors to perform all of the Company's dental and vision reviews.
After acceptance to the Company's panel and completion of an orientation
program, each dental office participates in an ongoing quality review program.
Each dental office is reviewed periodically by licensed dentists specifically
trained in the area of quality review. These reviews include a facility review,
inspection of sterilization practices, and a patient record evaluation to ensure
that quality of care standards are achieved for all members. In order to be
beneficial to the patient, the review includes an analysis of the initial
appointment and continues throughout diagnosis, treatment planning and dental
procedures of a patient. The Company views the patient record as an extremely
important tool in quality assessment. If deficiencies are identified in the
review process, the Company's Provider Relations Department works with the
provider to remedy them, and a follow-up review is conducted within six months.
In addition, the Vice President of Provider Relations analyzes all complaints
lodged against providers quarterly and, in conjunction with the Company's dental
professionals, resolves clinical concerns of the plan members. The Company also
conducts special reviews of dental offices that provide services to a large
number of members or have been the subject of patient complaints exceeding
Company thresholds as to type and/or quantity. The Company's stated goal is to
resolve 98% of member inquiries or complaints within 72 hours of receipt.
The Company continues to improve its review system to insure members are
receiving quality care and providers are receiving training and guidance as
needed. The Company employs a team concept, combining its Quality Review,
Benefit Services and Provider Relations departments, to benefit both the member
and provider. In addition, the Company provides its panel providers with
specifications of new laws affecting the provider.
UTILIZATION REVIEW
The Company uses computerized analysis to monitor the dental treatment provided
to members. The computerized analysis of provider utilization and cost data
enable the Company and its clients to determine the type of procedures performed
by plan dental offices and ascertain the savings to both clients and members
compared to competitive dental indemnity insurance coverage. The computerized
analyses are also used by the Company to identify unusual patterns of dental
care utilization or complaints which may trigger special or comprehensive dental
reviews. The computer system greatly enhances the Company's ability to monitor
member utilization and appropriate dental treatment and to provide essential
statistical information.
The Company is also expanding its use of its indemnity claims paying processing
system to include utilization review and case management for its indemnity
insurance subsidiary. As part of the expansion of its PPO activities, the
Company has developed a sophisticated reporting system to demonstrate cost
savings for clients and members when PPO dentists are utilized. These reports
compare practice patterns that vary from established norms, identify patient
costs trends, provides detailed claims and group experience, and case and claims
management through a thorough preauthorization process. Repricing services are
also provided through the Company's PPO program. The Company compares
utilization patterns for dentists rendering dental services to the Company's
insureds to determine whether such dentists are over utilizing the benefits
provided. In the event that an unusual practice pattern is ascertained, the
Company conducts a review of the dentist's facility to determine the basis for
such practice patterns and reviews its findings with the dentist on a regular
basis to eliminate any potential for abuse.
RISK MANAGEMENT
The Company has sufficient general and professional liability insurance coverage
to manage the ordinary exposure of operating its managed care dental plan
business and its indemnity dental plans. Generally, the Company is indemnified
against professional liability claims by its contracting providers and the
independently contracted dentists practicing at the Guards dental offices. In
addition, each dentist is required to maintain professional liability insurance
with specified minimums of coverage. The Company also maintains arbitration
provisions in its contracts with providers.
7
<PAGE>
Considering the Company's exposure to future claims for failure to provide
coverage in addition to the secondary risk to professional liability claims, the
Company carries its own professional liability insurance coverage in the amount
of $5,000,000, which it views as being adequate. However, no guarantee is made
that sufficient professional liability insurance coverage will be available to
the Company at an acceptable cost.
During 1995, as a result of its favorable claims history, the Company continued
to lower its risk management costs.
CLIENTS AND CONTRACTS
Substantially all of the Company's 761,000 members at December 31, 1995,
participate through over 2,700 group plans paid for by governmental and private
sector employers, multiple-employer trusts and educational institutions or, to a
minor extent, through individual plans.
The Company's 10 largest clients accounted for approximately 20% and 24% of the
Company's health care revenues for 1995 and 1994, respectively. Significant
clients served in 1995 by the Company include the Bank of America, City of
Dallas, City of Los Angeles, County of Los Angeles, several contracts with
McDonnell Douglas Corporation, Southern California Edison Company, Southern
California Gas Company, Rockwell International Corporation, Joint Council #42
Welfare Trust, and the State of California. In the opinion of management, the
loss of any single client would not have a material adverse effect on the
Company's financial condition or results of operations.
The Company takes a proactive approach to better service its clients and
members. The Company maintains a sophisticated multi-faceted plan to address
the specific needs of its clients by assigning a specialty trained client
services representative to all clients. Each client services representative has
dental care and field experience. The Company also provides a customized
service plan to its clients. The Company also maintains multiple benefits
services teams, comprising 35 individuals, each one cross-trained to serve
clients, members and providers. Scheduling has been adjusted to maximize
telephone coverage, with special consideration to peak times of the day. Most
teams are provided with a Registered Dental Assistant leader for technological
support and each supervisor is trained in both technological support and
customer service.
The Company's customer service complaint system has been enhanced by the
Company's computer network which provides each representative with full access
to client, member and provider records. The Company's network also benefits its
multi-state clients.
Given the increasingly competitive nature of the dental care market, it is not
unusual for the Company to obtain a new client from competing indemnity insurers
or other managed care dental plans, or to lose an existing client to others.
The Company is also sensitive to the requirement that there be adequate levels
of compensation to its panel of participating providers so as to ensure that
there is an adequate panel of providers from which the client's members may
select for managed dental care benefits. As a result, the Company has been
obtaining price increases up to 12% per year. See "MARKETING" and
"COMPETITION."
The Company's contracts generally provide for a defined dental benefit program
to be delivered to plan members for a period of one to three years at a fixed
monthly per-capita rate to the client. The contracts normally allow the client
the right to terminate on 60 days written notice of a deficiency in performance;
the Company has the right to extend the 60-day period to correct the deficiency.
MARKETING
In the past, the Company's primary marketing strategy has been to contract with
large employer groups. While this strategy has served the Company well in the
past, several years ago the Company broadened its market strategy to seek out
and contract with employers with between 250 and 1,000 employees. While in the
past, the Company's managed care dental plan had been offered as an alternative
to the primary dental insurance included in the employer's health care benefit
program, with the acquisition of the Company's indemnity insurance subsidiary,
the Company is now able to contract with the employer to provide both the
managed care dental plan and the indemnity dental insurance program through one
relationship. By targeting the mid-sized employer groups described above, and
by offering both the managed care and indemnity dental products to the employer,
the Company is able to obtain a higher per member per month rate then it could
previously by only offering its managed dental care plan. Before submitting a
proposal to a prospective employer-client, the Company analyzes a demographic
profile of the potential new plan members, the current and desired dental
benefit levels, availability of adequate provider coverage and timely access,
and other factors.
8
<PAGE>
The Company markets its dental benefit plans through a network of over 2,000
independent insurance agents and brokers and a direct sales force of 17
employees. This dual distribution system is designed to reach group purchasers
of all sizes in an efficient and cost effective manner. The Company believes
that its marketing strategy provides it with a competitive advantage by enabling
it to market to a wider range of potential groups more effectively than
companies relying upon a single distribution system.
The Company's direct sales force targets larger employers and groups which are
more likely to contribute towards the cost of dental benefits for their
employees. In marketing to large groups, the Company's sales force focuses on
selling both the managed care dental plan and an indemnity/PPO product. The
Company pays its direct sales force through a combination of salary and bonus
based upon the number of members enrolled for new groups. As part of its growth
strategy, the Company intends to increase its internal sales and marketing staff
during 1996.
The Company's independent insurance agent and broker network focuses on offering
managed dental care products to medium and smaller sized employers which may or
may not contribute towards or offer dental benefit plans to their employees.
The Company believes that there are significant opportunities for the Company to
expand managed dental care and indemnity coverage to medium and smaller sized
employers by expanding its network of independent brokers who can effectively
sell dental benefit programs to the medium and smaller sized market. Brokers
and agents typically do not market the Company's dental plans on an exclusive
basis. Brokers and agents generally receive a flat percentage of premium
collected as commission for the initial sale and for each renewal thereafter.
Brokerage commissions paid by the Company were 2.4% and 1.9% of health care
revenues for 1995 and 1994, respectively. The Company also works with "in-
house" employee benefits managers in its marketing efforts.
Recognizing the shifting employee population base away from larger multi-state
corporations towards smaller, localized employers, the Company also embarked
upon a small group client program during the last two years. New plan benefit
programs were designed to specifically respond to the needs of the smaller group
employer, traditionally less than 250 employees. Marketing of dental plans to
the small group employer is in part directed to specific groups surrounding the
geographical locations of the Company-owned dental offices and the Company's
regional offices in other states.
Once plan participation is to be made available to employees, the Company's
marketing efforts shift to the potential plan members. During a designated
annual open enrollment period, usually lasting one month, participants may elect
the Company's managed care dental plan or opt for the other form(s) of dental
benefits being offered, generally dental indemnity insurance, either offered by
the Company or another insurance carrier. Generally, participating employees
can enroll into or drop out of the Company's plans only during this enrollment
period. Management believes that with larger group clients, an average of
approximately 10% to 15% of eligible employees select the Company's managed care
dental plan during the first open enrollment period in which it is offered and
that with smaller group clients, an average of approximately 20% with voluntary
plans and 90% with employer paid plans of eligible employees select the
Company's managed care dental plan during the first open enrollment period in
which it is offered. The net percentage of participation in the Company's
managed care dental plan tends to increase each year thereafter within most
employer groups.
The Company believes that it has an opportunity to obtain new contracts from
employers with between 250 and 1,000 employees in the markets in which the
Company operates. The Company believes that this represents a significant under
penetrated market segment for the products offered by the Company. The Company
intends to build upon its current market position and increase its sales
activities by applying market segmentation and quality management principles to
identify the highest potential of customers and proactively anticipating their
needs in the marketing process. The Company intends on accomplishing this by
identifying its core capabilities and competitive advantages that it has over
its competitors. By adding incremental service levels provided by the Company,
and applying technological advances to the marketing process, the Company's goal
is to lower per member acquisition costs, and eliminate unnecessary sales and
administrative expenses while increasing production capabilities of the
Company's marketing forces.
In the situation where the Company is successful in selling its dual choice or
triple choice products to the employer, all employees are enrolled in one of the
plan's offered by the Company. The Company believes that the ability to offer a
dual choice or triple choice option program increases the amount of revenue
generated from each sale by providing the employer with the entire insurance
program which may be available to its employees. This has the effect of
increasing the overall per member per month rate paid by the employer for each
employee since the per member per month premium for the Company's indemnity
dental program is significantly higher than that which the Company charges for
its managed dental care plans. This has the overall effect of increasing the
revenue generated from each dollar of expense associated with the selling of the
Company's products.
9
<PAGE>
In recent years, the Company has obtained contracts with large employers that
offer what are known as flexible benefits plans or cafeteria type benefit
programs. Typically, such arrangements provide for the employer to establish a
dollar value for all benefits to be provided to the employee who is then
requested to select the program of benefits desired and designate whether
dependent coverage is needed. The premium cost is then deducted from the
employer's set contribution to benefits expenses. By making the employee more
aware of the actual premium cost of the benefits provided, there appears to be a
greater attractiveness of the lower cost programs, such as the Company's managed
care dental plans. No assurance, however, can be given that such benefit
programs will result in increased enrollment in the Company's plans.
The following table sets forth enrollment by state (in thousands) as of the date
indicated, and the percentage of total enrollment accounted for by each state:
<TABLE>
<CAPTION>
MEMBERS ENROLLED PERCENT PERCENTAGE OF TOTAL
STATE AT DECEMBER 31, CHANGE ENROLLMENT AT DECEMBER 31,
- ---- ---------------- ------- --------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Arizona 1 3 N/M 0.1 0.4
California 652 626 4.2 85.7 86.8
Colorado 15 13 15.4 2.0 1.8
Illinois 5 6 (16.7) 0.6 0.8
Kansas * * N/M - -
Missouri 29 27 7.4 3.8 3.7
Nevada 4 2 50.0 0.5 0.3
Ohio * * N/M - -
Oklahoma 2 1 50.0 0.3 0.2
Oregon * * N/M - -
Texas 53 43 23.3 7.0 6.0
Utah * * N/M - -
Washington * * N/M - -
---- ---- ------- ----- -----
Total 761 721 5.5 100.0 100.0
- -------------
* Less than 1,000.
N/M - Not meaningful.
</TABLE>
The Company's vision plan maintained in California since early 1980, has not
produced significant revenues to date. Therefore, in an effort to expand upon
its vision plan offerings, the Company made available to its present and
potential clients a new vision program called the Premier Vision Care Plan (the
"Premier Plan"). The Company developed the Premier Plan with the intention of
enhancing the vision care component of its benefit programs in California. All
of the Company's clients participating in its vision programs have enrolled in
the Premier Plan. The Premier Plan features a convenient open provider option
that allows members to select any optometrist under contract with the Company at
the time they seek care. This open panel option is underwritten by the
Company's indemnity insurance subsidiary in California. The entire vision plan
is underwritten by this subsidiary in all other states in which it is provided.
No preselection is required. There are no cards to mail or forms to present
before receiving care so members can enjoy immediate access. With the Premier
Plan, the Company also offers a Provider Advantage Plus Program which allows
members to obtain services from any vision care professional and receive
reimbursement from the Company according to a set schedule of benefits. As of
December 31, 1995 there were approximately 30,000 members enrolled, and
approximately 1,400 providers on the Company's Premier Plan vision panel. While
the Premier Plan did not generate significant revenues during 1995, it is
anticipated that these new vision plans will be a positive revenue and net
income generator during 1996 and beyond.
Moreover, in an effort to continue to improve upon the quality assurance aspect
of the Company's vision program, the Company has affiliated itself with an
administrative organization which demonstrated a keen awareness of the specific
quality assurance needs of a managed vision care program. The Company's
business affiliation with this organization has accomplished expeditious
development of a high quality optometric provider network to augment the areas
where the Company has vision care providers; complete administrative knowledge
of vision care programs including claims handling, provider relations issues and
assistance in complaint resolution; augmentation of the Company's quality
assurance program and utilization review system so as to improve upon the
quality assurance provided by the Company; and a cost effective benefit program
to compete with larger vision care providers.
10
<PAGE>
Smaller group employers find especially attractive the Company's ability to
offer one-stop shopping with its dual choice dental package of indemnity dental
insurance and managed care dental plans, its expanded vision plans and its life
insurance plans.
The Company continues to increase its efforts to expand its business through
strategic alliances. As a result, the Company maintains a relationship with
several Health Maintenance Organizations ("HMOs") to provide dual choice
indemnity and managed dental care plans to segments of members enrolled in the
HMO.
INDEMNITY INSURANCE PLANS - INDEMNITY INSURANCE BENEFITS
As a result of its desire to respond to the changing marketplace, the Company
expanded its business to include indemnity dental plans. In September 1992, the
Company acquired a California domiciled life and health insurance company and
renamed it SafeHealth Life Insurance Company ("SafeHealth Life"). SafeHealth
Life is regulated by the California Department of Insurance and currently holds
a Certificate of Authority as a life, health and disability insurer in the
states of Arizona, California, Colorado, Illinois, Kansas, Missouri, Nevada,
Ohio, Oregon, Texas and Wisconsin. SafeHealth Life has applied for a
certificate of authority in the states of Alabama, Georgia, Florida, Indiana,
Maryland, New Mexico, Michigan, Minnesota, Oklahoma and Utah. The Company
intends to expand its operation by making applications to qualify SafeHealth
Life to transact the business of insurance in the states of Kentucky,
Pennsylvania, South Carolina, Tennessee and Virginia by the end of 1996.
SafeHealth Life has collaborated with other subsidiaries of the Company to
develop certain innovative marketing concepts with the intent of offering
consumers a multiple choice product consisting of a flexible indemnity plan, a
PPO plan, and a comprehensive managed care plan in the states where it holds a
Certificate of Authority. The ability to offer fee-for-service dental plans
along with managed care benefits, better serves new and existing clients. The
Company also offers a vision plan through Safeguard in California, and
SafeHealth Life in Colorado, Illinois, Missouri, Nevada and Texas.
During 1993, SafeHealth Life had begun marketing dual choice dental programs
through independent agents and brokers that generated approximately $600,000 in
premium revenue its first full year of operations. This revenue was derived
from business produced in California, Texas, and Colorado. SafeHealth Life
utilizes independent agents and brokers who specialize in the employee benefits
area and appreciate the ability of SafeHealth Life to custom design plans as
needed. Premium revenue grew to over $6 million in 1995, and SafeHealth Life
was a positive contributor to net income of the Company.
SafeHealth Life's client base includes small employer groups as well as
governmental agencies and political subdivisions. During 1995, the number of
insureds covered by SafeHealth Life grew 130.5% from 36,257 to 83,577.
SafeHealth Life anticipates increasing production of its multiple choice dental
programs in other states in which it is admitted to do business, with a majority
of business to continue to be in California for the foreseeable future.
SafeHealth Life is also offering group term life insurance as a participant in a
reinsurance pool.
The ownership of an indemnity insurance company exposes the Company to risk for
over utilization and claims costs in excess of premium revenue. To minimize its
risks, the Company conducts thorough claims review using the sophisticated
techniques of the computer system purchased by the Company for its indemnity
insurance business. Additionally, the Company has contracted with several well-
known actuarial consultants who assist the Company in developing its benefit
programs, rates and payment schedules.
PREFERRED PROVIDER ORGANIZATION
During 1993, SafeHealth Life developed it's PPO in response to the market
demands to offer a more cost-effective alternative to traditional indemnity
insurance, and more freedom of choice than the managed dental care
network/product alternatives. The PPO Network program was developed to
complement and also be used as a cost containment mechanism for current and
future indemnity dental plan clients. The negotiated fee arrangements enable
the Company to offer indemnity dental and SafeHealth Life PPO Network Plans that
reduce benefit costs for participating client groups and members. SafeHealth
Life PPO Network Plans are designed to encourage a greater level of
participation from participating network dentists due to lower levels of
benefits for the Out-of-Network option.
11
<PAGE>
The Company also offers PPO Network Lease Services which offer the network as a
stand alone option for a per-member per-month fee. The Network Lease Service is
intended to be an option that is marketed to Health and Welfare Trusts, Third-
Party Administrators and Self-funded Employer Groups, again promoting the cost
containment features of the negotiated discounts. The Company assumes no risk
for clients that lease the PPO network. At December 31, 1995, SafeHealth Life
had contracted with over 9,700 participating general and specialty dentists in
the markets in which it operates. The overall geographical distribution of the
dental network was developed to allow members easy access to network dentists to
take advantage of negotiated discounts. All participating dentists have passed
a strict qualification process and undergo annual quality reviews as part of
ongoing compliance with network participation.
The PPO offers savings to the Company in the form of lower dollar levels of
claims costs, and savings to the insured in lower out-of-pocket costs due to the
PPO contracted fees. Administrative review protocol that utilizes a
sophisticated case management system insures that the individual needs of a
member are matched to treatment plans. The necessity and appropriateness of the
treatment plans are continually monitored to assure a professional and
appropriate treatment conclusion. The combination of the waiver of deductibles,
negotiated provider fees and case management review system can result in
significant member and claim costs savings.
During 1995, the Company began recruitment efforts to develop an alternative
dental network, the "Choice Dental Plan" in the State of Texas that would offer
clients the option of greater discounts similar to those under the PPO network,
but not part of a PPO program. Approximately 600 dentists were contracted in
this plan as of December 31, 1995. The Choice Dental Plan is not an insured
product, but simply a discount program, whereby members receive a discount for
services from participating providers. The Company assumes no risk for this
product, and there is no out of network coverage. While recruitment activities
are ongoing, this plan has not yet been activated.
Recruitment efforts in 1995 far exceeded management's expectations for growth
adding almost 4,000 dentists to its network in operational areas. The Company
continues to actively recruit dentists for its PPO plan, and intends to add
substantially more dentists throughout 1996.
GEOGRAPHIC EXPANSION
The Company's strategy regarding geographic expansion is presently undergoing a
strategic review to identify and capitalize upon opportunities that may exist in
states in which the Company is not presently operating. In the past, the
Company's strategy generally has been to enter new states only after obtaining a
major contract, either by expanding the geographic scope of service to existing
clients, by entering into contracts with new clients, or by establishing
marketing agreements with other organizations. While the Company generally
prefers not to expand into new states until an adequate base of client business
exists to help defray the start-up costs of operations in those new states, the
Company is currently reviewing its strategic opportunities to provide managed
care and dental indemnity benefits in other states and markets in which the
Company does not presently operate. A number of opportunities exist through
strategic affiliations which the Company is pursuing.
Once a decision to expand has been made, the Company usually establishes a sales
and marketing office to provide sales, marketing and provider services support
in the local market. All basic administrative services are provided by the
Company at its corporate headquarters, with the exception of the Company's Texas
operations which due to regulatory constraints, requires that administrative
services also be provided in the Company's Texas facilities. By using
strategically located regional sales and marketing offices instead of separate
full-service offices in each state, the Company has better controlled
administrative expenses associated with new plan start-ups, and can more
efficiently and effectively service a greater number of members in each market.
The Company's managed care dental plans are operating or have been granted
regulatory approval to operate in Arizona, California, Colorado, Illinois,
Kansas, Kentucky, Missouri, Nevada, Ohio, Oklahoma, Oregon, Texas, Utah and
Washington. The Company's indemnity insurance subsidiary has been granted a
Certificate of Authority in Arizona, California, Colorado, Illinois, Kansas,
Missouri, Nevada, Ohio, Oregon, Texas and Wisconsin. The Company will most
likely seek regulatory approvals in additional areas.
GOVERNMENT REGULATION
Many states have laws establishing the requirements for, and regulating the
conduct of, the Company and other managed care dental plans. Such laws vary
from state to state and they generally require a state license, frequently
prescribe requirements for contracts, establish minimum benefit levels, impose
financial tests and maintain standards for management and other personnel.
There is currently no regulation of the Company's plans at the federal level.
12
<PAGE>
Since some states will only license full service health plans, the Company
cannot enter those states except in conjunction with SafeHealth Life, its
indemnity insurance subsidiary, or with a full service HMO. Other states permit
only nonprofit corporations to become licensed as managed care dental plans,
again limiting the Company's access. The heavily regulated nature of the
Company's industry imposes a variety of potential obstacles to management's
plans for further geographic expansion and could limit the Company's future
growth. On the other hand, this regulatory environment also governs the conduct
and expansion prospects of existing and new competitors.
The Company's managed dental care plans are licensed and regulated by pertinent
state authorities. Among the areas regulated, although not necessarily by each
state, are the scope of benefits available to members, the content of all
contracts with clients, providers and others, tests of financial resources,
including maintenance of minimum stipulated financial reserves for the benefit
of plan members, procedures for review of quality assurance, enrollment
requirements, minimum loss ratios, "any willing provider" requirements which may
limit the Company's right to restrict the size of its provider network, the
relationship between the plan and its providers, procedures for resolving
grievances, and the manner in which premiums are determined or structured.
The Company's indemnity insurance operations are regulated by the California
Department of Insurance, and the Department of Insurance of the other states in
which the Company is licensed to transact insurance business. These regulations
include specific requirements with regard to minimum capital and surplus,
permitted investments, advertising, policy forms and claims processing
requirements. The Company's insurance operations are also licensed to transact
business in other states which traditionally follow the compliance requirements
of the insurance company's domiciled state, while sometimes imposing minimal
specific policy and deposit requirements for the Company's operations in those
states. Insurance companies are heavily regulated and require significant cash
deposits for capital and surplus. The Company's ability to expand its insurance
operations into states in which it is not currently licensed is dependent for
the most part on the regulatory review process which is conducted by the
Department of Insurance in each state in which the Company is applying. Such
reviews may take anywhere from six to twenty-four months.
TRADEMARKS, SERVICE MARKS AND TRADENAMES
The Company has filed and received approval from the United States Patent and
Trademark office for certain trademarks and tradenames for names and products
used by the Company in its ordinary course of business. The Company has
received a trademark, service mark or tradename for the following words and
phrases used with and without distinctive logos maintained by the Company:
- - Safeguard-Registered Trademark- used with a distinctive logo depicting three
superimposed figures used in connection with its managed care dental plans;
- - Safeguard Health Plans-Registered Trademark- used in descriptive material to
describe the products offered by the Company;
- - Safeguard Dental Plans-TM- used to describe the various managed care dental
plans offered by the Company; and
- - SafeHealth Life-Registered Trademark- used with a descriptive logo depicting
three superimposed figures used by the Company to describe its indemnity
insurance and PPO products.
Collectively, these trademarks, service marks and tradenames were first used in
commerce in 1984 and have been continuously used thereafter.
COMPETITION
The Company operates in a highly competitive environment. Its competitors
principally include large insurance companies, which offer managed dental care
and indemnity dental products in most of the Company's markets, and public and
private independent companies, offering managed dental care plans similar to
those offered by the Company, which typically compete in particular markets.
The Company also competes with for-profit and not-for-profit HMOs, self-funded
plans, PPO's and discounted fee-for-service dental plans. Many of the Company's
competitors are significantly larger and have substantially greater financial
and other resources than the Company. The major competitive factors for both
client contracts and membership enrollment are the cost of services, the
reputation of the plans for providing quality dental care, the size of the
plan's dental panel and the reputation of the plan itself.
13
<PAGE>
Indemnity insurance coverage offered by insurance carriers other than the
Company, has a competitive advantage since many indemnity carriers are more
mature and better known than the Company. As contrasted to managed care dental
plans offered by the Company, indemnity insurance coverage has the benefit of
allowing a beneficiary to select most any licensed dentist while managed care
dental plan participants must select a dentist from the Company's panel.
Management believes the Company's primary competitive advantage of its managed
care plans has been, and will continue to be, the Company's ability to deliver
services at a lower cost to both clients and members while providing quality
dental care. Management believes that the Company's competitive advantage of
its indemnity dental insurance plans is the Company's ability to provide
comprehensive dental coverage, applying managed dental care principles,
including the concepts associated with the Company's PPO plans.
The Company has also experienced increased competition from indemnity insurance
companies through direct entry into the managed dental care benefits market. It
is likely that these efforts will intensify in the future. Frequently, such
plans are being offered in tandem with indemnity dental coverage and/or PPO
alternatives. In addition, an increasing number of medically-oriented HMOs and
PPOs are including dental care benefits as part of their benefit programs.
Other than for technological expenses associated with the provision of managed
care and indemnity dental benefit programs, the Company's business does not
require substantial amounts of capital. Other than government regulation and
the related operating costs of start-up, there are no significant barriers to
new companies entering into the market. There can be no assurance that the
Company will be able to compete successfully with new market entrants. Any such
additional competition could adversely impact the Company's revenues, net income
and growth prospects through fee reductions, loss of providers or clients, or
market share.
EMPLOYEES
At December 31, 1995, the Company had 558 employees, of whom 10 were executives,
3 were Executive Directors of Regional offices, 17 were sales personnel, and 441
were administrative and clerical personnel. In addition, as of that date, the
Company had 87 independent dentists under contract at its Guards dental offices.
Most all administrative services are provided at the corporate offices in
Anaheim, California, with the exception of certain administrative functions
which are performed in the Company's Dallas, Texas office, as required by
applicable Texas statutes and regulations. Billing and other paperwork
processing for Guards is also centralized at the corporate offices.
Approximately 234 clerical and auxiliary employees are represented by two labor
unions. No other employees or dentists are union members. The Company
considers its relations with its employees to be good.
The Company maintains a 401(k) plan which allows for a pre-tax contribution from
an employee's earnings. Employees are eligible to participate in the 401(k)
plan upon completion of six months of service with the Company. Under the
401(k) plan, an employee may defer up to 15% of his or her gross compensation
each pay period and the Company may, at its option, make an additional
discretionary contribution to be allocated among employees in the plan in
proportion to the compensation deferred. Employees are 100% vested in their
interest in the 401(k) plan at all times. The Company also maintains a pre-tax
medical insurance option within the meaning of Paragraph 106 of Section 125 of
the Internal Revenue Code for its employees insuring dependents.
14
<PAGE>
DIRECTORS AND/OR EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and/or executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven J. Baileys, D.D.S. 42 Chairman of the Board of Directors, President
and Chief Executive Officer (4)
John E. Cox 44 Executive Vice President and Chief Operating
Officer
Ronald I. Brendzel, J.D. 46 Senior Vice President, Chief Financial Officer,
Secretary and Director (4)
Wayne K. Butts 42 Senior Vice President, Director of Regional
Operations
Judith M. Deal 44 Vice President-Provider Relations
Thomas C. Tekulve, C.P.A. 44 Vice President-Accounting, Finance
and Information Services
Kenneth E. Keating 32 Vice President-Guards Dental Office Operations
John D. Lyon 47 Vice President-Marketing and Sales
Carlos Ferrera 32 Vice President-SafeHealth Life Operations
Susan M. Klarner 41 Vice President -Quality Programs
Michael M. Mann, Ph.D. 56 Director (1)(2)(3)(4)
William E. McKenna 76 Director (1)(2)(3)(4)
George H. Stevens 42 Director (1)(2)(4)
Bradford M. Boyd, D.D.S. 44 Director (1)(2)(3)(4)
<FN>
(1) Member, Compensation and Stock Option Committee
(2) Member, Audit Committee
(3) Member, Nominating Committee
(4) Directors hold office from the Annual Meeting of Stockholders for staggered
terms of three years (until re-elected or until successors are elected and
qualified), as follows:
Dr. Baileys and Mr. Stevens - May, 1996
Mr. McKenna - May, 1997
Mr. Brendzel, Dr. Mann and Dr. Boyd - May, 1998
</TABLE>
Officers are elected annually and serve at the pleasure of the Board of
Directors, subject to all rights, if any, under certain contracts of employment.
See Part III, Item 11-"EXECUTIVE COMPENSATION." Dr. Baileys is the brother-in-
law of Mr. Brendzel.
Dr. Baileys is Chairman of the Board of Directors, President, and Chief
Executive Officer. He has been President since 1981, Chief Executive Officer
since May 1995, and Chairman of the Board since August 1995. From 1975 until
1981, Dr. Baileys served in a variety of executive and administrative capacities
with the Company. Dr. Baileys is also licensed to practice dentistry in the
State of California.
