-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BjV0kskpDliYitMKiRL105P0I0uKnmXAumPJjqxD3YNE6XdkPG/vN8ZcGM05hyWu /GUBwZpH9mqD0IYp2fh4iQ== 0000892569-98-003186.txt : 19981124 0000892569-98-003186.hdr.sgml : 19981124 ACCESSION NUMBER: 0000892569-98-003186 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEGUARD HEALTH ENTERPRISES INC CENTRAL INDEX KEY: 0000727303 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 521528581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12050 FILM NUMBER: 98757645 BUSINESS ADDRESS: STREET 1: 505 N EUCLID ST STREET 2: PO BOX 3210 CITY: ANAHEIM STATE: CA ZIP: 92803-3210 BUSINESS PHONE: 7147781005 10-Q 1 FORM 10-Q PERIOD DATE FOR 09/30/1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-12050 SAFEGUARD HEALTH ENTERPRISES, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1528581 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 95 ENTERPRISE ALISO VIEJO, CALIFORNIA 92656 (Address of principal executive offices) (Zip Code) (949) 425-4300 (Registrant's telephone number, including area code) 505 NORTH EUCLID STREET ANAHEIM, CALIFORNIA 92801 (Former name, former address and former fiscal year, if changed since last report) 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 such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of registrant's common stock, par value $.01 per share, at September 30, 1998, was 4,747,498 shares (not including 3,274,788 shares of common stock held in treasury). Page 1 of 17 2 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 INFORMATION INCLUDED IN REPORT
Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Position 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 17
Page 2 of 17 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (000'S OMITTED, EXCEPT SHARE DATA) (UNAUDITED)
September 30, December 31, 1998 1997 ------------- ------------ ASSETS Current assets: Cash $ 2,187 $ 3,652 Investments available for sale, at fair value 3,716 5,557 Investments held to maturity, at amortized cost -- 3,697 Accounts and notes receivable, net of allowances of $1,699 in 1998 and $1,061 in 1997 11,235 7,227 Income taxes receivable 475 132 Prepaid expenses and other current assets 1,003 1,029 Net assets of discontinued operations -- 4,062 Deferred income taxes 705 1,047 -------- -------- Total current assets 19,321 26,403 -------- -------- Property and equipment, net 10,598 9,351 Investments available for sale -- long term, at fair value 3,363 -- Investments held to maturity, at amortized cost -- 5,656 Notes receivable -- long-term, net of allowances of $9,453 in 1998 and $3,595 in 1997 22,778 12,327 Other assets 246 247 Goodwill, net of accumulated amortization of $1,386 in 1998 and $815 in 1997 28,091 29,556 Intangibles and covenants not to compete, net of accumulated amortization of $3,011 in 1998 and $2,287 in 1997 4,173 4,978 -------- -------- Total assets $ 88,570 $ 88,518 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term note payable $ 8,000 $ 8,500 Current portion of long-term debt 1,692 1,692 Accounts payable and accrued expenses 3,751 5,193 Reserves for dental claims 3,561 3,631 Deferred revenue 949 1,177 -------- -------- Total current liabilities 17,953 20,193 -------- -------- Long-term debt 33,000 33,894 Deferred income taxes 2,837 1,289 Accrued compensation agreement 356 383 Stockholders' equity Preferred stock - $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding -- -- Common stock $.01 par value; 30,000,000 shares authorized; 4,747,000 in 1998 and 1997 shares issued and outstanding, stated at 21,509 21,509 Retained earnings 31,778 29,816 Net unrealized loss on available for sale investments, net of deferred taxes of $547 in 1998 and $299 in 1997 (740) (443) Treasury stock, at cost (18,123) (18,123) -------- -------- Total stockholders' equity 34,424 32,759 -------- -------- $ 88,570 $ 88,518 ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 3 of 17 4 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000'S OMITTED, EXCEPT PER SHARE DATA)
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenues $ 24,004 $ 24,491 $ 72,939 $ 70,921 Expenses: Health care services 16,539 16,255 49,258 47,472 Selling, general and administrative 7,567 6,597 20,964 18,450 -------- -------- -------- -------- Total expenses 24,106 22,852 70,222 65,922 -------- -------- -------- -------- Operating income (loss) (102) 1,639 2,717 4,999 Other income 199 506 1,703 1,122 Interest expense (1,020) (836) (2,915) (1,960) -------- -------- -------- -------- Income (loss) from continuing operations before provision for income taxes and discontinued operations (923) 1,309 1,505 4,161 Provision for income taxes (300) 562 757 1,777 -------- -------- -------- -------- Income (loss) from continuing operations before discontinued operations (623) 747 748 2,384 Discontinued operations: (Loss) from dental office operations to be disposed of (net of income tax benefits of $0 and $396 in 1998 and $1,758 and $2,039 in 1997) -- (2,711) (620) (3,202) Gain on disposal of dental practices (net of income taxes of $0 and $1,182 in 1998 and $2,104 and $2,968 in 1997) -- 3,291 1,834 4,611 -------- -------- -------- -------- Net income $ (623) $ 1,327 $ 1,962 $ 3,793 ======== ======== ======== ======== Basic earning per share: Income (loss) from continuing operations $ (0.13) $ 0.16 $ 0.16 $ 0.50 Income from discontinued operations $ 0.00 $ 0.12 $ 0.25 $ 0.30 -------- -------- -------- -------- Net income (loss) $ (0.13) $ 0.28 $ 0.41 $ 0.80 ======== ======== ======== ======== Weighted average shares outstanding 4,747 4,717 4,747 4,717 Diluted earning per share: Income (loss) from continuing operations $ (0.13) $ 0.15 $ 0.16 $ 0.48 Income from discontinued operations $ 0.00 $ 0.12 $ 0.25 $ 0.29 -------- -------- -------- -------- Net income (loss) $ (0.13) $ 0.27 $ 0.41 $ 0.77 ======== ======== ======== ======== Weighted average shares outstanding 4,767 4,888 4,796 4,899
See accompanying Notes to Consolidated Financial Statements. Page 4 of 17 5 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED)
Nine months ended September 30, ------------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net income $ 1,962 $ 3,793 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Loss from discontinued operations 1,016 7,685 Gain on disposal of discontinued dental practices (3,016) (7,685) Depreciation and amortization 1,865 1,665 Deferred income taxes 1,436 2,728 Changes in operational assets and liabilities: Accounts and current notes receivable, net (5,035) (826) Income taxes receivable (343) 30 Prepaid expenses and other current assets 26 130 Accounts payable and accrued expenses (1,442) (815) Deferred revenue (228) 567 Reserves for dental claims (70) (1,744) -------- -------- Net cash (used in) provided by continuing operations (3,829) 5,528 Net cash used in discontinued operations (2,016) (7,942) -------- -------- Net cash (used in) operating activities (5,845) (2,414) -------- -------- Cash flows from investing activities: Purchase of investments available for sale (2,295) (3,526) Proceeds from sales/maturity of investments available for sale 5,049 7,736 Purchase of investments held to maturity (2,259) (4,014) Proceeds from maturity of investments held to maturity 7,039 1,476 Purchases of property and equipment (1,799) (2,143) Capital expenditures of discontinued operations -- (394) Cash paid for business acquired -- (1,459) Additions to intangibles and other assets 65 (363) -------- -------- Net cash provided by (used in) investing activities 5,800 (2,687) -------- -------- Cash flows from financing activities: Proceeds from long-term debt 8,000 35,500 Payments on bank debt -- (22,000) Payments on accrued compensation agreement (26) (21) Payments on notes payable (9,394) (852) -------- -------- Net cash provided by financing activities (1,420) 12,627 -------- -------- Net (decrease) increase in cash (1,465) 7,526 Cash at beginning of period 3,652 706 -------- Cash at end of period $ 2,187 $ 8,232 ======== ======== Purchase of business acquired: Fair value of assets acquired $ -- $ 17,342 Less: cash acquired -- (5,455) Less: note payable issued -- (1,000) Less: long-term debt issued -- (8,500) Less: liabilities assumed -- (928) -------- -------- Cash paid for business acquired $ -- $ 1,459 ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 5 of 17 6 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF REPORTING The accompanying unaudited Consolidated Financial Statements of Safeguard Health Enterprises, Inc. and subsidiaries (the "Company") for the quarter ended September 30, 1998, have been prepared in accordance with generally accepted accounting principles applicable to interim periods, and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. This information should be read in conjunction with the Consolidated Financial Statements and Notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Management believes that the disclosures herein are adequate to make the information presented not misleading. As described in Note 4 herein, the operating results for the quarters ended September 30, 1998 and 1997 have been reclassified to reflect the effect of the discontinued operation of the general dental and orthodontic practices. Beginning with the third quarter of 1998, the Company transferred approximately $4.2 million of securities from the held to maturity category to the available for sale category. This amount represented the amortized cost of the securities at the date of transfer. The estimated fair value of those securities was approximately $4.4 million resulting in a net after tax unrealized gain of $0.1 million, which was reflected as a direct increase to equity. The change in classification was a result of a change in management's intent with respect to these securities. In order to have the flexibility to respond to changes in interest rates and to take advantage of changes in the availability of and the yield on alternative investments, management determined that the reclassification of these securities as available for sale was appropriate. NOTE 2: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE Since October 1986, the Company's Board of Directors has, at various times, authorized the repurchase of up to 4,510,888 shares of its common stock through open market or private transactions. As of September 30, 1998, a total of 3,819,088 shares had been acquired. All shares acquired prior to August 24, 1987, have been retired as required by California law. All 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. Earnings per share have been restated to conform with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share excludes the effect of all potentially dilutive securities. Diluted earnings per share includes the effect of all potentially dilutive common securities. For the quarters ended September 30, 1998 and 1997, the current presentation of diluted earnings per share is identical to the Company's former presentation of primary earnings per share. NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per Share, which becomes effective for fiscal years ending after December 15, 1997. FAS 128 specifies the computation, presentation and disclosure requirements for earnings per share, and its objective is to simplify the computation of earnings per share, and to make the U.S. standard for computing earnings per share more compatible with the standards of other countries. The statement requires that all prior period earnings per share data presented shall be restated. The Company adopted FAS 128 in fiscal year 1997 as required, and its adoption did not have a significant effect on the Company's financial position or results of operations. In June 1997, FASB issued Statement of Financial Accounting Standards No. 130 ("FAS 130"), Reporting Comprehensive Income, which becomes effective for fiscal years ending after December 15, 1997. FAS 130 requires that all components of comprehensive income be displayed with the same prominence as other financial statements. The Company will adopt FAS 130 in fiscal year 1998 and its adoption is not expected to have a significant effect on the Company's financial position. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 ("FAS 131"), Disclosure About Segments of an Enterprises and Related Information, which becomes effective for periods beginning after December 15, 1997. FAS 131 requires that financial statements contain disclosures about products and services, geographic areas and major customers related to its reportable operating segments. The Company adopted FAS 131 in fiscal year 1998 and has identified only one reportable operating segment. Page 6 of 17 7 NOTE 4: DISCONTINUED OPERATIONS On October 21, 1996, the Company implemented a strategic plan to sell all of the general dental practices owned by the Company. Four of the general practices were sold during 1996, the remaining were sold during 1997. The assets of the general dental practices sold, pursuant to the Company's plan, consisted primarily of accounts receivable, supply inventories and leasehold improvements. Each general dental practice sold could enter into a contract with the Company's practice management subsidiary, whereby the Company would provide certain services to support the dentists in the operation of their practices, including administrative support. The Company terminated these agreements in 1998. The Company projected a gain on the disposal of the discontinued operations that offset the operating losses of the dental practices during the phase-out period ended September 30, 1997. In the fourth quarter 1997, the Company recorded a pretax charge of $8.5 million related to discontinued operations for both dental and orthodontic practices. This charge included reserves for under-performing notes and receivables ($5.6 million), litigation costs ($0.7 million) and other transition costs ($2.2 million). Operating losses for the discontinued general dental practices subsequent to the measurement date of October 21, 1996, were recognized in the consolidated statements of operations up to the amount of the net gain on disposal of the discontinued general dental practices. The remaining losses were deferred as an asset until the completion of the sale of all the dental practices as of September 30, 1997. The statement of operations for prior years has been restated and operating results of the dental and orthodontic practices are also shown as discontinued operations. Orthodontic Practices On February 26, 1998, the Company announced the discontinuance of its orthodontic practices effective in fiscal year 1997. On April 1, 1998, the Company completed the sale of its orthodontic practices to Pacific Coast Dental, Inc./Associated Dental Services, Inc., and affiliated dentists. The practices were sold for $15 million in 8.5% long-term notes, discounted for up to $2.5 million for early cash payment by January 1, 1999. The transaction includes the sale of all assets and associated liabilities of the orthodontic practices and a long-term commitment from the purchaser to continue to provide orthodontic services to SafeGuard members. The assets of the orthodontic practices sold consist of accounts receivable, supply inventory and dental equipment. The Company recorded a gain on the