15
<PAGE>
Mr. Cox joined the Company as Executive Vice President and Chief Operating
Officer in May 1995. From 1985 to 1995, he served in various executive
capacities for CIGNA Dental Health, including Vice President, Sales and Account
Services, Western Regional President, Chief Financial Officer and Controller.
Mr. Brendzel is Senior Vice President, Chief Financial Officer, Secretary and a
Director of the Company. He was Vice President - Corporate Development from
August 1980 until April 1986, General Counsel from August 1980 until May 1987
and held various executive and administrative positions from July 1978 until
August 1980. Mr. Brendzel is a member of the California State Bar and is
licensed to practice law in the state of California. He is also a member of the
California Knox-Keene Health Care Service Plan Advisory Committee, which assists
the California Department of Corporations in regulating managed care health
plans. From 1989 to 1991, Mr. Brendzel was also a member of the Texas Health
Maintenance Organization Solvency Surveillance Committee which assists the Texas
Department of Insurance in regulating health maintenance organizations.
Mr. Butts was appointed Senior Vice President - Director of Regional Operations
in December 1995. Prior thereto, he was Vice President-National Sales Director
since February 1988. Prior to joining the Company, he was a Senior Account
Executive with Equicor-Equitable HCA Corporation in Los Angeles from November
1985 to February 1988. Preceding that, Mr. Butts was a Senior Sales
Representative with the Company from February 1983 to November 1985. Mr. Butts'
background in the insurance/benefits area began in 1978 with Blue Cross of
California.
Ms. Klarner is the Vice President-Quality and Service Programs for the Company.
From November 1993 to February 1996, she was Vice President-Network Programs for
the Company's indemnity insurance subsidiary. From May 1989 until October 1993,
she was the Company's Director of Provider Relations. Prior to joining the
Company, Ms. Klarner was Manager of Provider Relations for a managed dental care
company from July 1986 to April 1989.
Ms. Deal was appointed Vice President-Provider Relations in January 1995. Prior
to joining the Company, Ms. Deal was the Director of Provider Relations for
CIGNA Dental Health from November 1988 to January 1995. Preceding that, Ms.
Deal was the Dental Office Manager of a large group dental practice from
November 1974 to November 1988.
Mr. Tekulve was appointed Vice President, Accounting, Finance and Information
Systems of the Company in April 1995. He was Director of Finance, International
Operations for Beckman Instruments, Inc. from 1992 to 1995. During the period
from 1984 to 1992, he also served as corporate Controller and Director of
Corporate Accounting and Planning for Beckman Instruments, Inc. Mr. Tekulve is
also a Certified Public Accountant.
Mr. Keating is the Vice President-Guards Dental Office Operations for the
Company. He was Vice President-SafeHealth Life Operations from August 1995
until October 1995 when he was appointed to his present position. From March
1987 to July 1995, Mr. Keating served in various executive capacities for CIGNA
Dental Health, including Director of Sales and Account Services, Director of
Network Development and Director of Staff Model Operations.
Mr. Lyon is the Vice President-Marketing and Sales for the Company. He joined
the Company in July 1995. From September 1993 to April 1995, Mr. Lyon was Vice
President-Marketing of Scan Health Plan. From October 1990 to July 1993, he was
Associate Vice President-Marketing of FHP Health Care. Preceding that, he was
Vice President-Project Director of Fessel International from February 1989 to
September 1990.
Mr. Ferrera is the Vice President-SafeHealth Life Operations for the Company.
He joined the Company in October 1995. From March 1988 to October 1995, Mr.
Ferrera served as Director of Provider Relations and Product Consultant for
CIGNA Dental Health. Preceding that, he was a Staff Sergeant in the United
States Air Force.
Dr. Mann has been a Director of the Company since May 1987. He is also Chairman
of Blue Marble Partners, and Chairman, President and Chief Executive Officer of
Blue Marble Development Group, Inc. international corporate development and
consulting firms. From August 1986 until September 1987, Dr. Mann was a Partner
of Mann, Kavanaugh, Chernove & Associates, a business development firm. He was
President, Chief Executive Officer and a Director of Helionetics, Inc., a
defense, energy and signal information processing company, from December 1984 to
July 1986, and Executive Vice President from April to December 1984. Dr. Mann
is currently the Chairman of the Board of Encompass Technologies, Inc., and a
Director of Datum, Inc. and Management Technology, Inc.
16
<PAGE>
Mr. McKenna has been a Director of the Company since September 1983. Since
December 1977, Mr. McKenna has been a general partner of MCK Investment Company,
a private investment company. Mr. McKenna was Chairman of the Board of
Technicolor, Inc. from 1970 to 1976 and was formerly Chairman of the Board and
Chief Executive Officer of Hunt Foods & Industries, Inc. and its successor,
Norton Simon, Inc. From 1960 to 1967, Mr. McKenna was associated with Litton
Industries, Inc. as a Director and in various executive capacities. He is
currently a Director of California Amplifier, Inc., Calprop Corporation, Drexler
Technology Corporation, Midlantic Corporation, Midlantic National Bank, WMS
Industries, Inc., and Williams Hospitality Group, Inc.
Mr. Stevens has been a Director of the Company since May 1989. He has been
President of Belle Haven Marina, Inc., a privately held leisure and recreational
organization located in Virginia, since 1982. He is also President of Kingfish
Corporation, a privately held corporation which is engaged in the business of
chartering pleasure yachts in the mid-Atlantic region. Mr. Stevens is also the
owner of Mariner Sailing School located in Virginia. Mr. Stevens' combined
organization is the largest operator of recreational vessels in the Washington
D.C. area.
Dr. Boyd has been a Director of the Company since May 1995. He is licensed to
practice dentistry in the State of California since 1983, and has been the sole
proprietor of Bradford M. Boyd, D.D.S., located in Lancaster, California. Dr.
Boyd also is private investor. He is a member of the American Dental
Association, California Dental Association, and San Fernando Valley Dental
Society. He is also a member of the Board of Directors of High Desert
Children's Dental, a charity organization providing free dental services to
underprivileged children
ITEM 2. PROPERTIES
The Company owns a 60,000 square foot building in Anaheim, California which it
utilizes as its corporate headquarters and executive offices. In addition, the
Company leases branch sales and marketing offices in Sacramento, California; San
Diego, California; Walnut Creek, California; Denver, Colorado; Kansas City,
Kansas, St. Louis, Missouri; Dallas, Texas; and Houston, Texas. The Company
leases all but one of its Guards dental offices. Those leases expire on dates
ranging through July 2005. A Guards facility in Riverside, California is leased
from an affiliate. See Part III, Item 13-"CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." In the opinion of management, the Company's facilities are
adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions in the ordinary
course of business. The Company believes all pending claims either are
adequately covered by insurance maintained by panel providers or the Company, or
will not have a material adverse effect on the Company's results of operations
or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1995.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's common stock is traded on the NASDAQ National Market System under
the symbol SFGD. The following table sets forth the high and low prices at
which the Company's common stock traded as reported. The bid quotations
represent inter-dealer prices, without retail markups or commissions, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year ended December 31, 1995
First Quarter.................... $ 9.75 $ 8.25
Second Quarter.................... $11.50 $ 8.88
Third Quarter................... $12.25 $10.50
Fourth Quarter..................... $13.25 $11.25
Fiscal Year ended December 31, 1994
First Quarter.................... $15.50 $13.25
Second Quarter.................... $15.00 $12.50
Third Quarter................... $13.75 $ 9.63
Fourth Quarter..................... $10.63 $ 8.50
</TABLE>
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF
RECORD HOLDERS
TITLE OF CLASS (AS OF DECEMBER 31, 1995)
- -------------- -------------------------
<S> <C>
Common Stock, $.01 Par Value 1,000
</TABLE>
(c) DIVIDENDS
No cash dividends have been paid on the Company's common stock. It is the
policy of the Board of Directors to retain the Company's earnings for use in its
business, and the Company does not anticipate paying cash dividends in the
foreseeable future.
(d) STOCKHOLDER RIGHTS PLAN
On March 22, 1996 ("RIGHTS DIVIDEND DECLARATION DATE"), the Company's Board of
Directors declared a dividend of one right (a "RIGHT") to purchase fractions of
the shares of its Series A Junior Participating Preferred Stock, par value $.01
per share having the rights, preferences, privileges and restrictions described
below ("PREFERRED STOCK"), and, under certain circumstances, other securities,
for each outstanding share of the Company's common stock, par value $.01 per
share ("COMMON STOCK"), to be distributed to stockholders of record at the close
of business on April 12, 1996 ("RECORD DATE"). The description and terms of the
Rights are set forth in a Rights Agreement (the "RIGHTS AGREEMENT"), dated as of
March 22, 1996, between the Company and American Stock Transfer and Trust
Company, as Rights Agent.
The following is a brief description of the Rights. It is intended to provide a
general description only and is qualified in its entirety by reference to the
Rights Agreement which has been filed as an exhibit to the Company's
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission.
ISSUANCE OF THE RIGHTS
Each share of Common Stock outstanding at the close of business on the Record
Date will receive one Right. In addition, prior to the earliest of the
Distribution Date, a Section 13 Event or the Expiration Date (as each is
hereinafter defined), one additional Right (as such number may be adjusted
pursuant to the provisions of the Rights Agreement) shall be issued with each
share of Common Stock issued after the Record Date. Following the Distribution
Date and prior to the expiration or redemption of the Rights, the Company will
issue one Right (as such number may be adjusted pursuant to the provisions of
the Rights Agreement) for each share of Common Stock issued pursuant to the
exercise of
18
<PAGE>
stock options or under employee plans or upon the exercise, conversion or
exchange of securities issued by the Company prior to the Distribution Date.
A "SECTION 13 EVENT" shall mean any event in which (i) the Company merges or
consolidates with another and the Company is not the surviving corporation;
(ii) the Company merges or consolidates with another, the Company is the
surviving corporation, and all or part of the Company's common stock is
exchanged for other securities, cash or property; or (iii) the Company sells
or transfers more than 50% of its assets or earning power. The "EXPIRATION
DATE" shall mean the earliest of (i) March 21, 2006; (ii) the date of
redemption of the Rights; (iii) the date the Board orders an exchange of
Rights; or (iv) the date of consummation of a tender offer approved as fair
to and in the best interests of the Company and its stockholders, and
adequately priced with each stockholder receiving the same consideration per
share in the same manner.
COMMON STOCK CERTIFICATES REPRESENT THE RIGHTS PRIOR TO THE DISTRIBUTION DATE
Prior to the Distribution Date (as hereinafter defined), no separate Rights
certificates will be issued. Instead, the Rights will be evidenced by the
certificates for the Common Stock to which they are attached and will be
transferred with and only with such Common Stock certificates. The surrender
for transfer of any certificates for Common Stock outstanding will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. New Common Stock certificates issued after the
Record Date will contain a legend incorporating the Rights Agreement by
reference.
DISTRIBUTION DATE; ISSUANCE OF RIGHTS CERTIFICATES
The Rights will separate from the Common Stock and become exercisable and a
Distribution Date will occur ("DISTRIBUTION DATE") upon the earlier of ten days
after (i) public announcement that a person or group of affiliated or associated
persons has acquired beneficial ownership of 15% or more of the outstanding
shares of Common Stock (an "ACQUIRING PERSON") or such earlier date as a
majority of the Directors shall become aware of the existence of an Acquiring
Person ("STOCK ACQUISITION DATE"); or (ii) the commencement of a tender or
exchange offer by any person or group, if upon consummation thereof, such person
or group of affiliated or associated persons would be the beneficial owner of
15% or more of the shares of Common Stock then outstanding. As soon as
practicable after the Distribution Date, Rights certificates will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and, thereafter, the separate Rights certificates alone will
represent the Rights.
EXERCISE OF THE RIGHTS
RIGHTS INITIALLY NOT EXERCISABLE. Prior to the Distribution Date, the Rights
are not exercisable.
EXERCISE OF THE RIGHTS TO PURCHASE PREFERRED STOCK OF THE COMPANY. At any time
after the Distribution Date but prior to the earlier of the expiration or
redemption of the Rights, each Right may be exercised at the stated purchase of
$75.00 (subject to adjustment, the "EXERCISE PRICE") for one one-thousandth of a
share of the Preferred Stock, provided, however, that upon the occurrence of any
of the events described below the Rights may no longer be exercised for the
Preferred Stock and may only be exercised for certain other securities described
below.
EXERCISE OF THE RIGHTS TO PURCHASE COMMON STOCK OF THE COMPANY. In the event
that at any time following the Rights Dividend Declaration Date, a person, alone
or with affiliates, becomes the beneficial owner of 15% or more of the then
outstanding shares of the Company's Common Stock (except pursuant to an offer
for all outstanding shares of Common Stock which is determined by both (i) the
Board of Directors acting by Special Vote, and (ii) a majority of the Directors
who are not associated with an Acquiring Person ("CONTINUING DIRECTORS") and who
are also not employees of the Company, to be fair to and otherwise in the best
interests of the Company and its stockholders (a "PERMITTED OFFER"), then each
holder of a Right will thereafter have the right to exercise the Right for
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value equal to two times the Exercise Price of the
Right. If the Company does not have sufficient Common Shares available for all
Rights to be exercised, the Company may substitute for all or any portion of the
Common Stock that would be issuable upon exercise of the Rights, cash, assets,
or other securities having the same aggregate value as such Common Stock. The
Rights are exercisable as described in this paragraph only after the Company's
right of redemption (as described below) has expired. Notwithstanding any of
the foregoing, following the occurrence of the event set forth in this paragraph
(a "SECTION 11(a)(ii) EVENT"), all Rights that are, or under certain
circumstances specified in the Rights Agreement were, beneficially owned by an
Acquiring Person will be null and void. A "SPECIAL VOTE" of the Board of
Directors is approval by both a majority of the Continuing Directors and a
majority of the entire Board, including the Continuing Directors.
19
<PAGE>
EXERCISE OF THE RIGHTS TO PURCHASE COMMON STOCK OF AN ACQUIRING COMPANY. In the
event that, at any time following the Stock Acquisition Date, (i) the Company is
merged or consolidated with another company in a business combination
transaction in which the Company is not the surviving corporation or in which
the Company is the surviving corporation and all or part of the Common Stock of
the Company is exchanged for stock of any other person, cash or any other
property (other than a merger which follows an offer described in the preceding
paragraph), or (ii) more than 50% of the assets or earning power of the Company
and its subsidiaries (taken as a whole) is sold or transferred, then each holder
of a Right (except Rights which previously have been voided as set forth above)
shall thereafter have the right to exercise the Right for common stock of the
acquiring company having a value equal to two times the Exercise Price of the
Right. (An event described in this paragraph is a "SECTION 13 EVENT.")
ADJUSTMENT OF NUMBER OF RIGHTS, PURCHASE PRICE AND NUMBER OF UNITS OF PREFERRED
STOCK. The Exercise Price payable and/or the number of shares of Preferred
Stock or other securities or property issuable upon exercise of the Rights are
subject to proportionate adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of the Preferred Stock, (ii) in the event holders of the
Preferred Stock are granted certain rights or warrants to subscribe for
Preferred Stock or convertible securities at less than the current market price
of the Preferred Stock, or (iii) upon the distribution to holders of the
Preferred Stock of evidences of indebtedness or assets (excluding regular
quarterly cash dividends) or of subscription rights or warrants (other than
those referred to above). If at any time after the Rights Dividend Declaration
Date and prior to the Distribution Date the Company declares a stock dividend
on, subdivides or combines the outstanding shares of Common Stock, the number of
Rights associated with each share of Common Stock shall be proportionately
adjusted.
FRACTIONAL RIGHTS AND FRACTIONAL SHARES
The Company is generally not required to issue fractional Rights, fractions of
shares of Preferred Stock (other than fractions which are integral multiples of
one one-thousandth share), or fractions of shares of Common Stock and, in lieu
thereof, an adjustment in cash will be made on the market price of the Rights,
Preferred Stock, or Common Stock, respectively.
REDEMPTION OF THE RIGHTS
In general, the Company may redeem all (but not less than all) of the Rights at
a price of $0.01 per Right (subject to adjustment to reflect stock splits, stock
dividends, or similar transactions), at any time until the earlier of the tenth
day following the Stock Acquisition Date or March 21, 2006 (provided that any
redemption after any person becomes an Acquiring Person may be effected only by
the Board of Directors acting by Special Vote). This redemption period may be
extended by the Board of Directors by amending the Rights Agreement as described
below prior to the time when the Rights become nonredeemable. The redemption
price may be paid in cash, shares of Common Stock, or any other consideration
the Board of Directors deems appropriate. Immediately upon the action of the
Board of Directors ordering redemption of the Rights, the Rights will terminate
and the only right of the holders of Rights will be to receive the $0.01
redemption price.
EXCHANGE OF THE RIGHTS
At any time after a Section 11(a)(ii) Event or a Section 13 Event and before any
person or group acquires 50% or more of the outstanding Common Stock, the Board
of Directors of the Company, acting by Special Vote, may cause the Company to
exchange some or all of the outstanding and exercisable Rights for Common Stock
at a one-to-one exchange ratio (appropriately adjusted to reflect stock splits,
dividends or similar transactions). Rights may not be exercised after the Board
orders their exchange. If there is not sufficient authorized unissued Common
Stock to fund an exchange, the Board, acting by Special Vote, may fund the
exchange through other consideration, including issuance of debt and/or equity.
In addition, at any time before any person or group becomes an Acquiring Person,
the Board, acting by Special Vote, may exchange some or all of the Rights for
rights of substantially equivalent value.
AMENDMENTS
Other than those provisions relating to the redemption price or the final
expiration date of the Rights, any of the provisions of the Rights Agreement may
be supplemented or amended by the Board of Directors of the Company prior to the
Distribution Date, without approval of the Rights holders, whether or not a
supplement or amendment is adverse to the Rights holders. After the
Distribution Date, any provisions of the Rights Agreement (other than those
provisions relating to the redemption price or the final expiration date of the
Rights) may be amended by the Board of Directors acting by Special Vote in order
to (i) cure any ambiguous, defective or inconsistent provision, (ii) shorten or
lengthen any time period hereunder, or (iii) otherwise change a provision which
the Board of Directors acting by Special Vote
20
<PAGE>
may deem necessary or desirable and which does not materially and adversely
affect the interests of holders of Rights (other than any Acquiring Person);
provided, the Rights Agreement may not be amended to (A) make the Rights
again redeemable after the Rights have ceased to be redeemable, or (B) change
any other time period unless such change is for the purpose of protecting,
enhancing or clarifying the rights of, and/or the benefits to the holders of
the Rights (other than any Acquiring Person).
EXPIRATION
The Rights will expire upon the earliest to occur of the close of business on
March 21, 2006, the exchange or redemption of the Rights by the Company, or the
consummation of a Permitted Offer transaction followed by a merger or
consolidation of the Company with another company in which all stockholders of
the Company receive the same consideration and terms as in the Permitted Offer.
NO STOCKHOLDER RIGHTS PRIOR TO EXERCISE
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of the Company, including, without limitation, the right to vote
or to receive dividends.
TERMS OF THE PREFERRED STOCK
The Company has initially reserved 30,000 shares of Preferred Stock for issuance
upon exercise of the Rights, such number to be subject to adjustment from time
to time in accordance with the Rights Agreement. The Preferred Stock will be
nonredeemable. The dividend, liquidation and voting rights, and the rights upon
consolidation or merger of the Preferred Stock are designed so that the value of
the one one-thousandth interest in a share of Preferred Stock purchasable with
each Right will approximate the value of one share of Common Stock. Each whole
share of Preferred Stock will be entitled to receive a quarterly preferential
dividend of 1,000 times the dividend declared on the Common Stock. In the event
of liquidation, the holders of the Preferred Stock will be entitled to receive a
preferential liquidation payment of $1,000 per share plus the amount of accrued
unpaid dividends thereon, the holders of the Common Stock will then be entitled
to receive a liquidation payment equal to $1.00 per share (subject to
proportionate adjustment to reflect stock splits, dividends or combinations),
and the holders of the Preferred Stock and Common Stock will then share ratably
in all assets remaining available for distribution to stockholders. Each share
of Preferred Stock will have 1,000 votes (subject to proportionate adjustment to
reflect stock splits, dividends and combinations), and will generally vote
together with the Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock are exchanged
for or changed into other stock or securities, cash and/or other property, each
share of Preferred Stock will be entitled to receive 1,000 times the amount
received per share of Common Stock (subject to proportionate adjustment to
reflect stock splits, dividends and combinations).
ANTI-TAKEOVER EFFECTS
The Rights are designed to protect and maximize the value of stockholders'
interests in the Company in the event of an unsolicited attempt to take control
of the Company in a manner or on terms not approved by the Board of Directors.
Attempts to take control of a company frequently include coercive tactics to
deprive the Board of Directors and stockholders of any real opportunity to
determine the destiny of the Company. The Rights have been declared by the
Board in order to deter such tactics, including a gradual accumulation in the
open market of a 15% or greater position, followed by a merger or a partial, or
two-tier tender offer that does not treat all stockholders equally. These
tactics can unfairly pressure stockholders, squeeze them out of their investment
without giving them any real choice, and deprive them of the full value of their
shares.
The Rights are not intended to prevent a takeover of the Company and will not do
so. The rights may be redeemed by the Company as described above, and
accordingly, the Rights should not interfere with any merger or business
combination approved by the Board of Directors.
Issuance of the Rights does not weaken the Company or interfere with its
business plans. The issuance of the Rights themselves has no dilutive effect,
will not affect reported earnings per share, should not be taxable to the
Company or to its stockholders, and will not change the way in which the
Company's shares are presently traded. The Company's Board of Directors
believes that the Rights represent a sound and reasonable means of addressing
the complex issues of corporate policy created by the current takeover
environment.
21
<PAGE>
However, the Rights may have the effect of rendering more difficult or
discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the table for the five years ended December 31,
1995 have been derived from financial statements audited by the Company's
independent accountants, Deloitte & Touche LLP. This data should be read in
conjunction with such financial statements and notes thereto.
SELECTED OPERATING, STATISTICAL AND BALANCE SHEET DATA
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (IN $000'S EXCEPT INCOME PER SHARE):
Health care revenues $81,577 $70,503 $62,776 $60,642 $60,837
------- ------- ------- ------- -------
Expenses:
Health care services 65,578 56,631 45,556 44,717 45,653
Selling, general and
administrative 13,451 12,778 11,692 10,308 11,378
------- ------- ------- ------- -------
Total expenses 79,029 69,409 57,248 55,025 57,031
------- ------- ------- ------- -------
Operating income 2,548 1,094 5,528 5,617 3,806
Other income, net 1,286 1,023 690 811 480
------- ------- ------- ------- -------
Income before income taxes 3,834 2,117 6,218 6,428 4,286
Income taxes 1,446 825 2,256 2,507 1,672
Net Income $ 2,388 $ 1,292 $ 3,962 $ 3,921 $ 2,614
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Income per share
Primary $ .52 $ .27 $ .83 $ .83 $ .58
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Fully Diluted $ .51 $ .27 $ .83 $ .83 $ .56
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average shares
outstanding (000's)
Primary 4,623 4,852 4,793 4,711 4,499
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Fully Diluted 4,725 4,852 4,793 4,711 4,656
------- ------- ------- ------- -------
------- ------- ------- ------- -------
STATISTICAL DATA:
Membership (000's) 761 721 664 648 665
Clients 2,661 2,086 1,665 1,250 1,068
Employees 558 432 387 333 324
Dental offices 3,291 2,902 2,532 2,274 2,133
PPO dental offices 9,706 5,765 - - -
Guards dental offices 33 30 29 23 22
BALANCE SHEET DATA (IN $000'S):
Cash and short-term
investments $14,746 $ 8,661 $17,869 $14,771 $13,030
Current assets 20,578 12,378 20,903 17,456 15,653
Current liabilities 5,941 3,043 2,107 1,362 3,784
Long-term debt - - - - -
Stockholder's equity 31,929 27,469 27,224 22,763 18,097
Total assets 38,343 30,792 29,917 24,808 22,729
</TABLE>
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1995 1994 1993
Versus Versus Versus
Results of operations (000's omitted) 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Health care revenues $11,074 $ 7,727 $ 2,134
Percentage change 15.7% 12.3% 3.5%
- ------------------------------------------------------------------------------
Membership enrollment 40 57 16
Percentage change 5.5% 8.6% 2.5%
- ------------------------------------------------------------------------------
Health care expenses $ 8,947 $ 11,075 $ 839
Percentage change 15.8% 24.3% 1.9%
Percent of revenues 80.4% 80.3% 72.6%
- ------------------------------------------------------------------------------
Selling, general and
administrative expenses $ 673 $ 1,086 $ 1,384
Percentage change 5.3% 9.3% 13.4%
Percent of revenues 16.5% 18.1% 18.6%
- ------------------------------------------------------------------------------
Other income, net $ 263 $ 333 $ (121)
Percentage change 25.7% 48.3% (14.9%)
Percent of revenues 1.6% 1.5% 1.1%
- ------------------------------------------------------------------------------
Net Income $ 1,096 $ (2,670) $ 41
Percentage change 84.8% (67.4%) 1.0%
- ------------------------------------------------------------------------------
</TABLE>
1995 VERSUS 1994
Health care revenues increased as a result of sales to new small and mid-size
clients, increased revenue from the Company's dental office subsidiary and
increased revenue from the Company's indemnity insurance subsidiary. Membership
enrollment increased to 761,000 primarily from sales to new small and mid-size
group clients and an increase in the number of persons covered under various
dental indemnity insurance products offered by the Company's insurance
subsidiary.
Health care expense increased primarily due to increased expenses within the
Company's dental office subsidiary, increased capitation, and increased
indemnity benefits paid to insureds directly related to increased premium
revenue. Health care expense also increased due to increased claims and claims
reserve costs associated with the implementation of a number of new indemnity
benefit programs offered by the Company's indemnity insurance subsidiary,
geographic expansion, and to a lesser extent, the expansion of the Company's
Preferred Provider Organization operations. General and administrative expenses
increased at a lower rate due to increased operating efficiencies. Selling
expenses increased primarily due to higher costs in the distribution of the
Company's products through insurance related sources. Other income increased
due to the favorable disposition by the Company of certain equity investments
and dividend income. Net income increased due to the above factors.
1994 VERSUS 1993
Health care revenues increased as a result of sales to new small and mid-sized
clients, the Company's indemnity insurance subsidiary, and a slowing of layoffs
at the Company's major clients in the aerospace, defense and retailing
industries. Membership enrollment increased primarily due to sales to new group
indemnity clients and an increase in the number of persons covered under
indemnity insurance products offered by the Company's indemnity insurance
subsidiary. Enrollment increases as a result of sales to new groups offset
entirely the continued workforce reduction in a number of the Company's major
group clients.
23
<PAGE>
Health care expenses increased primarily due to increased expenses associated
with the opening of new Company-owned dental offices, and increases in
capitation payments to participating providers in direct correlation with the
increase in premium revenues. Health care expenses, as a percentage of
revenues, increased primarily due to the increase costs associated with the
expansion of the Company's dental office subsidiary and the increase in payments
made to providers of care under the Company's indemnity insurance program, along
with an increase in the reserve established for incurred, but not reported
claims.
General and administrative expenses remain virtually the same notwithstanding an
increase in revenue and the number of persons to whom benefits were provided.
Selling expenses increased primarily due to an increase in sales and marketing
activities, along with an increase in the number of persons employed by the
Company in sales and marketing positions. Selling, general and administrative
expenses declined as a percentage of revenue due to increase efficiencies within
the Company's administrative operations.
Other income increased as a result of an increase in the Company's investment
portfolio which was realized in 1994. Net income declined as a result of the
above factors.
1993 VERSUS 1992
Health care revenues increased as a result of sales to new small and mid-sized
clients, increased revenue from the Company's dental office subsidiary,
increased revenue from the Company's indemnity insurance subsidiary, and a
slowing of layoffs at the Company's major clients in the aerospace, defense and
retailing industries. Membership enrollment increased primarily due to sales to
new group indemnity clients and an increase in the number of persons covered
under indemnity insurance products offered by the Company's indemnity insurance
subsidiary. Enrollment increases as a result of sales to new groups offset
entirely the continued workforce reduction in a number of the Company's major
group clients.
Health care expense increased primarily due to increased expenses associated
with the opening of new Company-owned dental offices and increases in capitation
payments to participating providers in direct correlation with the increase in
premium revenues. Health care expenses, as a percentage of revenue, continued
to decline as a result of increased utilization for primary and specialty care
services by plan membership of Company-owned dental offices.
General and administrative expenses remained virtually the same, despite an
increase in revenue and the number of persons covered by the Company's benefit
programs. Selling expense increased primarily due to an increase in the number
of persons directly employed by the Company in sales and marketing positions.
It is anticipated that the Company will continue to add additional sales staff
during 1994.
Other income declined due to a one time gain in the third quarter of 1992 from a
litigation settlement. The Company's effective tax rate for 1993 declined
slightly primarily due to the favorable tax treatment obtained as a result of
the acquisition of the Company's indemnity insurance subsidiary. Net income
increased slightly due to the above factors.
GENERAL
The Company's California dental plan contributes substantially all of the
Company's operating earnings. Additionally, in 1995, Colorado, Illinois,
Kansas, Missouri, Ohio, Oklahoma, Oregon, Texas, and Utah all contributed
positively towards operating earnings. Management believes that each state plan
is capable of being profitable once targeted enrollment levels are attained and
stable provider panels are in place. The Company's dental office subsidiary was
a profit contributor in 1995, despite incurring significant expenses, primarily
due to the opening of new dental offices. The Company's indemnity insurance
subsidiary contributed positively to net income in 1995.
The Company's ability to attract clients is affected by the timing of labor-
management contract negotiations, revisions in employee benefit programs,
fluctuations in employment levels at major existing or prospective clients,
increasing market competition and other factors. Guards' ability to bolster
revenue from non-plan patients hinges upon continued quality care and Guards'
ability to compete in an excess-capacity dental care environment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business has not been capital intensive. The Company's
operational cash requirements have been met principally from operating cash
flows and this is expected to continue.