disposal of the discontinued orthodontic practices of $1.2 million, net of taxes of $0.8 million, or $0.25 per diluted share. All deferred losses recorded in prior periods have been offset against the gain recorded on the sale. Additionally, the Company has accrued against the gain on these sales certain run-out expenses that included agreed upon salary, payables and other transition costs that the Company expected to incur in future periods relating to the discontinuation of this business. NOTE 5: BANK CREDIT AGREEMENT On January 29, 1998, the Company entered into an $8 million revolving working capital credit facility with a Bank. The loan has a maturity date of January 28, 1999. The interest rate during the quarter for the facility, as amended, was established at the bank's prime rate plus 1.5 percent. The loan is secured by a first priority security interest in all of the personal property of the Company, including accounts receivable, fixed assets and intangibles and a negative pledge on the stock of the Company's subsidiaries and on real property owned by the Company. In connection with the bank loan, as amended, the Company is subject to certain financial and operational debt covenants. As of September 30, 1998, the Company was in compliance with, or has obtained a waiver with respect to those covenants. Page 7 of 17 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the attached consolidated financial statements and notes thereto.
1998 versus 1997 Nine months ended September 30, --------------------------- Increase/ Percent (Decrease) Change ---------- ------- Results of operations (000's omitted) Health care revenues $ 2,018 2.8% ------- ----- Health care expenses $ 1,786 3.8% ------- ----- Selling, general and administrative expenses $ 2,514 13.6% ------- ----- Other income, net $ 581 51.8% ------- ----- Interest expense $ 955 48.7% ------- ----- Income from continuing operations before discontinued operations $(1,636) (68.6)% ------- ----- Gain from discontinued operations, net $ (195) (13.8)% ------- ----- Net income $(1,831) (48.3)% ======= =====
1998 Versus 1997 Health care revenues for the quarter ended September 30, 1998 were $24,004, or a 2.0% decrease as compared to $24,491 over the same period a year earlier. This was on a decrease of 5.0% in membership over the corresponding period a year ago due to the anticipated loss of a large private label HMO relationship in the first quarter of this year. Though the membership and revenues for the quarter were lower than comparable periods in the prior year, the Company has, on a year to date basis, increased revenues by 2.8% over the previous nine months ended September 30, 1997. This increase has been due in part to the acquisition of Advantage Dental HealthPlans ("Advantage") in May 1997 compared to a full nine months of revenue due to the acquisition in 1998. Revenues for the nine months ended September 30, 1998 were $72,939 compared to $70,921 for the same period in the prior year. Excluding the effect of the Advantage acquisition, healthcare revenues decreased overall by 0.7% for the nine month period ended September 30, 1998. Health care expenses for the nine months ended September 30, 1998 increased $1,786, or 3.8%. Health care expense as a percentage of health care revenues increased by 0.9% from 66.9% of revenues for the nine months ended September 30, 1997, to 67.5% for the same period in 1998. This change was due to the effect of the HMO relationship lost this year, which experienced lower health care cost ratios in 1997 than the business that replaced it in 1998. General and administrative expenses for the nine months ended September 30, 1998, increased $2,514, or 28.7% of revenue compared to 26.0% of revenue for the same period a year ago. This was impacted by the acquisition of Advantage in May 1997, which had a higher ratio of general and administrative expenses to revenues than the Company had prior to the acquisition. Excluding the impact of the acquisition and the associated goodwill amortization, the ratio of general and administrative expenses to revenues was 28.7% for the nine months ended September 30, 1998, compared to 26.5% for the corresponding period a year ago. This was due primarily to the hiring of six additional sales representatives and increased telecommunications and computer network systems costs. The Company also relocated its corporate headquarters in August 1998 to Aliso Viejo, California, incurring $400 in costs relating to the move. Other income for the nine months ended September 30, 1998 was $1,703, which increased from $1,122 for the same period a year ago. This was due to an increase in interest bearing notes receivable resulting from the sale of the discontinued general dental and orthodontic practices. Other income, however, for the three months ended September 30, 1998 decreased $307 over the same period a year ago due to a decline in market value of certain investments during this quarter. These investments were sold, realizing the losses, and preventing further erosion of the value of those assets to the Company. Interest expense of $2,915 for the nine months ended September 30, 1998, was an Page 8 of 17 9 increase of $955 over the prior year, primarily as a result of the borrowings obtained by the Company for the acquisition of Advantage in May 1997. For the nine months ended September 30, 1998, the net gain from discontinued operations was $1,214 compared to $1,409 for the same period a year ago. This included the net income from the operations of the discontinued dental and orthodontic practices, plus the net gain on the sale of the discontinued practices. The operating losses of the discontinued orthodontic practices recorded in the first quarter 1998 were $620, net of taxes and were deferred against the anticipated gain on the sale, which was recorded in April 1998 in the second quarter (see Note 4 of the Notes to the Consolidated Financial Statements). Additionally, the Company has accrued against the gain on these sales certain run-out expenses that included agreed upon salary, payables and other transition costs that the Company expected to incur in future periods relating to the discontinuation of this business. The same nine-month period a year ago included a loss, net of taxes of $3,202 for the operating results of both the discontinued orthodontic and general dental practices. This loss was offset by the net after-tax gains on the sale of the general practices during the first nine months of 1997. Net income for the nine months ended September 30, 1998, was $1,962, which changed from the same period in 1997 due to the above-discussed factors. Net income for the same period in 1997 was $3,793. Business Segment Information The Company is engaged in a single business segment, the operation of managed care dental plans. Liquidity and Capital Resources The Company's capital and operational cash requirements have been met principally from operating cash flows, the sale of investments and corporate borrowings. At September 30, 1998, the Company's current ratio was 1.08 to 1.0. The Company's net worth was $34.4 million compared to $32.8 million at the beginning of the year. The Company had $9.3 million of cash and investments as of September 30, 1998 compared to $18.6 million at the beginning of the year. 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 in addition to minimum required total assets to satisfy depository and other regulatory requirements imposed by state regulatory agencies. The Company believes that cash flow from continuing operations, together with the existing cash and investments on hand and other available sources of financing, should be adequate to meet operating capital and regulatory needs for the foreseeable future. Credit Facilities On September 30, 1997, the Company completed a private placement of $32.5 million in long-term debt consisting of eight-year senior notes. The notes are unsecured senior notes and bear a fixed interest rate of 7.91 percent. In connection with the issuance of the senior notes, the Company is subject to certain financial and operational debt covenants. As of September 30, 1998, the Company was in compliance, or has obtained a waiver, with respect to these covenants. Page 9 of 17 10 On January 29, 1998, the Company entered into an $8 million revolving working capital credit facility with a Bank. The loan has a maturity date of January 28, 1999. The interest rate was established at the bank's Prime rate, plus 1.5 percent. The loan is secured by a first priority security interest in all the personal property of the Company and a negative pledge on the stock of the Company's subsidiaries and on the real property owned by the Company. In connection with the bank loan, as amended, the Company is subject to certain financial and operational debt covenants. As of September 30, 1998, the Company was in compliance, or has obtained a waiver, with respect to these covenants. 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. Year 2000 Company's State of Readiness The Company relies heavily upon information technology ("IT") systems and other systems and facilities such as telephones, building access control systems and heating and ventilation equipment ("embedded systems") to conduct its business. The Company also has business relationships with dental health care providers, financial institutions and other third parties ("Vendors") as well as regulators and customers who are themselves reliant upon IT and embedded systems to conduct their business. As part of the Company's proactive approach to automation, the Company began planning an awareness activity as early as January 1996 and incorporated Year 2000 compliance into its business continuity plans. As a result, the Company purchased and is in the final implementation process of upgrading any and all information systems software and hardware. The implementation of such new and upgraded computer information systems will recognize the Year 2000 and process date data correctly, including the Company's manipulation of data when dates are in the 20th or 21st century. The Company executed its initial steps in 1996 when it continued to enhance its information systems, including all hardware and software products, individually and in combination, to better manage operational resources and analysis of data. A review was also performed to determine the future needs of the Company and to enhance technology to better enable the Company to provide its services. In addition, as a foundation for developing and executing its Year 2000 compliance program, SafeGuard utilized and integrated Year 2000 compliance programs developed by both Federal and State governments and corporate industry leaders. Moreover, SafeGuard developed a comprehensive five-phase approach for all of its Year 2000 Program activities and management processes. The five phases are included in the following table that indicates the percentage completed as of November 1998. Page 10 of 17 11
Anticipated Program Goals Start Date Date Completed Completion Date ------------- ---------- -------------- --------------- Planning and Awareness 1 Jan 1996 1 Jun 1997 N/A Assessment 1 Jun 1996 1 Jan 1998 N/A Renovation 1 Dec 1996 In Process 1 Jan 1999 Validation 1 Jan 1997 In Process 1 Jun 1999 Implementation 1 Jun 1996 In Process 1 Jun 1999
The Company's five-phase comprehensive approach is as follows: (1) Phase 1: Planning and Awareness -- identify all IT and other systems and facilities and risk rate each according to its potential business impact; (2) Phase 2: Assessment -- identify IT and other systems and facilities that utilize date functions and assessing them for Year 2000 functionality; (3) Phase 3: Renovation-- reprogram or replace when necessary, inventoried items to ensure that they are Year 2000 compliant; (4) Phase 4: Validation -- test the code modifications and new inventory of other associated systems, including extensive date testing and performing quality assurance testing to ensure successful operation in a post-1999 environment; and (5) Phase 5: Implementation of Year 2000 Compliant IT and other systems. As indicated in the above-referenced chart, the Company completed Phase 1 Planning and Awareness on or about June 1, 1997, and Phase 2 Assessment on or about January 1, 1998. The Company plans to complete Phase 3 Renovation of all of its IT and other systems and related facilities by January 1, 1999. In addition, the Company anticipates completing Phase 4 Validation and beginning Phase 5 Implementation of such Year 2000 Compliant IT and other systems and facilities by June 1999. The Company has inventoried and risk rated substantially all of its embedded systems. The results of these processes indicate that embedded systems should not present a material Year 2000 risk to the Company. The Company's remaining steps include testing selected embedded systems and remediating through replacement and/or repair and certifying systems that exhibit Year 2000 issues. The Company is focusing its testing and facilities such as data centers, service centers and communication centers. The Company plans to complete the testing, validation and implementation of these systems by June 1999. The Company has also inventoried and risk rated its systems. The Company believes the tested IT systems have been found to be compliant. As part of the Company's Year 2000 Compliance Program Planning/Awareness and Assessment phases, the Company documented the state and condition of existing systems and processes and conducted a thorough analysis of inventory and vendor supplied systems and subsystems. The Company included information technology systems and non-information technology systems. The Company also faces the risk that one or more of its Vendors will not be able to interact with the Company Page 11 of 17 12 due to the Vendor's inability to resolve its own Year 2000 issues, including those associated with its own external relationships. The Company has completed its inventory of Vendors and risk rated each external relationship based upon the potential business impact, available alternatives and cost of substitution. Although the Company is diligently working with its vendors regarding Year 2000 compliance, there can be no guarantee that all the Company's vendors will be Year 2000 compliant. The Company has previously compiled a comprehensive list of any and all Vendors and Vendor products, which was included in a Vendor identification matrix. Although the Company does not currently rely upon external Vendors for proprietary software or data services, all other Vendors have been identified and have either stated their full compliance or partial compliance with contingent solutions to Year 2000 issues. The Company believes that its Vendors with which it has a material relationship are Year 2000 Compliant, based upon such Vendor's assurances. Nonmaterial Vendors of the Company currently have provided either full and/or partial certification of compliance with the Year 2000 issue. The Company will continue to monitor such nonmaterial Vendor compliance activity in order to determine the risk to overall company operations. As a result of the anticipated execution of the Renovation, Validation and Implementation phases of the