24
<PAGE>
At December 31, 1995 and December 31, 1994, the current ratio was 3.5 to 1.0 and
4.1 to 1.0, respectively. The Company's net worth was $32.0 million compared to
$27.5 million the previous year. The Company had $14.7 million and $8.6 million
of cash and short-term investments as of December 31, 1995 and December 31,
1994, respectively. As a result of its regulated nature, the Company is
required to maintain various regulatory bank accounts in an aggregate amount of
approximately $6.5 million to satisfy certain capital and surplus requirements
imposed by various regulatory agencies. Due to the significant cash position
maintained by the Company, these requirements do not pose a significant
financial liquidity burden on the Company. The Company believes that income
from operations, together with the existing cash on hand, and other available
sources of financing, should be adequate to meet operating capital and
regulatory needs for the foreseeable future.
IMPACT OF INFLATION
Management believes that the Company's operations are not materially affected by
inflation. The Company believes that a majority of its costs are capitated or
fixed in nature and are directly related to membership levels, and therefore
related to premium levels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the related Notes and Schedules
thereto filed as part of this 1995 Annual Report on Form 10-K are listed on the
accompanying Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in the Company's independent auditors or
disagreements with such auditors on accounting principles or practices or
financial statement disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 set forth in the table, the notes thereto and
the paragraphs thereunder, under the caption "ELECTION OF DIRECTORS" in the
Company's Proxy Statement for its Annual Meeting of Stockholders, set for May
22, 1996, is incorporated herein by reference. Additional information related
to Item 10 appears in Part I (c) of this 1995 Annual Report on Form 10-K under
the caption "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT," which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section "EXECUTIVE COMPENSATION" in the Company's Proxy Statement for its Annual
Meeting of Stockholders, set for May 22, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
section "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement for its Annual Meeting of Stockholders, set for May
22, 1996
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from "CERTAIN
TRANSACTIONS" in the Company's Proxy Statement for its Annual Meeting of
Stockholders, set for May 22, 1996.
25
<PAGE>
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(a) (1) - (2)
AND (d). FINANCIAL STATEMENTS
The consolidated financial statements and financial statement schedules of
Safeguard Health Enterprises, Inc. filed as part of this 1995 Annual Report on
Form 10-K are listed in the accompanying Index to Financial Statements on Page
F-1.
ITEM 14(a) (3) AND (c). EXHIBITS
An "Exhibit Index" has been filed as part of this 1995 Annual Report on Form 10-
K beginning on Page E-1. All Exhibits, except for Exhibit 24.1, are on file
with the Securities and Exchange Commission.
ITEM 14(b). REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the year ended
December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Anaheim,
State of California, on the 27th day of March, 1996.
SAFEGUARD HEALTH ENTERPRISES, INC.
STEVEN J. BAILEYS, D.D.S.
-------------------------
STEVEN J. BAILEYS, D.D.S.,
Chairman of the Board, President and
Chief Executive Officer
RONALD I. BRENDZEL
------------------
RONALD I. BRENDZEL,
Senior Vice President, Chief Financial
Officer and Secretary
26
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
POWER OF ATTORNEY
We, the undersigned directors and officers of Safeguard Health Enterprises,
Inc., and each of us, do hereby constitute and appoint Steven J. Baileys, D.D.S.
and/or Ronald I. Brendzel, as our true and lawful attorneys and agents, each
with power of substitution, to do any and all acts and things in our name and
behalf in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated above, which
said attorneys and agents, or any one of them, may deem necessary or advisable
to enable said corporation to comply with the Securities Exchange Act of 1934,
as amended, and any rules, regulations, and requirements of the Securities and
Exchange Commission, in connection with this 1995 Annual Report on Form 10-K,
including specifically but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments hereto; and we do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or any one of them,
shall do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
STEVEN J. BAILEYS,D.D.S. Chairman of the Board, President and March 27, 1996
- ------------------------ Chief Executive Officer
STEVEN J. BAILEYS,D.D.S. (Principal Executive Officer)
RONALD I. BRENDZEL Senior Vice President, Chief Financial March 27, 1996
- ------------------ Officer, Secretary and Director
RONALD I. BRENDZEL (Principal Financial and Accounting
Officer)
MICHAEL M. MANN Director March 27, 1996
- ---------------
MICHAEL M. MANN
WILLIAM E. MCKENNA Director March 27, 1996
- ------------------
WILLIAM E. MCKENNA
GEORGE H. STEVENS Director March 27, 1996
- -----------------
GEORGE H. STEVENS
BRADFORD M. BOYD, D.D.S Director March 27, 1996
- -----------------------
BRADFORD M. BOYD, D.D.S.
</TABLE>
27
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation****
3.2 Bylaws****
10.2 1984 Stock Option Plan***
10.3 Stock Option Plan Amendment*
10.3.1 Stock Option Plan Amendment+
10.3.2 Stock Option Plan Amendment++
10.41 Corporation Grant Deed, dated December 21, 1984, relating to a
property located at 505 North Euclid Avenue, Anaheim, California**
10.60 Employment Agreement, as Amended, dated May 25, 1995, between Steven
J. Baileys, D.D.S. and the Company.
10.61 Employment Agreement, as Amended, dated May 25, 1995, between Ronald
I. Brendzel and the Company.
10.62 Employment Agreement dated May 25, 1995, between John E. Cox and the
Company.
10.63 Employment Agreement dated May 25, 1995, between Wayne K. Butts and
the Company.
10.64 Form of Rights Agreement, dated as of March 22, 1996, between the
Company and American Stock Transfer and Trust Company, as Rights
Agent.
21.1 Subsidiaries of the Company
24.1 Independent Auditors' Consent
25.1 Power of Attorney (Reference is made to Page 27 of the Report)
* Incorporated by reference herein to the exhibit of the same number
filed as an exhibit to the Company's Registration Statement on Form
S-1 filed on September 12, 1983 (File No. 2-86472).
** Incorporated by reference herein to the exhibit of the same number
filed as an exhibit to the Company's Registration Statement on Form
S-1 filed on August 22, 1985 (File No. 2-99663).
*** Incorporated by reference herein to the exhibit of the same number
filed as an exhibit to the Company's Registration Statement on Form
S-1 filed on July 3, 1984 (File No. 2-92013).
**** Incorporated by reference herein to the exhibit of the same number
filed as an exhibit to the Company's Annual Report of Form 10-K for
the period ended December 31, 1987.
+ Incorporated by reference herein to the exhibit of the same number
filed as an exhibit to the Company's Annual Report of Form 10-K for
the period ended December 31, 1989.
++ Incorporated by reference herein to the exhibit of the same number
filed as an exhibit to the Company's Annual Report of Form 10-K for
the period ended December 31, 1992.
E-1
28
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.............................. F-2
Financial Statements
Consolidated Statements of Financial Position...... F-3
Consolidated Statements of Income.................. F-4
Consolidated Statements of Cash Flows.............. F-5
Consolidated Statements of Stockholders' Equity.... F-6
Notes to Consolidated Financial Stateme............ F-7 to F-15
Financial Statement Schedule
Schedule I - Valuation and Qualifying Accounts..... F-16
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Safeguard Health Enterprises, Inc.:
We have audited the accompanying consolidated statements of financial position
of Safeguard Health Enterprises, Inc. and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1995. Our audits also included the financial statement schedule for the
years ended December 31, 1995, 1994 and 1993 listed in the Index at item 14.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Safeguard Health Enterprises, Inc.,
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 22, 1996
F-2
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($000'S OMITTED, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 506 $ 503
Investments available for sale,at estimated fair value 14,038 4,898
Investments held to maturity, at cost 202 3,260
Accounts and notes receivable, net of
allowances of $260 in 1995 and $206 in 1994 4,344 2,183
Income taxes receivable 45 255
Prepaid expenses and other current assets 1,181 1,032
Deferred income taxes 262 247
------- -------
Total current assets 20,578 12,378
------- -------
Property and equipment, net 13,055 11,256
Investments held to maturity, at cost 4,073 6,509
Other assets 226 229
Intangibles, net of accumulated amortization of
$1,384 in 1995 and $1,293 in 1994 411 420
------- -------
$38,343 $30,792
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,683 $ 1,966
Reserves for incurred but not reported claims 2,063 849
Deferred revenue 195 228
------- -------
Total current liabilities 5,941 3,043
------- -------
Deferred income taxes 473 280
Commitments and contingencies (Notes 3 and 8)
Stockholders' equity:
Common stock - $.01 par value; 30,000,000
shares authorized; 4,695,000 and 4,541,000
shares outstanding, stated at 21,092 19,212
Preferred stock - $.01 par value; 1,000,000 shares
authorized; 0 shares outstanding - -
Retained earnings 29,113 26,725
Net unrealized loss on investments available for sale (153) (345)
Treasury stock, at cost (18,123) (18,123)
------- -------
Total stockholders' equity 31,929 27,469
------- -------
$38,343 $30,792
------- -------
------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($000'S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Health care revenues $81,577 $70,503 $62,776
Expenses:
Health care services 65,578 56,631 45,556
Selling, general and
administrative 13,451 12,778 11,692
------- ------- -------
Total expenses 79,029 69,409 57,248
------- ------- -------
Operating income 2,548 1,094 5,528
Other income, net 1,286 1,023 690
------- ------- -------
Income before provision for income taxes 3,834 2,117 6,218
Provision for income taxes 1,446 825 2,256
------- ------- -------
Net income $ 2,388 $ 1,292 $ 3,962
======= ======= =======
Net income per common share
and common share equivalent:
Primary $ .52 $ .27 $ .83
------- ------- -------
------- ------- -------
Fully Diluted $ .51 $ .27 $ .83
------- ------- -------
------- ------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000'S OMITTED)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,388 $ 1,292 $ 3,962
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating activities:
(Gain) loss on sale of property and equipment (23) - 18
Depreciation and amortization 1,602 1,440 1,007
Deferred income taxes 178 (116) 162
Changes in assets and liabilities:
Accounts and notes receivable, net (2,161) (379) (436)
Income taxes receivable 805 167 348
Prepaid expenses and other current assets (149) (170) (248)
Accounts payable and accrued expenses 2,931 1,039 558
Deferred revenue (33) (103) 187
------- ------- -------
Net cash provided by operating activities 5,538 3,170 5,558
------- ------- -------
Cash flows from investing activities:
Purchase of investments - - (54,014)
Proceeds from sale/maturity of investments - - 51,269
Purchase of investments available for sale (11,913) (20,070) -
Proceeds from sales/maturity of investments
available for sale 2,965 25,855 -
Purchase of investments held to maturity (2,680) (4,532) -
Proceeds from maturity of investments held
to maturity 8,174 510 -
Additions to property and equipment (3,320) (4,233) (2,469)
Proceeds from sale of property and equipment 33 - -
Payments received on notes receivable from sale
of dental offices - - 13
Additions to intangibles (82) (51) (178)
Other assets 3 (47) (40)
------- ------- -------
Net cash used in investing activities (6,820) (2,568) (5,419)
------- ------- -------
Cash flows from financing activities:
Stock repurchases - (1,378) -
Proceeds from exercise of stock options 1,285 406 214
------- ------- -------
Net cash provided by (used in) financing
activities 1,285 (972) 214
------- ------- -------
Net (decrease) increase in cash 3 (370) 353
Cash at beginning of year 503 873 520
------- ------- -------
Cash at end of year $ 506 $ 503 $ 873
------- ------- -------
------- ------- -------
Supplemental disclosure of non cash activities:
Tax benefit from exercise of stock options $ 595 $ 270 285
Conversion of debt securities to equity securities $ 348 $ - $ -
Supplementary information:
Cash paid during the year for:
Interest $ - $ 3 $ 2
Income taxes $ 586 $ 821 $ 1,823
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000'S OMITTED)
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON
INVESTMENT
NUMBER OF SHARES SECURITIES
---------------- COMMON RETAINED TREASURY AVAILABLE
COMMON TREASURY STOCK EARNINGS STOCK FOR SALE TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1993 7,623 (3,128) $18,037 $21,471 $(16,745) $ - $22,763
Net income 3,962 3,962
Exercise of stock
options (including
tax benefits of $285) 46 499 499
----- ------ ------ ------- -------- ------- -------
December 31, 1993 7,669 (3,128) 18,536 25,433 (16,745) 27,224
Net income 1,292 1,292
Stock repurchases
for treasury (146) (1,378) (1,378)
Exercise of stock
options (including
tax benefits of $270) 70 676 676
Net unrealized loss on
investment securities
available for sale (345) (345)
----- ------ ------- ------- -------- ------- -------
December 31, 1994 7,739 (3,274) 19,212 26,725 (18,123) (345) 27,469
Net income 2,388 2,388
Exercise of stock
options (including
tax benefits of $595) 230 1,880 1,880
Net unrealized gain on
investment securities
available for sale 192 192
----- ------ ------- ------- -------- ------- -------
December 31, 1995 7,969 (3,274) $21,092 $29,113 $(18,123) $(153) $31,929
----- ------ ------- ------- -------- ------- -------
----- ------ ------- ------- -------- ------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Safeguard Health Enterprises, Inc., a Delaware corporation (the "Company"), is a
holding company which manages what is, collectively, one of the largest publicly
traded managed care dental plans in the United States. Operations are conducted
through wholly-owned subsidiaries in thirteen states. The Company was founded
as a nonprofit entity in California in 1974 and converted to a for-profit entity
at the end of 1982. Since then, the Company has expanded its operations into
Arizona, Colorado, Illinois, Kansas, Missouri, Nevada, Ohio, Oklahoma, Oregon,
Texas and Utah. The Company is also authorized to operate in Kentucky. In
1992, the Company acquired a California based indemnity insurance company
licensed to transact insurance business in the states of Arizona, California,
Colorado, Missouri, Oregon and Texas. Since then, the Company expanded its
operations by qualifying its indemnity insurance company to transact the
business of insurance in the states of Illinois, Kansas, Nevada, Ohio and
Wisconsin.
The Company provides managed care and indemnity dental benefits for
approximately 761,000 members, through a panel of primary care dental offices
and specialists, and a Preferred Provider Organization panel. At December 31,
1995, the Company also operates 33 dental offices in California under the name
Guards Dental, Inc. ("Guards"). Guards offices are part of the Company's panel
of dental providers and offer dental services to plan members and non-plan
patients.
BASIS OF CONSOLIDATION
The consolidated financial statements include all the accounts of the Company
and its subsidiaries, presented on a consolidated basis. Significant
intercompany accounts and transactions have been eliminated in consolidation.
REVENUE AND COST RECOGNITION
Premiums collected for health care revenues are recognized in the period for
which the member was entitled to service. Related costs for health care
services are expensed in the period the Company provides such service.
MAJOR CUSTOMERS
In 1995, 1994, and 1993, one customer accounted for approximately 3.6%, 4.1% and
6.1% of revenues, respectively.
INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 ("FAS 115"), ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. The Company has classified its investment portfolio into
"available-for-sale" and "held-to-maturity" categories. In accordance with FAS
115, investments classified as available-for-sale are carried at fair value, and
unrealized gains or losses, net of applicable income taxes, are reported in a
separate caption of stockholders' equity. Investments classified as held-to-
maturity are carried at amortized cost. In 1995, the Company recorded net
unrealized gains of $315,000 and increased stockholders' equity by $192,000 (net
unrealized gains less deferred income taxes of $123,000) at December 31, 1995.
In accordance with FAS 115, prior period financial statements have not been
restated.
Prior to the adoption of FAS 115, investments were stated at the lower of cost
or market value. Investments consist principally of variable rate interest-
bearing tax-exempt investments, taxable bonds, equity securities, treasury bills
and notes, and certificates of deposit with maturities greater than three
months. Investments are not considered cash equivalents for the consolidated
statements of cash flows. The adjusted cost of specific securities sold is used
to compute the gain or loss on sale of investments.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of the
respective property and equipment as follows: buildings - 30 years; leasehold
and building improvements - 5 to 25 years; furniture, fixtures, dental equipment
and other equipment - 3 to 10 years.
F-7
<PAGE>
Expenditures for maintenance and repairs are expensed as incurred, while major
improvements which extend the estimated useful life of an asset are capitalized.
Upon the sale or other retirement of assets, the accounts are relieved of the
cost and related accumulated depreciation and amortization, and any resultant
gain or loss is recognized.
INTANGIBLES
License acquisition costs associated with the purchase of an indemnity insurance
company in October 1992 are amortized over a twenty year period. The Company
periodically evaluates whether events and circumstances have occurred which may
affect the estimated useful lives or the recoverability of the remaining balance
of its intangibles. At December 31, 1995, the Company's management believed
that no material impairment of goodwill or other intangible assets existed.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 109, ("FAS 109") ACCOUNTING FOR
INCOME TAXES. This Statement mandates the liability method of computing
deferred income taxes. Effective January 1, 1993, the Company adopted this
Statement as required. The effect of adoption did not have a significant effect
on the Company's financial position or results of operations and therefore has
been included in the provision for income taxes in 1993.
This Statement requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of the deferred items is
based on enacted tax laws. In the event the future consequences of differences
between financial reporting bases and the tax bases of the Company's assets and
liabilities result in a deferred tax asset, FAS 109 requires an evaluation of
the probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred tax asset is recorded when
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. As permitted under the new Statement, financial
statements of prior years have not been restated.
401(K) PLAN
The Company maintains a 401(k) plan which allows for a pre-tax contribution from
an employee's earnings. Employees are eligible to participate in the 401(k)
plan upon completion of six months of service with the Company. Under the
401(k) plan, an employee may defer up to 15% of his or her gross compensation
each pay period and the Company may, at its option, make an additional
discretionary contribution to be allocated among employees in the plan in
proportion to the compensation deferred. Employees are 100% vested in their
interest in the 401(k) plan at all times. The Company also maintains a pre-tax
medical insurance option within the meaning of Paragraph 106 of Section 125 of
the Internal Revenue Code for its employees insuring dependents.
NET INCOME PER SHARE
Primary earnings per share for the years ended December 31, 1995, 1994, and 1993
were computed by dividing net income by 4,623,000, 4,852,000 and 4,793,000
shares, respectively, which were the weighted average numbers of outstanding
common shares and common share equivalents (stock options using the treasury
stock method) during the respective periods. Fully diluted earnings per share
in 1995 were computed using an additional 102,000 shares.
RECLASSIFICATIONS
Certain amounts have been reclassified in prior years to conform with the
financial statement presentation for the year ended December 31, 1995.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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 could differ from those estimates.
F-8
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheet includes the following financial instruments: cash,
trade accounts and notes receivable, and trade accounts payable. The Company
considers the carrying amounts in the financial statements to approximate the
fair value for these financial instruments because of the relatively short
period of time between origination of the instruments and their expected
realization.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121 ("FAS 121"), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, which becomes effective for fiscal years
beginning after December 15, 1995. FAS 121 requires impairment losses to be
recognized for long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the assets' carrying amount. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount. The statement
also requires that assets to be disposed of should be written down to fair value
less selling costs. The Company will adopt this statement in fiscal year 1996
as required, and its adoption is not expected to have a significant effect on
the Company's financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 ("FAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, which becomes
effective for fiscal years beginning after December 15, 1995. FAS 123
established new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense
for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
in APB Opinion No. 25 will be required to make pro forma disclosures of net
income and earnings per share as if the provisions of FAS 123 had been applied.
The Company is in the process of evaluating the Statement. The potential impact
on the Company of adopting the new standard has not been quantified at this
time. The Company must adopt FAS 123 no later than December 1, 1996.
NOTE 2: COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
INVESTMENTS
The following table summarizes the Company's investments as of December 31, 1995
(in $000's). The estimated fair value of investments is based on quoted market
prices.
<TABLE>
<CAPTION>
Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Classified as Available for Sale:
State obligations $ 840 $ 5 $ (9) $ 836
Corporate bonds 1,050 17 (153) 914
Equity securities 1,204 47 (158) 1,093
Funds and other short-term
municipal obligations 11,195 - - 11,195
------- ---- ----- -------
Total available for sale 14,289 69 (320) 14,038
------- ---- ----- -------
Classified as Held to Maturity:
U.S. Government and its agencies 3,127 25 (-) 3,152
State obligations 700 7 (6) 701
Municipal obligations 448 7 (1) 454
------- ---- ----- -------
Total held to maturity 4,275 39 (7) 4,307
------- ---- ----- -------
Total $18,564 $108 $(327) $18,345
------- ---- ----- -------
------- ---- ----- -------
</TABLE>
F-9
<PAGE>
The following table summarizes the Company's investments as of December 31, 1995
(in $000's). The estimated fair value of investments is based on quoted market
prices.
<TABLE>
<CAPTION>
Cost/
Amortized Estimated
Cost Fair Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Available for Sale:
Due in one year or less $11,206 $11,206
Due after one year through five years 1,175 1,196
Due after five years through ten years 104 104
Due after ten years 600 439
------- -------
13,085 12,945
Equity securities 1,204 1,093
------- -------
Total Available for Sale 14,289 14,038
------- -------
Held to Maturity:
Due in one year or less 202 205
Due after one year through five years 2,502 2,515
Due after five years through ten years 859 868
Due after ten years 712 719
------- -------
Total Held to Maturity 4,275 4,307
------- -------
Total $18,564 $18,345
------- -------
------- -------
</TABLE>
The following table summarizes the Company's investment as of December 31,
1994 (in $000's). The estimated fair value of investments is based on quoted
market prices.
<TABLE>
<CAPTION>
Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Classified as Available for Sale:
State obligations $ 1,400 $ - $ - $ 1,400
Corporate bonds 1,325 3 (428) 900
Equity securities 1,016 - (141) 875
Funds and other short-term
municipal obligations 1,723 - - 1,723
------- --- ------ -------
Total available for sale 5,464 3 (569) 4,898
------- --- ------ -------
Classified as Held to Maturity:
U.S. Government and its agencies 4,750 - (307) 4,443
State obligations 3,227 - (62) 3,165
Municipal obligations 1,403 - (49) 1,354
Corporate bonds 389 - - 389
------- --- ------ -------
Total held to maturity 9,769 - (418) 9,351
------- --- ------ -------
Total $15,233 $ 3 $(987) $14,249
------- --- ------ -------
------- --- ------ -------
</TABLE>
F-10
<PAGE>
The contractual maturities of investments at December 31, 1994, are shown
below (in $000's). Expected maturities may differ from contractual
maturities:
<TABLE>
<CAPTION>
Cost/
Amortized Estimated
Cost Fair Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Available for Sale:
Due in one year or less $ 3,123 $ 3,123
Due after one year through five years 449 279
Due after five years through ten years 141 144
Due after ten years 735 477
------- -------
4,448 4,023
Equity securities 1,016 875
------- -------
Total Available for Sale 5,464 4,898
------- -------
Held to Maturity:
Due in one year or less 3,260 3,250
Due after one year through five years 2,492 2,464
Due after five years through ten years 2,173 1,990
Due after ten years 1,844 1,647
------- -------
Total Held to Maturity 9,769 9,351
------- -------
Total $15,233 $14,249
------- -------
------- -------
</TABLE>
PROPERTY AND EQUIPMENT
The Company's property and equipment consist of (in $000's):
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C>
Land $ 692 $ 692
Buildings and improvements 5,909 5,866
Leasehold improvements 6,232 4,814
Dental equipment 5,160 4,561
Furniture, fixtures and other equipment 7,140 5,620
Construction in progress 297 629
------- -------
25,430 22,182
Less - accumulated depreciation and amortization (12,375) (10,926)
------- -------
$ 13,055 $ 11,256
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation and amortization expense (in $000's) $1,511 $1,358 $989
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company's accounts payable and accrued expenses consist of (in $000's):
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------
<S> <C> <C>
Accounts payable $2,862 $1,306
Accrued compensation 97 184
Other accrued expenses 724 476
------ ------
$3,683 $1,966
------ ------
------ ------
</TABLE>
F-11
<PAGE>
NOTE 3: LEASE OBLIGATIONS
The Company leases administrative and dental office space under various
non-cancelable operating leases, including one lease with a related party.
Rental expense (in $000's) was $1,609, $1,401 and $1,153 in 1995, 1994 and
1993, respectively. Future minimum rental payments required under operating
leases that have initial or remaining lease terms in excess of one year as of
December 31, 1995 are (in $000's):
Year ending December 31:
1996 $1,561
1997 1,435
1998 1,414
1999 1,353
2000 1,364
Thereafter 4,448
The Company incurred rent expense (in $000's) to a related party of $12 in
1995, 1994 and 1993.
NOTE 4: INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("FAS 109"), which
requires the recognition of deferred tax assets and liabilities for the
future consequences of events that have been previously recognized in the
Company's consolidated financial statements or tax returns. The measurement
of the deferred items is based on enacted tax laws.
The Company's provision for federal and state income taxes is (in $000's):
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes:
Taxes currently payable:
Federal $1,084 $ 688 $1,544
State 302 253 550
Tax effect of timing differences:
Difference in depreciation methods 61 (80) (64)
Difference in accounting method
for revenue adjustments (23) (22) 61
Difference in accounting method for
intangibles 2 (7) -
Difference in accounting method for
specialist costs 37 (103) 69
Difference in accounting method for
prepaid expenses (6) (22) 37
Deferred State Taxes (32) 124 41
Other 21 (6) 18
------ ----- ------
$1,446 $ 825 $2,256
====== ===== ======
</TABLE>
F-12
<PAGE>
A reconciliation of the Federal income tax provision at the expected
statutory rate compared to the actual income tax provision is as follows (in
$000's):
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected $1,342 35.0% $ 741 35.0% $2,176 35.0%
State taxes, net of
federal effect 208 5.4 126 6.0 360 5.8
Tax-free income (159) (4.1) (111) (5.3) (95) (1.5)
Other 55 1.4 69 3.3 (185) (3.0)
------ ----- ----- ---- ------- ----
$1,446 37.7% $ 825 39.0% $2,256 36.3%
====== ===== ===== ==== ======= ====
</TABLE>
At December 31, 1995 and 1994, the Company's net tax deferred liability was
$211,000 and $33,000, respectively. The major components of the Company's
deferred taxes are as follows (in $000's):
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued specialist costs $ 157 $ 194
Reserve for revenue adjustments 112 89
Amortization of prepaid expenses (108) (116)
State income taxes 90 55
Other 11 25
------ -----
Net current deferred tax asset 262 247
------ -----
Noncurrent deferred tax assets (liabilities):
Book versus tax basis in property, including
depreciation and amortization (605) (544)
Unrealized loss on investments 98 221
Amortization of intangibles 34 43
------ -----
Net noncurrent deferred tax liability (473) (280)
------ -----
Net deferred tax liability $(211) $ (33)
------ -----
------ -----
</TABLE>
The Company believes that the major components of its deferred tax asset will
reverse in 1995.
NOTE 5: OTHER INCOME, NET
Other income, net, consists principally of interest income and dividends earned
on investments, as follows (in $000's):
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 796 $ 744 $584
Dividend income 233 - -
Interest expense - (3) (2)
Other 257 282 108
------ ------ ----
$1,286 $1,023 $690
------ ------ ----
------ ------ ----
</TABLE>
NOTE 6: CAPITAL STOCK
STOCK INFORMATION
Thirty million shares of Common Stock, $.01 par value, have been authorized
since the Company's reincorporation in Delaware in August 1987. One million
shares of Preferred Stock, $.01 par value, are authorized but no preferred
stock has ever been issued. The Board of Directors may, without stockholder
approval, establish rights, terms, preferences and privileges for these
preferred shares.
F-13
<PAGE>
STOCK TRANSACTIONS
Since October 1986, the Company has, at various times, announced plans to
repurchase up to a total of 4,510,888 shares of its common stock through open
market or private transactions. As of December 31, 1995, a total of
3,819,088 shares had been acquired. A total of 544,300 shares acquired prior
to August 24, 1987 have been retired as required by California law. Shares
acquired after the August 24, 1987 reincorporation in Delaware are being held
as treasury stock, at an average cost of $5.54 per share.
STOCK PLANS
The Safeguard Health Enterprises, Inc. Stock Option Plan (the "Plan")
authorizes both incentive and non-qualified stock options to be granted in an
aggregate amount up to 1,200,000 shares of common stock. Options may be
granted to executive officers or other key employees of the Company;
non-employee directors of the Company are also eligible but only for
nonqualified options. The option price must, at least, equal fair market
value on the date the option is granted. The Plan is divided into a
discretionary program for key employees and an automatic program for
non-employee directors. The Plan is administered by the Compensation and
Stock Option Committee of the Board of Directors.
All stock options granted by the Company to employees through December 31,
1995 were incentive stock options. The following is a summary of stock
option transactions:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 538,000 623,669 485,667
Granted 285,000 6,000 185,000
Canceled (195,167) (21,668) (666)
Exercised (230,333) (70,001) (46,332)
---------------- -------------- ---------------
Outstanding at end of year 397,500 538,000 623,669
---------------- -------------- ---------------
---------------- -------------- ---------------
Exercisable at end of year 240,000 421,662 428,000
---------------- -------------- ---------------
---------------- -------------- ---------------
Price range of options outstanding $4.25 - $13.06 $4.25 - $13.06 $ 4.25 - $13.06
Price range of options exercised $4.625 - $11.875 $4.25 - $11.87 $ 4.25 - $ 8.75
Price range of options granted $9.00 - $11.50 $9.00 - $ 9.00 $10.25 - $13.06
</TABLE>
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various litigations arising in the normal
course of business. In the opinion of Management, the ultimate outcome of
such litigation or any other contingencies would not have a material effect
on the Company's consolidated financial position or results of operations.
The Company has employment agreements with various executive officers
requiring an annual payment of (in $000's):
Year ending December 31,
1996 $910
1997 910
1998 910
1999 910
2000 379
F-14
<PAGE>
NOTE 8: RESERVES FOR INCURRED BUT NOT REPORTED CLAIMS
Activity in the liability for dental indemnity insurance claims, specialists
claims, and claim adjustment expenses is summarized as follows (in $000's):
<TABLE>
<CAPTION>
Policy
Reserves Specialist Total
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1994 $ 164 $ 209 $ 373
Incurred related to:
Current year - 1994 2,006 2,813 4,819
Prior years - 126 126
------ ------ -----
Total incurred 2,006 2,939 4,945
Paid related to:
Current year - 1994 1,633 2,364 3,997
Prior years 137 335 472
------ ------ -----
Total paid 1,770 2,699 4,469
Balance at December 31, 1994 $ 400 $ 449 $ 849
------ ------ ------
------ ------ ------
Incurred related to:
Current year - 1995 6,015 3,464 9,479
Prior years - 55 55
------ ------ ------
Total incurred 6,015 3,519 9,534
Paid related to:
Current year - 1995 4,353 3,101 7,454
Prior years 362 504 866
------ ------ ------
Total paid 4,715 3,605 8,320
Balance at December 31, 1995 $1,700 $ 363 $2,063
------ ------ ------
------ ------ ------
</TABLE>
NOTE 9: UNAUDITED SELECTED QUARTERLY INFORMATION
Unaudited quarterly results of operations for the years ended December 31,
1995 and 1994 are set forth in the table below (000's omitted, except per
share data).
<TABLE>
<CAPTION>
Operating Net Weighted Net Income
Income Income Average (Loss)
Quarter Revenues (Loss) (Loss) Shares Per Share
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993 First $15,386 $1,365 $ 933 4,721 $.20
Second 15,478 1,384 973 4,724 .21
Third 15,887 1,365 1,031 4,773 .22
Fourth 16,025 1,414 1,025 4,807 .21
1994 First $16,933 $1,515 $1,057 4,911 $.22
Second 17,412 632 493 4,890 .10
Third 18,060 (980) (475) 4,844 (.10)
Fourth 18,098 (73) 217 4,719 .05
1995 First $19,423 $ 602 $ 485 4,656 $.10
Second 20,042 653 550 4,668 .12
Third 20,834 585 649 4,777 .14
Fourth 21,278 708 704 4,820 .15
</TABLE>
F-15
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
SCHEDULE I
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1995, 1994 AND 1993
(IN $000'S)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Cost and Beginning Cost and End
Classification of Year Expenses Write Offs of Year
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993:
Allowance for doubtful accounts:
Accounts receivable $297 $269 $(410) $156
1994:
Allowance for doubtful accounts:
Accounts receivable $156 $179 $(129) $206
1995:
Allowance for doubtful accounts:
Accounts receivable $206 $278 $(224) $260
</TABLE>
F-16
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into as of August 16,
1995, by and between Safeguard Health Enterprises, Inc., a Delaware corporation
("Company") and Steven J. Baileys, D.D.S. ("Employee") and hereby specifically
amends Paragraph 3(a) of the Employment Agreement between the parties dated May
25, 1995, as follows:
3. COMPENSATION TERMS
(a) BASE SALARY. Effective August 14, 1995, and for the remainder
of the term of employment, Employee shall receive a base salary of $400,000 per
year.
In all other respects, the terms and conditions of the Employment Agreement
entered into by and between the parties dated May 25, 1995, shall remain the
same.
IN WITNESS WHEREOF, the parties have affixed their signatures to this
Amendment to Employment Agreement as of the date set forth above.
EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC.
/s/ Steven J. Baileys /s/ Steven J. Baileys
- ------------------------------- By ----------------------------------
STEVEN J. BAILEYS, D.D.S. STEVEN J. BAILEYS, D.D.S.,
President
/s/ Ronald I. Brendzel
By ----------------------------------
RONALD I. BRENDZEL,
Secretary
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of May 25,
1995, by and between Safeguard Health Enterprises, Inc., a Delaware Corporation
("Company") and Steven J. Baileys, D.D.S. ("Employee").
The Company desires to have the benefits of Employee's knowledge and
experience as a full-time employee and considers such employment a vital element
to protecting and enhancing the best interests of the Company, and Employee
desires to be employed full time by the Company. The Company and Employee
desire to enter into an agreement reflecting the terms under which the Company
will employ Employee as its President and Chief Executive Office ("CEO") until
May 31, 2000. Therefore, the Company and Employee agree to the following terms
and conditions under which Employee will serve as CEO of the Company:
1. EMPLOYMENT SERVICES AND DUTIES
The Company agrees to employ and retain the services of Employee as
CEO and Employee hereby agrees to continue employment with the Company as its
CEO for the term of this Agreement. During the term of this Agreement, Employee
agrees to perform his duties as CEO faithfully, to the best of his ability and
in the best interests of the Company, to perform both his regular duties and
other projects as requested by the Board of Directors of the Company, and assume
such other additional reasonable duties or capacities as the Board of Directors
of the Company may provide.
2. TERM OF EMPLOYMENT
The Company agrees to employ Employee, and Employee agrees to serve,
as CEO for the period commencing the date of the execution of this Agreement
until the earlier of May 31, 2000, the date of Employee's death, or the date of
termination pursuant to Sections 6 and 7 of this Agreement.
3. COMPENSATION TERMS
The Company agrees to compensate Employee for his services rendered as
CEO under this Agreement as follows:
(a) BASE SALARY. Effective May 25, 1995, and for the remainder of
the term of employment, Employee shall receive a base salary of $300,000 per
year.
-1-
<PAGE>
(b) BONUSES. Employee shall receive such bonuses, if any, as
determined by the Board of Directors of the Company in its sole and absolute
discretion.
(c) BENEFITS. Subject to satisfaction of all eligibility
requirements, Employee and his dependents shall be entitled to and shall receive
any and all benefits generally available to executive employees of the Company,
including participation in health, dental, vision and life insurance programs
and retirement plans.
(d) INDEMNIFICATION. The Company shall indemnify Employee in
accordance with the terms and conditions of its then current indemnification
agreements with directors and/or officers of the Company.
(e) NON-PERMANENT DISABILITY. In the event that Employee becomes
disabled but not permanently disabled as set forth in Section 6(b)(iii) of this
Agreement and is unable temporarily to perform his duties as CEO, he shall
continue to receive as disability income the amount of his base salary under
Section 3(a), but the Board of Directors may in its best judgment under the
circumstances, elect another person to serve as interim CEO during the period of
Employee's disability.
4. EXPENSES
(a) BUSINESS EXPENSES. The Company authorizes Employee to incur the
reasonable and necessary expenses for promoting the business of the Company and
its subsidiaries according to the policies of the Company with respect thereto
and as may be determined from time to time by the Board of Directors of the
Company. In connection with such expenses, Employee shall have the use of a
Company credit card and is authorized to incur charges necessary to promote the
business of the Company. Additionally, the Company agrees to reimburse Employee
for any such reasonable and necessary expenses paid out of Employee's own funds.
(b) TRANSPORTATION. During the term of this Agreement, the Company
shall furnish to Employee an automobile (including all expenses such as
insurance, gasoline and maintenance) suitable for business transportation. Such
automobile shall be selected at the discretion of the Employee. Every third
year thereafter during the term of this Agreement, Employee, at his election,
may replace the automobile with a new automobile selected at the discretion of
Employee.
-2-
<PAGE>
5. VACATION
Unless otherwise agreed to orally or by written agreement between
Employee and the Company, Employee shall be entitled to four weeks of paid
vacation during any fiscal year. Such vacation may be taken at such times as
are mutually agreed upon by Employee and the Company, and pursuant to the
Company's vacation policy then in effect.
6. TERMINATION BY COMPANY
(a) TERMINATION. The Company may terminate Employee for "Cause."
(b) "CAUSE" shall mean:
(i) The failure of Employee to render services to the Company in
accordance with his employment duties, as determined by all of the independent
directors of the Company's Board of Directors;
(ii) The commission by Employee of an act of fraud or
embezzlement against Company or an act which Employee knew to be in violation of
his duties to the Company (including, but not limited to, the unauthorized
disclosure of confidential information);
(iii) The death or "permanent disability" of Employee.
Permanent disability shall occur if, during the term of this Agreement, Employee
becomes physically or mentally disabled such that he is substantially unable to
perform his duties hereunder and such disability continues for six (6)
continuous months or for ten (10) months over a two (2) fiscal year period. In
the event Employee and the Company are unable to agree as to whether Employee is
permanently disabled within the meaning of this Paragraph 6(b)(iii), Employee
and Company shall each appoint a licensed doctor of medicine. The two named
doctors shall then appoint a third licensed doctor of medicine and the three
shall act as a committee to determine by majority vote whether such disability
exists. In the event such a committee is appointed under this Paragraph
6(b)(iii), Employee and Company hereby agree to bound by the determination of
the majority of the committee as to the characterization of Employee's
disability; or
(iv) Good cause as determined by all of the independent
directors of the Company's Board of Directors to be a material breach justifying
termination of Employee.
-3-
<PAGE>
(c) NOTICE OF TERMINATION. Any termination of Employee by the
Company shall be communicated by a written Notice of Termination to Employee.
For purposes of this Agreement, a Notice of Termination shall specify the
termination provision of this Agreement relied upon to effect such termination
and shall set forth in reasonable detail the specific facts and circumstances
claimed to provide a basis for termination of Employee.
7. TERMINATION BY EMPLOYEE
(a) TERMINATION. Upon written notice delivered to the Company in
accordance with Section 6(c), Employee may terminate his employment hereunder
for:
(i) "Good Reason" as is herein defined; or
(ii) health reasons, if his health should become impaired to an
extent that makes his continued performance of his duties hereunder hazardous to
his physical or mental health or his life, provided that Employee shall have
furnished the Company with a written statement from a qualified doctor of
medicine to such effect and provided, further, that, at the Company's request,
Employee shall submit to an examination by a doctor of medicine selected by the
Company and such doctor of medicine shall have concurred in the conclusion of
the Employee's doctor. In the event that Employee elects to terminate his
employment for health reasons in accordance with this Paragraph 7(a)(ii), the
Company shall pay as severance compensation to Employee sixty percent (60%) of
his yearly salary for the remainder of the term of this Agreement.
(b) "GOOD REASON" means;
(i) the occurrence of a "Change in Control" of the Company (as
defined herein);
(ii) a failure by the Company to comply with any material
provision of this Agreement that has not been cured within thirty (30) days
after notice of such noncompliance has been given by Employee to the Company; or
(iii) any purported termination of Employee's employment which
is not effected pursuant to a Notice of Termination as set forth in Paragraph
6(c).
(c) "CHANGE IN CONTROL" occurs if (i) substantially all the assets of
the Company are sold to, or the Company is merged with, any "person," as that
term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, other than a then existing shareholder or group of shareholders of the
Company (or affiliate thereof) owning fifty percent (50%) or more of the
combined voting power of the Company's then
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outstanding securities, or (ii) any person or group becomes or is discovered
to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as
in effect on the date hereof) directly of securities of the Company
representing twenty-five percent (25%) or more of the combined voting power
of Company's then outstanding securities (unless such person or group owns at
least twenty-five percent (25%) of such voting power on the effective date of
this Agreement), and in connection with such change in ownership the
individuals who constitute the Board of Directors of Company immediately
prior to such change cease to constitute at least a majority of the Board of
Directors thereafter.
8. PAYMENT UPON TERMINATION
(a) DATE. The "Termination Date" shall be the effective date
specified in the Notice of Termination unless the party receiving such notice
disputes the Notice of Termination as contrary to the terms and conditions of
this Agreement. In that case, the Termination Date shall be the date such
dispute is finally resolved either by mutual written agreement of the parties,
by a binding and final arbitration award, or by a final judgment, order, or
decree of a court of competent jurisdiction (the time for appeal therefrom
having expired and no appeal having been perfected).
(b) TERMINATION BY COMPANY. In the event the Company terminates
Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company
shall pay to Employee his full salary through the Termination Date after which
the Company shall have no further obligation to Employee under this Agreement.
(c) DEATH. The Company shall maintain a life insurance policy owned
by Employee which provides for payment to Employee's estate or designated
beneficiary, a death benefit of $1,000,000.
(d) PERMANENT DISABILITY. In the event the Company terminates
Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the
Company shall pay to Employee eighty percent (80%) of Employee's yearly salary
for a period of five (5) years following termination. Such payments shall begin
no later than thirty (30) days following the Termination Date or, in the event
such termination is contested pursuant to Paragraph 6(b)(iii), thirty (30) days
following the decision of the commission.
(e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD REASON.
If, in breach of this Agreement, the Company terminates Employee's employment
other than pursuant to Section 6 (it being understood that a termination
purported to be pursuant to Section 6 hereof which is disputed by Employee and
finally determined not to have been proper shall be a termination by the Company
in breach of this Agreement) or if Employee terminates his employment for Good
Reason, then:
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(i) The Company shall pay Employee his full salary through the
Termination Date at the rate in effect at the time the Notice of Termination is
given; and
(ii) In lieu of any further compensation payments to Employee
for periods subsequent to the Termination Date, the Company shall pay as
severance pay to Employee an amount equal to one dollar less than three (3)
times Employee's average total compensation for the five (5) full taxable years
preceding the Change in Control, as determined in accordance with the "parachute
payments" provisions of the Internal Revenue Code in effect on the date of this
Agreement. If resulting from a termination based on a Change in Control of the
Company, such payments shall be made in a lump sum on or before the thirtieth
(30th) day following the Termination Date. If resulting from any other cause,
such payments shall be made in substantially equal semimonthly installments on
the fifteenth and last days of each month commencing with the month in which the
Termination Date occurs and continuing for twenty-four (24) consecutive
semimonthly payment dates (including the first such date as aforesaid); and
(iii) If termination of Employee's employment arises out of a
breach by the Company of this Agreement, the Company shall pay all other damages
to which Employee may be entitled as a result of such breach, including damages
for any and all loss of benefits to Employee under the Company's employee
benefit plans that Employee would have received if the Company had not breached
this Agreement and had Employee's employment continued for the full term as set
forth in Section 2 and including all legal fees and expenses incurred by
Employee as a result of such termination including, but not limited to, all such
fees expended in enforcement of this Agreement. If Employee resigns for Good
Reason and the Company contests its obligations, as hereunder, Employee shall be
entitled to recover as damages the amount of his legal fees and expenses,
including costs of investigation, related to his enforcement of the Agreement.
(f) CONTINUANCE OF BENEFITS. Unless the Company terminates Employee
for Cause or death, the Company shall maintain in full force and effect, for the
continued benefit of Employee for the greater number of years (including partial
years) remaining in the term of the employment hereunder or the number three
(3), all employee benefit plans and programs in which Employee was entitled to
participate immediately prior to the Termination Date provided that Employee's
continued participation is possible under the general terms and provisions of
such plans and programs. In the event that Employee's participation in any such
plan or program is barred, the Company shall arrange to provide Employee with
benefits substantially similar to those which Employee would otherwise have been
entitled to receive under such plans and programs from which his continued
participation is barred.
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(g) NO DUTY TO MITIGATE. Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise.
9. SEVERABILITY
The provisions of this Agreement are severable. If a court of
competent jurisdiction determines that any one or more provisions of this
Agreement is invalid, void, or unenforceable, in whole or in part, it will be
severed therefrom. The remaining provisions of this Agreement shall then
continue in full force without being impaired or invalidated in any way.
10. ASSIGNMENT; BINDING EFFECT
(a) ASSIGNABILITY. Subject to the restrictions in this Section 10,
the Company may assign this Agreement.
(b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The Company
shall require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company or assignee of this Agreement, by agreement in form and
substance satisfactory to Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
Employee to compensation from the Company in the same amount and on the same
terms as he would be entitled to hereunder if he terminated his employment for
Good Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date. As used in this Agreement, "Company" shall mean the Company as herein
before defined and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 10, or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operations of law.
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding on the parties and their respective successors and
assigns. If Employee should die while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided for herein, shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee, or other designee or, if there be no
such designee, to Employee's estate.
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11. CONFIDENTIAL INFORMATION
Employee agrees that he shall not, during the term of this Agreement,
and for a period of five (5) years following its termination, absent the
Company's consent, disclose to any person, or otherwise use or exploit any non-
public proprietary or confidential information of material significance to the
Company and/or its affiliates, including without limitation trade secrets,
customer lists, records of research, memoranda, proposals, reports, methods,
processes, techniques, non-public financial information, contracts,
negotiations, business plans and strategies, marketing data or other non-public
information regarding the Company and/or any of its affiliates, their business,
properties or affairs ("CONFIDENTIAL INFORMATION") obtained by him at any time
prior to or subsequent to the execution of this Agreement, except to the extent
required by his performance of his assigned duties for the Company (including
its affiliates). Upon termination of employment, Employee shall surrender all
Confidential Information and all other property belonging to the Company and its
subsidiaries, it being understood by Employee that such documents are the sole
property of the Company and that Employee shall not make any copies thereof.
Additionally, the terms and conditions of this Agreement shall constitute
Confidential Information and shall not be disclosed by Employee except in
accordance with this Section 11.
12. CONFLICTING INVESTMENTS
During the term of this Agreement and for one (1) year after
termination of this Agreement, Employee shall not make or cause to be made on
his behalf, or maintain an investment in any business which is engaged, either
in whole or in part, in any business which is competitive with or detrimental to
any businesses of the Company, or its subsidiaries, except that Employee may
make or maintain an investment of no more than five percent (5%) of any
outstanding class of capital stock of any publicly traded company, provided such
class of capital stock is regularly traded by the public, without prior written
permission of the Company. Notwithstanding this Section 12, nothing in this
Agreement shall preclude: (i) Employee from investing in commercial property at
which a dentist, a dental or a prepaid health plan is a tenant or from pursuing
activities not conflicting or interfering with his duties to Company; or (ii)
Employee from owning in whole or in part dental practices at any time that
Employee may acquire in the future.
13. ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between the
parties concerning the subject matter hereof. This Agreement supersedes all
negotiations, prior discussions, and preliminary agreements. This Agreement may
not be amended except in a writing executed by the Employee and the Company.
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14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, regardless of the application of conflicts
of laws principles.
15. NOTICES
All notices, requests, demands and other communication required or
contemplated under this Agreement, shall be in writing and shall be deemed to
have been duly given when delivered personally or when enclosed in a properly
sealed and addressed envelope, registered or certified, return receipt
requested, and deposited (postage prepaid) in a post office or branch post
office regularly maintained by the United States Government.
Any notice given to the Company under the terms of this Agreement
shall be addressed to the Company at the following address:
Safeguard Health Enterprises, Inc.
Attention: Secretary
505 North Euclid Street
P.O. Box 3210
Anaheim, California 92803-3210
Any notice to be given to Employee shall be addressed to him at his
home address last shown on the Company's records, or at such other address as
either party may hereafter designate in writing to the other.
16. WAIVER
No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
17. COUNTERPARTS
This Agreement may be executed in counterparts, and such counterparts
may be transmitted by facsimile, and all counterparts, taken together, will
constitute one and the same document.
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18. ARBITRATION
Any dispute regarding any aspect of this Agreement or any act that
allegedly has or would violate any provision of this Agreement must be submitted
to arbitration in Orange County, California, in accordance with the rules of the
Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for
such claim or dispute. Either party may invoke this clause by serving on the
other, in writing, a request to arbitrate. Within thirty (30) days thereafter,
either party may institute proceedings in superior court to enforce this clause
by way of reference pursuant to Section 638 of the California Code of Civil
Procedure. If the parties cannot mutually select a judge from the JAMS panel,
the superior court shall make the selection. The decision of JAMS will be final
and binding. If Employee alleges in good faith that he has resigned for Good
Reason, then the Company is required to advance to him any amounts necessary for
legal fees and expenses, including costs of investigation, related to the
dispute, subject to the Company's receipt of his undertaking to repay such
amounts if it is ultimately determined by JAMS that he is not entitled to keep
such amounts as damages under Section 8(e)(iii).
IN WITNESS WHEREOF, the parties have duly executed this Agreement
effective May 25, 1995.
EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC.
/s/ Steven J. Baileys /s/ Steven J. Baileys
- --------------------------- By: -------------------------------
STEVEN J. BAILEYS, D.D.S. STEVEN J. BAILEYS, D.D.S.,
President
/s/ Ronald I. Brendzel
By: -------------------------------
RONALD I. BRENDZEL,
Secretary
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into as of November
10, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware
corporation ("Company") and RONALD I. BRENDZEL, ("Employee") and hereby
specifically amends Paragraph 3(a) of the Employment Agreement between the
parties dated May 25, 1995, as follows:
3. COMPENSATION TERMS
(a) BASE SALARY. Effective January 1, 1996, and for the
remainder of the term of employment, Employee shall receive a base salary of
$185,000 per year.
In all other respects, the terms and conditions of the Employment
Agreement entered into by and between the parties dated May 25, 1995, shall
remain the same.
IN WITNESS WHEREOF, the parties have affixed their signatures to this
Amendment to Employment Agreement as of the date set forth above.
EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC.
/s/ Ronald I. Brendzel By /s/ Steven J. Baileys
- ---------------------------- -------------------------------
RONALD I. BRENDZEL STEVEN J. BAILEYS, D.D.S.,
President
By /s/ Ronald I. Brendzel
-------------------------------
RONALD I. BRENDZEL,
Secretary
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of May 25,
1995, by and between Safeguard Health Enterprises, Inc., a Delaware Corporation
("Company") and Ronald I. Brendzel ("Employee").
The Company desires to have the benefits of Employee's knowledge and
experience as a full-time employee and considers such employment a vital element
to protecting and enhancing the best interests of the Company, and Employee
desires to be employed full time by the Company. The Company and Employee
desire to enter into an agreement reflecting the terms under which the Company
will employ Employee as its Senior Vice President, Treasurer and Secretary
("SVP") until May 31, 2000. Therefore, the Company and Employee agree to the
following terms and conditions under which Employee will serve as SVP of the
Company:
1. EMPLOYMENT SERVICES AND DUTIES
The Company agrees to employ and retain the services of Employee as
SVP and Employee hereby agrees to continue employment with the Company as its
SVP for the term of this Agreement. During the term of this Agreement, Employee
agrees to perform his duties as SVP faithfully, to the best of his ability and
in the best interests of the Company, to perform both his regular duties and
other projects as requested by the Board of Directors of the Company, and assume
such other additional reasonable duties or capacities as the Board of Directors
of the Company may provide.
2. TERM OF EMPLOYMENT
The Company agrees to employ Employee, and Employee agrees to serve,
as SVP for the period commencing the date of the execution of this Agreement
until the earlier of May 31, 2000, the date of Employee's death, or the date of
termination pursuant to Sections 6 and 7 of this Agreement.
3. COMPENSATION TERMS
The Company agrees to compensate Employee for his services rendered as
SVP under this Agreement as follows:
(a) BASE SALARY. Effective May 25, 1995, and for the remainder of
the term of employment, Employee shall receive a base salary of $152,004 per
year.
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(b) BONUSES. Employee shall receive such bonuses, if any, as
determined by the Board of Directors of the Company in its sole and absolute
discretion.
(c) BENEFITS. Subject to satisfaction of all eligibility
requirements, Employee and his dependents shall be entitled to and shall receive
any and all benefits generally available to executive employees of the Company,
including participation in health, dental, vision and life insurance programs
and retirement plans.
(d) INDEMNIFICATION. The Company shall indemnify Employee in
accordance with the terms and conditions of its then current indemnification
agreements with directors and/or officers of the Company.
(e) NON-PERMANENT DISABILITY. In the event that Employee becomes
disabled but not permanently disabled as set forth in Section 6(b)(iii) of this
Agreement and is unable temporarily to perform his duties as SVP, he shall
continue to receive as disability income the amount of his base salary under
Section 3(a), but the Board of Directors may in its best judgment under the
circumstances, elect another person to serve as interim SVP during the period of
Employee's disability.
4. EXPENSES
(a) BUSINESS EXPENSES. The Company authorizes Employee to incur the
reasonable and necessary expenses for promoting the business of the Company and
its subsidiaries according to the policies of the Company with respect thereto
and as may be determined from time to time by the Board of Directors of the
Company. The Company agrees to reimburse Employee for any such reasonable and
necessary expenses paid out of Employee's own funds.
(b) TRANSPORTATION. During the term of this Agreement, the Company
shall furnish to Employee an automobile (including all expenses such as
insurance, gasoline and maintenance) suitable for business transportation. Such
automobile shall be selected at the discretion of the Company's Chief Executive
Officer. Every third year thereafter during the term of this Agreement,
Employee, at his election, may replace the automobile with a new automobile
selected at the discretion of the Company's Chief Executive Officer.
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5. VACATION
Unless otherwise agreed to orally or by written agreement between
Employee and the Company, Employee shall be entitled to four weeks of paid
vacation during any fiscal year. Such vacation may be taken at such times as
are mutually agreed upon by Employee and the Company, and pursuant to the
Company's vacation policy then in effect.
6. TERMINATION BY COMPANY
(a) TERMINATION. The Company may terminate Employee for "Cause."
(b) "CAUSE" shall mean:
(i) The failure of Employee to render services to the Company in
accordance with his employment duties, as determined by all of the independent
directors of the Company's Board of Directors;
(ii) The commission by Employee of an act of fraud or
embezzlement against Company or an act which Employee knew to be in violation of
his duties to the Company (including, but not limited to, the unauthorized
disclosure of confidential information);
(iii) The death or "permanent disability" of Employee.
Permanent disability shall occur if, during the term of this Agreement, Employee
becomes physically or mentally disabled such that he is substantially unable to
perform his duties hereunder and such disability continues for six (6)
continuous months or for ten (10) months over a two (2) fiscal year period. In
the event Employee and the Company are unable to agree as to whether Employee is
permanently disabled within the meaning of this Paragraph 6(b)(iii), Employee
and Company shall each appoint a licensed doctor of medicine. The two named
doctors shall then appoint a third licensed doctor of medicine and the three
shall act as a committee to determine by majority vote whether such disability
exists. In the event such a committee is appointed under this Paragraph
6(b)(iii), Employee and Company hereby agree to bound by the determination of
the majority of the committee as to the characterization of Employee's
disability; or
(iv) Good cause as determined by all of the independent
directors of the Company's Board of Directors to be a material breach justifying
termination of Employee.
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(c) NOTICE OF TERMINATION. Any termination of Employee by the
Company shall be communicated by a written Notice of Termination to Employee.
For purposes of this Agreement, a Notice of Termination shall specify the
termination provision of this Agreement relied upon to effect such termination
and shall set forth in reasonable detail the specific facts and circumstances
claimed to provide a basis for termination of Employee.
7. TERMINATION BY EMPLOYEE
(a) TERMINATION. Upon written notice delivered to the Company in
accordance with Section 6(c), Employee may terminate his employment hereunder
for:
(i) "Good Reason" as is herein defined; or
(ii) health reasons, if his health should become impaired to an
extent that makes his continued performance of his duties hereunder hazardous to
his physical or mental health or his life, provided that Employee shall have
furnished the Company with a written statement from a qualified doctor of
medicine to such effect and provided, further, that, at the Company's request,
Employee shall submit to an examination by a doctor of medicine selected by the
Company and such doctor of medicine shall have concurred in the conclusion of
the Employee's doctor. In the event that Employee elects to terminate his
employment for health reasons in accordance with this Paragraph 7(a)(ii), the
Company shall pay as severance compensation to Employee sixty percent (60%) of
his yearly salary for the remainder of the term of this Agreement.
(b) "GOOD REASON" means;
(i) the occurrence of a "Change in Control" of the Company (as
defined herein);
(ii) a failure by the Company to comply with any material
provision of this Agreement that has not been cured within thirty (30) days
after notice of such noncompliance has been given by Employee to the Company; or
(iii) any purported termination of Employee's employment which
is not effected pursuant to a Notice of Termination as set forth in Paragraph
6(c).
(c) "CHANGE IN CONTROL" occurs if (i) substantially all the assets of
the Company are sold to, or the Company is merged with, any "person," as that
term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, other than a then existing shareholder or group of shareholders of the
Company (or affiliate thereof) owning fifty percent (50%) or more of the
combined voting power of the Company's then
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outstanding securities, or (ii) any person or group becomes or is discovered
to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as
in effect on the date hereof) directly of securities of the Company
representing twenty-five percent (25%) or more of the combined voting power
of Company's then outstanding securities (unless such person or group owns at
least twenty-five percent (25%) of such voting power on the effective date of
this Agreement), and in connection with such change in ownership the
individuals who constitute the Board of Directors of Company immediately
prior to such change cease to constitute at least a majority of the Board of
Directors thereafter.
8. PAYMENT UPON TERMINATION
(a) DATE. The "Termination Date" shall be the effective date
specified in the Notice of Termination unless the party receiving such notice
disputes the Notice of Termination as contrary to the terms and conditions of
this Agreement. In that case, the Termination Date shall be the date such
dispute is finally resolved either by mutual written agreement of the parties,
by a binding and final arbitration award, or by a final judgment, order, or
decree of a court of competent jurisdiction (the time for appeal therefrom
having expired and no appeal having been perfected).
(b) TERMINATION BY COMPANY. In the event the Company terminates
Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company
shall pay to Employee his full salary through the Termination Date after which
the Company shall have no further obligation to Employee under this Agreement.
(c) DEATH. The Company shall maintain a life insurance policy owned
by Employee which provides for payment to Employee's estate or designated
beneficiary, a death benefit of $500,000.
(d) PERMANENT DISABILITY. In the event the Company terminates
Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the
Company shall pay to Employee eighty percent (80%) of Employee's yearly salary
for a period of five (5) years following termination. Such payments shall begin
no later than thirty (30) days following the Termination Date or, in the event
such termination is contested pursuant to Paragraph 6(b)(iii), thirty (30) days
following the decision of the commission.
(e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD REASON.
If, in breach of this Agreement, the Company terminates Employee's employment
other than pursuant to Section 6 (it being understood that a termination
purported to be pursuant to Section 6 hereof which is disputed by Employee and
finally determined not to have been proper, shall be a termination by the
Company in breach of this Agreement) or if Employee terminates his employment
for Good Reason, then:
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(i) The Company shall pay Employee his full salary through the
Termination Date at the rate in effect at the time the Notice of Termination is
given; and
(ii) In lieu of any further compensation payments to Employee
for periods subsequent to the Termination Date, the Company shall pay as
severance pay to Employee an amount equal to one dollar less than three (3)
times Employee's average total compensation for the five (5) full taxable years
preceding the Change in Control, as determined in accordance with the "parachute
payments" provisions of the Internal Revenue Code in effect on the date of this
Agreement. If resulting from a termination based on a Change in Control of the
Company, such payments shall be made in a lump sum on or before the thirtieth
(30th) day following the Termination Date. If resulting from any other cause,
such payments shall be made in substantially equal semimonthly installments on
the fifteenth and last days of each month commencing with the month in which the
Termination Date occurs and continuing for twenty-four (24) consecutive
semimonthly payment dates (including the first such date as aforesaid); and
(iii) If termination of Employee's employment arises out of a
breach by the Company of this Agreement, the Company shall pay all other damages
to which Employee may be entitled as a result of such breach, including damages
for any and all loss of benefits to Employee under the Company's employee
benefit plans that Employee would have received if the Company had not breached
this Agreement and had Employee's employment continued for the full term as set
forth in Section 2 and including all legal fees and expenses incurred by
Employee as a result of such termination including, but not limited to, all such
fees expended in enforcement of this Agreement. If Employee resigns for Good
Reason and the Company contests its obligations, as hereunder, Employee shall be
entitled to recover as damages the amount of his legal fees and expenses,
including costs of investigation, related to his enforcement of the Agreement.