Company's Year 2000 Compliance Program, the Company believes the Year 2000 issue will not have a material impact on the Company's results or operations. Cost to Address Company's Year 2000 Issues The cost the Company incurred to address Year 2000 Compliance issues from a historical perspective is approximately $2.5 million. Whereas, the estimated cost of the Company's completion of the final phases of renovation, validation and implementation is estimated to be approximately $.5 million. A large majority of these costs are expected to be incremental expenses that will not recur in Year 2000 or thereafter. The Company's current estimates primarily reflect increased remediation and testing efforts. The source of funds for the Year 2000 Compliance Program costs, including the percentage of the information technology budget utilized for the program was $3.0 million. Year 2000 Compliance is critical to the Company. Therefore, the Company has redeployed some resources from non-critical system enhancements to address Year 2000 issues. Due to the importance of IT systems to the Company's business, management has not deferred the decision to make non-critical systems enhancements to become Year 2000 ready. The Company does not expect these redeployments to have a material impact on the Company's financial condition or result of operations. Risk and Contingency/Recovery Planning The Company reasonably believes that its Year 2000 Compliance Program, which involves the phases of planning and awareness, assessment, renovation, validation and implementation should prevent the Year 2000 from having a material effect on the Company's business or financial condition. However, if the Company's Year 2000 issues were unresolved, potential consequences would include, among other possibilities, the inability to accurately and timely process benefits claims, update client groups' accounts, process financial transactions, bill client groups, report accurate data to management, shareholders, customers, regulators and others as well as business interruptions or shutdowns, financial losses, reputational harm, increased scrutiny by regulators and litigation related to Year 2000 issues. The Company is attempting to limit the potential impact of the Year 2000 by monitoring the progress of its own Year 2000 project and those of its critical Vendors and by developing contingency/recovery plans. The Company has begun to develop contingency/recovery plans aimed at ensuring the continuity of critical business functions before and after December 31, 1999. As part of that process, the Company has begun to develop reasonably likely failure scenarios for its critical IT systems and external relationships and the embedded systems. Once these scenarios are identified, the Company will develop plans that are designed to reduce the impact on the Company, and provide methods of returning to normal operations, if one or more of those scenarios occur. The Company expects contingency/recovery planning to be substantially complete by June 1999. To reduce the risk of the Company presented by the Year 2000, the Company has also increased its on-hand supplies of inventory for printed documents and materials that are provided to client groups, and has also identified alternative Vendors, whether such Vendors have Page 12 of 17 13 previously provided assurances that they are fully Year 2000 Compliant or are in the process of becoming Year 2000 Compliant. Therefore, based upon the Company's proactive Year 2000 Compliance Program, the Company anticipates that the Year 2000 issue will not have a material impact on the Company's results or operations. See "Safe Harbor Statement" heading for factors that could cause actual Year 2000 results to differ from the Company's expectations. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of these safe harbor provisions The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning any future premium pricing levels, future dental health care expense levels, the Company's ability to control health care, selling, general and administrative expenses, items discussed under heading "Year 2000" and all other statements that are not historical facts, are forward looking statements. Words such as expects, projects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words and similar expressions are also intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties and contingencies, many of which are beyond the control of the Company. Actual results may differ materially from those projected in the forward looking statements, if any, which statements involve risks and uncertainties. The Company's ability to expand is affected by competition not only in benefit program choices, but also the number of dental plan competitors in the markets in which the Company operates. Certain large employer groups and other purchasers of commercial dental health care services continue to demand minimal premium rate increases, while limiting the number of choices offered to employees. In addition, securing cost effective contracts with dentists may become more difficult in part due to the increased competition among dental plans for dentist contracts. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs, while providing members with quality dental care. Factors such as levels of utilization of dental health care services, new technologies, specialists costs, and numerous other external influences may effect the Company's operating results. Any critical unresolved Year 2000 issues at the Company or its Vendors could have a material adverse effect on the Company's results of operations, liquidity or financial condition. In addition, the Company's expectations about the future costs and timely and successful completion of its Year 2000 Program are subject to uncertainties that could cause actual results to differ materially from what has been discussed above under the heading "Year 2000." Factors that could influence the amount of future costs and the completion dates and effectiveness of remediation, testing and certification and contingency planning efforts include the Company's success in identifying IT systems and embedded systems that contain two-digit year codes, the nature and amount of required reprogramming, testing and certification, the rate and magnitude of related labor and consulting costs, the availability of qualified personnel and the success of the Company's external relationships in addressing their own Year 2000 issues. The Company's expectations for the future are based on current information and evaluation of external influences. Changes in any one factor could materially impact the Company's expectations relating to premium rates, benefit plans offered, membership growth, the percentage of health care expenses, and as a result, profitability and therefore, effect the forward looking statements which may be included in these reports. In addition, past financial performance is not necessarily a reliable indicator of future performance. An investor should not use historical performance alone to anticipate future results or future period trends. Page 13 of 17 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in litigation arising in the normal course of business. In the opinion of management, the defense costs and/or ultimate outcome of such litigation is covered by insurance or will not have a material effect on the Company's financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Inapplicable. ITEM 5. OTHER INFORMATION On January 29, 1998, the Company entered into an $8 million revolving working capital credit facility with a Bank. The loan has a