(f) CONTINUANCE OF BENEFITS. Unless the Company terminates Employee
for Cause or death, the Company shall maintain in full force and effect, for the
continued benefit of Employee for the greater number of years (including partial
years) remaining in the term of the employment hereunder or the number three
(3), all employee benefit plans and programs in which Employee was entitled to
participate immediately prior to the Termination Date provided that Employee's
continued participation is possible under the general terms and provisions of
such plans and programs. In the event that Employee's participation in any such
plan or program is barred, the Company shall arrange to provide Employee with
benefits substantially similar to those which Employee would otherwise have been
entitled to receive under such plans and programs from which his continued
participation is barred.
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(g) NO DUTY TO MITIGATE. Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise.
9. SEVERABILITY
The provisions of this Agreement are severable. If a court of
competent jurisdiction determines that any one or more provisions of this
Agreement is invalid, void, or unenforceable, in whole or in part, it will be
severed therefrom. The remaining provisions of this Agreement shall then
continue in full force without being impaired or invalidated in any way.
10. ASSIGNMENT; BINDING EFFECT
(a) ASSIGNABILITY. Subject to the restrictions in this Section 10,
the Company may assign this Agreement.
(b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The Company
shall require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company or assignee of this Agreement, by agreement in form and
substance satisfactory to Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
Employee to compensation from the Company in the same amount and on the same
terms as he would be entitled to hereunder if he terminated his employment for
Good Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date. As used in this Agreement, "Company" shall mean the Company as herein
before defined and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 10, or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operations of law.
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding on the parties and their respective successors and
assigns. If Employee should die while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided for herein, shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee, or other designee or, if there be no
such designee, to Employee's estate.
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11. CONFIDENTIAL INFORMATION
Employee agrees that he shall not, during the term of this
Agreement, and for a period of five (5) years following its termination,
absent the Company's consent, disclose to any person, or otherwise use or
exploit any non-public proprietary or confidential information of material
significance to the Company and/or its affiliates, including without
limitation trade secrets, customer lists, records of research, memoranda,
proposals, reports, methods, processes, techniques, non-public financial
information, contracts, negotiations, business plans and strategies,
marketing data or other non-public information regarding the Company and/or
any of its affiliates, their business, properties or affairs ("CONFIDENTIAL
INFORMATION") obtained by him at any time prior to or subsequent to the
execution of this Agreement, except to the extent required by his performance
of his assigned duties for the Company (including its affiliates). Upon
termination of employment, Employee shall surrender all Confidential
Information and all other property belonging to the Company and its
subsidiaries, it being understood by Employee that such documents are the
sole property of the Company and that Employee shall not make any copies
thereof. Additionally, the terms and conditions of this Agreement shall
constitute Confidential Information and shall not be disclosed by Employee
except in accordance with this Section 11.
12. CONFLICTING INVESTMENTS
During the term of this Agreement and for one (1) year after
termination of this Agreement, Employee shall not make or cause to be made on
his behalf, or maintain an investment in any business which is engaged, either
in whole or in part, in any business which is competitive with or detrimental to
any businesses of the Company, or its subsidiaries, except that Employee may
make or maintain an investment of no more than five percent (5%) of any
outstanding class of capital stock of any publicly traded company, provided such
class of capital stock is regularly traded by the public, without prior written
permission of the Company.
13. ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between the
parties concerning the subject matter hereof. This Agreement supersedes all
negotiations, prior discussions, and preliminary agreements. This Agreement may
not be amended except in a writing executed by the Employee and the Company.
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14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, regardless of the application of conflicts
of laws principles.
15. NOTICES
All notices, requests, demands and other communication required or
contemplated under this Agreement, shall be in writing and shall be deemed to
have been duly given when delivered personally or when enclosed in a properly
sealed and addressed envelope, registered or certified, return receipt
requested, and deposited (postage prepaid) in a post office or branch post
office regularly maintained by the United States Government.
Any notice given to the Company under the terms of this Agreement
shall be addressed to the Company at the following address:
Safeguard Health Enterprises, Inc.
Attention: Secretary
505 North Euclid Street
P.O. Box 3210
Anaheim, California 92803-3210
Any notice to be given to Employee shall be addressed to him at his
home address last shown on the Company's records, or at such other address as
either party may hereafter designate in writing to the other.
16. WAIVER
No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
17. COUNTERPARTS
This Agreement may be executed in counterparts, and such counterparts
may be transmitted by facsimile, and all counterparts, taken together, will
constitute one and the same document.
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18. ARBITRATION
Any dispute regarding any aspect of this Agreement or any act that
allegedly has or would violate any provision of this Agreement must be submitted
to arbitration in Orange County, California, in accordance with the rules of the
Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for
such claim or dispute. Either party may invoke this clause by serving on the
other, in writing, a request to arbitrate. Within thirty (30) days thereafter,
either party may institute proceedings in superior court to enforce this clause
by way of reference pursuant to Section 638 of the California Code of Civil
Procedure. If the parties cannot mutually select a judge from the JAMS panel,
the superior court shall make the selection. The decision of JAMS will be final
and binding. If Employee alleges in good faith that he has resigned for Good
Reason, then the Company is required to advance to him any amounts necessary for
legal fees and expenses, including costs of investigation, related to the
dispute, subject to the Company's receipt of his undertaking to repay such
amounts if it is ultimately determined by JAMS that he is not entitled to keep
such amounts as damages under Section 8(e)(iii).
IN WITNESS WHEREOF, the parties have duly executed this Agreement
effective May 25, 1995.
EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC.
/s/ Ronald I. Brendzel By: /s/ Steven J. Baileys
- ------------------------------- ----------------------------------
RONALD I. BRENDZEL STEVEN J. BAILEYS, D.D.S.,
President
By: /s/ Ronald I. Brendzel
---------------------------------
RONALD I. BRENDZEL,
Secretary
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<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of May 25,
1995, by and between Safeguard Health Enterprises, Inc., a Delaware Corporation
("Company") and John E. Cox ("Employee").
The Company desires to have the benefits of Employee's knowledge and
experience as a full-time employee and considers such employment a vital element
to protecting and enhancing the best interests of the Company, and Employee
desires to be employed full time by the Company. The Company and Employee
desire to enter into an agreement reflecting the terms under which the Company
will employ Employee as its Executive Vice President and Chief Operating Officer
("EVP") until May 31, 2000. Therefore, the Company and Employee agree to the
following terms and conditions under which Employee will serve as EVP of the
Company:
1. EMPLOYMENT SERVICES AND DUTIES
The Company agrees to employ and retain the services of Employee as
EVP and Employee hereby agrees to continue employment with the Company as its
EVP for the term of this Agreement. During the term of this Agreement, Employee
agrees to perform his duties as EVP faithfully, to the best of his ability and
in the best interests of the Company, to perform both his regular duties and
other projects as requested by the Board of Directors of the Company, and assume
such other additional reasonable duties or capacities as the Board of Directors
of the Company may provide.
2. TERM OF EMPLOYMENT
The Company agrees to employ Employee, and Employee agrees to serve,
as EVP for the period commencing the date of the execution of this Agreement
until the earlier of May 31, 2000, the date of Employee's death, or the date of
termination pursuant to Sections 6 and 7 of this Agreement.
3. COMPENSATION TERMS
The Company agrees to compensate Employee for his services rendered as
EVP under this Agreement as follows:
(a) BASE SALARY. Effective May 25, 1995, and for the remainder of
the term of employment, Employee shall receive a base salary of $200,000 per
year.
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(b) BONUSES. Employee shall receive such bonuses, if any, as
determined by the Board of Directors of the Company in its sole and absolute
discretion.
(c) BENEFITS. Subject to satisfaction of all eligibility
requirements, Employee and his dependents shall be entitled to and shall receive
any and all benefits generally available to executive employees of the Company,
including participation in health, dental, vision and life insurance programs
and retirement plans.
(d) INDEMNIFICATION. The Company shall indemnify Employee in
accordance with the terms and conditions of its then current indemnification
agreements with directors and/or officers of the Company.
(e) NON-PERMANENT DISABILITY. In the event that Employee becomes
disabled but not permanently disabled as set forth in Section 6(b)(iii) of this
Agreement and is unable temporarily to perform his duties as EVP, he shall
continue to receive as disability income the amount of his base salary under
Section 3(a), but the Board of Directors may in its best judgment under the
circumstances, elect another person to serve as interim EVP during the period of
Employee's disability.
4. EXPENSES
(a) BUSINESS EXPENSES. The Company authorizes Employee to incur the
reasonable and necessary expenses for promoting the business of the Company and
its subsidiaries according to the policies of the Company with respect thereto
and as may be determined from time to time by the Board of Directors of the
Company. The Company agrees to reimburse Employee for any such reasonable and
necessary expenses paid out of Employee's own funds.
(b) TRANSPORTATION. During the term of this Agreement, the Company
shall furnish to Employee an automobile (including all expenses such as
insurance, gasoline and maintenance) suitable for business transportation. Such
automobile shall be selected at the discretion of the Company's Chief Executive
Officer. Every third year thereafter during the term of this Agreement,
Employee, at his election, may replace the automobile with a new automobile
selected at the discretion of the Company's Chief Executive Officer.
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<PAGE>
5. VACATION
Unless otherwise agreed to orally or by written agreement between
Employee and the Company, Employee shall be entitled to four weeks of paid
vacation following completion of one year of employment. Such vacation may be
taken at such times as are mutually agreed upon by Employee and the Company, and
pursuant to the Company's vacation policy then in effect.
6. TERMINATION BY COMPANY
(a) TERMINATION. The Company may terminate Employee for "Cause."
(b) "CAUSE" shall mean:
(i) The failure of Employee to render services to the
Company in accordance with his employment duties, as determined by all of the
independent directors of the Company's Board of Directors;
(ii) The commission by Employee of an act of fraud or
embezzlement against Company or an act which Employee knew to be in violation of
his duties to the Company (including, but not limited to, the unauthorized
disclosure of confidential information);
(iii) The death or "permanent disability" of Employee.
Permanent disability shall occur if, during the term of this Agreement,
Employee becomes physically or mentally disabled such that he is
substantially unable to perform his duties hereunder and such disability
continues for six (6) continuous months or for ten (10) months over a two (2)
fiscal year period. In the event Employee and the Company are unable to
agree as to whether Employee is permanently disabled within the meaning of
this Paragraph 6(b)(iii), Employee and Company shall each appoint a licensed
doctor of medicine. The two named doctors shall then appoint a third
licensed doctor of medicine and the three shall act as a committee to
determine by majority vote whether such disability exists. In the event such
a committee is appointed under this Paragraph 6(b)(iii), Employee and Company
hereby agree to bound by the determination of the majority of the committee
as to the characterization of Employee's disability; or
(iv) Good cause as determined by all of the independent
directors of the Company's Board of Directors to be a material breach
justifying termination of Employee.
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<PAGE>
(c) NOTICE OF TERMINATION. Any termination of Employee by the
Company shall be communicated by a written Notice of Termination to Employee.
For purposes of this Agreement, a Notice of Termination shall specify the
termination provision of this Agreement relied upon to effect such termination
and shall set forth in reasonable detail the specific facts and circumstances
claimed to provide a basis for termination of Employee.
7. TERMINATION BY EMPLOYEE
(a) TERMINATION. Upon written notice delivered to the Company in
accordance with Section 6(c), Employee may terminate his employment hereunder
for:
(i) "Good Reason" as is herein defined; or
(ii) health reasons, if his health should become impaired to
an extent that makes his continued performance of his duties hereunder
hazardous to his physical or mental health or his life, provided that
Employee shall have furnished the Company with a written statement from a
qualified doctor of medicine to such effect and provided, further, that, at
the Company's request, Employee shall submit to an examination by a doctor of
medicine selected by the Company and such doctor of medicine shall have
concurred in the conclusion of the Employee's doctor. In the event that
Employee elects to terminate his employment for health reasons in accordance
with this Paragraph 7(a)(ii), the Company shall pay as severance compensation
to Employee sixty percent (60%) of his yearly salary for the remainder of the
term of this Agreement.
(b) "GOOD REASON" means;
(i) the occurrence of a "Change in Control" of the Company (as
defined herein);
(ii) a failure by the Company to comply with any material
provision of this Agreement that has not been cured within thirty (30) days
after notice of such noncompliance has been given by Employee to the Company;
or
(iii) any purported termination of Employee's employment which
is not effected pursuant to a Notice of Termination as set forth in Paragraph
6(c).
(c) "CHANGE IN CONTROL" occurs if (i) substantially all the assets of
the Company are sold to, or the Company is merged with, any "person," as that
term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, other than a then existing shareholder or group of shareholders of the
Company (or affiliate thereof) owning fifty percent (50%) or more of the
combined voting power of the Company's then
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<PAGE>
outstanding securities, or (ii) any person or group becomes or is discovered
to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as
in effect on the date hereof) directly of securities of the Company
representing twenty-five percent (25%) or more of the combined voting power
of Company's then outstanding securities (unless such person or group owns at
least twenty-five percent (25%) of such voting power on the effective date of
this Agreement), and in connection with such change in ownership the
individuals who constitute the Board of Directors of Company immediately
prior to such change cease to constitute at least a majority of the Board of
Directors thereafter.
8. PAYMENT UPON TERMINATION
(a) DATE. The "Termination Date" shall be the effective date
specified in the Notice of Termination unless the party receiving such notice
disputes the Notice of Termination as contrary to the terms and conditions of
this Agreement. In that case, the Termination Date shall be the date such
dispute is finally resolved either by mutual written agreement of the parties,
by a binding and final arbitration award, or by a final judgment, order, or
decree of a court of competent jurisdiction (the time for appeal therefrom
having expired and no appeal having been perfected).
(b) TERMINATION BY COMPANY. In the event the Company terminates
Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company
shall pay to Employee his full salary through the Termination Date after which
the Company shall have no further obligation to Employee under this Agreement.
(c) DEATH. The Company shall maintain a life insurance policy owned
by Employee which provides for payment to Employee's estate or designated
beneficiary, a death benefit of $500,000.
(d) PERMANENT DISABILITY. In the event the Company terminates
Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the
Company shall pay to Employee eighty percent (80%) of Employee's yearly salary
for a period of five (5) years following termination. Such payments shall begin
no later than thirty (30) days following the Termination Date or, in the event
such termination is contested pursuant to Paragraph 6(b)(iii), thirty (30) days
following the decision of the commission.
(e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD REASON.
If, in breach of this Agreement, the Company terminates Employee's employment
other than pursuant to Section 6 (it being understood that a termination
purported to be pursuant to Section 6 hereof which is disputed by Employee and
finally determined not to have been proper, shall be a termination by the
Company in breach of this Agreement) or if Employee terminates his employment
for Good Reason, then:
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(i) The Company shall pay Employee his full salary through the
Termination Date at the rate in effect at the time the Notice of Termination is
given; and
(ii) In lieu of any further compensation payments to Employee
for periods subsequent to the Termination Date, the Company shall pay as
severance pay to Employee an amount equal to one dollar less than three (3)
times Employee's average total compensation for the five (5) full taxable
years preceding the Change in Control, as determined in accordance with the
"parachute payments" provisions of the Internal Revenue Code in effect on the
date of this Agreement. If resulting from a termination based on a Change in
Control of the Company, such payments shall be made in a lump sum on or
before the thirtieth (30th) day following the Termination Date. If resulting
from any other cause, such payments shall be made in substantially equal
semimonthly installments on the fifteenth and last days of each month
commencing with the month in which the Termination Date occurs and continuing
for twenty-four (24) consecutive semimonthly payment dates (including the
first such date as aforesaid); and
(iii) If termination of Employee's employment arises out of a
breach by the Company of this Agreement, the Company shall pay all other
damages to which Employee may be entitled as a result of such breach,
including damages for any and all loss of benefits to Employee under the
Company's employee benefit plans that Employee would have received if the
Company had not breached this Agreement and had Employee's employment
continued for the full term as set forth in Section 2 and including all legal
fees and expenses incurred by Employee as a result of such termination
including, but not limited to, all such fees expended in enforcement of this
Agreement. If Employee resigns for Good Reason and the Company contests its
obligations, as hereunder, Employee shall be entitled to recover as damages
the amount of his legal fees and expenses, including costs of investigation,
related to his enforcement of the Agreement.
(f) CONTINUANCE OF BENEFITS. Unless the Company terminates
Employee for Cause or death, the Company shall maintain in full force and
effect, for the continued benefit of Employee for the greater number of years
(including partial years) remaining in the term of the employment hereunder
or the number three (3), all employee benefit plans and programs in which
Employee was entitled to participate immediately prior to the Termination
Date provided that Employee's continued participation is possible under the
general terms and provisions of such plans and programs. In the event that
Employee's participation in any such plan or program is barred, the Company
shall arrange to provide Employee with benefits substantially similar to
those which Employee would otherwise have been entitled to receive under such
plans and programs from which his continued participation is barred.
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<PAGE>
(g) NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise.
9. SEVERABILITY
The provisions of this Agreement are severable. If a court of
competent jurisdiction determines that any one or more provisions of this
Agreement is invalid, void, or unenforceable, in whole or in part, it will be
severed therefrom. The remaining provisions of this Agreement shall then
continue in full force without being impaired or invalidated in any way.
10. ASSIGNMENT; BINDING EFFECT
(a) ASSIGNABILITY. Subject to the restrictions in this Section 10,
the Company may assign this Agreement.
(b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The Company
shall require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company or assignee of this Agreement, by agreement in form and
substance satisfactory to Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
Employee to compensation from the Company in the same amount and on the same
terms as he would be entitled to hereunder if he terminated his employment for
Good Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date. As used in this Agreement, "Company" shall mean the Company as herein
before defined and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 10, or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operations of law.
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding on the parties and their respective successors and
assigns. If Employee should die while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided for herein, shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee, or other designee or, if there be no
such designee, to Employee's estate.
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11. CONFIDENTIAL INFORMATION
Employee agrees that he shall not, during the term of this
Agreement, and for a period of five (5) years following its termination,
absent the Company's consent, disclose to any person, or otherwise use or
exploit any non-public proprietary or confidential information of material
significance to the Company and/or its affiliates, including without
limitation trade secrets, customer lists, records of research, memoranda,
proposals, reports, methods, processes, techniques, non-public financial
information, contracts, negotiations, business plans and strategies,
marketing data or other non-public information regarding the Company and/or
any of its affiliates, their business, properties or affairs ("CONFIDENTIAL
INFORMATION") obtained by him at any time prior to or subsequent to the
execution of this Agreement, except to the extent required by his performance
of his assigned duties for the Company (including its affiliates). Upon
termination of employment, Employee shall surrender all Confidential
Information and all other property belonging to the Company and its
subsidiaries, it being understood by Employee that such documents are the
sole property of the Company and that Employee shall not make any copies
thereof. Additionally, the terms and conditions of this Agreement shall
constitute Confidential Information and shall not be disclosed by Employee
except in accordance with this Section 11.
12. CONFLICTING INVESTMENTS
During the term of this Agreement and for one (1) year after
termination of this Agreement, Employee shall not make or cause to be made on
his behalf, or maintain an investment in any business which is engaged,
either in whole or in part, in any business which is competitive with or
detrimental to any businesses of the Company, or its subsidiaries, except
that Employee may make or maintain an investment of no more than five percent
(5%) of any outstanding class of capital stock of any publicly traded
company, provided such class of capital stock is regularly traded by the
public, without prior written permission of the Company.
13. ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between the
parties concerning the subject matter hereof. This Agreement supersedes all
negotiations, prior discussions, and preliminary agreements. This Agreement
may not be amended except in a writing executed by the Employee and the
Company.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, regardless of the application of conflicts
of laws principles.
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15. NOTICES
All notices, requests, demands and other communication required or
contemplated under this Agreement, shall be in writing and shall be deemed to
have been duly given when delivered personally or when enclosed in a properly
sealed and addressed envelope, registered or certified, return receipt
requested, and deposited (postage prepaid) in a post office or branch post
office regularly maintained by the United States Government.
Any notice given to the Company under the terms of this Agreement
shall be addressed to the Company at the following address:
Safeguard Health Enterprises, Inc.
Attention: Secretary
505 North Euclid Street
P.O. Box 3210
Anaheim, California 92803-3210
Any notice to be given to Employee shall be addressed to him at his
home address last shown on the Company's records, or at such other address as
either party may hereafter designate in writing to the other.
16. WAIVER
No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
17. COUNTERPARTS
This Agreement may be executed in counterparts, and such counterparts
may be transmitted by facsimile, and all counterparts, taken together, will
constitute one and the same document.
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18. ARBITRATION
Any dispute regarding any aspect of this Agreement or any act that
allegedly has or would violate any provision of this Agreement must be submitted
to arbitration in Orange County, California, in accordance with the rules of the
Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for
such claim or dispute. Either party may invoke this clause by serving on the
other, in writing, a request to arbitrate. Within thirty (30) days thereafter,
either party may institute proceedings in superior court to enforce this clause
by way of reference pursuant to Section 638 of the California Code of Civil
Procedure. If the parties cannot mutually select a judge from the JAMS panel,
the superior court shall make the selection. The decision of JAMS will be final
and binding. If Employee alleges in good faith that he has resigned for Good
Reason, then the Company is required to advance to him any amounts necessary for
legal fees and expenses, including costs of investigation, related to the
dispute, subject to the Company's receipt of his undertaking to repay such
amounts if it is ultimately determined by JAMS that he is not entitled to keep
such amounts as damages under Section 8(e)(iii).
IN WITNESS WHEREOF, the parties have duly executed this Agreement
effective May 25, 1995.
EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC.
/s/ John E. Cox By: /s/ Steven J. Baileys
- ------------------------------- ----------------------------------
JOHN E. COX STEVEN J. BAILEYS, D.D.S.,
President
By: /s/ Ronald I. Brendzel
---------------------------------
RONALD I. BRENDZEL,
Secretary
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of May
25, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware
Corporation ("Company") and Wayne K. Butts ("Employee").
The Company desires to have the benefits of Employee's knowledge
and experience as a full-time employee and considers such employment a vital
element to protecting and enhancing the best interests of the Company, and
Employee desires to be employed full time by the Company. The Company and
Employee desire to enter into an agreement reflecting the terms under which
the Company will employ Employee as its Senior Vice President ("SVP") until
May 31, 2000. Therefore, the Company and Employee agree to the following
terms and conditions under which Employee will serve as SVP of the Company:
1. EMPLOYMENT SERVICES AND DUTIES
The Company agrees to employ and retain the services of Employee as
SVP and Employee hereby agrees to continue employment with the Company as its
SVP for the term of this Agreement. During the term of this Agreement,
Employee agrees to perform his duties as SVP faithfully, to the best of his
ability and in the best interests of the Company, to perform both his regular
duties and other projects as requested by the Board of Directors of the
Company, and assume such other additional reasonable duties or capacities as
the Board of Directors of the Company may provide.
2. TERM OF EMPLOYMENT
The Company agrees to employ Employee, and Employee agrees to
serve, as SVP for the period commencing the date of the execution of this
Agreement until the earlier of May 31, 2000, the date of Employee's death, or
the date of termination pursuant to Sections 6 and 7 of this Agreement.
3. COMPENSATION TERMS
The Company agrees to compensate Employee for his services rendered
as SVP under this Agreement as follows:
(a) BASE SALARY. Effective May 25, 1995, and for the remainder of
the term of employment, Employee shall receive a base salary of $125,000 per
year.
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(b) BONUSES. Employee shall receive such bonuses, if any, as
determined by the Board of Directors of the Company in its sole and absolute
discretion.
(c) BENEFITS. Subject to satisfaction of all eligibility
requirements, Employee and his dependents shall be entitled to and shall
receive any and all benefits generally available to executive employees of
the Company, including participation in health, dental, vision and life
insurance programs and retirement plans.
(d) INDEMNIFICATION. The Company shall indemnify Employee in
accordance with the terms and conditions of its then current indemnification
agreements with directors and/or officers of the Company.
4. EXPENSES
(a) BUSINESS EXPENSES. The Company authorizes Employee to incur
the reasonable and necessary expenses for promoting the business of the
Company and its subsidiaries according to the policies of the Company with
respect thereto and as may be determined from time to time by the Board of
Directors of the Company. The Company agrees to reimburse Employee for any
such reasonable and necessary expenses paid out of Employee's own fund.
(b) TRANSPORTATION. During the term of this Agreement, the
Company shall furnish to Employee an automobile expense allowance as may be
determined by the Company's Chief Executive Officer.
5. VACATION
Unless otherwise agreed to orally or by written agreement between
Employee and the Company, Employee shall be entitled to four weeks of paid
vacation during any fiscal year. Such vacation may be taken at such times as
are mutually agreed upon by Employee and the Company, and pursuant to the
Company's vacation policy then in effect.
6. TERMINATION BY COMPANY
(a) TERMINATION. The Company may terminate Employee for "Cause."
(b) "CAUSE" shall mean:
(i) The failure of Employee to render services to the Company
in accordance with his employment duties, as determined by all of the
independent directors of the Company's Board of Directors;
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(ii) The commission by Employee of an act of fraud or
embezzlement against Company or an act which Employee knew to be in violation
of his duties to the Company (including, but not limited to, the unauthorized
disclosure of confidential information);
(iii) The death or "permanent disability" of Employee.
Permanent disability shall occur if, during the term of this Agreement,
Employee becomes physically or mentally disabled such that he is
substantially unable to perform his duties hereunder and such disability
continues for six (6) continuous months; or
(iv) Good cause as determined by all of the independent
directors of the Company's Board of Directors to be a material breach
justifying termination of Employee.
(c) NOTICE OF TERMINATION. Any termination of Employee by the
Company shall be communicated by a written Notice of Termination to Employee.
For purposes of this Agreement, a Notice of Termination shall specify the
termination provision of this Agreement relied upon to effect such
termination and shall set forth in reasonable detail the specific facts and
circumstances claimed to provide a basis for termination of Employee.
7. TERMINATION BY EMPLOYEE
(a) TERMINATION. Upon thirty (30) days advance written notice
delivered to the Company, Employee may terminate his employment with the
Company; or upon written notice delivered to the Company in accordance with
Section 6(c), Employee may terminate his employment hereunder for "Good
Reason" as is herein defined.
(b) "GOOD REASON" means;
(i) the occurrence of a "Change in Control" of the Company
(as defined herein);
(ii) a failure by the Company to comply with any material
provision of this Agreement that has not been cured within thirty (30) days
after notice of such noncompliance has been given by Employee to the Company;
or
(iii) any purported termination of Employee's employment which
is not effected pursuant to a Notice of Termination as set forth in Paragraph
6(c).
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(c) "CHANGE IN CONTROL" occurs if (i) substantially all the
assets of the Company are sold to, or the Company is merged with, any
"person," as that term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, other than a then existing shareholder or
group of shareholders of the Company (or affiliate thereof) owning fifty
percent (50%) or more of the combined voting power of the Company's then
outstanding securities, or (ii) any person or group becomes or is discovered
to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as
in effect on the date hereof) directly of securities of the Company
representing twenty-five percent (25%) or more of the combined voting power
of Company's then outstanding securities (unless such person or group owns at
least twenty-five percent (25%) of such voting power on the effective date of
this Agreement), and in connection with such change in ownership the
individuals who constitute the Board of Directors of Company immediately
prior to such change cease to constitute at least a majority of the Board of
Directors thereafter.
8. PAYMENT UPON TERMINATION
(a) DATE. The "Termination Date" shall be the effective date
specified in the Notice of Termination as provided for in Paragraphs 6(c) or
7(a).
(b) TERMINATION BY COMPANY. In the event the Company terminates
Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company
shall pay to Employee his full salary through the Termination Date after
which the Company shall have no further obligation to Employee under this
Agreement.
(c) DEATH. The Company shall maintain a life insurance policy
owned by the Employee which provides for payment to Employee's estate or
designated beneficiary, a death benefit of $100,000.
(d) PERMANENT DISABILITY. In the event the Company terminates
Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the
Company shall pay to Employee fifty percent (50%) of Employee's annual salary
then in effect, payable in equal amounts over a period of six (6) months
following termination. Such payments shall begin no later than thirty (30)
days following the Termination Date.
(e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD
REASON. If, in breach of this Agreement, the Company terminates Employee's
employment other than pursuant to Section 6 (it being understood that a
termination purported to be pursuant to Section 6 hereof which is disputed by
Employee and finally determined not to have been proper, shall be a
termination by the Company in breach of this Agreement) or if Employee
terminates his employment for Good Reason, then;
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<PAGE>
(i) The Company shall pay Employee his full salary through the
Termination Date at the rate in effect at the time the Notice of Termination is
given; and
(ii) In lieu of any further compensation payments to Employee
for periods subsequent to the Termination Date, the Company shall pay as
severance pay to Employee an amount equal to one (1) times Employee's average
total compensation for the five (5) full taxable years preceding the Change
in Control, as determined in accordance with the "parachute payments"
provisions of the Internal Revenue Code in effect on the date of this
Agreement. If resulting from a termination based on a Change in Control of
the Company, such payments shall be made in a lump sum on or before the
thirtieth (30th) day following the Termination Date. If resulting from any
other cause, such payments shall be made in substantially equal semimonthly
installments on the fifteenth and last days of each month commencing with the
month in which the Termination Date occurs and continuing for twenty-four
(24) consecutive semimonthly payment dates (including the first such date as
aforesaid); and
(iii) If termination of Employee's employment arises out of a
breach by the Company of this Agreement, the Company shall pay all other
damages to which Employee may be entitled as a result of such breach,
including damages for any and all loss of benefits to Employee under the
Company's employee benefit plans that Employee would have received if the
Company had not breached this Agreement and had Employee's employment
continued for the full term as set forth in Section 2 and including all legal
fees and expenses incurred by Employee as a result of such termination
including, but not limited to, all such fees expended in enforcement of this
Agreement. If Employee resigns for Good Reason and the Company contests its
obligations, as hereunder, Employee shall be entitled to recover as damages
the amount of his legal fees and expenses, including costs of investigation,
related to his enforcement of the Agreement.
(f) NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise.
9. SEVERABILITY
The provisions of this Agreement are severable. If a court of
competent jurisdiction determines that any one or more provisions of this
Agreement is invalid, void, or unenforceable, in whole or in part, it will be
severed therefrom. The remaining provisions of this Agreement shall then
continue in full force without being impaired or invalidated in any way.