maturity date of January 28, 1999. The interest rate for the facility, as amended, was established at the bank's prime rate plus 1.5 percent. The loan is secured by a first priority security interest in all of the personal property of the Company, including accounts receivable, fixed assets and intangibles and a negative pledge on the stock of the Company's subsidiaries and on real property owned by the Company. In connection with the bank loan, as amended, the Company is subject to certain financial and operational debt covenants. As of September 30, 1998, the Company was in compliance, or has obtained a waiver, with respect to those covenants. On February 26, 1998, the Company announced the discontinuance of its orthodontic practices. On April 1, 1998, the Company completed the sale of its orthodontic practices to Pacific Coast Dental, Inc./Associated Dental Services, Inc., and affiliated dentists. The practices were sold for $15 million in 8.5% long-term notes, discounted for up to $2.5 million for early cash payment by December 31, 1998. The transaction includes the sale of all assets and associated liabilities of the orthodontic practices and a long-term commitment from the purchaser to continue to provide orthodontic services to SafeGuard members. The assets of the orthodontic practices sold consist of accounts receivable, supply inventory and dental equipment. The principle followed in determining the amount of consideration was the fair market value of the assets. The Company recorded a gain on the disposal of the discontinued orthodontic practices of $1.2 million, net of taxes of $0.8 million, or $0.25 per diluted share. All deferred losses recorded in prior periods have been offset against the gain recorded on the sale. Additionally, the Company has accrued against the gain on these sales certain run-out expenses that included agreed upon salary, payables and other transition costs that the Company expected to incur in future periods relating to the discontinuation of this business. Page 14 of 17 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
NUMBER EXHIBIT OF NUMBER COLUMNS DESCRIPTION - ------- ------- ----------- 2.1 One Plans of Acquisition(8) 3.1 One Restated Articles of Incorporation 3.2 One Bylaws(4) 3.3 One Amendment to Bylaws 10.1 One 1984 Stock Option Plan(3) 10.2 One Stock Option Plan Amendment(1) 10.3 One Stock Option Plan Amendment(5) 10.4 One Stock Option Plan Amendment(6) 10.5 One Amended Stock Option Plan(10) 10.6 One Corporation Grant Deed, dated December 21, 1984, relating to a property located at 505 North Euclid Street, Anaheim, California(2) 10.7 One Employment Agreement, as Amended, dated May 25, 1995, between Steven J. Baileys, D.D.S. and the Company.(7) 10.8 One Employment Agreement, as Amended, dated May 25, 1995, between Ronald I. Brendzel and the Company.(7) 10.9 One Employment Agreement dated May 25, 1995, between John E. Cox and the Company.(7) 10.10 One Employment Agreement dated May 25, 1995, between Wayne K. Butts and the Company.(7) 10.11 One Form of Rights Agreement, dated as of March 22, 1996, between the Company and American Stock Transfer and Trust Company, as Rights Agent.(7) 10.12 One Employment Agreement dated January 5, 1997, between Herb J. Kaufman, D.D.S. and the Company.(10) 10.13 One Credit Agreement dated September 25, 1996, between Bank of America National Trust and Savings Association and the Company.(9) 10.14 One Stock Purchase Agreement between Consumers Life Insurance Company and SafeGuard Health Enterprises, Inc. dated March 6, 1997(11) 10.15 One Purchase Agreement between Associated Dental Services, Inc. and Guards Dental, Inc. dated August 1, 1997(11) 10.16 One Purchase agreement between Pacific Coast Dental, Inc. and Guards Dental, Inc. dated August 1, 1997(11) 10.17 One Form of Note Purchase Agreement dated as of September 30, 1997, and form of Promissory Note(12) 18.1 One Independent Auditors' Preferability Letter for Change in Accounting Method(13) 23.1 One Independent Auditors' Consent(13) 24.1 One Power of Attorney(14) 27.1 One Financial Data Schedule
- ---------- (1) 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). (2) 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). (3) 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). (4) 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. (5) 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. (6) 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. (7) 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, 1995. (8) Incorporated by reference herein to Exhibit D filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. (9) Incorporated by reference herein to Exhibit E filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. (10) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report on Form 10-K for the period ended December 31, 1996. (11) Incorporated by reference to the exhibit of the same number filed as an exhibit to the Company's quarterly statement on Form 10-Q for the period ended June 30, 1997. (12) Incorporated by reference herein to Exhibit 99.1 filed as an exhibit to the Company's Report on Form 8-K dated October 7, 1997. (13) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report on Form 10-K for period ended December 31, 1996. (14) Incorporated by reference to the exhibit of the same number as referenced on page 28 to the Company's Annual Report of Form 10-K for the period ended December 31, 1997. Page 15 of 17 16 (b) Reports on Form 8-K. Page 16 of 17 17 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 Aliso Viejo, State of California, on the 23rd of November, 1998. SAFEGUARD HEALTH ENTERPRISES, INC. By: /s/ JOHN E. COX ------------------------------------- JOHN E. COX, President and Chief Operating Officer By: /S/ THOMAS C. TEKULVE ------------------------------------- THOMAS C. TEKULVE, Vice President and Chief Financial Officer Page 17 of 17 18 EXHIBIT INDEX
NUMBER EXHIBIT OF NUMBER COLUMNS DESCRIPTION - ------- ------- ----------- 2.1 One Plans of Acquisition(8) 3.1 One Restated Articles of Incorporation 3.2 One Bylaws(4) 3.3 One Amendment to Bylaws 10.1 One 1984 Stock Option Plan(3) 10.2 One Stock Option Plan Amendment(1) 10.3 One Stock Option Plan Amendment(5) 10.4 One Stock Option Plan Amendment(6) 10.5 One Amended Stock Option Plan(10) 10.6 One Corporation Grant Deed, dated December 21, 1984, relating to a property located at 505 North Euclid Street, Anaheim, California(2) 10.7 One Employment Agreement, as Amended, dated May 25, 1995, between Steven J. Baileys, D.D.S. and the Company.(7) 10.8 One Employment Agreement, as Amended, dated May 25, 1995, between Ronald I. Brendzel and the Company.(7) 10.9 One Employment Agreement dated May 25, 1995, between John E. Cox and the Company.(7) 10.10 One Employment Agreement dated May 25, 1995, between Wayne K. Butts and the Company.(7) 10.11 One Form of Rights Agreement, dated as of March 22, 1996, between the Company and American Stock Transfer and Trust Company, as Rights Agent.(7) 10.12 One Employment Agreement dated January 5, 1997, between Herb J. Kaufman, D.D.S. and the Company.(10) 10.13 One Credit Agreement dated September 25, 1996, between Bank of America National Trust and Savings Association and the Company.(9) 10.14 One Stock Purchase Agreement between Consumers Life Insurance Company and SafeGuard Health Enterprises, Inc. dated March 6, 1997(11) 10.15 One Purchase Agreement between Associated Dental Services, Inc. and Guards Dental, Inc. dated August 1, 1997(11) 10.16 One Purchase agreement between Pacific Coast Dental, Inc. and Guards Dental, Inc. dated August 1, 1997(11) 10.17 One Form of Note Purchase Agreement dated as of September 30, 1997, and form of Promissory Note(12) 18.1 One Independent Auditors' Preferability Letter for Change in Accounting Method(13) 23.1 One Independent Auditors' Consent(13) 24.1 One Power of Attorney(14) 27.1 One Financial Data Schedule