-5-
<PAGE>
10. ASSIGNMENT; BINDING EFFECT
(a) ASSIGNABILITY. This Agreement may be assigned by the Company to
any successor to all or substantially all of the business and/or assets of the
Company.
(b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company or assignee of this Agreement, by
agreement in form and substance satisfactory to Employee, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had
taken place. Failure of the Company to obtains such agreement prior to the
effectiveness of any such succession or assignment shall be a breach of this
Agreement and shall entitle Employee to compensation from the Company in the
same amount and on the same terms as he would be entitled to hereunder if he
terminated his employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as herein before defined and any successor
to its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 10, or which otherwise becomes bound
by all the terms and provision of this Agreement by operations of law.
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding on the parties and their respective successors and
assigns. If Employee should die while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided for herein, shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee, or other designee or, if there be no
such designee, to Employee's estate.
11. CONFIDENTIAL INFORMATION
Employee agrees that he shall not, during the term of this Agreement,
and for a period of five (5) years following its termination, absent the
Company's consent, disclose to any person, or otherwise use or exploit any non-
public proprietary or confidential information of material significance to the
Company and/or its affiliates, including without limitation trade secrets,
customer lists, records of research, memoranda, proposals, reports, methods,
processes, techniques, non-public financial information, contracts,
negotiations, business plans and strategies, marketing data or other non-public
information regarding the Company and/or any of its affiliates, their business,
properties or affairs ("CONFIDENTIAL INFORMATION") obtained by him at any time
prior to or subsequent to the execution of this Agreement, except to the extent
required by his performance of his assigned duties for the
-6-
<PAGE>
Company (including its affiliates). Upon termination of employment, Employee
shall surrender all Confidential Information and all other property belonging
to the Company and its subsidiaries, it being understood by Employee that
such documents are the sole property of the Company and that Employee shall
not make any copies thereof. Additionally, the terms and conditions of this
Agreement shall constitute Confidential Information and shall not be
disclosed by Employee except in accordance with this Section 11.
12. CONFLICTING INVESTMENTS
During the term of this Agreement and for one (1) year after
termination of this Agreement, Employee shall not make or cause to be made on
his behalf, or maintain an investment in any business which is engaged, either
in whole or in part, in any business which is competitive with or detrimental to
any businesses of the Company, or its subsidiaries, except that Employee may
make or maintain an investment of no more than five percent (5%) of any
outstanding class of capital stock of any publicly traded company, provided such
class of capital stock is regularly traded by the public, without prior written
permission of the Company.
13. ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between the
parties concerning the subject matter hereof. This Agreement supersedes all
negotiations, prior discussions, and preliminary agreements. This Agreement may
not be amended except in a writing executed by the Employee and the Company.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, regardless of the application of conflicts
of laws principles.
15. NOTICES
All notices, requests, demands and other communication required or
contemplated under this Agreement, shall be in writing and shall be deemed to
have been duly given when delivered personally or when enclosed in a properly
sealed and addressed envelope, registered or certified, return receipt
requested, and deposited (postage prepaid) in a post office or branch post
office regularly maintained by the United States Government.
Any notice given to the Company under the terms of this Agreement
shall be addressed to the Company at the following address:
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<PAGE>
Safeguard Health Enterprises, Inc.
Attention: Secretary
505 North Euclid Street
P.O. Box 3210
Anaheim, California 92803-3210
Any notice to be given to Employee shall be addressed to him at his
home address last shown on the Company's records, or at such other address as
either party may hereafter designate in writing to the other.
16. WAIVER
No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
17. COUNTERPARTS
This Agreement may be executed in counterparts, and such counterparts
may be transmitted by facsimile, and all counterparts, taken together, will
constitute one and the same document.
18. ARBITRATION
Any dispute regarding any aspect of this Agreement or any act that
allegedly has or would violate any provision of this Agreement must be submitted
to arbitration in Orange County, California, in accordance with the rules of the
Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for
such claim or dispute. Either party may invoke this clause by serving on the
other, in writing, a request to arbitrate. Within thirty (30) days thereafter,
either party may institute proceedings in superior court to enforce this clause
by way of reference pursuant to Section 638 of the California Code of Civil
Procedure. If the parties cannot mutually select a judge from the JAMS panel,
the superior court shall make the selection. The decision of JAMS will be final
and binding. If Employee alleges in good faith that he has resigned for Good
Reason, then the Company is required to advance to him any amounts necessary for
legal fees and expenses, including costs of investigation, related to the
dispute, subject to the Company's receipt of his undertaking to repay such
amounts if it is ultimately determined by JAMS that he is not entitled to keep
such amounts as damages under Section 8(e)(iii).
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement
effective May 25, 1995.
EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC.
/s/ Wayne K. Butts By: /s/ Steven J. Baileys
- -------------------------- ------------------------------
WAYNE K. BUTTS STEVEN J. BAILEYS, D.D.S.,
President
By: /s/ Ronald I. Brendzel
------------------------------
RONALD I. BRENDZEL,
Secretary
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<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
AS RIGHTS AGENT
______________
RIGHTS AGREEMENT
DATED AS OF MARCH 22, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . 5
3. Issue of Rights Certificates. . . . . . . . . . . . . . . . . . . . . . . 5
4. Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . 6
5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . 7
6. Transfer, Split-Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost & Stolen Rights Certificates. . . . . . . 8
7. Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . . 8
8. Cancellation and Destruction of Rights Certificates . . . . . . . . . . . 10
9. Reservation and Availability of Capital Stock . . . . . . . . . . . . . . 10
10. Preferred Stock Record Date . . . . . . . . . . . . . . . . . . . . . . . 12
11. Adjustment of Purchase Price, Number and Kind of Shares or Number
of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
12. Certificate of Adjusted Purchase Price or Number of Shares. . . . . . . . 19
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. . . 19
14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . 22
15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . . 24
17. Rights Certificate Holder Not Deemed a Shareholder. . . . . . . . . . . . 24
18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . 25
19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . 25
20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . . 25
21. Change of Rights Agents . . . . . . . . . . . . . . . . . . . . . . . . . 27
22. Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . . 28
23. Redemption and Termination. . . . . . . . . . . . . . . . . . . . . . . . 28
24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
25. Notice of Certain Events. . . . . . . . . . . . . . . . . . . . . . . . . 31
26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
27. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . . . . 32
28. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
29. Determination and Actions by the Board of Directors, etc. . . . . . . . . 33
30. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . . . . 33
31. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
32. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
33. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
34. Descriptive Headings; References. . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of March 22, 1996 ("AGREEMENT"), between
Safeguard Health Enterprises, Inc., a Delaware corporation ("COMPANY") and
American Stock Transfer & Trust Company ("RIGHTS AGENT").
WHEREAS, on March 22, 1996 ("RIGHTS DIVIDEND DECLARATION DATE"), the
Board of Directors of the Company authorized and declared a dividend
distribution of one Right for each share of Common Stock (as hereinafter
defined) of the Company outstanding at the close of business on April 12, 1996
("RECORD DATE"), and has authorized the issuance of one Right (as such number
may hereinafter be adjusted pursuant to the provisions of SECTION 11(P) hereof)
for each share of Common Stock of the Company issued from the Record Date
(whether originally issued or delivered from the Company's treasury) until the
earliest of the Distribution Date or a Section 13 Event or the Expiration Date
(each as hereinafter defined), each Right initially representing the right to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock of the Company having the rights, preferences, privileges and
restrictions set forth in the form of Certificate of Designation, Preferences
and Rights attached hereto as EXHIBIT A, upon the terms and subject to the
conditions hereinafter set forth ("RIGHTS");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "ACQUIRING PERSON" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, without the prior approval
of the Board of Directors of the Company, shall become, after the date hereof,
the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding, but shall not include an Exempt Person or any Person or entity
organized, appointed or established by the Company for or pursuant to the terms
of any such plan, or a Person who or which, together with its Affiliates and
Associates, shall become the Beneficial Owner of 15% or more of the shares of
Common Stock then outstanding solely as a result of a reduction in the number
of shares of Common Stock outstanding due to a repurchase of Common Stock by
the Company, unless such Person shall thereafter purchase or otherwise become
the Beneficial Owner of additional shares of Common Stock. Notwithstanding the
foregoing, if the Board of Directors of the Company determines in good faith
that a Person who would otherwise be an "Acquiring Person," as defined pursuant
to the foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as practicable a sufficient
number of shares of Common Stock so that such Person would no longer be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), then such Person shall not be deemed to be an "Acquiring Person"
for any purposes of this Agreement.
(b) "ACT" shall mean the Securities Act of 1933.
(c) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.
<PAGE>
(d) A Person shall be deemed the "BENEFICIAL OWNER" of, and shall be
deemed to "BENEFICIALLY OWN," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (whether or not in writing) or upon
the exercise of conversion rights, exchange rights, rights, warrants or
options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," (A) securities tendered
pursuant to a tender or exchange offer made by such Person or any of such
Person's Affiliates or Associates until such tendered securities are accepted
for purchase or exchange, or (B) securities issuable upon exercise of Rights at
any time prior to the occurrence of a Triggering Event, or (C) securities
issuable upon exercise of Rights from and after the occurrence of a Triggering
Event which Rights were acquired by such Person or any of such Person's
Affiliates or Associates prior to the Distribution Date or pursuant to
SECTION 3(A) or SECTION 22 (the "ORIGINAL RIGHTS") or pursuant to SECTION
11(I) in connection with an adjustment made with respect to any Original
Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing; PROVIDED,
HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such security if such agreement
arrangement or understanding: (A) arises solely from a revocable proxy given
in response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the General Rules and Regulations
under the Exchange Act, and (B) is not also then reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for the purpose of
acquiring, holding, voting (except pursuant to a revocable proxy as described
in the proviso to subparagraph (ii) of this paragraph (d)) or disposing of any
voting securities of the Company; PROVIDED, HOWEVER, that nothing in this
paragraph (d) shall cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to "beneficially own," any
securities acquired through such person's participation in good faith in a firm
commitment underwriting until the expiration of forty days after the date of
such acquisition.
(e) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in the State of California are
authorized or obligated by law or executive order to close.
(f) "CLOSE OF BUSINESS" on any given date shall mean 5:00 P.M.,
California time on such date; PROVIDED, HOWEVER, that if such date is not a
Business Day it shall mean 5:00 P.M., California time on the next succeeding
Business Day.
(g) "COMMON STOCK" shall mean the common stock, $0.01 par value, of
the Company, except that "Common Stock" when used with reference to any Person
other
2
<PAGE>
than the Company shall mean the capital stock (or units of beneficial
interest which represent the right to participate in profits, losses,
deductions and credits) of such Person with the greatest voting power, or the
equity securities or other equity interest having power to control or direct
the management, of such Person.
(h) "COMMON STOCK EQUIVALENTS" shall have the meaning set forth in
SECTION 11(A)(III).
(i) "CONTINUING DIRECTOR" shall mean (i) any member of the Board of
Directors of the Company, while a member of the Board, who is not an Acquiring
Person, or an Affiliate or Associate of an Acquiring Person, or a
representative of an Acquiring Person or of any such Affiliate or Associate,
and who was a member of the Board prior to the date of this Agreement, or (ii)
any Person who subsequently becomes a member of the Board, while a member of
the Board, who is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative of an Acquiring Person or of any such
Affiliate or Associate, if such Person's nomination for election or election to
the Board is recommended or approved by a majority of the Continuing Directors.
(j) "CURRENT MARKET PRICE" shall have the meaning set forth in
SECTION 11(D)(I).
(k) "CURRENT VALUE" shall have the meaning set forth in SECTION
11(A)(III).
(l) "DISTRIBUTION DATE" shall have the meaning set forth in SECTION
3(A).
(m) "EQUIVALENT PREFERRED STOCK" shall have the meaning set forth in
SECTION 11(B).
(n) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended and in effect on the date of this Agreement.
(o) "EXEMPT PERSON" shall mean the Company, any Subsidiary of the
Company, any employee benefit plan or employee stock plan of the Company or any
Subsidiary of the Company, or any person or entity organized, appointed, or
established by the Company or any Subsidiary of the Company, for or pursuant to
the terms of any such plan.
(p) "EXPIRATION DATE" shall mean the earliest of (i) the Final
Expiration Date, (ii) the time at which the Rights are redeemed as provided in
SECTION 23, (iii) the time at which the Board of Directors orders the exchange
of Rights as provided in SECTION 24, or (iv) the consummation of a transaction
contemplated by SECTION 13(D).
(q) "FINAL EXPIRATION DATE" shall mean the close of business on
March 21, 2006.
(r) "PERSON" shall mean any individual, firm, corporation,
partnership, limited liability company or partnership or other entity.
(s) "PREFERRED STOCK" shall mean shares of Series A Junior
Participating Preferred Stock, $.01 par value, of the Company and, to the
extent that there is not a sufficient number of shares of Series A Junior
Participating Preferred Stock authorized to
3
<PAGE>
permit the full exercise of the Rights, any other series of Preferred Stock,
$.01 par value, of the Company designated for such purpose containing terms
substantially similar to the terms of the Series A Junior Participating
Preferred Stock.
(t) "PRINCIPAL PARTY" shall have the meaning set forth in SECTION
13(B).
(u) "PURCHASE PRICE" shall have the meaning set forth in SECTION
4(A).
(v) "RECORD DATE" shall have the meaning set forth in the WHEREAS
clause at the beginning of this Agreement.
(w) "REDEMPTION PRICE" shall have the meaning set forth in SECTION
23(A).
(x) "RIGHTS" shall have the meaning set forth in the WHEREAS clause
at the beginning of this Agreement.
(y) "RIGHTS CERTIFICATES" shall have the meaning set forth in
SECTION 3(A).
(z) "RIGHTS DIVIDEND DECLARATION DATE" shall-have the meaning set
forth in the WHEREAS clause at the beginning of this Agreement.
(aa) "SECTION 11(A)(II) EVENT" shall mean any event described in
SECTION 11(A)(II).
(bb) "SECTION 11(A)(II) TRIGGER DATE" shall have the meaning set
forth in SECTION 11(A)(III).
(cc) "SECTION 13 EVENT" shall mean any event described in clause (x),
(y) or (z) of SECTION 13(A).
(dd) "SPECIAL VOTE:" An action of the Company's Board of Directors
by "Special Vote" means an action that is taken (and can only be taken) at a
time when there are two or more Continuing Directors, and that is approved by
both (i) a majority of the Continuing Directors, and (ii) a majority of the
entire Board of Directors, including the Continuing Directors.
(ee) "SPREAD" shall have the meaning set forth in SECTION 11(A)(III).
(ff) "STOCK ACQUISITION DATE" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such or
such earlier date as a majority of the directors shall become aware of the
existence of an Acquiring Person; PROVIDED THAT, if such person is thereafter
determined not to have become an Acquiring Person within the meaning of
SECTION 1(A), then no Stock Acquisition Date shall be deemed to have occurred.
(gg) "SUBSIDIARY" shall mean, with reference to any Person, any
corporation or other entity of which securities or other ownership interests
having ordinary voting power sufficient to elect at least a majority of the
directors of such corporation (or
4
<PAGE>
other persons performing similar functions) is beneficially owned, directly
or indirectly, by such Person, or otherwise controlled by such Person.
(hh) "SUBSTITUTION PERIOD" shall have the meaning set forth in
SECTION 11(A)(III).
(ii) "TRADING DAY" shall have the meaning set forth in SECTION
11(D)(I).
(jj) "TRIGGERING EVENT" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Any determination required by the definitions contained in this
SECTION 1 shall be made by the Board of Directors of the Company in its good
faith judgment, which determination shall be binding on the Rights Agent and
the holders of the Rights.
2. APPOINTMENT OF RIGHTS AGENT.
The Company hereby appoints the Rights Agent to act as agent for the
Company and the holders of the Rights (who, in accordance with SECTION 3, shall
prior to the Distribution Date also be the holders of the Common Stock) in
accordance with the terms and conditions hereof, and the Rights Agent hereby
accepts such appointment. The Company may from time to time appoint such Co-
Rights Agents as it may deem necessary or desirable.
3. ISSUE OF RIGHTS CERTIFICATES.
(a) Until the earlier of (i) the close of business on the tenth day
after the Stock Acquisition Date (or, if the tenth day after the Stock
Acquisition Date occurs before the Record Date, the close of business on the
Record Date), or (ii) the close of business on the tenth day after the date
that a tender or exchange offer by any Person (other than an Exempt Person) is
first published or sent or given within the meaning of Rule 14d-2(a) of the
General Rules and Regulations under the Exchange Act, if upon consummation
thereof, such Person together with its Affiliates and Associates, would be the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding
(irrespective of whether any shares are actually purchased pursuant to any such
offer) (each of the time periods in (i) and (ii) being subject to extension as
provided in SECTION 27 and the earliest of (i) and (ii) being herein referred
to as the "DISTRIBUTION DATE"), (x) the Rights will be evidenced (subject to
the provisions of paragraph (b) of this SECTION 3) by the certificates for the
Common Stock registered in the names of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and (y) each Right will be
transferable only in connection with the transfer of the underlying share of
Common Stock (including a transfer to the Company). As soon as practicable
after the Distribution Date, the Rights Agent will send to each record holder
of the Common Stock as of the close of business on the Distribution Date, at
the address of such holder shown on the records of the Company, one or more
rights certificates, in substantially the form of EXHIBIT B hereto (the "RIGHTS
CERTIFICATES"), evidencing one Right for each share of Common Stock so held,
subject to adjustment as provided herein. In the event that an adjustment in
the number of Rights per share of Common Stock has been made pursuant to
SECTION 11(P), at the time of distribution of the Rights Certificates, the
Company shall make the necessary and appropriate rounding adjustments (in
accordance with SECTION 14(A)) so that Rights Certificates representing only
whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights.
<PAGE>
As of and after the Distribution Date, the Rights will be evidenced solely by
such Rights Certificates.
(b) As promptly as practicable following the Record Date, the
Company will send a copy of a Summary of Rights to purchase Preferred Stock,
containing substantially the information set forth in the form attached hereto
as EXHIBIT C, to each record holder of the Common Stock as of the close of
business on the Record Date, at the address of such holder shown on the records
of the Company. With respect to certificates for the Common Stock outstanding
as of the Record Date, until the Distribution Date, the Rights will be
evidenced by such certificates for the Common Stock and the registered holders
of the Common Stock shall also be the registered holders of the associated
Rights. Until the earlier of the Distribution Date or the Expiration Date, the
transfer of any certificates representing shares of Common Stock in respect of
which Rights have been issued shall also constitute the transfer of the Rights
associated with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of Common Stock
which are issued after the Record Date but prior to the earliest of the Stock
Acquisition Date, a Section 13 Event or the Expiration Date. Certificates
representing such shares of Common Stock (including, without limitation,
certificates issued upon transfer or exchange of Common Stock) shall also be
deemed to be certificates for Rights, and shall bear the following legend:
"This certificate also represents Rights that entitle the holder
hereof to certain rights as set forth in a Rights Agreement between the
Corporation and American Stock Transfer & Trust Company, as Rights Agent, dated
as of March 22, 1996 ("Rights Agreement"), the terms, conditions and
limitations of which are hereby incorporated herein by reference and a copy of
which is on file at the principal offices of the Corporation. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate. The Corporation will mail to the holder of this certificate a
copy of the Rights Agreement, as in effect on the date of mailing, without
charge promptly after receipt of a written request therefor. Under certain
circumstances set forth in the Rights Agreement, Rights issued to, or
beneficially owned by, any Person who is, was or becomes an Acquiring Person or
any Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement), whether currently held by or on behalf of such Person or by any
subsequent holder, may become null and void."
With respect to such certificates containing the foregoing legend,
the Rights associated with the Common Stock represented by such certificates
shall, until the Distribution Date, be evidenced by such certificates alone and
registered holders of Common Stock shall also be the registered holders of the
associated Rights, and the transfer of any of such certificates shall also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificates.
4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (and the forms of an election to
purchase and of assignment and of certificates to be printed on the reverse
thereof) when, as and if issued, shall each be substantially in the form set
forth in EXHIBIT B hereto and may have such marks of identification or
designation and such legends, summaries or endorsements printed thereon as the
Company may deem appropriate and as are not inconsistent with the
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provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any stock exchange on which the Rights may from
time to time be listed, or to conform to usage. Subject to the provisions of
SECTION 11 and SECTION 22, the Rights Certificates, whenever distributed,
shall be dated as of the Record Date and on their face shall entitle the
holders thereof to purchase such number of one one-thousandths of a share of
Preferred Stock as shall be set forth therein at the price set forth therein
(such exercise price per one one-thousandth of a share, the "PURCHASE
PRICE"), but the amount and type of securities purchasable upon the exercise
of each Right and the Purchase Price thereof shall be subject to adjustment
as provided herein.
(b) Notwithstanding any other provision of this Agreement, any
Rights Certificate issued pursuant to SECTION 3(A) or SECTION 22 that
represents Rights beneficially owned by any Person known to be: (i) an
Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such, or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person
becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect avoidance of SECTION 7(E), and any
Rights Certificate issued pursuant to SECTION 6 or SECTION 11 upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend,
modified as applicable to apply to such Person:
"The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person (as such terms are defined in the
Rights Agreement). Accordingly, this Rights Certificate and the Rights
represented hereby may become null and void in the circumstances specified in
Section 7(e) of such Agreement."
5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any other officer of the
Company designated by the Chairman or President, either manually or by
facsimile signature, and shall have affixed thereto the Company's seal or a
facsimile thereof which shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The
Rights Certificates shall be manually countersigned by the Rights Agent and
shall not be valid for any purpose unless so countersigned. In case any
officer of the Company who shall have signed any of the Rights Certificates
shall cease to be such officer of the Company before countersignature by the
Rights Agent and issuance and delivery by the Company, such Rights
Certificates, nevertheless, may be countersigned by the Rights Agent and issued
and delivered by the Company with the same force and effect as though the
person who signed such Rights Certificates had not ceased to be such officer of
the Company; and any Rights Certificates may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Rights
Certificate shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
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(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its office or offices designated as the appropriate place
for surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the
Rights Certificates, the number of Rights evidenced on its face by each of the
Rights Certificates and the certificate number and the date of each of the
Rights Certificates.
6. TRANSFER, SPLIT-UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to the provisions of SECTION 4(B), SECTION 7(E) and
SECTION 14, at any time after the close of business on the Distribution Date,
and at or prior to the close of business on the Expiration Date, any Rights
Certificate or Certificates may be transferred, split up, combined or exchanged
for another Rights Certificate or Certificates, entitling the registered holder
to purchase a like number of one-thousandths of a share of Preferred Stock (or,
following a Triggering Event, Common Stock, other securities, cash or other
assets, as the case may be) as the Rights Certificate or Certificates
surrendered then entitled such holder (or former holder in the case of a
transfer) to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Rights Certificate or Certificates shall make such
request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Certificates to be transferred, split up, combined or
exchanged at the office or offices of the Rights Agent designated for such
purpose. Neither the Rights Agent nor the Company shall be obligated to take
any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and signed
the certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to SECTION 4(B), SECTION 7(E) and SECTION 14,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificate.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Rights Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to the
Company and the Rights Agent of all reasonable expenses incidental thereto, and
upon surrender to the Rights Agent and cancellation of the Rights Certificate
if mutilated, the Company will execute and deliver a new Rights Certificate of
like tenor to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Subject to SECTION 7(E), 23(B) and 24(B), the registered holder
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in SECTION 9(C), SECTION 11(A)(III) and SECTION
23(A)), in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to
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<PAGE>
purchase and the certificate on the reverse side thereof duly executed, to
the Rights Agent at the office or offices of the Rights Agent designated for
such purpose, together with payment of the aggregate Purchase Price with
respect to the total number of one one-thousandths of a share of Preferred
Stock (or other securities, cash or other assets, as the case may be) as to
which such surrendered Rights are then exercisable, at or prior to the
Expiration Date.
(b) The Purchase Price for each one one-thousandth of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be $75.00,
and shall be subject to adjustment from time to time as provided in SECTIONS 11
and 13(A) and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly
executed, accompanied by payment, with respect to each Right so exercised, of
the Purchase Price per one one-thousandth of a share of Preferred Stock (or
other shares, securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any applicable transfer
tax, the Rights Agent shall, subject to SECTION 20(K), thereupon promptly
(i) (A) requisition from any transfer agent of the shares of Preferred Stock
(or make available, if the Rights Agent is the transfer agent for such shares)
certificates for the total number of one one-thousandths of a share of
Preferred Stock to be purchased and the Company hereby authorizes its transfer
agent to comply with all such requests, or (B) if the Company shall have
elected to deposit the total number of shares of Preferred Stock issuable upon
exercise of the Rights hereunder with a depository agent, requisition from the
depository agent depository receipts representing such number of one one-
thousandths of a share of Preferred Stock as are to be purchased (in which case
certificates for the shares of Preferred Stock represented by such receipts
shall be deposited by the transfer agent with the depository agent) and the
Company will direct the depository agent to comply with such request,
(ii) requisition from the Company an amount of cash, if any, to be paid in lieu
of fractional shares in accordance with SECTION 14, (iii) after receipt of such
certificates or depository receipts, cause the same to be delivered to or upon
the order of the registered holder of such Rights Certificate, registered in
such name or names as may be designated by such holder, and (iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to SECTION 11(A)(III)) may be made by bank
draft, certified bank check or money order payable to the order of the Company.
In the event that the Company is obligated to issue other securities (including
Common Stock) of the Company, pay cash and/or distribute other property
pursuant to SECTION 11(A), the Company will make all arrangements necessary so
that such other securities, cash and/or other property are available for
distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of SECTION 14.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a
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transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such, or (iii) a
transferee of an Acquiring Person (or of any such Associate of Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person
becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) by or for the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of
Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
SECTION 7(E), shall become null and void without any further action and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The
Company shall use all reasonable efforts to insure that the provisions of
this SECTION 7(E) and SECTION 4(B) are complied with, but shall have no
liability to any holder of Rights Certificates or other Person as a result of
its failure to make any determinations with respect to an Acquiring Person or
any of their respective Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this SECTION 7 unless such registered holder shall
have (i) completed and signed the certificate contained in the form of election
to purchase set forth on the reverse side of the Rights Certificate surrendered
for such exercise, and (ii) provided such additional evidence of the identity
of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES.
All Rights Certificates surrendered for the purpose of exercises, transfer,
split up, combination or exchange shall, if surrendered to the Company or any
of its agents, be delivered to the Rights Agent for cancellation or in
cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by
it, and no Rights Certificates shall be issued in lieu thereof except as
expressly permitted by any of the provisions of this Agreement. The Company
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Rights Certificate
purchased or acquired by the Company otherwise than upon the exercise
thereof. The Rights Agent shall deliver all cancelled Rights Certificates to
the Company, or shall, at the written request of the Company, destroy such
cancelled Rights Certificates, and in such case shall deliver a certificate
of destruction thereof to the Company.
9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event, out of
its authorized and unissued shares of Common Stock and/or other securities or
out of its authorized and issued shares held in its treasury), the number of
shares of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and, or other securities) that, as provided in this Agreement
including SECTION 11(A)(III), will be sufficient to permit the exercise in full
of all outstanding Rights, PROVIDED, HOWEVER, that the Company shall not be
required to reserve and keep available shares of Preferred Stock, Common Stock
or other securities sufficient to permit the exercise in full of all
outstanding Rights pursuant to the adjustments
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set forth in SECTION 11(A)(II), SECTION 11(A)(III) or SECTION 13 unless, and
only to the extent that, the Rights become exercisable pursuant to such
adjustments.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities)
issuable and deliverable upon the exercise of Rights may be listed on any
national securities exchange, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares reserved
for such issuance to be listed on such exchange upon official notice of
issuance upon such exercise.
(c) If necessary to permit the offer and issuance of Preferred Stock
(and, following the occurrence of a Triggering Event, Common Stock and/or other
securities) issuable and deliverable upon the exercise of Rights, the Company
shall use its best efforts to (i) file, as soon as practicable following the
earliest date after the occurrence of a Section 11(a)(ii) Event on which the
consideration to be delivered by the Company upon exercise of the Rights has
been determined in accordance with SECTION 11(A)(III), or as soon as is
required by law following the Distribution Date, as the case may be, a
registration statement under the Act, with respect to the securities
purchasable upon exercise of the Rights on an appropriate form, (ii) cause such
registration statement to become effective as soon as practicable after such
filing, and (iii) cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Act) until the earlier
of (A) the date as of which the Rights are no longer exercisable for such
securities, and (B) the date of the expiration of the Rights. The Company will
also take such action as may be appropriate under, or to ensure compliance
with, the securities or "blue sky" laws of the various states in connection
with the exercisability of the Rights. The Company may temporarily suspend,
for a period of time not to exceed ninety (90) days after the date set forth in
clause (i) of the first sentence of this SECTION 9(C), the exercisability of
the Rights in order to prepare and file such registration statement and permit
it to become effective. Upon any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction, unless the requisite qualification in such jurisdiction shall
have been obtained and until a registration statement (if required) has been
declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all one one-thousandths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of one one-thousandths of a
share of Preferred Stock (or Common Stock and/or other securities, as the case
may be) upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Rights Certificates to a Person other than, or the
issuance or delivery of a number of one one-thousandths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) in respect
of a name other than that of,
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the registered holder of the Rights Certificates evidencing Rights
surrendered for exercise or to issue or deliver any certificates for a number
of one one-thousandths of a share of Preferred Stock (or Common Stock and/or
other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have
been paid (any such tax being payable by the holder of such Rights
Certificate at the time of surrender) or until it has been established to the
Company's satisfaction that no such tax is due.
10. PREFERRED STOCK RECORD DATE. Each person in whose name any
certificate for a number of one one-thousandths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) is
issued upon the exercise of Rights shall for all purposes be deemed to
have become the holder of record of such fractional shares of Preferred
Stock (or Common Stock and/or other securities, as the case may be)
represented thereby and such certificate shall be dated as of the date
upon which the Rights Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and all applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Stock (or Common Stock and/or
other securities, as the case may be) transfer books of the Company are
closed, such Person shall be deemed to have become the record holder of
such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books
of the Company are open. Prior to the exercise of the Rights evidenced
thereby, the holder of a Rights Certificate, as such, shall not be
entitled to any rights of a stockholder of the Company with respect to
shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions
or to exercise any preemptive rights, and shall not be entitled to receive
any notice of any proceedings of the Company, except as provided herein.
11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR
NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this SECTION 11.
(a) (i) In the event the Company shall at any time after the date
of this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C)
combine the outstanding Preferred Stock into a smaller number of shares, or (D)
issue any shares of its capital stock in a reclassification of the Preferred
Stock (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this SECTION 11(A) and SECTION 7(E), the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and
the number and kind of shares of Preferred Stock or capital stock, as the case
may be, issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive,
upon payment of the Purchase Price then in effect, the aggregate number and
kind of shares of Preferred Stock or capital stock, as the case may be, which,
if such Right had been exercised immediately prior to such date and at a time
when the Preferred Stock transfer books of the Company were open, he would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification. If an event occurs
which would require an adjustment
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under both this SECTION 11(A)(I) and SECTION 11(A)(II), the adjustment
provided for in this SECTION 11(A)(I) shall be in addition to, and shall be
made prior to, any adjustment required pursuant to SECTION 11(A)(II).
(ii) Subject to SECTION 23(A) and SECTION 24, in the event any
Person (other than an Exempt Person), alone or together with its Affiliates and
Associates, shall, at any time after the Rights Dividend Declaration Date,
become the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding, unless the event causing the 15% threshold to be crossed is an
acquisition of shares of Common Stock pursuant to a tender offer or an exchange
offer for all outstanding shares of Common Stock at a price and on terms
determined by the Board of Directors of the Company acting by Special Vote and
by at least a majority of the Continuing Directors who are not officers of the
Company, after receiving advice from one or more investment banking firms, to
be (a) at a price which is fair to shareholders of the Company (taking into
account all factors which such members of the Board deem relevant including,
without limitation, prices which could reasonably be achieved if the Company or
its assets were sold on an orderly basis designed to realize maximum value) and
(b) otherwise in the best interests of the Company and its shareholders, then,
proper provision shall be made so that each holder of a Right (except as
provided below and in SECTION 7(E)) shall thereafter have the right to receive,
upon exercise thereof at the then current Purchase Price in accordance with the
terms of this Agreement, in lieu of a number of one one-thousandths of a share
of Preferred Stock, such number of shares of Common Stock of the Company as
shall equal the result obtained by (x) multiplying the then current Purchase
Price by the then number of one one-thousandths of a share of Preferred Stock
for which a Right was exercisable immediately prior to the occurrence of a
Section 11(a)(ii) Event, and (y) dividing that product (which, following such
occurrence, shall thereafter be referred to as the "PURCHASE PRICE" for each
Right and for all purposes of this Agreement) by 50% of the Current Market
Price (determined pursuant to SECTION 11(D)) per share of Common Stock on the
date of such occurrence (such number of shares is herein called the "ADJUSTMENT
SHARES"); provided that the Purchase Price and the number of Adjustment Shares
shall be further adjusted as provided in this Agreement to reflect any events
occurring after the date of such occurrence.
(iii) In the event that the number of shares of Common Stock
which are authorized by the Company's Certificate of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights is not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this SECTION 11(A) and the
Rights shall become so exercisable, to the extent permitted by applicable law
and any agreements in effect on the date hereof to which the Company is a
party, the Company shall: (A) determine the excess of (1) the value of the
Adjustment Shares issuable upon the exercise of a Right (the "CURRENT VALUE")
over (2) the Purchase Price (such excess, the "SPREAD"), and (B) with respect
to each Right, make adequate provision to substitute for the Adjustment Shares,
upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) Common Stock or other equity securities of the Company
(including, without limitation, shares, or units of shares, of preferred stock
which the Board of Directors of the Company has deemed to have the same value
as shares of Common Stock (such shares of preferred stock, "COMMON STOCK
EQUIVALENTS")), (4) debt securities of the Company, (5) other assets, or
(6) any combination of the foregoing, having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the Board of
Directors of the Company based upon the advice of a nationally recognized
investment banking firm selected by the Board of Directors of the Company;
PROVIDED, HOWEVER, if the Company shall not have made
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adequate provision to deliver value pursuant to clause (B) above within
thirty (30) days following the later of (x) the occurrence of a Section
11(a)(ii) Event and (y) the date on which the Company's right of redemption
pursuant to SECTION 23(A) expires (the later of (x) and (y) being referred to
herein as the "SECTION 11(A)(II) TRIGGER DATE"), then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, shares of Common Stock (to the
extent available) and then, if necessary, cash, which shares and/or cash have
an aggregate value equal to the Spread. If the Board of Directors of the
Company shall determine in good faith that it is likely that sufficient
additional shares of Common Stock could be authorized for issuance upon
exercise in full of the Rights, the thirty (30) day period set forth above
may be extended to the extent necessary, but not more than ninety (90) days
after the Section 11(a)(ii) Trigger Date, in order that the Company may seek
stockholder approval for the authorization of such additional shares (such
period, as it may be extended, the "SUBSTITUTION PERIOD"). To the extent
that the Company determines that some action need be taken pursuant to the
first and/or second sentences of this Section 11(a)(iii), the Company (x)
shall provide, subject to SECTION 7(E), that such action shall apply
uniformly to all outstanding Rights, and (y) may suspend the exercisability
of the Rights until the expiration of the Substitution Period in order to
seek any authorization of additional shares and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement
at such time as the suspension is no longer in effect. For purposes of this
SECTION 11(A)(III), the value of the Common Stock shall be the Current Market
Price (as determined pursuant to SECTION 11(D)) per share of the Common Stock
on the Section 11(a)(ii) Trigger Date and the value of any "COMMON STOCK
EQUIVALENT" shall be deemed to have the same value as the Common Stock on
such date. The Board of Directors may, but shall not be required to,
establish procedures to allocate the right to receive Common Stock upon the
exercise of Rights pursuant to this SECTION 11(A)(III).
(b) In case the Company shall fix a record date for the issuance of
rights (other than the Rights), options or warrants to all holders of Preferred
Stock entitling them to subscribe for or purchase (for a period expiring within
forty-five (45) calendar days after such record date) Preferred Stock (or
shares having the same rights, privileges and preferences as the shares of
Preferred Stock ("EQUIVALENT PREFERRED STOCK")) or securities convertible into
Preferred Stock or Equivalent Preferred Stock at a price per share of Preferred
Stock or per share of Equivalent Preferred Stock (or having a conversion price
per share, if a security convertible into Preferred Stock or Equivalent
Preferred Stock) less than the Current Market Price (as determined pursuant to
SECTION 11(D)) per share of Preferred Stock on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of shares of Preferred
Stock outstanding on such record date, plus the number of shares of Preferred
Stock which the aggregate offering price of the total number of shares of
Preferred Stock (and/or Equivalent Preferred Stock so to be offered and/or the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such Current Market Price, and the denominator of
which shall be the number of shares of Preferred Stock outstanding on such
record date, plus the number of additional shares of Preferred Stock and/or
Equivalent Preferred Stock to be offered for subscription or purchase (or into
which the convertible securities so to be offered are initially convertible).
In case such subscription price may be paid by delivery of consideration part
or all of which may be in a form other than cash, the value of such
consideration shall be as determined in good faith
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by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on
the Rights Agent and the holders of the Rights. Shares of Preferred Stock
owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall
be made successively whenever such a record date is fixed, and in the event
that such rights or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution
to all holders of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness, cash (other than a
regular quarterly cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other then Preferred Stock) or
subscription rights or warrants (excluding those referred to in SECTION 11(B)),
the Purchase Price to be in effect after such record date shall be determined
by multiplying the Purchase Price in effect immediately prior to such record
date by a fraction, the numerator of which shall be the Current Market Price
(as determined pursuant to SECTION 11(D)) per share of Preferred Stock on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the cash, assets or
evidences of indebtedness so to be distributed or of such subscription rights
or warrants applicable to a share of Preferred Stock and the denominator of
which shall be such Current Market Price (as determined pursuant to
SECTION 11(D)) per share of Preferred Stock. Such adjustments shall be made
successively whenever such a record dated is fixed, and in the event that such
distribution is not so made, the Purchase Price shall be adjusted to be the
Purchase Price which would have been in effect if such record date had not been
fixed.
(d) (i) For the purpose of any computation hereunder, other than
computations made pursuant to SECTION 11(A)(III), the "CURRENT MARKET PRICE"
per share of Common Stock on any date shall be deemed to be the average of the
daily closing prices per share of such Common Stock for the thirty (30)
consecutive Trading Days (as such term is hereinafter defined) immediately
prior to such date and for purposes of computations made pursuant to
SECTION 11(A)(III), the "Current Market Price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices per share of
such Common Stock for the then ten (10) consecutive Trading Days immediately
following such date; provided, however, that in the event that the Current
Market Price per share of the Common Stock is determined during a period
following the announcement by the issuer of such Common Stock of (A) a dividend
or distribution on such Common Stock payable in shares of such Common Stock or
securities convertible into shares of such Common Stock (other than the
Rights), or (B) any subdivision, combination or reclassification of such Common
Stock, and prior to the expiration of the requisite thirty (30) Trading Day or
ten (10) Trading Day period, as set forth above, after the ex-dividend date for
such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the Current
Market Price shall be properly adjusted to take into account ex-dividend
trading. The closing price for each day shall be the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the shares
of Common Stock are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
system with
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respect to securities listed on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading or, if the
shares of Common Stock are not listed or admitted to trading on any national
securities exchange the last quoted price or, if not so quoted, the average
of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") or such other system then in use, or, if on any
such date the shares of Common Stock are not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock selected by the
Board of Directors of the Company. If on any such date no market maker is
making a market in the Common Stock, the fair value of such shares on such
date as determined in good faith by the Board of Directors of the Company
shall be used. The term "TRADING DAY" shall mean a day on which the
principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading is open for the transaction of business or,
if the shares of Common Stock are not listed or admitted to trading on any
national securities exchange, a Business Day. If the Common Stock is not
publicly held or not so listed or traded, "Current Market Price" per share
shall mean the fair value per share as determined in good faith by the board
of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all
purposes.
(ii) For the purpose of any computation hereunder, the Current
Market Price per share of Preferred Stock shall be determined in the same
manner as set forth above for the Common Stock in clause (i) of this
SECTION 11(D) (other than the last sentence thereof). If the Current Market
Price per share of Preferred Stock cannot be determined in the manner provided
above or if the Preferred Stock is not publicly held or listed or traded in a
manner described in clause (i) of this SECTION 11(D), the Current Market Price
per share of Preferred Stock shall be conclusively deemed to be an amount equal
to 1,000 (as such number may be appropriately adjusted for such events as stock
splits, stock dividends and recapitalizations with respect to the Common Stock
occurring after the date of this Agreement) multiplied by the Current Market
Price per share of the Common Stock. If neither the Common Stock nor the
Preferred Stock is publicly held or so listed or traded, "Current Market Price"
per share of the Preferred Stock shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes. For all purposes of this Agreement, the
Current Market Price of one one-thousandth of a share of Preferred Stock shall
be equal to the Current Market Price of one share of Preferred Stock divided by
1,000.
(e) Anything herein to the contrary notwithstanding, no adjustment
in the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
PROVIDED, HOWEVER, that any adjustments which by reason of this SECTION 11(E)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this SECTION 11 shall be
made to the nearest cent or to the nearest ten-thousandth of a share of Common
Stock or other share or one-millionth of a share of Preferred Stock, as the
case may be. Notwithstanding the first sentence of this SECTION 11(E), an
adjustment required by this SECTION 11 shall be made no later than the earlier
of (i) three (3) years from the date of the transaction which mandates such
adjustments, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to SECTION
11(A)(II) or SECTION 13(A), the holder of any Right thereafter exercised shall
become entitled to receive
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any shares of capital stock other than Preferred Stock, thereafter the number
of such other shares so receivable upon exercise of any Right and the
Purchase Price thereof shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Preferred Stock contained in SECTION 11, and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the
Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of
a share of Preferred Stock purchasable from time to time hereunder upon
exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in SECTION 11(I), upon each adjustment of the Purchase Price as a result of the
calculations made in SECTIONS 11(B) and (C), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandths of
a share of Preferred Stock (calculated to the nearest one ten-thousandths)
obtained by (i) multiplying (x) the number of one one-thousandths of a share
covered by a Right immediately prior to this adjustment, by (y) the Purchase
Price in effect immediately prior to such adjustment of the Purchase Price, and
(ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in lieu of any adjustment in
the number of one one-thousandths of a share of Preferred Stock purchasable
upon the exercise of a Right. Each of the Rights outstanding after the
adjustment in the number of Rights shall be exercisable for the number of one
one-thousandths of a share of Preferred Stock for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one-ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment to be made.
This record date may be the date on which the Purchase Price is adjusted or any
day thereafter, but, if the Rights Certificates have been issued, shall be at
least ten (10) days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights
pursuant to this SECTION 11(I), the Company shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates evidencing, subject to SECTION 14, the
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be distributed to
such holders of record in substitution and replacement for the Rights
Certificates held by such holders prior to the date of adjustment, and upon
surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued executed
and countersigned in the manner provided for herein (and may bear, at the
option of the Company, the adjusted Purchase Price) and shall be registered in
the names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
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(j) Irrespective of any adjustment or change in the Purchase Price
or the number of one one-thousandths of a share of Preferred Stock issuable
upon the exercise of the Rights, the Rights Certificates theretofore and
thereafter issued may continue to express the Purchase Price per one one-
thousandths of a share and the number of one one-thousandths of a share which
were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause adjustment reducing
the Purchase Price below the then stated value, if any, of the number of one
one-thousandths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable such number of one one-thousandths of a
share of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this SECTION 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-thousandths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of one one-thousandths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon
such exercise on the basis of the Purchase Price in effect prior to such
adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares (fractional or otherwise) or securities upon the
occurrence of the event requiring such adjustment.
(m) Anything in this SECTION 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this SECTION 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares
of Preferred Stock at less than the Current Market Price, (iii) issuance wholly
for cash of shares of Preferred Stock or securities which by their terms are
convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
SECTION 11, hereafter made by the Company to holders of its Preferred Stock
shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person
(other than a Subsidiary of the Company in a transaction which complies with
SECTION 11(O)), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with SECTION
11(O)), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or
Persons (other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with SECTION 11(O)), if (x) at the time
of or immediately after such consolidation, merger, sale or transfer there
are any rights, warrants or other instruments or securities outstanding or
agreements in effect which would substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger, sale or
transfer there are any rights, warrants or other instruments or securities
outstanding or agreements in effect which would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights or (y)
prior to, simultaneously with or immediately after such
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consolidation, merger, sale or transfer, the shareholders of the
Person who constitutes, or would constitute, the "Principal Party" for
purposes of SECTION 13(a) shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by SECTION 23, 24 or 27, take (or
permit any Subsidiary to take) any action if at the time such action is taken
it is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in
the event that the Company shall at any time after the Rights Dividend
Declaration Date and prior to the Distribution Date (i) declare a dividend on
the outstanding shares of Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, the
number of Rights associated with each share of Common Stock then outstanding,
or issued or delivered thereafter but prior to the Distribution date, shall
be proportionately adjusted so that the number of Rights thereafter
associated with each share of Common Stock following any such event shall
equal the result obtained by multiplying the number of Rights associated with
each share of Common Stock immediately prior to such event by a fraction the
numerator which shall be the total number of shares of Common Stock
outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event.
12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in SECTION 11 and SECTION 13, the
Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate, and (c)
mail a brief summary thereof to each holder of a Rights Certificate (or, if
prior to the Distribution Date, to each holder of a certificate representing
shares of Common Stock) in accordance with SECTION 25. Notwithstanding the
foregoing sentence, the failure of the Company to give such notice shall not
affect the validity of or the force or effect of or the requirement for such
adjustment. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained. Any adjustment to be
made pursuant to SECTIONS 11 and 13 shall be effective as of the date of the
event giving rise to such adjustment.
13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING
POWER.
(a) In the event that, following the Stock Acquisition Date,
directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any other Person (other than a Subsidiary of the Company in a
transaction which complies with SECTION 11(o)), and the Company shall not be
the continuing or surviving corporation of such consolidation or merger, (y)
any Person (other than a Subsidiary of the Company in a transaction which
complies with SECTION 11(o)) shall consolidate with, or merge with or into, the
Company, and the Company shall be the continuing or surviving corporation of
such consolidation or merger, and, in connection with such consolidation or
merger, all or
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part of the outstanding shares of Common Stock shall be changed into or
exchanged for stock or other securities of any other Person or cash or any
other property, or (z) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer), in one
transaction or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to any Person or Persons (other than the
Company or any Subsidiary of the Company in one or more transactions each of
which complies with SECTION 11(o)), then, and in each such case, proper
provisions shall be made so that: (i) each holder of a Right, except as
provided in SECTION 7(e), shall thereafter have the right to receive, upon
the exercise thereof at the then current Purchase Price in accordance with
the terms of this Agreement, such number of validly authorized and issued,
fully paid, non-assessable and freely tradable shares of Common Stock of the
Principal Party (as such term is hereinafter defined), not subject to any
liens, encumbrances, rights of first refusal or other adverse claims, as
shall be equal to the result obtained by (1) multiplying the then current
Purchase Price by the number of one one-thousandths of a share of Preferred
Stock for which a Right was exercisable immediately prior to the occurrence
of a Section 11(a)(ii) Event by the Purchase Price in effect immediately
prior to such Section 11(a)(ii) Event, and (2) dividing that product (which,
following the first occurrence of a Section 13 Event, shall be referred to as
the "PURCHASE PRICE" for each Right and for all purposes of this Agreement)
by 50% of the Current Market Price (determined pursuant to SECTION 11(d)(i))
per share of the Common Stock of such Principal Party on the date of
consummation of such Section 13 Event (or the fair market value on such date
of other securities or property of the Principal Party, as provided for
herein); PROVIDED that the Purchase Price and the number of shares of Common
Stock of such Principal Party issuable upon exercise of each Right shall be
further adjusted as provided in this Agreement to reflect any events
occurring after the date of the first occurrence of a Section 13 event; (ii)
such Principal Party shall thereafter be liable for, and shall assume, by
virtue of such Section 13 Event, all the obligations and duties of the
Company pursuant to this Agreement; (iii) the term "Company" shall thereafter
be deemed to refer to such Principal Party, it being specifically intended
that the provisions of SECTION 11 shall apply only to such Principal Party
following the first occurrence of a Section 13 Event; (iv) such Principal
Party shall take such steps (including, but not limited to, the reservation
of a sufficient number of shares of its Common Stock) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its shares of Common Stock thereafter deliverable upon the
exercise of the Rights; PROVIDED, HOWEVER, that upon the subsequent
occurrence of any merger, consolidation, sale of all or substantially all
assets, recapitalization, reclassification of shares, reorganization or other
extraordinary transaction in respect of such Principal Party, each holder of
a Right shall thereupon be entitled to receive, upon exercise of a Right and
payment of the Purchase Price, such cash, shares, rights, warrants and other
property which such holder would have been entitled to receive had such
Rights Holder, at the time of such transaction, owned the shares of Common
Stock of the Principal Party purchasable upon the exercise of a Right, and
such Principal Party shall take such steps (including, but not limited to,
reservation of shares of stock) as may be necessary to permit the subsequent
exercise of the Rights in accordance with the terms hereof for such cash,
shares, rights, warrants and other property; and (v) the provisions of
SECTION 11(a)(ii) shall be of no effect following the first occurrence of any
Section 13 Event.
(b) "PRINCIPAL PARTY" shall mean:
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(i) in the case of any transaction described in clause (x) or
(y) of the first sentence of SECTION 13(a): (A) the Person that is the
issuer of any securities into which shares of Common Stock of the Company
are converted in such merger or consolidation, or, if there is more than
one such issuer, the issuer whose issued and outstanding Common Stock has
the greatest aggregate market value or (B) if no securities are so issued,
(x) the Person that is the other party to such merger or consolidation and
survives said merger or consolidation, or, if there is more than one such
Person, the Person whose issued and outstanding Common Stock has the
greatest aggregate market value or (y) if the Person that is the other
party to the merger or consolidation does not survive the merger or
consolidation, the Person that does survive the merger or consolidation
(including the Company if it survives); and
(ii) in the case of any transaction described in clause (z) of
the first sentence of SECTION 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power transferred
pursuant to such transaction or transactions, or, if each Person that is a
party to such transaction or transactions receives the same portion of the
assets or earning power so transferred or if the Person receiving the
greatest portion of the assets or earning power cannot be determined,
whichever of such Persons as is the issuer of Common Stock having the
greatest market value of shares outstanding;
PROVIDED, HOWEVER, that in any such case, (l) if the Common Stock of such
Person is not at such time and has not been continuously over the preceding
twelve (12) month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the Common
Stock of which is and has been so registered, "Principal Party" shall refer to
such other Person; and (2) if such Person is a Subsidiary, directly or
indirectly, of more than one Person, the Common Stocks of two or more of which
are and have been so registered, "Principal Party" shall refer to whichever of
such persons is the issuer of the issued and outstanding Common Stock having
the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved
for issuance to permit the exercise in full of the Rights in accordance with
this SECTION 13 and unless prior thereto the Company and such Principal Party
shall have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this SECTION 13
and further providing that, as soon as practicable after the date of any
consolidation, merger, sale or transfer mentioned in paragraph (a) of this
SECTION 13, the Principal Party will:
(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon exercise of the
Rights on an appropriate form, and will use its best efforts to cause such
registration statement to (A) become effective as soon as practicable after
such filing and (B) remain effective (with a prospectus at all times meeting
the requirements of the Act) until the Expiration Date and similarly comply
with applicable state securities laws;
(ii) will deliver to holders of the Rights historical financial
statements of the Principal Party and each of its Affiliates which comply in
all respects
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with the requirements for registration on Form 10 (or any successor form)
under the Exchange Act;
(iii) use its best efforts, if the Common Stock of the Principal
Party shall become listed on a national securities exchange, to list (or
continue the listing of) the Rights and the securities purchasable upon
exercise of the Rights on such securities exchange and, if the Common Stock of
the Principal Party shall not be listed on a national securities exchange, to
cause the Rights and the securities purchasable upon exercise of the Rights to
be reported by NASDAQ or such other system then in use; and
(iv) obtain waivers of any rights of first refusal or preemptive
rights in respect of the shares of Common Stock of the Principal Party subject
to purchase upon exercise of outstanding Rights.
The provisions of this SECTION 13 shall similarly apply to successive
mergers or consolidations or sales or transfers. In the event that a Section
13 Event shall occur at any time after the occurrence of a Section 11(a)(ii)
Event, the Rights which have not theretofore been exercised shall thereafter
become exercisable in the manner described in SECTION 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
SECTION 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of SECTION 13(a) if (i) such transaction is consummated with a
Person or Persons who acquired shares of Common Stock pursuant to a tender
offer or exchange offer for all outstanding shares of Common Stock which
complies with the provisions of SECTION 11(a)(ii) hereof (or a wholly owned
Subsidiary of any such Person or Persons), (ii) the price per share of Common
Stock offered in such transaction is not less than the price per share of
Common Stock paid to all holders of shares of Common Stock whose shares were
purchased pursuant to such tender offer or exchange offer, and (iii) the form
of consideration being offered to the remaining holders of shares of Common
Stock pursuant to such transaction is the same as the form of consideration
paid pursuant to such tender offer or exchange offer. Upon consummation of any
such transaction contemplated by this SECTION 13(d), all Rights hereunder shall
expire.
14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of Rights,
except prior to the Distribution date as provided in SECTION 11(p), or to
distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the Current Market
Value of a whole Right. For purposes of this SECTION 14(a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable. The closing price of the Rights for any day shall be
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading, or
if the Rights
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are not listed or admitted to trading on any national securities exchange,
the last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by NASDAQ or
such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights the fair value of
the Rights on such date as determined in good faith by the Board of Directors
of the Company shall be used.
(b) The Company shall not be required to issue fractions of shares
of Preferred Stock (other than fractions which are integral multiples of one
one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock
that are not integral multiples of one one-thousandth of a share of Preferred
Stock, the Company may pay to the registered holders of Rights Certificates at
the time such Rights are exercised as herein provided an amount in cash equal
to the same fraction of the Current Market Value of one one-thousandth of a
share of Preferred Stock. For purposes of this SECTION 14(b), the Current
Market Value of one one-thousandth of a share of Preferred Stock shall be one
one-thousandth of the closing price of a share of Preferred Stock (as
determined pursuant to SECTION 11(d)(ii)) for the Trading Day immediately prior
to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company
shall not be required to issue fractions of shares of Common Stock upon
exercise of the Rights or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the Current Market Value of one (1) share of Common Stock.
For purposes of this SECTION 14(c), the Current Market Value of one share of
Common Stock shall be the closing price of one share of Common Stock (as
determined pursuant to SECTION 11(d)(i)) for the Trading Day immediately prior
to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this SECTION 14.
15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, other than rights of action vested in the Rights Agent pursuant
to SECTION 18, are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered
holders of the Common Stock); and any registered holder of any Rights
Certificate (or, prior to the Distribution Date, of the Common Stock),
without the consent of the Rights Agent or of the holder of any other
Rights Certificate (or, prior to the Distribution Date, of the Common
Stock), may, in his own behalf and for his own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company
to enforce, or otherwise act in respect of, his right to exercise the
Rights evidenced by such Rights Certificate in the manner provided in such
Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy
at law for any breach of this Agreement and shall be
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entitled to specific performance of the obligations hereunder and injunctive
relief against actual or threatened violations of the obligations hereunder
of any Person subject to this Agreement.
16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights
Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office or offices of the Rights Agent designated for such purposes, duly
endorsed or accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed;
(c) subject to SECTION 6(a) and SECTION 7(f), the Company and the
Rights Agent may deem and treat the person in whose name a Rights Certificate
(or, prior to the Distribution Date, the associated Common Stock certificate)
is registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Stock certificate made by anyone other
than the Company or the Rights Agents) for all purposes whatsoever, and neither
the Company nor the Rights Agent, subject to the last sentence of SECTION 7(e),
shall be required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; PROVIDED, HOWEVER, the Company must use its
best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote,
receive dividends or be deemed for any purposes the holder of the number
of one one-thousandths of a share of Preferred Stock or any other
securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained
herein or in any Rights Certificate be construed to confer upon the holder
of any Rights Certificate, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings
or other actions affecting shareholders (except as provided in SECTION
25), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by such Rights Certificate shall have been
exercised in accordance with the provisions hereof.
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18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder as set forth in a
separately executed written fee agreement. The Company also agrees to
indemnify the Rights Agent for, and to hold it harmless against, any loss,
liability, or expense, incurred without gross negligence or willful misconduct
on the part of the Rights Agent, for anything done or omitted by the Rights
Agent in connection with the acceptance and administration of this Agreement,
including the costs and expenses of defending against any claim of liability in
the premises.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons.
19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights
Agent or any successor Rights Agent, shall be the successor to the Rights Agent
under this Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto; PROVIDED, HOWEVER, that
such corporation would be eligible for appointment as a successor Rights Agent
under the provisions of SECTION 21. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any of the Rights
Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of a predecessor Rights
Agent and deliver such Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Rights Certificates either in the
name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of
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which the Company and the holders of Rights Certificates, by their acceptance
thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "Current Market Price") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed)
may be deemed to be conclusively proved and established by a certificate signed
by the Chairman of the Board, Chief Executive Officer, President, any Vice
President, Chief Financial Officer, Treasurer, any Assistant Treasurer,
Secretary or any Assistant Secretary of the Company and delivered to the Rights
Agent; and such certificate shall be full authorization to the Rights Agent for
any action taken or suffered in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
gross negligence or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any adjustment required under the
provisions of SECTION 11 or SECTION 13 or responsible for the manner, method or
amount of any such adjustment or the ascertaining of the existence of facts
that would require any such adjustment (except with respect to the exercise of
Rights evidenced by Rights Certificates after receipt of the certificate
described in SECTION 12 setting forth any such adjustment); nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock or Preferred Stock
to be issued pursuant to this Agreement or any Rights Certificates or as to
whether any shares of Common Stock or Preferred Stock will, when so issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board or the President of the Company or any other officer of
the Company designated
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to the Rights Agent in writing by the Chairman of the Board or President of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken
or suffered to be taken by it in good faith in accordance with instructions
of any such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct or any such
attorneys or agents or for any loss to the Company resulting from any such act,
default, neglect or misconduct; PROVIDED, HOWEVER, reasonable care was
exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agents
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its rights
if there shall be reasonable grounds for believing that repayment of such funds
or adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to
such requested exercise of transfer without first consulting with the Company.
21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days' notice in writing mailed to the Company,
and to each transfer agent of the Common Stock and Preferred Stock by
registered or certified mail, and to the holders of the Rights
Certificates by first-class mail. The Company may remove the Rights Agent
or any successor Rights Agent (with or without cause) upon thirty (30)
days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Stock
and Preferred Stock, by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. If the Rights Agent shall
resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company
shall fail to make such appointment within a period of thirty (30) days
after giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who
shall, with such notice, submit his Rights Certificate for inspection by
the Company), then the incumbent Rights Agent or any registered holder of
any Rights Certificate may apply to any court of competent jurisdiction
for the appointment of a new Rights Agent. Any successor Rights Agent,
whether appointed by the
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Company or by such a court, shall be (a) a corporation organized and doing
business under the laws of the United States or of any other state of the
United States in good standing, which is authorized under such laws to
exercise corporate trust or stock transfer powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus deemed
by the Company's Board of Directors to be reasonable under the circumstances.
After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property
at the time held by it hereunder, and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose. Not later than
the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent
of the Common Stock and the Preferred Stock, and mail a notice thereof in
writing to the registered holders of the Rights Certificates. Failure to give
any notice provided for in this SECTION 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of
the Rights Agent or the appointment of the successor Rights Agents as the
case may be.