- ---------- (1) 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). (2) 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). (3) 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). (4) 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. (5) 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. (6) 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. (7) 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, 1995. (8) Incorporated by reference herein to Exhibit D filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. (9) Incorporated by reference herein to Exhibit E filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. (10) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report on Form 10-K for the period ended December 31, 1996. (11) Incorporated by reference to the exhibit of the same number filed as an exhibit to the Company's quarterly statement on Form 10-Q for the period ended June 30, 1997. (12) Incorporated by reference herein to Exhibit 99.1 filed as an exhibit to the Company's Report on Form 8-K dated October 7, 1997. (13) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report on Form 10-K for period ended December 31, 1996. (14) Incorporated by reference to the exhibit of the same number as referenced on page 28 to the Company's Annual Report of Form 10-K for the period ended December 31, 1997. EX-3.1 2 RESTATED ARTICLES OF INCORPORATION 1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS EXHIBIT 3.1 FILED 09:0 AM 06/04/1996 960161428 - 2124562 RESTATED CERTIFICATE OF INCORPORATION OF SAFEGUARD HEALTH ENTERPRISES, INC. (A DELAWARE CORPORATION) THE UNDERSIGNED, Steven J. Baileys, D.D.S., and Ronald I. Brendzel, do hereby certify that: 1. They are the President and Secretary, respectively, of Safeguard Health Enterprises, Inc. a Delaware corporation (the "Corporation"): 2. The Corporation was originally incorporated in Delaware under the name "SFGD REINCORPORATION COMPANY" pursuant to a Certificate of Incorporation filed with the Delaware Secretary of State on April 27, 1987; 3. The Corporation's Certificate of Incorporation, as amended, is hereby amended and restated in its entirety by the Restated Certificate of Incorporation of Safeguard Health Enterprises, Inc., attached hereto as Exhibit A, and incorporated herein by this reference (Exhibit A and this certificate are collectively referred to as the "Restated Certificate"); and 4. The Restated Certificate was duly adopted by the Board of Directors of the Corporation on March 22, 1996, and approved by the holders of 62.7 percent of the outstanding shares of stock of each class entitled to vote and voting thereon on May 22, 1996, in accordance with the requirements of Sections 242 and 245 of the Delaware General Corporation Law. IN WITNESS WHEREOF, the undersigned have signed this certificate this 22nd day of May 1996, and hereby do affirm and acknowledge under penalty of perjury that the filing of the Restated Certificate of Incorporation is the act and deed of the Corporation. /s/ STEVEN J. BAILEYS, D.D.S. ---------------------------------------- STEVEN J. BAILEYS, D.D.S. President /s/ RONALD I. BRENDZEL ---------------------------------------- RONALD I. BRENDZEL Secretary 2 RESTATED CERTIFICATE OF INCORPORATION OF SAFEGUARD HEALTH ENTERPRISES, INC. FIRST. the name of the corporation is Safeguard Health Enterprises, Inc. SECOND. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be now or hereafter organized under the General Corporation Law of Delaware. FOURTH. The total number of shares of stock which the corporation shall have authority to issue is Thirty-one Million (31,000,000), of which Thirty Million (30,000,000) shares are Common Stock and One Million (1,000,000) shares are Preferred Stock, and the par value of each such share is one cent ($.01), amounting in the aggregate to Three Hundred Ten Thousand Dollars ($310,000). The Board of Directors is authorized subject to limitations prescribed by law and the provisions of this Article FOURTH, to provide for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in any such series, and to determine or alter the designation, powers, preferences and rights of the shares of each wholly unissued series and the qualifications, limitations or restrictions thereof. Within the limits and restrictions, if any, stated in any resolution of the Board of Directors originally fixing the number of shares constituting any series, the Board of Directors is authorized to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of such series. Except as otherwise provided for in this Certificate of Incorporation, in case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; Exhibit A 3 (b) The dividend rate of the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights or priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption rate; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series; (h) Any other relative rights, preferences and limitations of that series. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the common shares with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be sufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. FIFTH. In furtherance and not in limitation of powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend, and rescind from time to time any or all of the bylaws of the corporation; provided, however, any bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors or otherwise amending or altering the classified nature of the Board of Directors, shall require a resolution adopted by the affirmative vote of not less than seventy-five (75%) percent of the directors. In addition, new bylaws may be adopted or the bylaws may be amended or repealed by a vote of not less than sixty-six and two-thirds (66 2/3%) percent of the outstanding stock of the corporation entitled to vote thereon. 2 4 SIXTH. (a) The number of directors which shall constitute the whole Board of Directors of this corporation shall be as specified in the bylaws of this corporation, subject to the provisions of Article FIFTH hereof and this Article SIXTH. (b) The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1988; each initial director in Class II shall hold office until the annual meeting of stockholders in 1989; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1990. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. (c) In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his earlier resignation, removal from office or death, and (ii) the newly created or eliminated directorship resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. SEVENTH. No action shall be taken by the stockholders except at an annual or special meeting of stockholders. No action shall be taken by stockholders by written consent. EIGHTH. Special meetings of the stockholders of this Corporation for any purpose or purposes may be called at any time only by the Chairman of this Board of Directors, by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in the bylaws of this Corporation, include the power to call such meetings, or by the holder or holders of not less than ten (10%) percent of this Corporation's outstanding voting securities. NINTH. The affirmative vote of the holders of not less than sixty-six and two-thirds (66 2/3%) percent of the outstanding voting stock of the Corporation shall be required for the approval or authorization of any: (i) merger or consolidation of the Corporation with or into any other corporation; or (ii) sale, lease, exchange or other disposition of all or substantially all of the assets of the Corporation to or with any other corporation, person or other entity; provided, however, that such sixty-six and two-thirds (66 2/3%) percent voting requirement shall not be applicable if the Board of Directors of the Corporation shall have approved such transaction in clause (i) or (ii) by a resolution adopted by at least eighty (80%) percent of the members of the Board of Directors. The provisions set forth in this Article NINTH may not be repealed or amended in any respect unless such repeal or amendment is approved by the affirmative vote of not less than sixty-six and two-thirds (66 2/3%) percent of the total voting power of all outstanding shares of stock in this Corporation entitled to vote thereon. 