22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing
Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or
kind or class of shares or other securities or property purchasable under
the Rights Certificates made in accordance with the provisions of this
Agreement. In addition, in connection with the issuance or sale of shares
of Common Stock following the Distribution Date and prior to the
redemption or expiration of the Rights, the Company (a) shall, with
respect to shares of Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, or
upon the exercise, conversion or exchange of securities hereinafter issued
by the Company, and (b) may, in any other case, if deemed necessary or
appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection
with such issuance or sale; provided, however, that (i) no such Rights
Certificate shall be issued if, and to the extent that, the Company shall
be advised by counsel that such issuance would create a significant risk
of material adverse tax consequences to the Company or the Person to whom
such Rights Certificate would be issued, and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
23. REDEMPTION AND TERMINATION.
(a) The Board of Directors of the Company may, at its option, at any
time prior to the earlier of (i) the close of business on the tenth day
following the Stock Acquisition Date (or, if the Stock Acquisition Date shall
have occurred prior to the Record Date, the close of business on the tenth day
following the Record Date), subject to extension as provided in SECTION 27 or
(ii) the close of business on the Final Expiration Date, redeem all but not
less than all the then outstanding Rights at a redemption price of $0.01 per
Right, as such amount may be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
redemption price
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being hereinafter referred to as the "REDEMPTION PRICE"). Notwithstanding
anything contained in this Agreement to the contrary, the Rights shall not be
exercisable after the occurrence of an event described in SECTION 11(a)(ii)
until such time as the Company's right of redemption hereunder has expired.
The Company may, at its option, pay the Redemption Price in cash, shares of
Common Stock (based on the "Current Market Price," as defined in SECTION
11(d)(i), of the Common Stock at the time of redemption) or any other form of
consideration deemed appropriate by the Board of Directors. Such redemption
of the Rights by the Company may be made effective at such time, on such
basis and with such conditions as the Board of Directors in its sole
discretion may establish; PROVIDED, HOWEVER, that any redemption of Rights
occurring as of or after the time a Person becomes an Acquiring Person may be
effected, and the method of payment of the redemption price and conditions to
redemption may be determined, only by the Company's Board of Directors acting
by Special Vote.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, and without any further action
and without any notice, the right to exercise the Rights will terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price for each Right so held, without any interest thereon.
Promptly after the action of the Board of Directors ordering the redemption of
the Rights, the Company shall give notice of such redemption to the Rights
Agent and the holders of the then outstanding Rights by mailing such notice to
all such holders at each holder's last address as it appears upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the Transfer Agent for the Common Stock. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of redemption will state the method by
which the payment of the Redemption Price will be made. The failure to give
notice required by this SECTION 23(b) or any defect therein shall not affect
the legality or validity of the action taken by the Company.
24. EXCHANGE.
(a) Subject to applicable laws, rules and regulations, and subject
to subsection (c) below, at any time after the occurrence of a Triggering
Event, the Board of Directors of the Company, acting by Special Vote, may cause
the Company to exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become void pursuant to the
provisions of SECTION 7(e)) for Common Stock at an exchange ratio of one share
of Common Stock per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
exchange ratio being hereinafter referred to as the "RATIO OF EXCHANGE").
Notwithstanding the foregoing, the Board of Directors shall not be empowered to
effect such exchange at any time after any Person (other than an Exempt
Person), together with all Affiliates and Associates of such Person, becomes
the Beneficial Owner of 50% or more of the Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors ordering
the exchange of any Rights pursuant to subsection (a) of this SECTION 24 and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of shares of Common Stock equal to the number
of such Rights held by such holder multiplied by the Ratio of Exchange. The
Company shall give public notice of any such exchange; PROVIDED, HOWEVER, that
the failure to give, or any defect in, such notice shall not affect the
validity of such exchange. The Company shall mail a notice of any such
exchange to
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all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method by
which the exchange of the Common Stock for Rights will be effected and, in
the event of any partial exchange, the number of Rights that will be
exchanged. Any partial exchange shall be effected pro rata based on the
number of Rights (other than Rights which have become void pursuant to the
provisions of SECTION 7(e)) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Stock
authorized but unissued to permit any exchange of Rights as contemplated in
accordance with SECTION 24(a), the Company shall either take such action as may
be necessary to authorize additional shares of Common Stock for issuance upon
exchange of the Rights or alternatively, at the option of the Board of
Directors acting by Special Vote, with respect to each Right (i) pay cash in an
amount equal to the Current Value (as hereinafter defined), in lieu of issuing
Common Stock in exchange therefor, or (ii) issue debt or equity securities or a
combination thereof, having a value equal to the Current Value, in lieu of
issuing Common Stock in exchange for each such Right, where the value of such
securities shall be determined by a nationally recognized investment banking
firm selected by the Board of Directors acting by Special Vote, or
(iii) deliver any combination of cash, property, Common Stock and/or other
securities having a value equal to the Current Value in exchange for each
Right. For purposes of this SECTION 24(c) only, the "CURRENT VALUE" shall mean
the product of the current per share market price of Common Stock (determined
pursuant to SECTION 11(d) on the date of the occurrence of the event described
above in subparagraph (a)) multiplied by the number of shares of Common Stock
for which the Right otherwise would be exchangeable if there were sufficient
shares available. To the extent that the Company determines that some action
need be taken pursuant to clauses (i), (ii), or (iii) of this SECTION 24(c),
the Board of Directors acting by Special Vote may temporarily suspend the
exercisability of the Rights for a period of up to sixty (60) days following
the date on which the event described in SECTION 24(a) shall have occurred, in
order to seek any authorization of additional Common Stock and/or to determine
the appropriate form of distribution to be made pursuant to the above provision
and to determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the exercisability of
the Rights has been temporarily suspended.
(d) The Company shall not be required to issue fractions of Common
Stock or to distribute certificates that evidence fractional Common Stock. In
lieu of such fractional Common Stock, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional Common
Stock would otherwise be issuable, an amount in cash equal to the same fraction
of the current per share market value of a whole Common Stock (as determined
pursuant to the second sentence of SECTION 11(d)).
(e) The Company may, at the option of the Board of Directors acting
by Special Vote, at any time before any Person has become an Acquiring Person,
exchange all or part of the then outstanding Rights for rights of substantially
equivalent value, as determined reasonably and with good faith by the Board of
Directors acting by Special Vote, based upon the advice of one or more
nationally recognized investment banking firms.
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(f) Immediately upon the action of the Board of Directors acting by
Special Vote ordering the exchange of any Rights pursuant to subsection (e) of
this SECTION 24 and without any further action and without any notice, the
right to exercise such Rights shall terminate and the only right thereafter of
a holder of such Rights shall be to receive that number of rights in exchange
therefore as has been determined by the Board of Directors in accordance with
subsection (e) above. The Company shall give public notice of any such
exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company shall mail
a notice of any such exchange to all of the holders of such Rights at their
last addresses as they appear upon the registry books of the transfer agent for
the Common Stock of the Company. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the
exchange of the Rights will be effected.
25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular quarterly cash dividend out of earnings
or retained earnings of the Company), or (ii) to offer to the holders of
Preferred Stock rights or warrants to subscribe for or to purchase any
additional shares of Preferred Stock or shares of stock of any class or any
other securities, rights or options, or (iii) to effect any reclassification of
its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding shares of Preferred Stock), or (iv) to effect any
consolidation or merger into or with any other Person (other than a Subsidiary
of the Company in a transaction which complies with SECTION 11(o)), or to
effect any sale or other transfer (or to permit one or more of its Subsidiaries
to effect any sale or other transfer), in one transaction or a series of
related transactions, of more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with SECTION 11(o)), or (v) to effect the
liquidation, dissolution or winding up of the Company, then, in each such case,
the Company shall give to each holder of a Rights Certificate, to the extent
feasible and in accordance with SECTION 26, a notice of such proposed action,
which shall specify the record date for the purposes of such stock dividend,
distribution of rights or warrants, or the date on which such reclassification,
consolidation, merger, sale, transfer, liquidation, dissolution, or winding up
is to take place and the date of participation therein by the holders of the
shares of Preferred Stock, if any such date is to be fixed, and such notice
shall be so given in the case of any action covered by clause (i) or (ii) above
at least ten (10) days prior to the record date for determining holders of the
shares of Preferred Stock for purposes of such action, and in the case of any
such other action, at least ten (10) days prior to the date of the taking of
such proposed action or the date of participation therein by the holders of the
shares of Preferred Stock whichever shall be the earlier. The failure to give
notice required by this SECTION 25 or any defect therein shall not affect the
legality or validity of the action taken by the Company or the vote upon any
such action.
(b) In case any of the events set forth in SECTION 11(a)(II) shall
occur, then, in any such case, (i) the Company shall as soon as practicable
thereafter give to each holder of a Rights Certificate, to the extent feasible
and in accordance with SECTION 26, a notice of the occurrence of such event,
which shall specify the event and the consequences of the event to holders of
Rights under SECTION 11(a)(ii), and (ii) all references in the
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preceding paragraph to Preferred Stock shall be deemed thereafter to refer to
Common Stock and/or, if appropriate, other securities.
26. NOTICES. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Rights Agent) as follows:
Safeguard Health Enterprises, Inc.
505 North Euclid Street
P.O. Box 3210
Anaheim, California 92803-3210
Attention: President
Subject to the provisions of SECTION 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by the
holder of any Rights Certificate to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company) as
follows:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: Reorganization Department
Notices or demands authorized by this Agreement to be given or made
by the Company or the Rights Agent to the holder of any Rights Certificate (or,
if prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by first-
class mail, postage prepaid, addressed to such holder at the address of such
holder as shown on the registry books of the Transfer Agent.
27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date
and subject to the penultimate sentence of this SECTION 27, the Board of
Directors of the Company may, in its sole and absolute discretion and the
Rights Agent shall, if the Board of Directors so directs, supplement or
amend any provision of this Agreement without the approval of any holders
of certificates representing shares of Common Stock, whether or not such
supplement or amendment is adverse to any holders of Rights. From and
after the Distribution Date, and subject to the penultimate sentence of
this SECTION 27, the Board of Directors acting by Special Vote may, and
the Rights Agent shall, if the Board of Directors acting by Special Vote
so directs, supplement or amend this Agreement without the approval of any
holders of Rights Certificates in order to (i) cure any ambiguity,
(ii) correct or supplement any provision contained herein which may be
defective or inconsistent with any other provisions hereunder,
(iii) shorten or lengthen any time period hereunder, or (iv) otherwise
change or supplement the provisions hereunder in any manner which the
Board of Directors acting by Special Vote may deem necessary or desirable
and which shall not materially and adversely affect the interests of the
holders of Rights Certificates (other than an Acquiring Person or an
Affiliate or Associate of any such Person); provided, this Agreement may
not be supplemented or amended after the Distribution Date to (A) make the
Rights again redeemable after the Rights have ceased to be redeemable, or
(B) change any other time period
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<PAGE>
unless such change is for the purpose of protecting, enhancing or clarifying
the rights of, and/or the benefits to the holders of Rights (other than any
Acquiring Person and its Associates or Affiliates). Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this
SECTION 27, the Rights Agent shall execute such supplement or amendment.
Notwithstanding anything contained in this Agreement to the contrary, no
supplement or amendment shall be made which changes the Redemption Price or
the Final Expiration Date. Prior to the Distribution Date, the interests of
the holders of Rights shall be deemed coincident with the interests of the
holders of Common Stock.
28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
29. DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS, ETC.
For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding
shares of Common Stock of which any Person is the Beneficial Owner, shall
be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the
General Rules and Regulations under the Exchange Act. The Board of
Directors of the Company (acting by Special Vote where specifically
provided for herein) shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers
specifically granted to the Board of Directors of the Company or to the
Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power to (i)
interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of
this Agreement (including, but not limited to, a determination to redeem
or not redeem the Rights, or to amend this Agreement). All such actions,
calculations, interpretations and determinations (including, for purposes
of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board of Directors of the Company in good faith,
shall (x) be final, conclusive and binding on the Company, the Rights
Agent, the holders of the Rights and all other parties, and (y) not
subject any member of the Board of Directors to any liability to the
holders of the Rights or to any other Person.
30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, registered holders of the Common Stock)
any legal or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sole and exclusive benefit of the Company,
the Rights Agent and the registered holders of the Rights Certificates
(and, prior to the Distribution Date, registered holders of the Common
Stock).
31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction
or other authority to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired
or invalidated; provided, however, that notwithstanding anything in this
Agreement to the contrary, if any such term,
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<PAGE>
provision, covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board of Directors of the Company
(acting by Special Vote) determines in its good faith judgment that severing
the invalid language from this Agreement would adversely affect the purpose
or effect of this Agreement, the right of redemption set forth in SECTION 23,
if lapsed, shall be reinstated and shall not expire until the close of
business on the tenth Business Day following the date of such determination
by the Board of Directors of the Company.
32. GOVERNING LAW. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts made and to be performed entirely within such State.
33. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
34. DESCRIPTIVE HEADINGS; REFERENCES. Descriptive headings of
the several Sections of this Agreement are inserted for convenience only
and shall not control or affect the meaning or construction of any of the
provisions hereof. References herein to Sections and Exhibits shall,
unless otherwise specified, be to the referenced section or exhibit hereof
or hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
SAFEGUARD HEALTH ENTERPRISES, INC.
By: /s/ Steven J.Baileys
---------------------------------------
Steven J.Baileys, D.D.S.
Chairman, President and Chief Executive
Officer
By: /s/ Ronald I. Brendzel
---------------------------------------
Ronald I. Brendzel
Senior Vice President, Chief Financial
Officer and Secretary
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:
---------------------------------------
Herbert J. Lemmer
Senior Vice President and General
Counsel
34
<PAGE>
EXHIBIT A
[FORM OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS]
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
SAFEGUARD HEALTH ENTERPRISES, INC.
Pursuant to Section 151 of the General Corporation Law of the State
of Delaware:
We, Steven J. Baileys, Chairman, President, and Chief Executive
Officer, and Ronald I. Brendzel, Senior Vice President, Chief Financial Officer
and Secretary, of Safeguard Health Enterprises, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof, do hereby certify:
That pursuant to the authority conferred upon the Board of Directors
by the Certificate of Incorporation of the Corporation, said Board of Directors
on March 22, 1996 adopted the following resolution creating a series of 30,000
shares of Preferred Stock designated as Series A Participating Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, the Board of
Directors does hereby provide for the issue of a series of Preferred Stock,
$.01 par value, of the Corporation, to be designated "Series A Junior
Participating Preferred Stock" (hereinafter referred to as the "Series A
Preferred Stock"), initially consisting of 30,000 shares, and to the extent
that the designations, powers, preferences and relative and other special
rights and qualifications, limitations and restrictions of the Series A
Preferred Stock are not stated and expressed in the Certificate of
Incorporation, does hereby fix and herein state and express such designations,
powers, preferences, and relative and other special rights and qualifications,
limitations and restrictions thereof as follows (all terms used herein which
are defined in the Certificate of Incorporation shall be deemed to have the
meanings provided therein):
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series A Junior Participating Preferred Stock" and the number
of shares constituting such series shall be 30,000. Such number of shares may
be increased or decreased by resolution of the Board of Directors; provided,
that no decrease shall reduce the number of shares of Series A Junior
Participating Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise
of outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series A
Junior Participating Preferred Stock.
<PAGE>
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the 15th day of February, May,
August and November in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to, subject to the provision for adjustment hereinafter set forth, 1,000
times the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.01 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time after
March 22, 1996 ("Rights Declaration Date") (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of shares of Series
A Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) above concurrently with
any declaration of a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares of Series A Preferred Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of
Series A Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive payment of a dividend
or distribution declared thereon, which record date shall be no more than 30
days prior to the date fixed for the payment thereof.
2
<PAGE>
Section 3. VOTING RIGHTS. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to
1,000 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each case the number of votes per share to which holders of shares of Series
A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) Except as set forth
herein, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for taking
any corporate action.
Section 4. CERTAIN RESTRICTIONS.
(A) The Corporation shall not declare any dividend on, make any
distribution on, or redeem or purchase or otherwise acquire for consideration
any shares of Common Stock after the first issuance of a share or fraction of
a share of Series A Participating Preferred Stock unless concurrently
therewith it shall declare a dividend on the Series A Participating Preferred
Stock as required by Section 2 hereof.
(B) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section
2 have been declared but not paid, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distribution
on, or redeem or purchase or otherwise acquire for consideration any shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred
Stock and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such shares
are then entitled;
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<PAGE>
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock;
(iv) purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment
among the respective series or classes.
(C) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under the foregoing
provisions of this Section 4, purchase or otherwise acquire such shares at
such time and in such manner.
Section 5. REACQUIRED SHARES. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new
series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors, subject to the conditions and restrictions on issuance
set forth herein.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock
shall have received $1,000 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment ("Series A Liquidation Preference"). Following the
payment of the full amount of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of shares of Series A
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share ("Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
1,000 (as appropriately adjusted as set forth in subparagraph 6(C) below to
reflect such events as stock splits, stock dividends and recapitalizations
with respect to the Common Stock) (such number in clause (ii), the
"Adjustment Number"). Following the payment of the full amount of the Series
A Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Series A Preferred Stock and Common Stock,
respectively, holders of Series A Preferred Stock and holders of shares of
Common Stock shall receive their ratable and proportionate share of remaining
assets to be distributed in the ratio of the Adjustment Number to one (1)
with respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
4
<PAGE>
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series A Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the
event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction
in which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case
the shares of Series A Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series A Preferred Stock shall
be adjusted by multiplying such amount by a fraction the numerator of which
is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
Section 8. NO REDEMPTION. The shares of Series A Preferred Stock
shall not be redeemable.
Section 9. RANKING. The Series A Preferred Stock shall rank
junior to all other series of the Corporation's preferred stock, if any, as
to the payment of dividends and the distribution of assets, unless the terms
of any such series shall provide otherwise.
Section 10. AMENDMENT. The Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A
Preferred Stock so as to affect them adversely without the affirmative vote
of the holders of a majority or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class.
Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be
issued in fractions of a share, which shall entitle the holder, in proportion
to such holder's fractional
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<PAGE>
shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of
Series A Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
as of the 22nd day of March, 1996.
_________________________
Steven J. Baileys, D.D.S.
Chairman, President and
Chief Executive Officer
________________________
Ronald I. Brendzel
Senior Vice President, Chief
Financial Officer and Secretary
6
<PAGE>
EXHIBIT B
[FORM OF RIGHTS CERTIFICATE]
CERTIFICATE NO. R______________ ________________RIGHTS
NOT EXERCISABLE AFTER MARCH 21, 2006 OR EARLIER IF REDEEMED BY THE
COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY,
AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER
CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN
THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME
NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR
WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON
OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED
IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT.*]
RIGHTS CERTIFICATE
SAFEGUARD HEALTH ENTERPRISES, INC.
This certifies that ________________________, or registered
assigns, is the registered owner of the number of Rights set forth above,
each of which entitles the owner thereof, subject to the terms, provisions
and conditions of the Rights Agreement, dated as of March 22, 1996 ("Rights
Agreement"), between Safeguard Health Enterprises, Inc., a Delaware
corporation ("Company"), and American Stock Transfer & Trust Company, a New
York corporation ("Rights Agent"), to purchase from the Company at any time
prior to 5:00 P.M. (California time) on March 21, 2006 at the office or
offices of the Rights Agent designated for such purpose, or its successors as
Rights Agent, one one-thousandth of a fully paid, non-assessable share of
Series A Junior Participating Preferred Stock ("Preferred Stock") of the
Company, at a purchase price of $75.00 per one one-thousandth of a share
("Purchase Price"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase and related Certificate
duly executed. The Purchase Price may be paid by bank draft, certified bank
check or money order payable to the order of the Company.
The number of Rights evidenced by this Rights Certificate (and the
number of shares which may be purchased upon exercise thereof) set forth above,
and the Purchase Price per share set forth above, are the number and Purchase
Price as of ______________, based on the Preferred Stock as constituted at
such date.
- -------------------------------
* The portion of the legend in brackets shall be inserted only if
applicable, shall be modified to apply to an Acquiring Person, and shall
replace the preceding sentence.
<PAGE>
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate
or Associate an Acquiring of Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of an Acquiring Person, (or of any such
Associate or Affiliate), or (iii) under certain circumstances specified in
the Rights Agreement, a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person becoming such, such Rights shall become null and
void and no holder hereof shall have any right with respect to such Rights
from and after the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the
number and kind of shares of Preferred Stock or other securities which may be
purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events, including Triggering Events (as such term is defined in the
Rights Agreement).
The Rights Certificate is subject to all of the terms, provisions
and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description
of the Rights, limitations of Rights, and obligations, duties and immunities
of the Rights Agent, the Company and the holders of the Rights Certificates,
which limitations of Rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in
the Rights Agreement. Copies of the Rights Agreement are on file at the
office of the Rights Agent and are also available upon written request to the
Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the office or offices of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate amount of securities as the Rights evidenced by the
Rights Certificate or Rights Certificates surrendered shall have entitled
such holder to purchase. If this Rights Certificate shall be exercised in
part, the holder shall be entitled to receive upon surrender hereof another
Rights Certificate or Rights Certificates for the number of whole Rights not
exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be (i) redeemed by the Company at its
option at a redemption price of $0.01 per Right or (ii) exchanged by the
Company in whole or part for Common Shares, substantially equivalent rights,
or other consideration as determined by the Company.
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which
are integral multiples of one one-thousandth of a share of Preferred Stock,
which may, at the election of the Company, be evidenced by depository
receipts), but in lieu thereof a cash payment will be made, as provided in
the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of shares
of Preferred Stock or of any other securities of the Company which may at any
time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote
for the election of directors or upon any matter submitted to stockholders at
any meeting thereof, or to give or withhold consent to any corporate action,
or, to receive notice of meeting or other actions affecting stockholders
(except as provided in the Rights Agreement), or to receive
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<PAGE>
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Rights Certificate shall have been exercised as provided in
the Rights Agreement.
The Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of _____________________, __
(Seal)
SAFEGUARD HEALTH ENTERPRISES, INC.
By:
========================
(Printed Name & Title)
ATTEST:
______________________________
______________________________
(Printed Name & Title)
Countersigned:
American Stock Transfer & Trust Company, as Rights Agent
By: _________________________
_________________________
(Printed Name & Title)
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<PAGE>
[FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Rights Certificate.)
FOR VALUE RECEIVED ________________________________ hereby sells,
assigns and transfers unto ______________________________________________
_______________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint __________________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company with full power of substitution.
Dated: ___________________,
______________________________
(Signature)
______________________________
(Printed Name)
Signature Guaranteed:
______________________________
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person
or an Affiliate or Associate of any such Person (as such terms are defined
pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
the undersigned [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of any such Person.
Dated: ___________________,
______________________________
(Signature)
______________________________
(Printed Name)
Signature Guaranteed:
______________________________
<PAGE>
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
[FORM OF ELECTION TO PURCHASE]
(TO BE EXECUTED IF HOLDER DESIRES TO
EXERCISE RIGHTS REPRESENTED BY THE
RIGHTS CERTIFICATE)
To: SAFEGUARD HEALTH ENTERPRISES, INC.
The undersigned hereby irrevocably elects to exercise
______________ Rights represented by this Rights Certificate to purchase the
number of one one-thousandths of a share of Preferred Stock issuable upon the
exercise of the Rights (or such other securities of the Company or of any
other Person which may be issuable upon the exercise of the Rights) and
requests that certificates for such shares be issued in the name of and
delivered to:
Please insert social security or other identifying number____________
(Please print name and address) _____________________________________
_____________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by
this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
Please insert social security or other identifying number____________
(Please print name and address) _____________________________________
_____________________________________________________________________
Dated: ___________________,
______________________________
(Signature)
______________________________
(Printed Name)
Signature Guaranteed:
______________________________
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(l) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
the undersigned [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or became an Acquiring Person or
an Affiliate or Associate of any such Person.
Dated: ___________________,
______________________________
(Signature)
______________________________
(Printed Name)
Signature Guaranteed:
______________________________
<PAGE>
NOTICE
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change
whatsoever.
<PAGE>
EXHIBIT C
SAFEGUARD HEALTH ENTERPRISES, INC.
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED STOCK
On March 22, 1996 ("Rights Dividend Declaration Date") the Board of
Directors of Safeguard Health Enterprises, Inc., a Delaware corporation
("Company") declared a dividend of one Right (a "Right") for each outstanding
share of Company Common Stock to be distributed to stockholders of record at
the close of business on April 12, 1996. Each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share (a "Unit")
of Series A Junior Participating Preferred Stock, par value $.01 per share
("Preferred Stock") at a "Purchase Price" of $75.00, subject to adjustment.
The description and terms of the Rights are set forth in a Rights Agreement
dated as of March 22, 1996 ("Rights Agreement") between the Company and
American Stock Transfer & Trust Company, as Rights Agent.
Initially, the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed.
Until the Distribution Date (as described below), (i) the Rights
will be evidenced by the Common Stock certificates and will be transferred
with and only with such Common Stock certificates, (ii) new Common Stock
certificates issued after April 12, 1996 will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on March 21, 2006, unless earlier redeemed by
the Company as described below.
The Rights will separate from the Common Stock and a Distribution
Date will occur ("Distribution Date") upon the earlier of 10 days (or such
longer time as may be determined by the Company's board, acting with the
approval of a majority of the Continuing Directors as defined below)
following (i) a public announcement (or determination by the Company's board)
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership
of 15% or more of the outstanding shares of Common Stock ("Stock Acquisition
Date"), or (ii) the commencement of a tender offer or exchange offer that
would result in a person or group beneficially owning 15% or more of such
outstanding shares of Common Stock.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of the Common Stock as of
the close of business on the Distribution Date and, thereafter, the separate
Rights Certificates alone will represent the Rights.
<PAGE>
In the event that on or at any time following the Rights Dividend
Declaration Date, a person becomes the beneficial owner of more than 15% of
the then outstanding shares of Common Stock (except pursuant to an offer for
all outstanding shares of Common Stock which the Continuing Directors
determine to be fair to and otherwise in the best interests of the Company
and its stockholders), then each holder of a Right will thereafter have the
right to receive, upon exercise, Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value equal to
two times the Purchase Price of the Right. Rights are exercisable following
the occurrence of the foregoing only after such time as the Rights are no
longer redeemable by the Company, as set forth below. Notwithstanding any of
the foregoing, following the occurrence of the event set forth in this
paragraph, all Rights that are, or (under certain circumstances specified in
the Rights Agreement) were, beneficially owned by any Acquiring Person will
be null and void.
In the event that, at any time following the Stock Acquisition
Date, (i) the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation or in which
the Company's outstanding Common Stock is exchanged for cash, stock or other
property (other than a merger which follows an offer described in the second
preceding paragraph), or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having
a value equal to two times the Purchase Price of the Right.
The Purchase Price payable, and the number of Units of Preferred
Stock or other securities or property issuable, upon exercise of the Rights
are subject to adjustment from time to time to prevent dilution, as set forth
in the Rights Agreement. With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative adjustments amount to at
least 1% of the Purchase Price. No fractional Rights, fractions of shares of
Preferred Stock (other than fractions which are integral multiples of one
one-thousandth of a share), or fractional shares of Common Stock will be
issued and, in lieu thereof, an adjustment in cash will be made based on the
market price of the Rights, Preferred Stock, or Common Stock, respectively,
on the last trading date prior to the date of exercise.
In general, the Company may redeem the Rights in whole, but not in
part, at a price of $0.01 per Right, at any time until ten days following the
Stock Acquisition Date (or such later date as may be determined by the
Company's board, acting with the approval of a majority of the Continuing
Directors, as defined below). Immediately upon the action of the Board of
Directors ordering redemption of the Rights, the Rights will terminate and the
only right of the holders of Rights will be to receive the $0.01 redemption
price.
The Company may exchange Common Stock or other substantially
equivalent rights or consideration for the Rights, in whole or part, from time
to time as determined by the Company's board, acting with the approval of a
majority of the Continuing Directors, as defined below.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends.
2
<PAGE>
Other than those provisions relating to the redemption price or the
final expiration date of the Rights, any of the provisions of the Rights
Agreement may be supplemented or amended by the Board of Directors prior to
the Distribution Date, without approval of the Rights holders, whether or not
a supplement or amendment is adverse to the Rights holders. After the
Distribution Date, the provisions of the Rights Agreement (other than the
provisions relating to the redemption price or the final expiration date of
the Rights) may be amended by the Board of Directors, with the approval of a
majority of the Continuing Directors in order to make changes which do not
materially and adversely affect the interests of holders of Rights (excluding
the interests of any Acquiring Person), PROVIDED, however, that the Rights
Agreement may not be amended to (i) make the Rights again redeemable after
the Rights have ceased to be redeemable, or (ii) change any other time period
unless such change is for the benefit of the holders (excluding any
Acquiring Person).
"Continuing Director" means a member of the Board of Directors of
the Company who is not an Acquiring Person or an affiliate or representative
of an Acquiring Person.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated
March 28, 1996. A copy of the Rights Agreement is available free of charge
from the Company. This summary description of the Rights does not purport to
be complete and is qualified in its entirety by reference to the Rights
Agreement, which is incorporated herein by reference.
3
<PAGE>
EXHIBIT 21.1
SAFEGUARD HEALTH ENTERPRISES, INC.
SUBSIDIARIES OF THE COMPANY
The subsidiaries of Safeguard Health Enterprises, Inc., a Delaware
corporation, are as follows:
1. Safeguard Health Plans, Inc., an Arizona corporation
2. Safeguard Health Plans, Inc., a California corporation
3. Safeguard Health Plans, Inc., a Colorado corporation
4. Safeguard Health Plans, Inc., an Illinois corporation
5. Safeguard Health Plans, Inc., a Kansas corporation
6. Safeguard Health Plans, Inc., a Kentucky corporation
7. Safeguard Health Plans, Inc., a Missouri corporation
8. Safeguard Health Plans, Inc., a Nevada corporation
9. Safeguard Health Plans, Inc., an Ohio corporation
10. Safeguard Health Plans, Inc., an Oklahoma corporation
11. Safeguard Health Plans, Inc., an Oregon corporation
12. Safeguard Health Plans, Inc., a Texas corporation
13. Safeguard Health Plans, Inc., a Utah corporation
14. Safeguard Health Plans, Inc., a Washington corporation
15. Guards Dental, Inc., a California corporation
(A wholly owned subsidiary of Safeguard Health Plans, Inc., a
California corporation)
16. SafeHealth Life Insurance Company, a California corporation
<PAGE>
EXHIBIT 24.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Registration Statement
No. 33-2226 on Form S-8 of Safeguard Health Enterprises, Inc. of our report
dated March 22, 1996, incorporated by reference in the Annual Report on Form
10-K of Safeguard Health Enterprises, Inc. for the year ended December 31,
1995.
DELOITTE & TOUCHE, LLP
Costa Mesa, California
March 28, 1996
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<PAGE>
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