3 5 TENTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles FIFTH, SIXTH, SEVENTH, EIGHTH, and this Article TENTH may not be repealed or amended in any respect unless such repeal or amendment is approved by the affirmative vote of not less than sixty-six and two-thirds (66 2/3%) percent of the total voting power of all outstanding shares of stock in this Corporation entitled to vote thereon. ELEVENTH. A Director of the Corporation shall not be personally liable to the Corporation, or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or hereafter may be amended or (iv) for any transaction from which the Director derived any improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize, with the approval of a corporation's stockholders, further eliminations or reductions in the liability of the corporation's directors for breach of fiduciary duty, then a Director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the Delaware General Corporation Law as so amended. Any repeal or modification of the foregoing provisions of this Article ELEVENTH by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification. 4 EX-3.3 3 AMENDMENT TO BYLAWS 1 EXHIBIT 3.3 AMENDED BYLAWS "SECTION 2.1. ANNUAL MEETINGS. The annual meeting of stockholders of the Corporation shall be held between April 1 and May 30 of each year on such date at such time as the Board of Directors shall determine. At each annual meeting of stockholders, directors shall be elected in accordance with the provisions of Section 3.3 hereof and any other proper business may be transacted." "SECTION 2.4 NOTICE OF MEETINGS. Except as otherwise required by law, written notice of each annual or special meeting of stockholders stating the date and time when, and the place where, it is to be held shall be delivered either personally or by mail to stockholders entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. The purpose or purposes for which the meeting is called may, in the case of an annual meeting, and shall, in the case of a special meeting, also be stated. If mailed, such notice shall be directed to a stockholder at his address as it shall appear on the stock books of the Corporation, unless he shall have filed with the Secretary of the Corporation, a written request that notices intended for him be mailed to some other address, in which case such notice shall be mailed to the address designated in such request. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting in which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting." "SECTION 2.13 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. A. Annual Meetings of Stockholders. (1) Nominations of persons for election to the board of directors of the Company and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Company's notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the Company who was a stockholder of record at the time of giving of notice provided for in this bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this bylaw. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Company and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such EXHIBIT B 1 2 anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner and (ii) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this bylaw to the contrary, in the event that the number of Directors to be elected to the Board of directors of the Company is increased and there is no public announcement by the Company naming all of the nominees for Director or specifying the size of the increased Board of directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company. B. Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting. Nominations of persons for election to the Board of directors may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Company's notice of meeting (a) by or at the direction of the Board of directors or (b) provided that the Board of directors has determined that Directors shall be elected at such meeting, by any stockholder of the Company who is a stockholder of record at the time of giving of notice provided for in this bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this bylaw. In the event the Company calls a special meeting of 2 3 stockholders for the purpose of electing one or more Directors to the Board of directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Company's notice of meeting, if the stockholder's notice required by paragraph (A)(2)of this bylaw shall de delivered to the Secretary at the principal executive offices of the Company not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. C. General. (1) Only such persons who are nominated in accordance with the procedures set forth in this bylaw shall be eligible to serve as Directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this bylaw. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this bylaw and, if any proposed nomination or business is not in compliance with this bylaw, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of preferred stock to elect Directors under specified circumstances." "SECTION 3.6. VACANCIES AND ADDITIONAL DIRECTORSHIPS. Any Bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors, shall require a resolution adopted by the affirmative vote of not less than seventy five (75%) percent of the directors. Newly created directorships resulting from any increase in the number of directors and any vacancies 3 4 on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, regardless of their class, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified or until such director's death, resignation or removal, whichever first occurs. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director." "SECTION 5.1. THIRD PARTY ACTIONS. Subject to any indemnification agreement which may be entered into between the Corporation and a director or officer, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith as determined by the Board of Directors or the Executive Committee thereof. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the Corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful." "SECTION 5.2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith as determined by the Board of Directors or the 4 5 Executive Committee thereof; provided, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper." "SECTION 5.3. SUCCESSFUL DEFENSE. To the extent that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 5.1 and 5.2 or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith." 5 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 2,187 3,716 12,935 (1,699) 0 19,321 19,410 8,812 88,570 (17,953) (33,000) 0 0 (21,509) 0 (88,570) 24,004 24,203 16,539 16,539 7,567 0 1,020 (923) (300) (625) 0 0 0 (623) (.13) (.13)
-----END PRIVACY-ENHANCED MESSAGE-----